The Coming Energy Crunch
Data released annually at this time by the major oil companies on their prior-year performances rarely generates much interest outside the business world. With oil prices at an all-time high and Big Oil reporting record profits, however, this year has been exceptional. Many media outlets covered the announcement of mammoth profits garnered by ExxonMobil, the nation's wealthiest public corporation, and other large firms. Exxon's fourth-quarter earnings, at $8.42 billion, represented the highest quarterly income ever reported by an American firm.
"This is the most profitable company in the world," declared Nick Raich, research director of Zacks Investment Research in Chicago. But cheering as the recent announcements may have been for many on Wall Street, they also contained a less auspicious sign. Despite having spent billions of dollars on exploration, the major energy firms are reporting few new discoveries and so have been digging ever deeper into existing reserves. If this trend continues -- and there is every reason to assume it will -- the world is headed for a severe and prolonged energy crunch in the not-too-distant future.
To put this in perspective, bear in mind that the global oil industry has, until now, largely been able to increase its combined output every year in step with rising world demand. True, there have been a number of occasions when demand has outpaced supply, producing temporary shortages and high gasoline prices at the pump. But the industry has always been able been able to catch up again and so quench the world's insatiable thirst for oil. This has been possible because the big energy companies kept up a constant and successful search for new sources of oil to supplement the supplies drawn from their existing reserves. The world's known reserves still contain a lot of oil -- approximately 1.1 trillion barrels, by the estimates of experts at the oil major BP -- but they cannot satisfy rising world demand indefinitely; and so, in the absence of major new discoveries, we face a gradual contraction in the global supply of petroleum.
Signs of an Energy Crunch
It is in this context that the following disclosures, all reported in recent months, take on such significance.
* ConocoPhillips, the Houston-based amalgam of Continental Oil and Phillips Petroleum, announced in January that new additions to its oil reserves in 2004 amounted to only about 60-65% of all the oil it produced that year, entailing a significant depletion of those existing reserves.
* ChevronTexaco, the second largest U.S. energy firm after ExxonMobil, also reported a significant imbalance between oil production and replacement. Although not willing to disclose the precise nature of the company's shortfall, chief executive Dave O'Reilly told analysts that he expects "our 2004 reserves-replacement rate to be low."
* Royal Dutch/Shell, already reeling from admissions last year that it had over-stated its oil and natural gas reserves by 20%, recently lowered its estimated holdings by another 10%, bringing its net loss to the equivalent of 5.3 billion barrels of oil. Even more worrisome, Shell announced in February that it had replaced only about 45-55% of the oil and gas it produced in 2004, an unexpectedly disappointing figure.
These and similar disclosures suggest that the major private oil companies are failing to discover promising new sources of petroleum just as demand for their products soars. According to a recent study released by PFC Energy of Washington, D.C., over the past 20 years, the major oil firms have been producing and consuming twice as much oil as they have been finding. "In effect," says Mike Rodgers, author of the report, "the world's crude oil supply is still largely dependent on legacy assets discovered during the exploration heydays." True, vast reservoirs of untapped petroleum were discovered in those "heydays," mostly the 1950s and 1960s, but these reserves, being finite, will eventually run dry and, if not replaced soon, will leave the world facing a devastating energy crunch.
The notion that world oil supplies are likely to contract in the years ahead is hotly contested by numerous analysts in government and industry, who contend that many large fields await discovery. "Is the resource base large enough [to satisfy rising world demand]? We believe it is," affirmed ExxonMobil president Rex W. Tillerson in December. But other experts cast doubt on such claims by pointing to those disappointing reserve-replacement rates. "We've run out of good projects," said Matt Simmons, head of the oil-investment bank Simmons & Co. International. "This is not a money issue.... If these companies had fantastic projects, they'd be out there [developing new fields]."
That the major oil firms see few promising new fields to invest in right now is further suggested by reports that these companies are sinking their colossal profits in mega-mergers and stock buy-back programs rather than in exploration and field development. ExxonMobil, for example, spent $9.95 billion to buy back its own stock in 2004, while ChevronTexaco put out $2.5 billion to do the same. Meanwhile several big companies, including ChevronTexaco, are said to be eyeing California-based Unocal Corp. as a possible acquisition, and ConocoPhillips recently announced a $2 billion investment in Lukoil, the Russian energy giant. These moves are consuming funds that might have gone into new-field exploration -- yet another indicator of diminished expectations for major new discoveries. "If they had attractive things to invest in, they'd be investing their little heads off," explained PFC Energy managing director Gerald Kepes. But the great exploration opportunities of yesteryear "have largely dried up."
It is true, of course, that the private energy firms are largely barred from investment in Mexico, Venezuela, and the Persian Gulf countries, where oilfield development is the exclusive prerogative of state-owned companies. Hence, a major goal of the Bush administration's energy policy is to persuade or compel these countries to open up their territories to exploration by U.S. firms -- which, it is claimed, possess the advanced technological know-how that would make possible the discovery of previously unknown fields. But the energy professionals who run the state-owned companies insist that they do not need outside help to search for oil and that they have already mapped their countries' major prospects. Here, too, there has been a marked slowdown in new discoveries over the past decade or so.
The worldwide decline in new discoveries has profound implications for the global supply of energy and, by extension, the world economy. Given a recent surge in energy demand from China and other rapidly-developing countries, the U.S. Department of Energy (DoE) predicts that, for all future energy needs to be satisfied, total world oil output will have to climb by 50% between now and 2025; from, that is, approximately 80 million to 120 million barrels per day. A staggering increase in global production, that extra 40 million barrels per day would be the equivalent of total world daily consumption in 1969. Absent major new discoveries, however, the global oil industry will likely prove incapable of providing all of this additional energy. Without massive new oil discoveries, prices will rise, supplies will dwindle, and the world economy will plunge into recession -- or worse.
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