Can U.S. Petroleum Companies Compete With National Oil Companies?

• Author: James M. Day
• Position: Professor the Washington College of Law
• Pages: 03

Professor Day teaches Oil & Gas Law, the Regulation of Energy, and International Petroleum Transactions at the Washington College of Law and practiced in the fields for over thirty-seven years. His third book, Oilmen & Other Scoundrels, was published in June 2004. It includes a chapter "Enronians & Other Scoundrels," from which this article is taken.

Page 57

THE WORLD IS FACING RECORD HIGH OIL prices. Supply cannot keep up with the demand for crude oil. The Paris-based International Energy Agency (IEA) forecasted an increased world demand of 2.1% in 2005 to 84.3 million barrels per day (b/d) that will reach 120 million (b/d) by 2025. Since 1985 more oil has been produced than discovered and the world is running out of places to look for new sources. As a result, every developed nation has an energy program except the U.S. Our Presidents and Congress have debated energy policy ad nauseam since the early 1970s. They implemented energy conservation and efficiency programs, developed alternate fuel sources, and improved technology, which helped. But their efforts are already factored into the IEA¥s estimates, which indicate that the U.S. energy supply has lost ground to demand. The U.S. offers few areas to drill for oil that are not considered environmentally off-limits and which will remain politically inviolate until the price of oil or our national security and economy reach unacceptable levels, which might be too late. America consumes 25% of the world¥s oil production, but has only two percent of the world?s reserves. The U.S. imports 60% of its petroleum needs, and the nation¥s crude oil production is declining. Those espousing America¥s "energy independence" in the near future are dreaming. We must open drilling in conceived environmentally sensitive areas under strict safeguards, conserve oil and obtain reliable sources of imports.

Political promises to shift our reliance from the Middle East and the Organization of Petroleum Exporting Countries (OPEC) are a fantasy. The Middle East has 57% of the world¥s crude oil reserves and OPEC has 72%. America¥s five major sources of imports are Canada, Mexico and OPEC members Saudi Arabia, Venezuela and Nigeria. All OPEC members, except Saudi Arabia, are currently producing at or near capacity. The only nations with the potential to increase production significantly are Russia, with its own self-serving political agenda; OPEC member Iraq, which is currently unable to produce its potential because of terrorism; OPEC member Iran, which is subject to U.S. sanctions; West Africa and the Caspian and Caucasus nations, which at best might add four million b/d. How the world will increase production by 42% over the next twenty years to produce 120 million b/d is an enigma.

The governments of every major nation, except the U.S., are scrambling to obtain oil supplies as an integral part of their economic and foreign policies. All hold the advantage of owning their minerals and have established national oil companies (NOCs) to develop their resources. NOCs are also responsible for assuring their nations have sufficient oil imports. This includes not merely purchased oil, but cheaper "equity" or "profit" oil from operations that reduce their nations¥ balance of payments.

In the U.S., minerals are privately owned except on state and federal lands and the outer continental shelf. The government depends on private companies to develop reserves and supply the nation with oil at a profit. The government, however, does little to support them compared to other nations. U.S. oil companies? only edge is their superior technology. NOCs are not constrained by having to earn profits and are backed by their respective governments, both financially and politically. And, in the quest for oil, government politics and support are crucial in obtaining or losing imported oil. A snapshot of U.S. competition is enlightening. Venezuela via its NOC, PetrÛleos de Venezuela SA (PdVSA), export 1.5 million b/d to the U.S. They own or have interests in eight U.S. refineries, and market gasoline at 1,400 U.S. Citgo stations. Its left-wing President, Hugo Ch·vez, has Page 58 called for developing nations to unite...