Will Opec show us what it can still do?

Private majors are investing in their stockholders, not in production, leaving it down to Opec to drop prices

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By  Nicholas Wilson Published  December 4, 2005

With the private majors’ third-quarter profits making the energy giants look suitably bloated, western motorists, media, and politicians accuse them of opportunism and profiteering. This may tempt the Organisation of Petroleum Exporting Countries (Opec) to use its meeting this month to try to deflect the western public’s usual flurry of Opec bashing to scapegoats closer to home, such as local oil businesses. Such a tactic may be a mistake, however, leaving the world’s most successful oil cartel looking as if it is being tossed about on roiling markets instead of being at the helm. Today’s energy world is a far cry from 1960 when the CIA produced a secret, 43-page report, “Middle East Oil,” which devoted four lines to the newly formed Opec. But neither is Opec any longer the organisation that humbled the mighty US for backing Israel 30 years ago, and once controlled 80% of exports as it did when founded. Last month, the cartel’s acting secretary general, Adnan Shibhab-Eldin, said, “Oil companies should make an effort to invest downstream to resolve the bottlenecks,” and Libya’s energy minister, Fathi Hamed Ben Shatwan, chimed in: “Opec countries have been unfairly criticised,” and said that private oil firms should do more. They may give the impression to some that Opec is no longer in charge. And if it’s no longer controlling prices, then what’s the point in Opec? BP CEO John Browne clearly thinks there’s a point. In November, he said Opec determines how far oil prices fall, and that US $40 a barrel is the price that many members say they need to sustain their economies. There are also, of course, those who remember that when oil was down at $10 per barrel, the Saudis figured out that by watching consumers’ inventories and cutting production, the cartel could induce a short, sharp, shock to the market and boost its bank accounts. These critics say that Opec could do the reverse trick and pull a low-priced rabbit out of a barrel. Critics they may be, but at least they clearly believe in the mystical power of the Middle Eastern producers, even though before being abandoned its toothless quota system was viewed by some of its members in the same way motorists in Rome regard traffic regulations — more as friendly suggestions than as legal rules. The critics would dismiss any Opec exhortion of the majors to dig deep and build refineries, as the cartel playing to the crowd by waving a red herring. And it’s not hard for the crowd to view as oily villains the multinationals that spend billions on shareholders instead of on refineries or exploration to bring prices down. Indeed, major bashing at any time is an easy sport. Even on a good day their most optimistic PRO would admit that their image is too often perceived as one of irresponsable greed: causing oil spills, scheming to drill in protected Arctic wildernesses, and supporting dodgy regimes; rather than that of a nice guy who helps consumers drive across the road, and who cares about the environment and human rights. On a bad day, PR-wise, like one of those days when politicians on both sides of the Atlantic solicit votes by talking about taxing “obscene windfall” profits, and environmentalists demand they hand over billions to save the planet, their marketing people burn the midnight hydrocarbons to produce campaigns as slick as the oil their firms are accused of leaving in the sea. This year they have spent tidy sums in a PR blitz promoting the dual messages that “We’re all in the same boat” and “We really do care about the environment, you know.” BP has gone so far to look green that it’s even taken the word petroleum out of its name and launched the slogan Beyond Petroleum, alongside its logo of leaves and the sun, although more than 99% of its cash is still made from good old fashioned oil. A quick flick through Chevron, ExxonMobil, and BP’s adverts in The Economist, not exactly a lefty rag, could give the impression that they are first and foremost eco-warriors. Despite the marketing, the media still focuses on the numbers that would make any shareholder smile. Third quarter profits compared to the year before tell a tale: ExxonMobil, $9.9 billion, up 75%; BP $6.5 billion, up 34%; Royal Dutch Shell, $9 billion, up 68%; ConocoPhillips, $3.8 billion, up 89%; and Chevron, the poor relative, will have everyone reaching for their hankies with a humble 12% jump to $3.6 billion. Some analysts predict that this year ExxonMobil will make the largest annual profits of any company in world history, which will be greater than General Electric’s and Microsoft’s annual profits combined. Motorists will not be happy. And what are the cash-rich oil giants doing with their money? Well, they’ve given some $90 billion to their shareholders since 2000, by buying back and retiring their own shares, increasing the value of those that remain, and they have also pumped up their stockholders’ wallets via special dividends. None of this drops prices or increases production, where they are investing very little compared to the generosity they show investors. So it’s opportune timing for Opec to wag its finger at them, too.Yet at least one Opec member, Venezuela, is partially responsible for the majors’ reluctance to splurge on digging for more oil. One reason is the growing oil nationalism in countries, including Russia and Venezuela. Government-owned firms control the best oil fields and are forcing the private majors to explore more marginal sites. Despite increasing exploration investment to about $200 billion last year, for the fifth straight year they are taking more oil from their proven reserves of oil and gas than they are adding to them. State-owned firms have also become the major purchasers of oil and gas assets, accounting for more than half of all reserves bought since 2003. They have also started to invest heavily in building refineries. Another reason is that many big oil bosses don’t believe today’s high prices will last forever. Not only do memories of past oil price crashes spook them, today’s sky-high prices have driven up the costs of purchases. An exception to this thinking is Chevron, which paid top dollar for its controversial purchase of US oil firm Unocal. Chevron CEO David O’Reilly said: “The time when we could count on cheap oil and even cheaper natural gas is clearly ending.” Others, however, look at the cost of massively investing in refineries, which is particularly hard to do in the US due to regulations and their rate of return, and prefer to give the cash to their shareholders. If this trend continues, it will leave the world more dependent on Opec, which hopefully will address the issue in Vienna and say something new at its quarterly meeting. As the organisation predicts prices of around $45 to $55 per barrel next year the world’s eyes are on: Japan’s recovering economy, Chinese demand, US winter temperatures, Hurricane Katrina’s economic fallout, a strike at Europe’s largest refinery, UK nuclear power programme’s rebirth, and Russian output picking up again. None of which involves Opec.

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