The Truth About 'Big Oil'
washingtonpost.com
By J. Robinson West
Saturday, October 7, 2000; Page A23
"Big Oil," the international oil and gas industry, makes a convenient scapegoat for politicians and the media. But like the rest of us, the oil and gas companies have been buffeted by the market. In 1998 and 1999, the companies suffered from catastrophically low prices, just as they benefit from high prices today. As price takers, rather than price makers, they do not have the power to set oil prices.
Oil companies have been under intense pressure. The volatility of the market, from boom to bust, makes managing such a capital-intensive business very complex. The "upstream" business--oil exploration and production--can be profitable, but the need to find new oil is relentless, and the process is risky and expensive. The "downstream" business--the refineries and service stations customers see--requires massive investment and is commodity-based and cyclical. This makes it a difficult and often unprofitable sector, where average profit margins are razor thin.
From 1997 to 1999, oil company upstream operations had average margins of 12 percent, while those downstream generated a mere 3 percent. From 1998 through the first half of 2000, oil industry margins averaged less than 4 percent. This is in stark contrast to other sectors--such as banking at 15 percent, or publishing and broadcasting at 12 percent over the same period.
When some large U.S. companies such as Mobil, Amoco and Arco could no longer compete effectively, stronger companies absorbed them. Today, Exxon-Mobil is the only remaining U.S. company among the top four; the others are Shell, BP and Total. The old Seven Sisters, the historical international "majors," included five U.S. companies.
The structure of the upstream oil industry was forged during the 1960s and '70s, when key producing governments such as Venezuela, Kuwait, Iraq, Iran and Saudi Arabia nationalized the oil reserves of the international companies. Governments now own about 90 percent of the world's oil reserves and produce about 70 percent of its oil. All the international oil companies combined (including Exxon-Mobil, Shell, BP and others), control only about 10 percent of reserves. The Persian Gulf, where most reserves are located, generally is not open to investment.
Many of the companies' key oil fields were discovered during the 1950s, '60s and '70s. By the mid-'80s, the international companies faced a crucial problem: These fields were depleted or getting old, and therefore more expensive to work with, and the industry was not permitted to replace dwindling reserves in low-cost regions with a lot of oil, notably the Mideast. Simultaneously, the oil prices were collapsing and companies' profitability with them.
The international oil companies and the service companies that gather information and manage projects for them responded by aggressively applying new technologies in such areas as information processing and deep-water engineering. Technical breakthroughs brought exploration and production costs down as much as 50 percent, while successfully identifying new reserves in existing oil-producing areas, and opening new ones, primarily in deep water. The effects of this new technology benefited not only the companies but the market as well. New, efficiently produced oil was brought on to reduce our dependence on OPEC production and drive prices down.
Some upstream assets can generate large profits, but they require risky, massive and constant reinvestment because they become depleted. Also, the larger the producing asset, the more difficult it is to replace, given the low probability of finding new giant fields.
The industry needs to replace well more than half the world's current oil and gas supplies in the next 10 years to meet demand growth and continuing depletion.
The international oil companies and the service companies that support them play an important part in a strategic industry. They are crucial in balancing the oil-producing countries, which hold the real power. Oil companies cannot set oil prices, but with their skills, technology and capital, they will be pivotal in replacing and expanding the energy supplies to fuel our economy during the next decade and beyond.
The writer, a former assistant secretary of the interior, is chairman of the Petroleum Finance Co., which advises international oil companies and service companies, as well as governments.
© 2000 The Washington Post Company |
