: It is the best of times; it is the worst of times’. Thus might one summarise the predicament of the international private petroleum companies.
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?
Vikram S Mehta
