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BP’s troubles in Russia show Big Oil’s clout fading

BP’s troubles in Russia show Big Oil’s clout fading

By LOREN STEFFY Copyright 2008 Houston Chronicle

Aug. 16, 2008, 1:16AM

Last year, soon after Tony Hayward became chief executive of BP, a colleague and I met with him and asked, among other things, about the company’s venture in Russia.

He described it as “stunningly successful” and pledged that “we are going to continue to expand and grow our business in Russia.”

A year later, TNK-BP is in tatters. Russia essentially kicked the venture’s chief executive out of the country. BP remains in an ugly battle for control, while almost a quarter of its annual production hangs in the balance. Russia’s invasion of Georgia last week, by the way, forced the shutdown of a BP pipeline originally built to circumvent Russia’s control of energy in the region.

TNK-BP was a hallmark of Hayward’s predecessor, John Browne. Browne transformed BP into a global player and pushed it into Russia in a bold move that many rivals wouldn’t dare attempt. Daring turned to disaster, though, as BP found itself unable to control the outcome.

Gone are the days when BP manhandled reserves out of foreign countries, as it did in Iran the early years of the last century. Once the lion of British enterprise, Russia has brushed it aside like a kitten.

It’s not alone. The rise in oil prices has emboldened foreign governments with petro-fed economies, from Russia to Venezuela. Western oil companies have been shut out of major new oil finds around the globe for years. Now, they’re finding it increasingly difficult to hold onto assets they already have.

Even when drilling rights are sold at auction, the majors often lose, outbid by state-owned oil companies that can afford to sacrifice profitability for supply.

In other words, Big Oil doesn’t seem so big these days.

The exception, of course, is in Washington, where it’s still villain of choice for high gasoline prices.

But in the rest of the world, the Seven Sisters that once dominated the global oil market now seem forgotten.

“The odds are against the integrated oil companies over the medium to long term,” ex-Shell Oil Co. President John Hofmeister told me. “The U.S. and Canada are perhaps the last opportunity for the majors to do what they do best.”

 

Natural gas attractive

No wonder, then, that Big Oil is talking green and pouring money into natural gas — both in unconventional domestic plays and new technology such as liquefied natural gas. As its Russian venture crumbled, BP announced plans to invest $90 million in a cellulosic ethanol program in Louisiana. 

Browne, of course, milked the green card to stardom, reinventing himself as a crunchy granola folk hero with Vanity Fair cred. But the “Beyond Petroleum” marketing hype masked a growing sense of desperation.

Too often, the focus is on price. But the real battle is over supply. Without shareholders or market pressures, state-owned oil companies have been snapping up reserves even outside their borders, often at Big Oil’s expense.

The irony in all this is that the same high prices that diminished Big Oil’s stature abroad have raised its profile at home. In Congress, oil companies are under fire for their profits and snubbed in efforts to drill off their native coasts. House Speaker Nancy Pelosi turned out the lights and went on vacation, leaving a small cadre of Republican lawmakers to talk about energy in the dark.

 

Drilling losing out

We not only don’t want to drill, we don’t want to allow seismic studies to find out how much oil we aren’t drilling. Drilling is what Big Oil wants, and, therefore, it must be bad. 

So beaten abroad and shut out at home, Big Oil watches its production decline and buys back its own stock in a strategy that, if unchecked, leads to self-liquidation.

Perhaps the majors will lead in developing a new energy technology, or major reserves will be found in a region that welcomes their involvement. But that seems unlikely. New discoveries are made behind the veil of state control, and new technology can’t grow fast enough to generate returns on par with record oil prices.

The reign of Big Oil is in its twilight, the promise of stunning successes dimming as rising oil prices — the bane of Big Oil’s public image at home — bolster its opponents abroad.

Nowhere is that more obvious than in Russia, where BP’s hopes unraveled into a glaring example of Big Oil’s lost stature.

Loren Steffy is the Chronicle’s business columnist. His commentary appears Sundays, Wednesdays and Fridays. Contact him at [email protected]. His blog is at http://blogs.chron.com/lorensteffy/.

http://www.chron.com/disp/story.mpl/business/steffy/5947272.html

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