Leaders
National oil companies
Really Big Oil
Aug 10th 2006
From The Economist print edition
Sluggish behemoths control virtually all the world's oil; they should be privatised
AP
WHEN activists, journalists and others speak of “Big Oil”, you know exactly what they mean: companies such as Exxon Mobil, Chevron, BP and Royal Dutch Shell. These titans have been making lots of money for their shareholders; their bosses enjoy vast pay packets; and their actions affect us all. BP's decision to shut down Prudhoe Bay, America's biggest oilfield, to repair leaking pipes is a case in point, outraging many and pushing petrol prices even higher (see article).
Yet Big Oil is pretty small next to the industry's true giants: the national oil companies (NOCs) owned or controlled by the governments of oil-rich countries, which manage over 90% of the world's oil, depending on how you count. Of the 20 biggest oil firms, in terms of reserves of oil and gas, 16 are NOCs. Saudi Aramco, the biggest, has more than ten times the reserves that Exxon does. Those with misgivings about oil—that its price is too high, that reserves are running out, that it damages the environment, that it is more a curse than an asset for countries that produce it—must look to NOCs for reassurance.
These companies are certainly sitting on a reassuring amount of oil. Saudi Aramco's proved reserves alone could keep the world supplied for several decades. But it is only exploiting ten of its 80 or so fields, so will be able to pump at the present rate for about 70 years even if it never discovers another drop of oil. In fact, Aramco and other NOCs are likely to find plenty more if they look, since their territory has not been very thoroughly explored. Only 2,000 wildcat wells have ever been dug in the countries around the Gulf, according to Leonardo Maugeri, an Italian oilman, compared with more than 1m wells in the United States.
But if the amount of oil at state oil companies' disposal is not much of a worry, the way they manage it certainly is. Few of the princes, politicians and strongmen who wield ultimate authority over these firms can resist the urge to meddle. At best, that leads to the sort of inefficiencies found at most state-owned firms: overstaffing, underinvestment and so on. At worst, the business of pumping and selling oil is entirely subsumed by politics, as in the case of Petróleos de Venezuela, one of the biggest NOCs (see article). In either case, NOCs produce less oil, more expensively, than they should.
The people's oil, not the bureaucrats'
That is bad for consumers, of course, in so far as it pushes up the price of oil. But it is also bad for oil-producing countries, which could be squeezing more profit from each barrel if their NOCs were more efficient. Moreover, there are several NOCs not bound by OPEC quotas, such as Mexico's Pemex and Russia's Rosneft, which would love to boost production to take advantage of the current high price, but are struggling to do so.
The easiest way to improve state oil firms' performance would be to privatise them. The authorities, no longer torn between nurturing their NOCs and milking them for all they are worth, could concentrate on maximising their oil revenue through taxes and royalties. Failing that, governments could instil a little market discipline by subjecting their NOCs to competition, either by encouraging them to expand abroad or by allowing foreign firms some access to their home territory. At least, they should grant NOCs operational autonomy, and allow them to retain and invest some portion of their earnings. The less bureaucrats interfere, after all, the more money their oil companies will generate for them to spend.
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In its August 10 edition, ''The Economist'' magazine asserts that Saudi Arabia can continue producing oil at its current production levels for 70 years, without having to look for another drop. Further, the magazine claims that the nation could find ''"plenty more if they look"'', calling for privatisation of national oil companies to help increase oil production.

The language is provocative - the world has plenty of oil, and only requires sufficient investment and exploration to find it. This is a line that ''The Economist'' has held for some time, certainly since before its now infamous March 1999 issue proclaiming that we were "drowning in oil" and featuring a prediction of US$5 per barrel. That issue was followed by an embarrassing retraction in December of that year, as oil started its steady climb. It now sits above US$70 per barrel.

However, petroleum geologists and energy investment specialists maintain a different view of oil reserves. They say that there is a limit to what is in the ground, and further to that, a limit to how much of it we can retrieve even with advancing technology. Just how much is down there can't be said with any certainty, for a variety of reasons. A big one is the suspicious reserves figures given by producers in the Middle East, including Saudi Arabia. Since OPEC starting using a quota system based on reserves, the estimated reserves for member nations has magically risen, and even continued rising in the face of increased extraction from those reserves.

Amongst those who deal with the physical realities of oil fields, forecasts of a peak in production vary between 30 years, as the USA's Energy Information Administration suggest, and now, as suggested by the Association for the Study of Peak Oil and Gas and other more pessimistic forecasters. A peak in production would then be followed by decline. Certainly, in the petroleum world, there is no serious suggestion of sustaining the current level of oil production for 70 years.