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The Toronto Star: Pump paradox

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With energy prices so high, what incentive do cash-rich oil-producing nations and multinationals have to increase supplies?) 

May 20, 2007 04:30 AM
David Olive

As gasoline prices soar to upwards of $1.10 per litre in the GTA, motorists stare at the rapidly revolving figures on the pump and curse multinational oil companies suspected of manipulating prices, governments that reap a tax windfall whenever prices rise – as federal finance minister Jim Flaherty acknowledged last week – and Middle East potentates whose regimes are further enriched with more wealth than they know what to do with.

The angst is unavoidable, since it represents a hike in the cost of living that hits hardest at low-income working families that rely on their vehicles for work and for whom conservation isn’t a viable option.

Meanwhile, in the transportation sector, at least, we seem trapped in our dependence on fossil fuels given the painfully slow pace of alternative-fuel development and distribution. Even assuming ultra-fuel-efficient vehicles were by now widely available, a mere 1,000 or so of North America’s quarter-million filling stations are equipped to pump ethanol-blend and hybrid-hydrogen fuels.

But that doesn’t mean consumers need be so vulnerable to the volatilities of a global oil market in which prices abruptly spike upward due to a refinery shutdown like the one at Imperial Oil Ltd.’s Nanticoke facility earlier this year, or the capsizing of oil rigs in the Gulf of Mexico and other hurricane-prone regions, or interminable civil wars and political upheaval that routinely disrupt oil production in Nigeria, Sudan, Iraq and other major producing nations.

Prices surge with each isolated disruption because the global supplies are so tight, given decades of industry failure to build new refining capacity, and spiraling demand for oil and gas in China, India and other fast-growing industrial economies.

Yet on the supply side of the equation, there are far more conventional oil and gas reserves than you might think, certainly enough to tide us over until alternatives are viable. Vast quantities of crude worldwide remain untapped because the state monopolies that control them have chronically under-invested in the leading-edge technologies by which their often inaccessible reserves could be tapped.

Not every state oil monopoly followed the extreme example of Saddam Hussein’s Iraq, the world’s third-largest reserve holder, which for decades produced just enough oil to finance Saddam’s armed forces and pet projects. It did so, as invading U.S. and British forces were surprised to discover after their 2003 invasion of the country, using production methods dating from the 1930s.

But most state oil and gas monopolies do have in common the underdevelopment of national reserves. A rising tide of nationalism has prompted many oil-producing nations to constrain the activity of multinational joint-venture partners with their advanced technology, or to evict them altogether. Many regimes are so flush with oil revenues they see no need for reinvestment in aging oilfields. Many are satisfied with production levels much lower than their fields are capable of in order to keep world prices artificially high, even at the cost of diminished revenues.

The multinationals, so easily demonized for high prices, own or control a mere 10 per cent of global reserves. They enjoy an effortless windfall of profit from soaring prices, to be sure, but also are severely restricted from deploying their state-of-the-art technology to boost supply in the politically hostile regions where the world’s remaining reserves are increasingly located.

Prior to the early 1960s, multinational oil firms could explore and extract crude almost everywhere except the Soviet Union and Mexico. That’s the point at which most developing-world oil producers nationalized their oil and gas wealth.

With few exceptions, the state monopolies use outdated methods and equipment to exploit their oil and gas fields, choosing not to invest in the modern technology by which multinational firms have learned over the past two decades how to prolong the life of major fields.

Worse, the old methods long ago abandoned by multinationals often prematurely curtail the life of oil and gas fields by allowing underground water reservoirs to flood an oil or gas pool, and destabilizing rock formations so that pools of oil and gas adjoining the initial discovery are rendered inaccessible.

“The full impact of the nationalizations that took place in the 1960s and 1970s are taking effect now,” Robin West, chairman of the leading oil consultancy PFC Energy said in a report last week.

A conspicuous example is Mexico’s massive Cantarell field, source of about two-thirds of Mexico’s oil production. The field is in significant decline. Yet Mexico’s state oil giant, Petróleos Mexicanos (Pemex), could arrest the decline of the offshore field, and perhaps even boost its production beyond its previous record levels, by deploying modern deep-water exploration methods. But by law, Pemex is severely restricted from partnering with foreign companies with the technological prowess to revive the Cantarell field.

The PNC report identifies Mexico, Iran, Iraq and Venezuela as nations with declining production prospects; describes Russian and Kuwaiti production as stagnant; and finds that even Saudi Arabia, the world’s leading producer, is growing its output only slightly. Those nations collectively account for about 65 per cent of the world’s oil and gas reserves, and 45 per cent of production.

Brazil’s state oil firm, Petróleo Brasileiro S.A. (Petrobras), stands out as a rare aggressive player in expanding production with innovative techniques. But the norm is Vladimir Putin’s Russia, preoccupied with entangling multinationals operating there in a thicket of alleged permit violations when it isn’t expropriating foreign holdings outright; and Hugo Chávez’s Venezuela, whose heavy oil deposits rival in size those of Alberta, itself now regarded as the world’s second-largest reserve holder.

Venezuela is the Western Hemisphere’s biggest oil exporter, and its Orinoco Belt is estimated to hold a staggering 235 billion barrels of recoverable oil. But those heavy oil reserves remain largely untapped. Foreign companies active in the country, including Exxon Mobil Corp., Chevron Corp., ConocoPhillips Co., BP PLC and Total SA, watched helplessly last year as Chávez abruptly seized majority control of 32 oilfields managed by foreign firms, prompting the companies to drastically scale back their investment outlays in projects across the nation.

Brunei, a tiny sultanate on Borneo’s north coast, is a model for a potential future of more abundant crude supplies. Royal Dutch Shell PLC, active in Brunei since 1913, has recently boosted offshore production using flexible “snake wells” monitored by onshore computers that bore horizontally for miles below the seabed, tapping hundreds of pockets of oil that were previously inaccessible. Brunei, population 380,000, collects 85 per cent of the revenues Shell generates from exporting its oil.

Shell hopes to deploy its pioneering snake-well technology in as many as 20 other global sites, but domestic upheaval and the caprice of bureaucrats is sure to more than occasionally thwart its efforts. In Russia, for instance, Shell recently was forced by Moscow to renegotiate its Sakhalin project off Russia’s Pacific Coast just north of Japan on unfavourable terms.

Exxon Mobil counts its own Sakhalin project among its top 10 most important initiatives worldwide. The firm’s new CEO, Rex Tillerson, owes his job in large part to spearheading the immense project over the past several years. But the firm has endured countless battles between Moscow and local governors that have repeatedly required Exxon Mobil to submit to arbitrary contractual changes that have threatened Sakhalin’s financial viability. Tillerson confessed last week in a Wall Street Journal interview, “I don’t know whether anyone ever will be able to sort out entirely why the Russian government does what it does.”

It’s not for consumers or multinationals to dictate how oil-producing nations manage their oil and gas reserves. Kleptocratic regimes from Sudan to Kuwait, Nigeria to Kazakhstan keep resource profits for themselves, denying impoverished local populations any share in their own resource bounty. That they do so, and that multinational oil firms and Western consumers are thus so often the focus of local populist antipathy, is a global diplomatic and humanitarian failure on an epic scale.

A meaningful world energy policy would begin by redressing that longstanding injustice. It’s a vision easily mocked as impractically Utopian.

But in the absence of co-ordinated statecraft among consumer nations to ensure a fair sharing of oil and gas wealth, the world’s oil consumers will be denied the energy security that could be the bridge between our continued oil dependence and the era when alternative fuels and energy efficient homes, factories and office buildings are a commonplace reality.

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One Comment

  1. dan says:

    Great Report. I have been unwillingly engulfed in the hoopla surrounding our countries negative relations with other countries, mostly in part, due to new energy crisis. I found a great article, much like this one, which further details some possible implications and scenarios our country might, and most likely will face in the future. Take a look.


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