Big Oil faces threats to its profits and future

The global companies are having a tough time finding new fields.

SAN FRANCISCO CHRONICLE

These should be the best of times for Big Oil.

Petroleum prices have tripled in five years, and gasoline prices reached record heights last summer. International oil companies are making the kind of money most capitalists can only dream of.

Chevron Corp. reported a record annual profit, topping $18.6 billion. And that’s less than half of what Exxon Mobil made last year. Exxon earned $40.6 billion in 2007 — the largest annual profit for any American company, ever.

And yet, for an industry awash in income, Big Oil faces serious long-term threats. Its profit and its very future are under pressure, both at home and abroad.

The large, global companies commonly known as Big Oil — companies such as Exxon, Chevron, BP and Shell — are having a hard time finding enough new oil fields to replace the petroleum they pump out of the ground. And the fields they’re finding are in hard-to-reach places like the bottom of the sea, where drilling and pumping costs far more than it does on land.

The oil fields they do control account for only about 6 percent of the world’s known oil reserves. Government-run companies in oil-producing countries, such as Saudi Aramco in Saudi Arabia or the National Iranian Oil Co. in Iran, have the rest.

“I think they are taking this seriously as an economic threat,” said David Hamilton, director of the Sierra Club’s global warming and energy program. “When you get to 2040, it’s unclear what they’re going to do.”

The firms are starting to invest in renewable energy and alternative fuels. Chevron Chief Executive Officer David O’Reilly has often said his company can adapt to the world’s changing energy picture. Chevron will supply energy in multiple forms, although he insists oil isn’t about to disappear.

“We’re a pretty resilient bunch,” O’Reilly once said. “We’ll be around. We’ll be selling energy. We’ll be providing energy services. But I’m confident it will be quite different than it is today.”

Right now, Big Oil’s main business could hardly be better. Just five years ago, crude oil prices on the New York Mercantile Exchange hovered around $30 per barrel, roughly the same level they’d held for years. They briefly touched $100 last month and since have been trading at about $90.

One of the main reasons for that increase has been the perilously thin margin between the amount of oil the world produces and the amount it consumes. From 2003 to 2006, the last year for which complete data are available, the world’s oil production grew 6.25 percent, to reach 84.6 million barrels per day, according to the federal Energy Information Administration. But demand for oil grew faster, pushed by the growing economies of China and India. Worldwide demand rose 6.43 percent to 84.73 million barrels per day.

Most of the world’s oil reserves lie in the hands of government-controlled oil companies. And as prices rise, those governments have become much more assertive. They have more money to develop oil fields themselves and can hire service companies to supply any technical expertise they may lack. When they form joint ventures with Big Oil, they demand a bigger share of the profit than they once did.

“The bargaining position of the resource owners is enhanced incredibly,” said Kenneth Medlock, an energy studies fellow at Rice University’s Baker Institute for Public Policy. As a result, peak oil isn’t the problem — access is.

“I think the issue is above ground,” Medlock said. “It’s geopolitics instead of geology.”

Then there’s the issue of climate change — perhaps the biggest wild card in Big Oil’s future.

Many countries have already committed themselves to lowering their carbon dioxide emissions, which is hard to do without cutting back on oil and gasoline use. In the United States, congressional Democrats have made it one of their priorities, and about half of the states are exploring ways to do it if the federal government doesn’t. Last year’s federal energy legislation mandated a dramatic increase in the use of biofuels —alternatives to petroleum.

After years of silence on global warming, or trying to prevent action on it, the oil companies are now staking out their positions. BP and ConocoPhillips have joined an organization of businesses calling for federal legislation that would require cuts in greenhouse gases.

“We’re already hurtling toward a very different future,” said Richard Duke, director of the Natural Resources Defense Council’s center for market transformation. “The better oil majors are already out in front of this issue, at least on grappling with policy.”