Thomas P.M. Barnett :: Weblog

SPECIAL REPORT: "Oil's dark secret: Most of the world's oil reserves are in the hands of state-run companies, many of which are badly run," The Economist, 12 August 2006, p. 55.

Most people think the remnants of the Seven Sisters (the original seven global oil companies that defined and rule the market for decades) still control the price of oil, but they don't. ExxonMobil is the world's most valuable listed company ($412 billion), but it ranks 14th in terms of barrels in the ground.

The NOCs (national oil companies) rule that roost, controlling 90% of the world's oil and gas.

The NOCs "are prone to overstaffing, underinvestment, political interference and corruption," and that means all those Hubbert Curve calculations capture only the reality that's presented by the NOCs, who naturally seek to hide their incompetence at every opportunity.

Venezeula's sad PDVSA (Petroleos de Venezuela) ranks sixth in overall O&G reserves (after Saudi Arabia, Iran [the Avis of both O&G], Russia [Gazprom's mostly G], Indonesia and Qatar). But as this piece points out, if one included its "treacly 'ultra-heavy' oil," then PDVSA would be number one in the world.

How to get at those reserves? High demand driving up prices helps. Got that going in spades from New Core economies in the Asia.

But you also need investments and a good company to run them, and PDVSA, under Chavez's grip, is going nowhere on that measure.

Too bad, because years ago, PDVSA was one of the best-run NOCs in the world.

When Chavez shows up and starts squeezing the firm for profits, investments drop, managers left amidst Chavez's constant accusations of corruption, and naturally, as state involvement grew, so did the corruption.

Now, PDVSA is one of the most poorly run NOCs in the world, as Chavez replaces real managers with cronies. So investment dries up because these incompetents can't get their tech specs correct. Another good sign is the steep rise in fatal accidents.

This is classic Big Man bullshit, as Chavez's cousin now runs the firm's shipping arm. His qualifications? Doesn't need any. Nor does his bro running oil sales around the Caribbean, which are highly subsidized to win political favor.

Yes, yes, Chavez rewards family, like any good dictator.

The latest brainchild of the "brilliant" Chavez? An expensive gas line to Brazil that would, according to one expert, "bring gas that does not exist to markets that do not exist."

Nice.

It is definitely true that NOCs tend to be secretive, leading the oil-peak enthusiast crowd to new levels of assertions that no one can prove.

But the key problem here is, as the article points out repeatedly, the underinvestment problem. Indonesia's NOC sits on the third largest oil reserves controlled by a single entity, and yet, due to underinvestment, Indonesia now imports oil.

Here's why we don't have a clue on what the world's oil reserves truly are: "The fact that NOCs are sitting on the vast majority of the world's oil but pumping only about half of global output suggests a systematic failure to invest."

Nationalization of energy reserves has been a systematic failure. Weak governments rely too much on the NOCs to be pseudo-governments in their place, and that makes them crappy oil companies who spend as much or more time distributing social welfare payments than surveying untapped fields.

The existence of the poorly-run NOCs is a primary reason why global oil demand will peak long before oil-production does. All this underinvestment will simply push the global economy down the hydrocarbon chain faster than would have otherwise occurred.

And yeah, that's ironic. These "all powerful" firms are actually running their industry into the ground--historically speaking--through their incompetence. They don't "run" anything, truth be told. Globalization will simply demand--and get--movement down the carbon chain as it needs it.

Update: Added Economist link above. It's worth the click through if all you look at is the graph (which I believe was linked at Coming Anarchy recently). Crazy to see Exxon Mobil all the way down there. Really puts it in (visual) perspective.