Future oil powers invest beyond the political cycle

Tom Ashby

• Last Updated: February 02. 2009 11:34PM UAE / February 2. 2009 7:34PM GMT

I bring news of another crisis!

Not peak oil, not a synchronised global depression, nor even the collapse of the global banking industry. No, this is far worse. I am referring to the end of the sun.

In eight billion years.

For a small fee, I could prepare a number of scenarios...

OK, perhaps I am getting slightly ahead of myself here. But with the way some bank analysts and consultants have got vexed about the issue of energy security, anyone would have thought the end was nigh.

The collapse of oil prices in the past six months has shut down some of the most extreme “peak oil” theorists. But I notice that those who make it their business to fret over such issues have now started to warn that we may have already passed the peak of oil demand. The world may never again burn 32 billion barrels as it did last year, as consumers shift unequivocally to other forms of energy, they say.

What on earth will we do with all those billions of barrels left in the ground when we have moved on to nuclear fission, or indeed fusion?

So confident is Barack Obama, the US president, about his ability to secure energy supplies that he has even promised to end America’s imports of oil from the Middle East and Venezuela.

What such see-saw analysis misses is that the oil industry moves at a pace somewhat more measured than the daily news cycle, or indeed the political cycle in a typical democracy.

These resources were, after all, deposited over a period measured in geological time, and those who are most successful at exploiting it operate over a cycle of decades.

What worries me is not so much whether there will be oil tomorrow, but that some countries just do not seem to learn how to handle it.

Take Venezuela, for example.

Having spent the first half of the 20th century as the world’s top exporter of crude oil, Caracas now faces the prospect of a major collapse in its oil production, and with it the end of its dreams to build a prosperous society based on its resource wealth.

It was Venezuela’s legendary minister of oil, Juan Pablo Perez Alfonzo, who foresaw the dangers of dependency on oil, titling a book on the subject Excrement of the Devil. He even kept a wrecked car in his garden to remind him of the finite nature of the resource.

As well as helping to found Opec, he wrote reams about how to transform oil wealth into the greater good by keeping tight control of the sovereign resource and “sowing” the windfall in other sectors to diversify the economy.

The industrialisation that followed in the 1960s and 1970s failed to achieve Mr Perez Alfonzo’s lofty goals, mostly because the new state-owned companies became overstaffed, inefficient political empires, and ended up creating an unsustainable drain on resources.

When Hugo Chavez was elected in 1998, the revolutionary socialist did not solve the problem of inefficient government. Instead, he managed to hobble the other side of the equation by causing a collapse in oil production.

Output from Venezuela’s traditional oilfields has fallen by two thirds since Mr Chavez came to power, mostly because he has starved the industry of cash and chased away the talent.

In the past few weeks, several drilling companies have walked off the job for lack of payment, while contractors say wages are not being paid in full.

All the signs are that Petroleos de Venezuela, once heralded as the most dynamic national oil company in the world, has been gutted of cash.

Before his election, Mr Chavez bewailed a policy he described as producing more oil and dead homes. Ten years later, he has lively homes but no oil.

In a country where the oilfields produce 25 per cent less every year without investment, the disappearance of contractors could signal a further collapse of Venezuela as an oil power.

In the Emirates, by contrast, the recent collapse in oil prices appears to have spurred a new investment drive.

The Supreme Petroleum Council has begun to award renewed concessions, and approved multibillion-dollar expansion plans. Last week, the Abu Dhabi National Oil Company announced a US$3.5 billion (Dh12.85bn) investment in its onshore fields, with a similar spending programme expected offshore. This should easily achieve a 30 per cent increase in capacity in the next five years.

Saudi Arabia has also announced a series of expansions that will ensure that it remains the pre-eminent oil power for the foreseeable future.

Even ExxonMobil, the world’s largest listed company, has budgeted for increased investment this year, despite the miserable economic outlook.

These investment strategies are not rooted in horizons stretching out for one year, or even five years. This business demands a much longer vision to ensure that these countries and companies are positioned to stay ahead when the global economy recovers, even if that takes another decade.

tashby@thenational.ae