KUWAIT: The recent announcements of 3rd quarter financial results for major international oil companies produced bad results in comparison to last year''s bonanza results. All of the international oil companies (IOCs) are maximizing costÜcuts to the limit. Most of them are also reducing their man power by cutting them by 10 percent and more. Shell is reducing their staff by 5000 and merging units.
Exxon Mobil, the world biggest oil company, reported last week that its profits fell by 68 percent in the 3rd quarter, while Chevron dropped by 51 percent, and Shell by 62 percent. Certainly not good news for IOC, but these are real facts. As oil prices dropped by more than 52 percent from its peak of 147 US dollar, this level is better than the $32 per barrel of December last year, which would have made the IOCs'' results much worst.
The overall opinion is that oil prices have reached their lowest; that $70 per barrel is the bottom line and everyone has to work around it. Despite the fact that demand for oil is increasing and that next year''s supply will be exceeding the demand, with new surplus reaching about 150,000 barrels per day (bpd), actual demand will be in the region of 30,000 bpd. This is figure is worrying to both oil producing countries and IOCs. Oil companies, however, are confident that they can manage their business.
Oil companies know that era of merger and acquisition is over and they have to come up with other ideas. Since the synergy is no longer there, if say BP to merge with Shell for example, no value will be created nor added to their base resources. The only valuable option is join forces with other growing oil companies that have the cash resources and strategic values in the East, with the likes of Petrochina, or Singopect or Vietnam Oil Company for example.
The best illustration is the Pertochina example, with BP in Iraq and the Rumillah field joint venture (JV). Or a better example is the recent JV between Kuwait Petroleum Corporation (KPC) and two Japanese companies and Vietnam for building a 150,000 bpd refinery in Vietnam, or the JV of Saudi Arabia''s Aramco with Total or ConocoPhillips.
Now the philosophy is changing with time and circumstances and mainly with the function of oil prices. Or because of the excessive power of IOCs of the fifties and the sixties. In the fifties, IOCs were controlling government; making and creating governments. They brought down the government regime in Iran and boycotted Iranian oil, opting to increase their oil supply from Saudi Arabia, Iraq and Kuwait and leaving Iran penniless. All of this led to the collapse of the Prime Minister Mosadeq''s regime.
Now that oil prices are settling comfortably at a globally acceptable rate of $70 a barrel, the question remains for how long and will it be enough to satisfy oil producing countries and the IOCs. Such acceptable level should be maintained for the next two years if we want to have economic stability and nominal growth, especially since the prospects for growth on oil demand are not forecasted. Any oil demand forecasted will be from Asian countries such as China and India, which will undoubtedly be met from the current excess availability.
Stable oil prices is the key for future economic growth, and oil producing countries must discipline themselves by not overproducing and by having the mechanism of maintaining adequate supply through insuring the level of $70 per barrel.
Any imbalance in oil supply will lead to the weakening of oil prices and eventually to fatal economic results, which will hurt all of us. IOCs, however, can always manage their business by cutting their work force at any time. On the contrary, oil producing governments can''t reduce the number of their employees as it will lead to their end.
Balancing oil supply is therefore the answer.
You can reach the writer at: naftikuwaiti@yahoo.com
Disclaimer: Please note that the views and opinions presented in the column are the writer''s own and do not necessarily represent those of Al Watan Daily and its staff.
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Last updated on Tuesday 3/11/2009
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