Big oil seeing shrinkage of both influence, supply

Oil production has begun falling at all of the major Western oil companies, and they are finding it harder than ever to find new prospects even though they are awash in profits and eager to expand.

Part of the reason is political. From the Caspian Sea to South America, Western oil companies are being squeezed out. They are being forced to renegotiate contracts on less-favorable terms and are fighting losing battles with state-owned oil companies.

And much of their production is in mature regions that are declining, like the North Sea and Alaska.

The reality, experts say, is that the oil giants that once dominated the global market have lost much of their influence — and with it, their ability to increase supplies.

"This is an industry in crisis," said Amy Myers Jaffe, the associate director of Rice University's energy program in Houston. "It's a crisis of leadership, a crisis of strategy and a crisis of what the future looks like for the supermajors," a term often applied to the biggest oil companies. "They are like a deer caught in headlights. They know they have to move, but they can't decide where to go."

The sharp retreat in all of the commodities' prices over the last month — about 20 percent — reflects slowing global growth and reduced demand for more oil in the short term. But over the next decade, the world will need more oil for developing Asian economies like China. This suggests future supplies may be hard to come by.

Oil production hasn't caught up with consumption, a disparity that propelled oil prices to records this year. Despite the recent decline, oil remains above $100 a barrel, unimaginable a few years ago, causing pain throughout the economy.

Profits up; output down

The scope of the problem became clearer in the latest quarter when the five biggest publicly traded oil companies said their output had dropped a total of 614,000 barrels a day, even as they posted $44 billion in profits.

While that drop might not sound like much in a world that consumes 86 million barrels of oil each day, the markets are so tight that a slight shortfall can push up prices.

Along with mature fields, the companies have contracts with producing countries whose governments allocate fewer barrels to oil companies as prices rise.

As a result of the industry's troubles, energy experts do not expect oil supplies to grow this year in countries outside the Organization of Petroleum Exporting Countries (OPEC). Global demand for oil is expected to expand by 800,000 barrels a day, mostly because of rising demand in China and the Middle East.

This imbalance between supplies and demand will be one thing OPEC ministers will consider when they meet next month to decide whether to increase their production. OPEC has 2 million barrels a day in untapped capacity that its members control.

Control changing hands

The new oil order has been emerging for a few decades.

As late as the 1970s, Western firms controlled well over half of the world's production. These companies — Exxon Mobil, BP, Royal Dutch Shell, Chevron, ConocoPhillips, Total of France and Eni of Italy — now produce just 13 percent.

Today's 10 largest holders of petroleum reserves are state-owned companies, such as Russia's Gazprom and Iran's national oil company.

Sluggish supplies have prompted doomsday predictions that world oil production has peaked But many experts say such theories are misplaced. They say the world isn't running out of oil — rather, the companies that know the most about how to produce oil are running out of places to drill.

"There is still a lot of oil to develop out there, which is why we don't call this geological peak oil, especially in places like Venezuela, Russia, Iran and Iraq," said Arjun Murti, a Goldman Sachs energy analyst. "What we have now is geopolitical peak oil."

Western firms are far better than most national oil companies at finding and extracting petroleum, experts say.

But oil-company executives contend they have been shut out of promising regions by a rising assertiveness in the Middle East, Russia, South America and elsewhere by governments determined to keep full control of their oil.

Meanwhile, countries like Russia, Algeria, Nigeria and Angola have sought to renegotiate their contracts to capture a bigger share of the profits.

Western oil companies say more offshore drilling in the U.S. is one of their few options.