[lbo-talk] political constraints on oil production

Doug Henwood dhenwood at panix.com
Thu May 10 16:29:31 PDT 2007

Financial Times - May 10, 2007

Politics and easy profits signal global oil crunch By Sheila McNulty in Houston

In the oil business, the constant development of new technology has created the adage "good fields just keep getting better and better".

Companies are able to get more out of oil fields than they expected even a decade ago. Yet if they cannot access those fields, the oil within is not going to come to market.

A study by PFC Energy, the respected consultancy, shows world oil supplies might well fall behind growing demand in the long term as political factors limit production capacity increases in key producing nations.

"The full impact of the nationalisations that took place in the 1960s and 1970s are taking effect now," says Robin West, chairman of PFC Energy.

Key national oil companies are not making the needed investment, either because resource nationalism is leading them to block out technologically advanced international oil companies or because they are making so much money from current fields that they do not see the need to reinvest.

The report singled out Mexico, Venezuela, Iran and Iraq as declining producers. It listed Russia and Kuwait as stagnant producers and Saudi Arabia - only just - as an expanding producer, with qualifications.

Lord Truscott, UK parliamentary undersecretary of state for energy, says countries such as Russia could have problems in future if their national oil companies do not have sufficient funds to invest in new fields, while other countries must attract western investment and technology to increase production capacity.

PFC says the Cantarell field, which accounts for two-thirds of Mexico's production, is declining rapidly, yet developing deep-water exploration could hold production steady if not boost it.

Venezuela could significantly increase production if it encouraged investment in heavy crude. Yet its move this month to nationalise major fields is likely to have the reverse effect, as the international oil companies get less for their investment.

In Iran, prospects for capacity increases are not favourable, given the political environment.

Iraq is seen as a "wild card". Pre-war production capacity was significantly higher than current levels, but new investment could reverse that trend.

PFC lists the stagnant producers as Russia and Kuwait. Russia's production levels are expected to flatten, it says, and without better management and capital, investment inflows are likely to remain flat. That seems especially probable given President Vladimir Putin's statements that current output levels are "appropriate".

Kuwait's courting of international oil companies to boost production has stalled on political infighting.

Saudi Arabia has said future demand for its production may advance its efforts, but Saudi Aramco, its national oil company, has said increasing production too much might run down its reserves faster than the country would like.

The impact of continued depletion and stagnation of oil production capacity will not be felt for some time, given that other producers are expanding production, many of them in partnership with international oil companies.

In Kazakhstan, Angola and Nigeria, for example, production is expanding with the aid of outside investors, says PFC, which says that Brazil has created a strong and innovative national oil company that funds and develops production increases on its own.

"The scale of these additions, however, is limited and will peak in relatively short order," PFC says.

Whether the declining and stagnant producers will step in at that point remains to be seen.

"For the first time in this petroleum cycle, the national oil companies have a major responsibility for supporting world oil markets over the long term," Mr West says.

"The real challenge is whether the national oil companies will meet their responsibility to bring the oil to market,"he says.

It is unclear whether that responsibility is as important to those countries as meeting their needs at home.

For, as Jim Mulva, chief executive of ConocoPhillips, the US's third largest oil company, says: "The [national oil companies'] host country may have other strategic objectives, which may limit the speed by which they develop their resources."

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