Wednesday, November 17, 2004

A Changing Oil Ecology
Most of us grew up with a pretty clear perception of the difference between the small, independent oil companies and the giant, multi-national oil majors: the former took risks the latter didn't want to take on. While that may still be true in some instances, a decade or more of evolution and selection--natural and otherwise--have changed both the size and nature of the various niches in the industry's ecology. As this article on the UK North Sea from the Economist (subscription may be required) illustrates nicely, small companies are increasingly focusing where the rewards are too small for the majors, while the majors seek opportunities more material to their scale, often with higher risk.

This shift is the natural consequence of a period of mergers and fierce cost competition, and it has implications for global energy supply, as well as for the firms that provide it. The majors must constantly assess the relationship between sustaining and growing their production, and the need to deliver high returns to their shareholders. The extremely tight oil markets we are experiencing now are at least partly the result of this deference to capital markets, rather than to oil markets.

But there are other implications for the smaller companies. They are having to become as international as their larger brethren, and in the process must manage a whole range of political risks and cultural sensitivities--along with issues such as sustainable development and climate change--that would have been rare in the earlier heyday of the independents. They have also benefited from the maturation of producing technologies that were previously the exclusive province of the majors, such as 3-d seismic and enhanced recovery.

Several years ago, majors were busily snapping up the small-fry, and there were real questions about the future role of independents in the industry. Perhaps there should now be some questions about the majors. Many of the more mature fields--some with quite a bit of oil left to produce--are in the hands of independents, while the largest and best opportunities remain the exclusive province of national oil companies such as Saudi Aramco.

Finding and developing enough oil each year to maintain their reserves will become an increasingly difficult challenge for the majors, as demonstrated by recent figures from Wood Mackenzie (subscription required) showing that the exploration efforts of the 10 largest oil companies failed to recover their costs over the last three years. In the meantime, the future looks bright for those independents that specialize in making lemonade out of the majors' lemons.

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