I like to discuss about energy equation and world history from time to time. I have written two posts here and here before - looking at energy policies mostly with a historical prism. Now, let us look at some of the future trends. Traditionally, western major oil companies have been shy of investing in India for two reasons: a) the red tapism was too much to deal with, and b) they weren't giant oil fields that were screaming to be discovered and produced in India with current technology (if there were elephant oil fields then reason a) would have not even mattered). Also, western major oil companies found opportunities like in Australia more appealing for many reasons.
However, western major oil companies are increasingly facing cul-de-sac in finding new reserves for oil and natural gas. Countries like Saudi Arabia, Russia, and Iran are set to be more powerful in energy politics in future and are essentially out of bounds for western major oil companies. Therefore, "cash rich but opportunity poor (as The Economist puts it)" major oil companies have started courting India even if it is tentatively.
From The Economist, "Starting to Spurge", October 10, 2005.
The big oil firms now seem keen to throw money at projects in Asia. BP has also just announced a $3 billion deal with Hindustan Petroleum, a partly state-owned Indian firm, to build oil refineries and petrol stations in India. Exxon Mobil, Chevron Texaco and BP are now thought to be wooing Reliance, an Indian energy firm, for a stake in a big new gas field in the Bay of Bengal. Chinese whispers suggest that BP may also soon announce a new joint venture with Sinopec, a partly government-owned Chinese firm, in refining and marketing fuels. Exxon is already pushing ahead with plans for a refining joint-venture there too.
Compared with the amounts of money being returned to shareholders, these are still relatively small investments. So why have big oil firms been so slow to take the plunge with large new investments? One reason is that oil executives—with Exxon bosses in the lead—mostly believe that today's oil prices will not last. They are haunted by the memory of $10 oil, and the fear of another price collapse has proved a powerful check on any desire to expand their empires. So too has the fact that the oil-price hike has greatly inflated the price of potential acquisitions. Shrewd oil investors reckon there are few bargains left, and oil bosses mostly agree.
The biggest gorillas in the energy intrigue are state-owned oil companies from Venezuela to Norway to Mexico to Saudi Arabia to Iran, and world major oil companies know that. However, the companies like Exxon-Mobil have to replenish their reserves to stay in business. OPEC is sitting very pretty and poised for future and will now find two new suitors - China and India in addition to USA, Europe, and Japan. Perhaps, one needs to view Middle East and Russia with this fact in mind. Also, India and China can play their cards deftly. Both countries can benefit from the influx of cutting edge technology and ideas from the major oil companies.
And Saudi Arabia is diversifying her economy to cushion themselves from boom and bust cycles of energy industry - even the biggest kid on the block knows that. Japan and Russia with a long history of mistrust are attempting to build grand alliance for energy partnership. This shows that the nature of energy industry is too dynamic to depend on status quo or past.
The crux of energy industry is that one has to plan and look into future boldly even in the face of its fickle nature. Strategically, even the bold frontiers like hydrogen economy will have to piggy-back on fossil fuel economy, perhaps through natural gas. Energy politics has never been simple, and it is not getting simpler any time soon.
The McKinsey Quarterly has come to similar conclusions in their analysis: What's next for Big Oil?
First two paragraphs:
On the surface, times could hardly be better for the petroleum industry. Surging demand and a tight global supply have pushed oil prices to record heights, with no downturn in sight. The major oil companies, even while investing at record levels in renewed exploration and development efforts, still have enough cash left over to return huge sums to shareholders. And projects now in development will keep production growing for the next five to eight years.
Yet all is not as it seems: Big Oil confronts its most far-reaching test in decades. The top five companies—Exxon Mobil, BP, Royal Dutch/Shell, ChevronTexaco, and Total—face increasingly tough challenges finding new sources of oil and natural gas to replace existing reserves. Access to the Middle East, which holds half the world's known petroleum reserves, has been difficult—especially for oil—since the 1960s and 1970s, when governments there nationalized the assets of Western oil companies. Many of the world's remaining potential new sources of oil and natural gas are in countries with relatively high political and legal instability, such as Nigeria and Russia, or technically challenging regions such as the Arctic and Asia-Pacific. The complex refineries needed to process the world's vast reserves of heavy, sulphur-laden crude represent a large and risky new investment.
[Rest of the article is accessible through free subscription of McKinsey Quarterly]