Barriers to entry in the oil market

In the 1960s, 85% of known reserves worldwide were fully open to the international oil companies. That number is now 16%. The rest of the world’s oil and gas is either restricted or entirely cordoned off. “You don’t have an infinite number of prospects to drill anymore,” says T. Boone Pickens, the raider and oil patch veteran. In 1979, U.S. and British companies accounted for 27.8% of world oil and gas production. By 2004 their share was just 14%, says Bernard J. Picchi, an analyst at Foresight Research Solutions LLC in New York. National champions such as Saudi Aramco, Kuwait Petroleum, and Mexico’s Pemex outweigh publicly traded oil companies in the production contest. “Everyone is pointing their fingers at the ExxonMobils, but they are relatively small players,” says Gal Luft, co-director of the Institute for the Analysis of Global Security.

While the international majors are not the altruistic utilities that U.S. politicians might wish them to be, their main interest is in efficiently extracting and selling oil and gas. Even when they struggle, as Royal Dutch Shell PLC has in Sakhalin in Siberia, the Western oil majors are usually best equipped to tackle the hardest projects. National oil companies, though, often have a different agenda. “More and more production and reserves are controlled by governments or institutions that have more of a political than a commercial motive,” says Gerald Kepes, a managing director at PFC Energy. “That has a huge impact on pricing.”

The track record of Petróleos de Venezuela (PDVSA), the Venezuelan national oil company, is a striking example. For President Hugo Chávez, PDVSA is a cash cow for social programs, and developing new production is apparently a low priority. Since 1998, just before Chávez took power, PDVSA’s output has fallen by 46%. [Business Week]

[Hat tip: Brandon Henak]

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