The Oil Patch Is Getting Slippery

Sure, Big Oil is raking in money. But new reserves are more elusive, and governments are bargaining harder

Times could hardly seem better for big oil companies. Buoyed by high crude prices, Western oil majors are reporting outsize profits. Stock valuations? They’re stratospheric.

But if investors knew the details of a recent auction of oil plots in Libya, they might temper their enthusiasm. Libya has thrown itself open for investment, and the oil majors of Europe and the U.S. have stormed in, hungry for a piece of the country’s 25 billion barrels in reserves. At an auction on Jan. 29 for exploration rights for 15 Libyan blocks, the bidding got so heated that the winners wound up with “extremely harsh terms that will make it difficult for them to make profits,” says Craig McMahon, an analyst at oil consultant Wood Mackenzie in Edinburgh. McMahon figures that for one block, No. 106, which was bid on by 16 companies and won by Occidental Petroleum Corp. (OXY ), the government is likely to capture upwards of 98% of the revenues, compared with around 80% on other deals in North Africa, where governments drive hard bargains. Occidental says McMahon’s estimate is too high and that it’s happy to get a stake in an underdeveloped oil patch. “The days that people had gotten used to, where oil was inexpensive and easily available — those days are gone,” says an Occidental spokesman.

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