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Big oil slips up

Stephen Beard Oct 31, 2006

KAI RYSSDAL: Oil traders put a temporary end to the bleeding today. Bounced back off Monday’s 4 percent drop to close up about 37 cents at $58.73.

Prices a lot higher than that gave Big Oil a lift this summer. Almost all the major oil companies brought in record profits in the third quarter. But a closer look at the books shows signs trouble. Companies are having problems finding and pumping more crude. Running short of your main product can be a problem. And Marketplace’s Stephen Beard reports from London the companies themselves may be partly to blame.

STEPHEN BEARD: This is the story of a classic business blunder: How the major oil companies surrendered their ace.

The story begins in the 1980s. Large traditional companies like the oil majors came under pressure from the stockmarket to cut their costs. And cut they did by shedding many of their staff scientists and engineers. Axel Busch of Energy Intelligence:

AXEL BUSCH: Geophysicists, geologists . . . It was horrendous, and it was brutal, and it was unnecessary.

And, as we will see, self-defeating. The companies shed more specialist staff in the late 1990’s. Carl Mortished, international business editor of The Times, says after the price of oil collapsed to just $10 a barrel in ’98, the companies came under more pressure to cut costs. And they succumbed:

CARL MORTISHED: They removed large numbers of staff, quite capable engineers and technicians. They tried to become what you might call a virtual oil company. It was during the dot-com boom. They were trying to convert themselves to something more outsourced that fitted the fashion of the moment.

Oil field service contractors like Halliburton and Schlumberger snapped up the geologists and the drilling experts that Big Oil had let go. Big mistake, says Chris Skrebowski of Petroleum Review:

CHRIS SKREBOWSKI: They allowed, if you like, the contractors to take on some of the specialist expertise that they’d previously had in-house. Up to that point they’d had a near monopoly on the sort of top-flight skills.

The impact of all this outsourcing is now all too appartent, says Carl Mortished. The major oil producing countries in the Middle East and elsewhere used to depend heavily on Big Oil to help them find and extract their crude. Not anymore:

MORTISHED: They can hire from the oil service companies drillers, technologists and so on who can put together quite sophisticated pieces of equipment and run them for them without the need for the Exxon-Mobils, the Shells and the BPs.

And they don’t need Big Oil’s money either. The producing countries are themselves awash with cash. Big Oil is beginning to feel the squeeze. Russia is preparing to develop the world’s biggest offshore gas field with enough reserves to supply all of America’s natural gas needs for five years. But Russia is going it alone, doing without any help from western multinationals. A clear sign of the times, says Nick Redman of the Economist Intelligence Unit:

NICK REDMAN: I think because oil field service companies are now more readily available. And at the same time, with oil prices so high Russia’s financial resources are that much stronger. And so the two big reasons to go to Big Oil, which is technical skills and financial power, they’re no longer quite so persuasive.

The Big Oil companies may be making big profits now but, say the analysts, the going can only get tougher. From here on in the scramble to find and pump more oil is sure to intensify.

In London, this is Stephen Beard for Marketplace.

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