BIG OIL BUCKS NOT PRODUCING

“Big Oil” now means governments as much as it means multinational corporations.

Energy Giants Love High Prices, But That Hurts Output, Reserves
Alan R. Elliott, August 8, 2007 (Investor’s Business Daily via Yahoo News)

WHO
“Big Oil” (here used to mean Exxon Mobil, BP, Chevron, ConocoPhillips, Royal Dutch Shell)

WHAT
Despite record profits from high prices, “Big Oil” has problems. Production is falling off, especially in the US, and many nations around the world are nationalizing their oil fields. This leaves them with falling reserves and nowhere to invest.

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WHEN
Observations on the present market, based on 2nd quarter numbers.

WHERE
Oil is an international phenomenon. The “Bigs” are increasingly dependent on oil from the Middle East, Asia and Latin America to feed their supply lines.

WHY
- Record world demand has driven prices up, producing phenomenal profits.
- The record profits are not being reinvested. Because US fields are failing, exploration and production (E & P) spending in the US is down.
- Once part of a network of contracts that included the “Bigs,” the world’s fields have largely been nationalized. Though the “Bigs” often still help run the fields, their take is a dwindling portion of dwindling profits as oil gets harder to recover. National oil companies, backed by their governments, are leveraging that power to renegotiate new deals that significantly disadvantage the multinationals. Therefore, overseas E & P spending by the “Bigs” is also down.
- Venezuela pushed ConocoPhillips out of the Orinoco basin, costing the company $4.5 billion.
- Russia pushed Royal Dutch Shell and BP out of the Siberian deals and is threatening Exxon’s position in Sakhalin-1.
- Both the loss of E & P investment and the loss of dependable reserves are causing bookkeeping nightmares. It makes profits AND losses bigger. Insiders are calling for a new standard by which to calculate reserves.

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QUOTES
- Nicole Decker, Bear Stearns: "Prices have accelerated the cost recovery on some of these big projects…Once you recover your costs according to these production-sharing agreements, the regimen changes, and your take (of production) is lower."
- Decker, on the loss to Exxon of Sakhalin-1: "It's likely to be rather substantial…It is a huge project."
- Jim Ross, oil-management consultant Ross Petroleum: "The investment community would be better served by the reporting of companies' expected future production, cost and net revenue forecasts…"