Oil Profits Fund Future Explorations With a barrel of oil hovering above $90, many of the major oil companies are heading for the Gulf of Mexico. Higher oil revenues mean they can spend more to drill farther out at sea and deeper down.
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Oil Profits Fund Future Explorations

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Oil Profits Fund Future Explorations

Oil Profits Fund Future Explorations

Oil Profits Fund Future Explorations

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The history of oil is one of boom and bust. When prices are low and profits thin, companies tend to hunker down and cut expenses.

But when times are good for the oil industry — like now, with the price hovering just under $100 a barrel — companies often use fatter profits to search for new deposits, or to go back and suck the last drop from retired wells.

As prices have spiked, "there has been new exploration," said Paul Henshaw, a geologist and consultant who spent years at Chevron exploring for oil.

Henshaw said fields that had been put on a shelf are being looked at again for possible further exploration.

"A lot of us geologists have some area where we've said, 'Oh boy, if the economics are right, we should go for that,'" he said.

Paying Now for Future Fuel

In North America, one place many of the major oil companies are going is the Gulf of Mexico. Higher oil revenues mean they can spend more to drill farther out at sea and in deeper water. Lease sales in the Gulf are way up. But experts say there's no magic dollar number at which oil explorers decide to drill.

"They may be basing their economic models on $50 a barrel," said Henshaw, in part because oil prices can vary widely during the decades it takes to complete a project. So he said the oil industry needs to believe that high prices are here to stay — and not just a spike — before they will invest millions or billions of dollars in a project.

Ironically, high oil prices also help drive up the price of exploration.

"I was just reading a study last week that shows that the price for developing a field had actually doubled in the last two years due to the increase in costs of raw materials and services and equipment," said Andy Radford, an exploration expert at the American Petroleum Institute in Washington.

That is why some companies are going back to old, supposedly tapped-out reservoirs — or "plays," as they call them in the business — instead of opening virgin fields.

Geologist Henshaw explains it this way: Imagine a milk shake in a glass full of beads. You can suck most of the shake out with a straw, but some will stick to the beads. More than you would think, in fact.

"When we leave an oil field, there can be 20 to 80 percent of the oil left," Henshaw said. When prices go up, he said, it can suddenly become economical to go back for the dregs.

Small companies such as Michigan-based Arbor Resources have made that strategy their business. For instance, the company will sometimes go back and fix a broken well that had been abandoned by its previous owner.

"To fix that well it might cost several hundreds of thousands of dollars," said Arbor engineer Dylan Foglesong. "At $20 a barrel, you might walk away from it and go down the road." But at today's high oil prices, he said "people will jump" at the chance to reclaim the wells.

Only So Much Can be Squeezed Out

Higher prices can also help pay for the expensive technology needed to squeeze more oil out of old wells. For instance, engineers can force steam or carbon dioxide down into wells to force out the oil. Or they can use the latest seismic technology to make underground images of old plays with oil that was missed before.

But exploiting old wells can be complicated. Sometimes neighborhoods can spring up around an old site — leading to resistance from the new tenants. "It's a permitting nightmare," said Foglesong. "But at $100 a barrel, they'll hire 10 lawyers and spend the time in court and do whatever it takes to get that thing on line."

Those efforts often pay off. Ultimately though, there is a limit to how much more geologists and engineers can "squeeze the sponge."

Already, energy companies are investing more in heavy oil from tar sands or shale. But, if the past is a guide, oil prices will have to stay high for these pricey alternatives to remain viable alternatives.

Governments Demanding Bigger Share of Their Oil

Governments Demanding Bigger Share of Their Oil

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Click to view an interactive map of the countries winning and losing as oil prices rise. Alice Kreit and Corey Flintoff, NPR hide caption

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Alice Kreit and Corey Flintoff, NPR

The Impact of Oil

As the price of oil approaches $100 a barrel, NPR looks at the reasons for the run-up in prices and the implications for the world economy.

Western Alberta province in Canada sits atop an estimated 175 billion barrels of oil. David Boily/AFP/Getty Images hide caption

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David Boily/AFP/Getty Images

Workers wave at Venezuelan state-owned Petroleos de Venezuela (PDVSA) oil company. Hugo Chavez took control of privately run installations in April. Juan Barreto/AFP/Getty Images hide caption

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Juan Barreto/AFP/Getty Images

Oil at $100 a barrel means countries with abundant oil reserves are sitting on a lot of wealth.

But how much these countries can earn from this oil depends on how much control they have over it.

In past years, governments from Mexico to Malaysia have nationalized their oil production, shutting out the big private oil companies that had been exploiting their resources. With oil prices now rising, governments in oil-rich countries are once again demanding a bigger share of oil profits.

'Petro Power' Movement

Countries with oil deposits but not the expertise to get the oil out of the ground often invite private oil companies to come and develop the fields. In return, the companies pay the governments a royalty fee on every barrel they produce and sell.

The deals have often worked to the advantage of the oil companies, and when the profits are high, government leaders are tempted to change the rules.

Last spring President Hugo Chavez of Venezuela, in his words, "buried" what had been known as the oil "opening" in his country — a favorable tax and royalty package introduced a decade earlier to induce foreign oil companies to develop the Orinoco River basin.

Chavez demanded that the companies give up majority control of those operations or face expropriation. On May Day, Chavez visited the Orinoco fields and told thousands of assembled oil workers that the deposits there would now be "entirely Venezuelan."

"Venezuela is free," Chavez told the cheering crowd. "Our oil is ours."

This is the new "petro power" movement. The presidents of Bolivia and Ecuador are following policies similar to those of Chavez.

The government of oil-rich Nigeria said last month that it will rewrite the contracts under which oil companies operate in the country.

Even Canada is asserting its petro power. Last month, the province of Alberta raised the royalties that energy companies pay there. In a news conference, Alberta Premier Ed Stelmach said he had ordered a review of the royalties as soon as he took office.

"I did that because I heard very clearly from Albertans. In a time of rapidly increasing oil prices, they weren't sure they were getting the fair value of the development of the resources they own," Stelmach said.

Wanting a Bigger Share

As in Venezuela, the government in Alberta had contracted oil companies to develop the oil fields, with the companies paying a small royalty fee on the oil they extracted — as low as 1 percent of pre-profit revenues.

But that was when oil was selling for maybe $20 a barrel. With the companies now getting five times that price, governments figure they deserve a bigger share.

"There's a lot of money in the oil business," says Robin West, chairman of PFC Energy, a consulting firm in Washington. "These politicians are desperate to find money. They want to deliver something quickly to their people and they figure the best place, the biggest bank they can find, is the major oil companies."

In Venezuela, the Chavez government raised the oil royalty fees last year. This year, Chavez told the foreign oil companies that the rules were changing again.

Still, he stopped short of nationalizing the companies' operations, as other governments had done.

"We told companies that we wanted them to stay, but in different conditions," says Bernardo Alvarez, Venezuela's ambassador to the United States.

The catch: They would have to sell a big part of their assets in the country for whatever the government offered and settle for a minority share.

Of the six big oil companies operating in the Orinoco region, two companies — ExxonMobil and Conoco Phillips — refused to accept the government's terms and had their properties expropriated. The Venezuelan government has promised to pay compensation, but the companies aren't happy with what they've been offered and the case is headed for international arbitration.

Abilities of State Company Challenged

The government's own oil company — Petroleos de Venezuela — will now take the lead in developing the Orinoco oil fields. The question is whether it's up to the task. The oil in the Orinoco fields is the thickness of tar. Getting it out of the ground is a challenging and expensive operation, requiring long-term planning and investment.

Luis Giusti was chairman of the Venezuelan state oil company until Hugo Chavez threw him out. It was his idea to ask the foreign oil companies to help develop the Orinoco oil fields.

"You can manage the process, but you need support in capital, operational expertise, technology, investment," Giusti says. "So we essentially went for a scheme that would allow us to partner with international companies to develop new projects and partnerships — and joint ventures and operational agreements. The country would benefit as a whole. We would always retain the best part of the portfolio. But at the same time, we would bring the companies to assume the risk of exploration, the technology required for developing the heavy oils, penetration into the markets and financing."

Officials in the Chavez government scoff at the notion that their state oil company isn't ready for "Big Oil" responsibility.

Alvarez, who is also former vice minister of energy, says Petroleos de Venezuela can even supply the country's Latin neighbors.

"Venezuela will have the resources to provide South America for many years to come," he says. "This is why we are even proposing countries in Latin America to sign a treaty and then we will guarantee the supply of energy to all those countries."

Decline of Oil Production

Since Chavez took office, however, oil production in Venezuela has declined by about 25 percent, according to independent analysts, because much of the industry is now staffed by relatively inexperienced engineers and technicians.

West says this is the risk governments take when they put the squeeze on foreign oil companies. The governments may get a bigger share of the oil profits, but their oil production could decline if the private companies stop investing in the countries.

"There are ways to do it. Certain governments are very skillful at extracting maximum rent for themselves while continuing production. What you don't want to do is kill the golden goose," West says.

In fact, the risk works both ways. Chavez and other politicians know the big oil companies will think long and hard before they abandon a potentially promising project. Four of the six companies involved in Venezuela chose to stay in the country as minority partners.

West points out that oil companies deal with risk every day, whether it's doing business with someone like Chavez or looking for oil under 8,000 feet of water off the coast of Africa.

"They have to. They have to. They don't have a choice," West says. "I mean, companies like Chevron and Exxon and BP and Shell — these are gigantic companies and they're producing several million barrels a day. Little projects don't do them any good. They're just a distraction, even if it's a good rate of return. What they need are huge projects. Well, the big barrels are in these difficult places, either technically difficult or politically difficult, so they have to go there.

"The era of easy oil is over. There are no easy barrels for these companies."

Governments have new petro power, oil companies have new production costs — and the demand for oil just keeps growing. That sounds like a sure formula for even higher oil prices.