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A Hazy Outlook for Private Oil Firms

Author: Lee Hudson Teslik
October 22, 2007

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At first blush, the two major stories dominating energy-market headlines seem an odd pairing. Even as oil prices skyrocket—they jumped over 10 percent in less than a week in mid-October, setting new records by surpassing eighty-eight dollars a barrel—news reports indicate that Warren Buffett, considered one of the world’s shrewdest investors, may be selling (AP) the last of his stake in PetroChina, China’s leading oil firm. Activists have long protested Buffett’s PetroChina holdings, saying the investment supports a company that operates in Sudan’s Darfur region. Some human rights groups thus claimed victory (WSJ) at the news of Buffett’s divestment. Yet industry experts poke holes in the idea that Buffett is caving on the Darfur question—similar pressures existed when he first purchased PetroChina shares in 2003—and highlight other, more pecuniary explanations for the sale.

Even discounting the political storm gathering over climate change, non-state-owned oil firms face a series of challenges that threaten to make them less attractive to investors. A sharp decrease in discoveries of new oil reserves ranks high among these concerns. Oil discoveries have tailed off rapidly since their heyday nearly fifty years ago. This chart, using data from the Association for the Study of Peak Oil and Gas, a Europe-based network of scientists, shows the dramatic historic decline in oil discoveries, and the coinciding increase in oil consumption.

A decrease in oil discoveries does not necessarily mean that the world is running out of oil—a lot has been discovered already, and research firms are continually coming up with new techniques, like horizontal drilling, to reach reserves in difficult-to-access places. As a new Backgrounder outlines, nonconventional exploration techniques are becoming increasingly lucrative as firms scramble for the resources still in the ground. Lee R. Raymond, the former chief of Exxon Mobil, said at a recent talk at CFR that “most people are reasonably comfortable that the resources are in the ground” to meet the world’s oil needs over the next ten to fifteen years, though he questioned whether sufficient investment capital exists to tap these resources.

Even if plenty of oil remains untapped, declining discovery creates a dynamic by which international oil firms increasingly depend upon countries with large oil reserves. This dynamic makes the return of “resource nationalism” all the more ominous for private firms, particularly as nationalistic policies spread beyond countries like Venezuela and Russia.

One example is Canada, listed by many experts as having the second-largest oil reserves in the world behind Saudi Arabia.* The Canadian government recently announced its intention to increase royalties on resources drawn from Alberta’s oil sands in a move that weighed heavily (Globe & Mail) on the stock prices of energy companies operating there. Though Canada says it will continue to encourage Chinese investment in Canadian oil, the prospects of a tightening tax regime still create an ominous business outlook. A Financial Times editorial concludes that Buffett, long praised as a market maven, has lived up to his reputation: “Mr Buffett was close to calling the bottom when he piled into PetroChina,” it says. “Even if he has sold short of the top, the investment has been an outstanding one.”

*Some estimates of Iraq’s reserves would make it the second-ranking nation in that regard, with the Federation of American Scientists recently pegging Iraq’s actual figure at 215 billion barrels (Brookings).

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