Big Oil, No Mojo.(Business)

Byline: Stefan Theil

With BP battered in Russia, and Total looking beyond petrol to nukes, what does the future hold?

BP CEO Tony Hayward is fighting the biggest battle in the British oil giant's history since it enlisted the CIA to overthrow the Iranian government for nationalizing the company's holdings in 1953. Except this time, the odds seem stacked against the company. BP has withdrawn executives and specialists from Russia in a battle over control of its Russian joint venture, TNK-BP. BP chairman Peter Sutherland has accused the Kremlin of turning a blind eye to an asset grab by BP's partners, four powerful Russian oligarchs. Were BP to be forced out, as many analysts now expect, the British company would in an instant lose a quarter of its oil production and as much as a third of its reserves. One analyst warned last week that a debacle in Russia could make BP ripe for a takeover.

The escalating dispute is emblematic of the problems facing Big Oil--shrinking access, falling profit margins, underinvestment in equipment and technology and a business model that's increasingly questioned. Major Western oil companies like BP, Exxon and Shell have dominated the industry for more than half a century, but the skyrocketing price of crude has shifted power to the countries owning the oil in the ground. They favor their own national oil companies, and are demanding an increasing slice of the pie--when they deign to share it at all. It's no wonder investors seem to be losing confidence in Big Oil's business model: last week, after Exxon reported the largest quarterly profit in global corporate history, its share price fell by 2 percent, and has now fallen 12 percent so far this year. With Exxon struggling to bring new fields on line, gas and oil production was actually down by 8 percent. The company spent a record 66 percent of last year's cash flow on stock buybacks and dividends--for lack of better investment opportunities.

It is by now fairly common knowledge that the Western majors today own a mere 5 percent of the world's oil reserves, compared to more than 70 percent in the 1970s (the rest is controlled by governments). That shift is sharply cutting into Big Oil's share of joint projects (more than 20 countries have taken a higher share of oil revenues in the past five years, according to Wood MacKenzie analyst Graham Kellas), or forcing them out of countries altogether. In May 2007, Venezuela kicked Exxon out of South America's largest oil field, the Orinoco Belt. The same year, Russia's Gazprom seized control from Shell of a majority stake in the $22 billion Sakhalin 2 oil and gas project. The power shift seems permanent and more squeeze outs are set to follow. "Governments and national oil companies are now setting the rules and the international oil companies can either follow them or get out," says Robin West, chairman of PFC Energy, a Washington-based consultancy.

National oil companies have also become tough competitors outside their home markets. Because state-controlled companies like Petrochina have a mandate to secure resources for their countries rather than extract profits for shareholders, ...