Big oil may have to get even bigger to survive

Multinational oil companies are having a tough time. Crude prices are falling, maintaining production is a struggle, yet taxes set by the world’s resource-rich nations are rising – as are costs. Topping it all is a rising trend of energy nationalism stretching round the globe.

The problems raise several linked questions in the minds of experts: is this a taste of the future for the majors such as Exxon, Shell and BP? More provocatively, is there a future for these companies as we know them? Or will they have to change what they do dramatically – even merge, as Shell and BP are rumoured to be considering, to create super-giant companies?
The root cause is that access to the world’s remaining oil and gas will only become harder. Roughly 20 per cent of global reserves are held by the multinationals, while 80 per cent are held by national oil companies, mainly state-owned in asset-rich countries, such as Saudi Aramco or the National Iranian Oil Company. The reserve position of the multinationals is much weaker than their production (total reserves are based on proven quantities that can reasonably be expected to be recovered, and therefore under estimate the amount of oil left in the world). This means that unless they can improve their reserves, production will fall dramatically. Recent experience does not bode well. Morgan Stanley says that in 1997, oil majors replaced 140 per cent of their reserves; in 2005, it was 75 per cent. In short, the companies are shrinking.

Observer