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Sustainable Society: A society that balances the environment, other life forms, and human interactions over an indefinite time period.
How are the Oil Companies Reacting to Oil Depletion?
Dr. Colin Campbell*
At the end of the war, the industry set off again in the post war epoch and it was dominated by the seven international oil companies, Shell, Anglo-Dutch, BP - British, and Exxon, Mobil, Gulf, Chevron, Texaco. These were the international oil companies who basically controlled the supply of oil from the wellhead in the Middle East, through the tankers, through the refineries, eventually to the forecourt. It was a good system. They could plan, long term planning. It was a highly centralized organization —really, in a way an extension of wartime central planning with almost a military kind of style.
Then it started in 1951 when the fall of the Shah, problems in domestic politics in Iran and Iran expropriated the local subsidiary of BP which had an exclusive concession in Iran since 1906. This was a fairly devastating result for BP and they couldn’t believe that the British government having just won a major war wouldn’t send in a gunboat to enforce the sanctity of the contract that they had.
But the British government tired after the war and didn’t do so —have no stomach for such things. So BP lost its prime position which was really critical for its past and to its future. But with remarkable resilience, it set forth to find new oil. It went into Libya, it went into Alaska, it went to all kinds of places and it was extraordinarily successful. In fact, in Alaska it found the largest field in North America, in the very backyard of the American companies.
The next extraordinary event that happened was Suez, in 1956 when Nasser sought to expropriate the Suez Canal. While the British and French tried to stop him, they were effectively frustrated when the United States government didn’t support them. The message was not lost to the other producing countries around the world that the sanctity of contract was not going to be enforced any longer. And so you had a succession of expropriations —Saudi Arabia, Iraq, Venezuela, and so on.
Now the oil companies had probably begun to anticipate... The aftermath of the Iranian situation in BP had alerted the companies that this was a likely kind of direction and so they had already long before the oil shocks of the ‘70s gone out to vigorously research new places which they would not have needed had they had control of their traditional sources. And they were successful and when the oil shocks came in, the offshore became viable with the higher prices and there was great activity around the world developing the offshore. Then over the last 30 years until the last five years the oil companies had this great inventory of under-reported oil that they knew they could draw on as they needed. They had a comfortable position to let this continue. It was very easy —it was not difficult to make money in such a situation.
But then eventually, this inventory was drawn down progressively and they more fully realized that future production without future discovery was falling. They could see the trend, now published by Exxon, see the decline in discovery from 1964 until now and they obviously weren’t oblivious to this. And their first reaction was to go to the last frontier, the deep, deep water, drilling in 5-6-10,000 feet of water. There are only a few parts of the world that had the right geology even there.
The oceans are deep over many areas but there’s only a few selected places, mainly in the Gulf of Mexico, off Brazil, off West Africa, that have the right geology. They started doing that and the fact they were willing to look in 10,000 feet of water tells you there wasn’t anywhere else easier accessible; so there’s another message. They kept on in this way and continue even to this day to make optimistic noises about how we’re running into oil, not out of it. This is a famous statement of BP.
And then, I would say in the last few years, you begin to detect, “Can this be the end of that particular chapter of trying to hide, if you like to put it bluntly, the essential nature of depletion?” You have BP for example, a couple of years ago changed its logo to a burst of sunshine and the chairman said that BP now stood for “beyond petroleum” and they started investing in solar energy and various alternative things.
I think, initially, primarily, as a public relations exercise, but also as a kind of position to take in relation to the investment community because in the modern age, everybody has to sing to the investment community. If the investment community would say, “Well, just how much are you finding?” and a few delicate questions of this sort, they could say, “Well, you know, we are an energy company.” Now they like to say “We now longer... Oil, well, yes oil is useful of course, but we’re moving on to gas, and then when gas is gone, we’ve got solar, and then into biomass in Bolivia...”
This was a sort of happy way to evade the issue of the underlying depletion of their principal asset of which they depend. So this was imagery, you could say. And I would say some of them even believed their own imagery, probably. It’s not entirely cynical public relations; some people can think this way, too.
But then even this sort of ran its course and you had this merger that began to take place. The first was Gulf Oil that had a corporate raid at Boone Pickens, the famous Boone Pickens who saw this moribund inbred management of Gulf Oil with the company jet taking the president’s wife’s dog to the vet and this kind of behavior and he interceded and made a sort of bid for Gulf as he had become a major shareholder of it.
And of course, the major companies joined ranks; at that point they couldn’t bear this to happen and so Chevron bought Gulf out and solved that little problem because the oil companies don’t like any kind of chink in the image of the fact that they’re on top of everything and they’re in control and whatever happens, we are going to deal with it. That’s what they like to present.
So Gulf was the first to go to Chevron and then Amoco, Standard Oil of Indiana as it used to be, a Pan-American, a big U.S. domestic company was bought out by BP. It was the next one to go. Then the Europeans consolidated —Totall Alph of France and Fina of Belgium got together. Then more recently, Chevron – Texaco was merged. So where you once had these seven, and then finally, Exxon – Mobil, so whereas you previously had seven major oil companies, you now only have four.
Chevron was the only one to remain in splendid isolation, so to speak, who has not gone down this merger... Even now it has bought out a small company, Enterprise, the other day, for its reserves. That’s an interesting thing to it. It bought Enterprise and Enterprise had nothing but some reserves in the North Sea, effectively given to it by Mrs. Thatcher at that time. They paid quite a lot for this company and so the fact that they’re willing to buy reserves on the stock market actually undervalued —debase the common stock value of their portfolio, their reserves to add to this expensive reserves later. So that gave a little message that they needed some more reserves. And they were on the criticism from the investment community who were saying they weren’t doing enough in exploration and production to offset that declining production.
Then when you look actually, and I haven’t really done it in detail but I have the impression, that if you look at the result of these merged companies you’ll end up finding that the staff is still the same as one of the... half of their staff has been let go. You find an enormous amount of outsourcing and contracting out. In fact, I think BP is officially said it would like to contract out on short-term basis about 30% of its workforce. This tells you they don’t want the commitment of employing these people for a very long time.
I think the combined budgets are slashed so I think the net result of this is a downsizing. I can’t, of course, say it in so many words, but that’s what it amounts to and I also noticed that there is very little investment in refineries so if production was set to rise, as some of the imagery would have us believe, you would wonder why they weren’t building some refineries to process this stuff. I think we can see that the major oil companies are declining. I think they recognize that themselves, internally. They will go into ..., perhaps, what just started as public relations becomes more real as the need for it increases and as nature imposes on them the decline of their principle past assets, they’ve got to do something or else they just wither away. And I would say, in a sense they are already withering away into what you could call financial institutions rather than old-fashioned oil companies with spanners and hammers in their hands.
What they say and what they do is not quite the same. You get this bland kind of imagery that they like to put out and it’s very hard to say whether this is quite deliberate or it’s mindset, or what it is. For example, Lord Brown, the chairman of BP at the Devros meeting a couple of years ago, said he expected oil production to reach a maximum —maximum was the choice of word— a maximum around 2010 and it would begin to run out 40-50 years after that. Well, the impression left with his audience was that the maximum would be reached and then have this happy plateau until it began to sort of fade away, in 40-50 years, far beyond anybody’s concern.
In a word, what he was actually saying is it would reach a peak and begin to decline in 2010. He didn’t exactly say that. So it’s a clever choice of words. When people choose their words with such care, it gives you the impression they do so deliberately and therefore they know what they’re trying to do. It’s not just an accident. All kinds of glib words are said all over the place. “Challenge” is a great word they like to use. In this latest statement by Exxon, he says that having depicted the declining discovery, he says, “Well, we face a big challenge to meet demand by 2010.”
So looking ahead to the role of the oil companies in the future, it strikes me.... I should say also that we’ve only spoken of the major international oil companies. Of course, there are huge numbers of smaller oil companies and they too are merging. And the contracting business is contracting. In fact, this is a certain constraint, because with this outsourcing of everything in the industry, the oil companies rely heavily on the contractors to supply rigs and offshore equipment and so on. The contracting business has little knowledge of the true nature of this long-term situation and so they often make mistakes in over building or under building or whatever.
It’s hard to
foresee the direction of the oil companies. But after all, we’re not running
out of oil as we’ve already discussed. There’s about as much left as we’ve used
already, so there’s a considerable role for the industry into the future,
producing. They’ll need every skill they can martial to take on ever more
difficult projects and the slower production, the heavy oil, and all these
things. There’s a certain future of the oil companies, but a rather different
style of things from what they have known in the past.
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