The Cowardly Giants

By Jaffe, Amy Myers | Newsweek International, November 26, 2007 | Go to article overview

The Cowardly Giants


Jaffe, Amy Myers, Newsweek International


Bottom line obsessed, Big Oil is forsaking the future.

The last time the world faced a major petroleum crisis, in the 1970s, the leading multinational oil companies helped soften the blow. Big Oil went on a drilling spree, finding giant new oil and gas fields outside the control of the Organization of Petroleum Exporting Countries (OPEC) in places like Alaska, the North Sea, Australia, Colombia and elsewhere. Non-OPEC production exploded in the 1980s, putting OPEC on the defensive and slashing costs.

Today, however, with prices approaching $100 a barrel, Big Oil has failed to ride to the rescue. The leading multinationals have grown too timid to spend aggressively on oil exploration -- even at a time of record oil prices. Unless Washington adopts a new national energy strategy and finds way to pressure the majors into changing tactics, Big Oil -- and the United States -- could face serious trouble ahead.

A study by Rice University released last week reveals the depths of the problem. By analyzing the spending patterns of the 25 largest oil companies, we discovered that exploration spending by the "Big Five" -- BP, Chevron, ConocoPhillips, ExxonMobil and Royal Dutch Shell -- fell from $9.8 billion in 1997 to $6.1 billion in 2005 (before rebounding in 2006), despite a fourfold increase in operating cash flow. In real terms, the drop was even deeper, since exploration costs have risen over 100 percent since the 1990s. Instead of prospecting, the Big Five used 56 percent of their new cash to repurchase shares and pay dividends in 2006, compared to only 35 percent in 1995. This shift might have been good for short-term investors and management, but it has endangered the companies' long-term reserves and their ability to increase production in the future. Indeed, production is already starting to suffer: Big Five output fell from 10.25 million barrels a day in 1996 to 9.45 million in 2005 (before recovering last year).

Some might argue that this is nobody's fault; there's just less new oil out there to be discovered these days. But in the same period, the next 20 largest U.S. firms -- companies like Marathon and Devon -- steadily increased their exploration spending, and now dish out as much as the majors despite having one third the operating cash. As a result, their production has climbed from 1.55 million barrels a day in 1996 to 2.13 million today. As this suggests, there's still more oil out there for those willing to look hard enough.

As the majors decline, national oil companies (NOCs) -- state monopolies in countries like Saudi Arabia, Iran, Venezuela, Russia, China and India -- are coming on strong. They now control more than 80 percent of the world's reserves, in marked contrast to the 1960s and 1970s. The NOCs are not only pushing the Big Five out of NOC home nations; they're also starting to beat them out in third countries as well. Chinese firms, for example, spent $9 billion alone in 2006 on foreign projects (mostly in Russia, Nigeria and Kazakhstan) -- about the same amount that the Big Five spent on exploration that year. And early this month, Brazil's Petrobras announced the discovery of a giant new 8 billion-barrel oil field, sending its stock soaring at the same time that ExxonMobil's shares were sinking on disappointing returns.

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