The Rise of National Oil Companies and Peak Oil

Amy Myers Jaffe

James A. Baker III Institute for Public Policy,Rice University

February 14, 2008

Saudi ArabiaCanada

IranIraq

UAEKuwait

VenezuelaRussia

LibyaNigeria

United StatesChina

MexicoQatar

AlgeriaNorway

KazakhstanBrazil

AzerbaijanOman

Rest of World

0 50 100 150 200 250 300

Billion Barrels

World Total:1,266 Billion Barrels

World Oil Reserves by Country

"Worldwide Look at Reserves and Production,“ Oil & Gas Journal, December 22, 2003

Control of World Oil Reserves

Control of Oil Reserves, 2005

NOCs77%

NOCs-IOCs jointly

7%

IOCs10%

Russian OCs6%

Majority of remaining oil resources are controlled

by traditional state monopolies and emerging partially privatized firms.

World Proved Crude Oil Reserves, 1980-2006

-

200

400

600

800

1,000

1,200

1,400

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Bil

lion

Bar

rels

OECD RoW

Iran, Iraq, Venezuela,

UAE

Alberta oil sands

Saudi Arabia

The Largest Five IOCs represent 20 percent of non-OPEC Production with 9.7 million b/d and had $150 billion in operating cash flow in 2006

(compared to $50 billion for the next largest twenty American firms).

Source: Baker Institute Working Paper: The International Oil Companies

Non- OPEC Production 2006

ENI2%Total3%

Pemex7%

Petrobras4% Total

Chinese8%

Big 520%

Next 20 US4%

Other27%

Total FSU25%

The Largest Five IOCs spent 56 percent of operating cash flow in 2006 on stock buybacks and dividends.

Source: Baker Institute Working Paper: The International Oil Companies

Figure 3: Selected Outlays (Big 5)

0

10,000

20,000

30,000

40,000

50,000

60,000

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Milli

ons

of D

olla

rs

Purchases of Equity Dividends Exploration Development Property Acquisitions

The Next Twenty American Firms are spending the same amount on exploration as the Largest Five IOCs.

Source: Baker Institute Working Paper: The International Oil Companies

Figure 6: Exploration Expenditues

-

2,000

4,000

6,000

8,000

10,000

12,000

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

$ M

illio

ns

Next 10 US Big 5 Next 20 US

The Largest Five IOCs are struggling to replace reserves.

Source: Baker Institute Working Paper: The International Oil Companies

Reserve Replacement Ratio

0

50

100

150

200

250

300

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

100% Replacement Big 5 Next 20

IOC Profile

• In 2005, the Big five firms account for 56% of profits and reserves, 64% of output and 31% of expenditures on exploration of the 135 private (US and foreign) companies for which the Oil and Gas Journal collects data. The Big Five also dominate the US gasoline market, with roughly 62% of the retail market and 50% of refinery capacity.

• The exploration spending of the five largest IOCs has been flat to lower in the aftermath of OPEC’s

reinvigorated effort to constrain market supply in 1998. Given the rise in costs of material, personnel, and equipment such as drilling rigs, the five largest IOCs have in effect cut spending levels in real terms over the past ten years. This trend appears, however, to be easing, with exploration spending by the five largest IOCs rising by 50 percent in 2006, from 2005.

• Instead of favoring exploration, the five largest IOCs have used (in 2006) fifty-six percent of their increased operating cash flow on share repurchases and dividends. They have also increased spending on developed resources, presumably to monetize these assets quickly while oil prices are high.

• Oil production for the Five largest oil companies fell from 10.25 million barrels a day in 1996 to 9.45 million b/d in 2005 before rebounding to 9.7 million b/b in 2006. By contrast, for the next twenty American independent oil firms, their oil production has risen since 1996, from 1.55 million b/d in 1996 to about 2.13 million b/d in 2005 and 2006.

• The next 20 largest privately traded American oil firms have not followed a similar pattern. Instead, they have steadily been increasing exploration spending since 1998 and their exploration spending levels are now equal to that of the five largest IOCs. This differing pattern comes despite the fact that the five largest IOCs have access to operating cash flow that is three times the size of the next 20 largely traded American oil firms. This exploration spending trend would indicate that these 20 next largest privately traded American firms will control an increasing portion of non-OPEC oil production in the coming years.

IEA Base Case Reference Scenario: Increase in World Oil Supply, 2004-2030

Under a business as usual scenario, world will increasingly rely on Persian Gulf and unconventional oil, including about 3.5 to 4 million b/d of Canadian tar sands production, 1.5 to 2 mb/d of

upgraded heavy oil, 2.4 mb/d of gas to liquids and 1.7 mb/d of coal to liquids, oil shale, etc

S.Arabia

Iraq

Iran

Other

0

5

10

15

20

25

OPEC conventional Non-conventional Non-OPECconventional

mb/

d

OPEC capacity has fallen, not increased, since 1979

Opec can replace allIraqi/Kuwait oil in 1990

Asian economic crisis leaves extra capacity in 1998

Demand bumpsup against capacity

Member Country 1979 1983 1990 1997 1998 2000 2001 2003 2005

Saudi Arabia 10.84 11.30 8.00 9.65 9.80 9.50 9.90 10.15 10.30

Iran 7.00 3.00 3.10 3.70 3.70 3.75 3.80 3.80 4.00

Iraq 4.00 1.50 3.60 2.30 2.80 2.90 3.05 2.20 1.80

Kuwait 3.34 2.80 2.40 2.40 2.40 2.40 2.40 2.50 2.60

UAE 2.50 2.90 2.20 2.40 2.40 2.40 2.45 2.50 2.40

Qatar 0.65 0.65 0.40 0.71 0.72 0.73 0.75 0.75 0.82

Venezuela 2.40 2.50 2.60 3.45 3.30 2.98 3.10 2.50 2.50

Nigeria 2.50 2.40 1.80 2.00 2.05 2.10 2.30 2.30 2.30

Indonesia 1.80 1.60 1.25 1.40 1.35 1.35 1.30 1.15 0.90

Libya 2.50 2.00 1.50 1.45 1.45 1.45 1.45 1.45 1.60

Algeria 1.23 1.10 0.75 0.88 0.88 0.88 0.88 1.15 1.35

Total 38.76 31.75 27.60 30.34 30.85 30.44 31.38 30.45 30.57

Call on OPEC 34.01 16.65 22.20 27.59 25.85 30.04 28.23 29.20 29.87

Spare Capacity 4.75 15.10 5.40 2.75 5.00 0.40 3.15 1.25 0.70

OPEC Production and Spare Capacity, 1979-2003 (mmbbl/d)

Billion Barrels Available per Price Outlook

• Does Peak Oil Matter?

At Current Prices, Unconventional Oil is Economical as is Liquefying Coal

Projected Gas-to-Liquids Projects

Source: Asia Pacific Consulting

Gas-to-Liquids Production

0

100

200

300

400

500

600

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Th

ou

sa

nd

Ba

rre

ls p

er

Da

y Oryx Plus (possible)

Escarvos (planned)

Pearl (planned)

OryxMossel BayBituluSasolberg (CTL)