ECONOMICS AND TRADE | Achieving growth through open markets
12 August 2008
Quest for Oil Hampered by Resource Nationalism
Some oil producers leave their reserves underused
This is the second article in a series on the oil crisis.
Washington -- New technologies can work magic to make more petroleum available. They can squeeze it from rock, suck it from deep under the bottom of the sea and wash it out from mud. But the magic costs a lot of money.
Without massive investment, getting more oil from old fields and unconventional resources will be impossible. As the pool of proven conventional reserves shrinks, extracting hard-to-reach petroleum becomes critical. (See “High Oil Prices Herald Era of Hard-to-Get Resource.”)
To satisfy world demand, about $3 trillion must be invested over the next 25 years, according to the International Energy Agency. There is no indication that level of investment will happen.
INVESTMENT CHALLENGE
Aramco, the Saudi national oil company, plans to invest $120 billion in new production projects over the next 10 years. But national petroleum outfits in many other countries have no similar plans.
Governments of some oil-producing countries “rob” their national oil companies to fund national treasuries and political projects, according to Michelle Foss, the head of the Center for Energy Economics at the University of Texas at Austin. For example, in Iran, oil revenues provide 90 percent of the government’s budget, and in Mexico, 80 percent. Countries with such policies tend to invest least in new exploration and production, Foss told America.gov.
Venezuela, for example, invests only half of what is needed to keep production steady, according to Michael Economides, an executive at the Texas Energy Center.
Some countries contemplate changes. Nigeria is considering a plan to restructure its national oil company’s joint ventures with Western oil companies to raise more private capital. Mexican President Felipe Calderon has proposed a modest reform of the country’s oil sector to allow more private investment. But in other oil-rich nations, reforms are not on the horizon. A 2007 study by the consulting firm PFC Energy implies that political factors are limiting capacity increases in Mexico, Venezuela, Iran, Iraq, Kuwait and Russia.
Even when countries do invest in drilling, production capacity or infrastructure expansion, they often do not make the best use of their money. While Saudi Arabia, Algeria and Malaysia have been shrewd buyers and appliers of new technologies, Foss said, many other nations either do not have access to technology or apply it inefficiently because they lack management skills or a skilled work force.
As a result, said Under Secretary of the Treasury David McCormick, output from some existing fields is below what it might have been if national oil companies that manage them had had the latest technology and applied it in the best way.
Some experts and U.S. lawmakers say major oil companies do not invest enough despite record profits.
But Foss said oil companies have pushed up such spending from the lows of the 1990s. She said the total dollars are up as well as the percentage of profits reinvested.
Oil companies can spend money on expanding a resource portfolio and production capacity only to the extent they have opportunities to do so. And these opportunities are today more limited than ever. The vast majority of the world’s oil reserves are nationally owned, and one-third is in countries that bar foreign investment. Oil companies are weary of dealing with governments of “questionable character” and partners that do not participate in global oil trade in “an open and transparent way,” according to Foss.
Exxon Mobil Corporation and Royal Dutch Shell PLC have lost billions of dollars to nationalization and takeovers in Venezuela and Russia. BP PLC seems to be losing a battle with its Russian partners to hold on to its oil joint venture in Russia.
U.S. POLITICS AND OIL
In the United States, oil giants would like to drill in the Outer Continental Shelf off the East and West coasts, in the eastern Gulf of Mexico and in a wilderness area in Alaska. President Bush has lifted the executive ban on offshore drilling and asked Congress to lift the related legislative moratorium.
Action taken by the United States, the world’s third-largest producer of petroleum, to expand production would send a signal to the rest of the world, experts say. It would “bring far greater credibility to our efforts to encourage increased production overseas,” McCormick said.
But Democrats in Congress and environmental groups oppose ending the moratorium. They argue that oil from new rigs would reach the market no earlier than in 2028 and would cause oil prices to drop only a few cents while damaging the environment. They also say oil companies have not fully used offshore leases and drilling permits on federal land they already have.
Most energy experts and officials say that in the future the United States will need all the resources it can muster, including conventional oil, unconventional oil, biofuels and other alternative sources.
