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State monopolies nudge out Big Oil

- The Washington Times - Saturday, May 24, 2008

Exxon Mobil, the world's largest corporation, is much criticized for raking in huge profits and polluting the environment, but could the epitome of Big Oil some day become an endangered species?

Oil experts say that yes, the day of the freewheeling and powerful corporate enterprise that finds the oil, pumps it out and delivers it to customers around the world may be slowly coming to an end. The reason: Most of the world's oil fields are now owned by countries with state oil monopolies that either prohibit foreign investment or no longer require the expertise of big, integrated oil companies to bring their oil to market.

Exxon Mobil and all the rest of the Western world's private oil companies — including BP, Shell, ConocoPhillips, Chevron and Total — today control only about 7 percent of the world's oil reserves. The rest belongs to state behemoths like Saudi Aramco, which owns more than a fifth of the world's oil; Iran and Iraq's oil companies, which each control about 10 percent of the world's reserves; and Pemex, the Mexican oil company, with 1.3 percent of the world's reserves.

National ownership of oil reserves in some countries like Mexico and Saudi Arabia has been a longstanding tradition. Mexico's constitution since the 1930s has prohibited any foreign investment in the country's oil sector. Venezuela, Russia and Ecuador, by contrast, closely collaborated with Western firms through the 1990s but started seizing their assets through forced nationalizations this decade.

"The handwriting is on the wall" for oil companies like Exxon Mobil, which have barely been able to maintain their share of world production and reserves in recent years, said Amy Myers Jaffe, a professor of energy studies at Rice University.

"They may see a declining rate of production over time, and eventually that is bad news for both their shareholders and consumers," she said.

Consumers stung by high oil prices today will suffer even more as state monopolies cement their control over the world's remaining oil resources in coming years, analysts say.

National oil companies — particularly those participating in the OPEC oil cartel — already are blamed in large part for keeping a tight rein on supply and driving up prices to more than $130 a barrel for premium crude and $4 a gallon for diesel and gasoline.

Rather than make the investments needed to ensure supplies are adequate to meet burgeoning demand for oil around the world, nationalized oil companies in countries like Russia and Venezuela have been allowing production to fall while they use their treasure of oil revenues to fund social and political causes. Those include the salaries of Russia's millions of state workers as well as food, fuel and military aid in Latin America.

Peter J. Robertson, vice chairman of Chevron Corp., said if major oil companies had access to the vast resources of these countries, they would be using their ample profits to pump more oil at cheaper prices.

"There's plenty of gas in the world, and plenty of oil in the world, to keep prices well below where they are today. The question is, can we get access to it, will the investments be made? In many of the countries that have these resources, the investments just aren't being made," he recently told the Council on Foreign Relations.

"Investments aren't being made in Russia at the rate they need to be. They're not being made in Mexico at the rate they need to be. They're not being made in Venezuela at the rate they need to be. They're not being made in Kuwait at the rate they need to be. And Iraq. What happens in these places will define what the price of oil and gas is ten, fifteen years from now."

But the state monopolies are not focused on increasing production. Instead, in states like Russia, Mexico, Iraq, Iran and most other oil states, oil and gas revenues — which are the government's main source of income — are being used to fund growing budgets for defense and domestic development and welfare, among other expensive priorities.

Oil states see higher prices as the best way to get what they want without having to pump more oil. State monopolies are inclined to charge customers whatever the market will bear to maintain their flow of oil revenues for various government purposes while increasing the value of the oil still in the ground — which is their future income.

"Countries have higher revenue goals because of growing population or development priorities," said Susan Roth, an analyst at Cambridge Energy Research Associates. Oil-producing nations have noted that prices over $100 so far have not done much to deter growth among consuming nations around the world, she said.

State control of oil only stands to grow in the future. The Boston energy think tank estimates that 84 percent of the growth in world oil production in the next decade will be controlled by 15 countries. Of those countries, only one — Canada — allows Western companies to freely explore and develop the oil. All the other countries either prohibit Western development or limit the role Western companies play.

Countries like Iran and Venezuela help attain their goal of high prices not only by keeping a lid on supplies of oil but by creating political instability and uncertainty, which also add to oil prices by roiling markets and increasing risks for consumers and investors.

"Iran does not even need to withhold oil from world markets to play its 'oil card,' " said Brookings Institution fellow David B. Sandalow. "The mere fear it might do so can cause oil prices to climb, as traders build a 'risk premium' into the cost of every barrel."

As long as major producers like Iran, Iraq and Nigeria remain in the center of political turmoil in the world, "anxiety about the reliability and adequacy of supplies will remain a feature of the oil market," said Ms. Roth.

Even in countries like Kazakhstan, Nigeria and Indonesia which allow Western companies to assist in extracting their oil, governments are demanding that companies build refineries and petrochemical facilities that can be run locally.

The goal of these and other countries like Russia is to acquire the technology and expertise needed to develop oil and gas resources without Western help or involvement. To that end, the Russian government in recent years engineered a leading role for its state-controlled Gazprom monopoly in all the major oil and gas projects started by Western firms in the 1990s.

While consumers in the West have been slow to wake up to the reality that the price of gasoline is largely controlled by foreign monopolies rather than big oil companies like Exxon Mobil, investors have overwhelmingly reached that conclusion. They have been piling into the stocks of state companies like Gazprom, PetroChina and Petrobras, the Brazilian oil company.

"Clearly, they are betting on who will own the oil in the future," said Ms. Jaffe. The flood of investors in state oil firms has put companies like Exxon Mobil on the defensive, forcing them to use more of their profits to try to prop up their stock prices with stock repurchases and dividends, she said.

"We still like Big Oil, but admit to becoming increasingly nervous about the future reserve and production levels of many U.S. oil companies," said Joseph Quinlan, chief market strategist at Bank of America. "It's in all the wrong places, at least from a U.S. perspective. We recommend investors increasingly take positions in the oil complex and energy infrastructures of the developing energy nations, where possible."