There is hardly a drawing room conversation at which I am present where the comment is not made, “so you are raking it in”, or the question asked, “where is the price of oil headed”? The comment reflects reality. With crude oil prices touching $120/barrel from around $85/b in February the companies are indeed in clover. Exxon has announced a first quarter earnings of $10.8 billion; Shell $9 bln and BP $7.6 bln. These are record results and well beyond the expectations of management and the market analysts. The question, however, suggests ignorance. Ignorance of the complexities of the international petroleum market; ignorance of the unpredictability of geopolitics; ignorance of the fallibility of the oil company executive. Who knows the direction of prices? Certainly not those who are in the business. Their projections to date have been strikingly inaccurate. This does not mean that they cannot offer cogent explanations for the recent price surge. But then hindsight has always proved beneficial.

Yes, if current profits are the benchmark for judging ‘the times’ then the oil companies are indeed in good shape. If, however, future growth and sustainable earnings are the touchstones then the picture has a cloudy edge. “The worst of times” may perhaps overdramatise the hue. But it does have the catch to forewarn against the blithe assumption that oil companies have little to worry about.

Success in the exploration and production of oil and gas requires a company to overcome three interlocking sets of probabilities. The probability that a given geologic structure contains hydrocarbons; the probability that the hydrocarbons will be located and the probability that once located the hydrocarbons can be commercially developed. No one gains if hydrocarbons are found but not produced. And that can happen because of either logistics, economics and/or markets. The Tripura gas field, for instance, was discovered decades ago but it remains under the surface because of the absence of a proximate market. Today the probability of locating hydrocarbons and then producing them on a commercial basis is more challenging than perhaps ever before. Why?

First, it is because the private companies do not have access to ‘easy oil’. Most, if not all, such designated oil is under the control of state-owned companies who understandably are disinclined to share their resource with the private sector. In consequence, they are now the dominant players in the market. A ranking of top 20 petroleum companies in the world by size of hydrocarbon reserves would place Exxon-Mobil, Shell and BP in positions 18, 19 and 20 respectively. The top 17 positions would be occupied by the state owned companies like Aramco (Saudi), Gazprom (Russia), Petronas (Venezuela) and Sonatrach (Algeria). To sustain growth, therefore, the private companies have had to extend their exploration activity into geologically complex, environmentally harsh and logistically labyrinthine acreages like the Arctic and deep waters. They have certainly measured up to the task. But they have also had to accept the reduced probability of finding new discoveries and the consequential hike in the overall finding and development costs.

It should be pointed out that the increase in costs is not simply because of geography and terrain. It is also because of general inflation in the costs of materials, equipment and technical personnel. The Cambridge Energy Research Institute (CERI) has estimated, for instance, that such costs have ratcheted by over 60 per cent over the period 2001-2006. And even then, the items are not readily available. A relatively new phenomenon confronting the oil industry is the longer lead times involved in accessing essentials like drilling rigs, etc. The CERI has estimated that these lead times have increased by 50 per cent over the past year. A further concern is the looming ‘skills deficit’. About 50 per cent of the technocrats in the oil/gas industry are of an age group that will retire sometime between 2010 and 2015. Companies may well find a ‘trained’ replacement but they will be hard pressed to secure the relevant operational experience. The consequential impact on design and execution will place further pressure on project economics.

The fundamental questions that an oil company executive must be thinking of even while declaring record profits are: where should the company invest? How can it grow in the face of increasing ‘resource nationalism’, complex geology, harsh geography, rising costs and cut throat competition. And perhaps most worryingly, how can the company meet the expectations of its shareholders and at the same time provide the energy needs of society on a sustainable basis?

The debate on climate change is substantively over. People may query the precision of the temperature hike and the time frame over which it will occur but few will oppose the assertion that fossil fuels are a significant contributor to global warming and that the world must shift towards a cleaner and more efficient energy economy. Equally, however, there is no escaping the reality that the world cannot do without fossil fuels for the foreseeable future. Certainly the reign of gasoline and the internal combustion engine does not look like coming to an early end. Yes, there are glimpses of alternatives — cellulosic biofuels converted from straw and other vegetable wastes and electric vehicles powered either by batteries or hydrogen fuel cells — but a lot more development and technological breakthroughs are still required for them to become competitive and reliable substitutes.

The deepening furrows on the brows of the oil company executive reflects these conundrums. Fossil fuels must be found and produced but this is no longer so straightforward. The money exists, but where to invest? The demand is growing but the environment compels restraint.

The drawing room conversationalist may genuinely believe that the oil companies could not have it better. A deeper understanding would mute this belief. A balanced view would be: the companies are caught in the crossroads of the best of times and the challenging of times.

The writer is chairman of the Shell Group of companies in India. Views are personal