The Vicious Competition For Peak Oil

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There has been a heated argument for the last several years about when the world will start to run out of oil. The rate of oil production, after more than a century of drilling, may have already peaked or it may peak in a decade. Everything in oil production will be downhill after that.  The Observer recently pointed out that, “Even the Paris-based IEA admits that the world still needs to find the equivalent of four new Saudi Arabias to feed increasing demand at a time when the depletion rate in old fields of the North Sea and other major producing areas is running at 7% year on year.”

The supply of crude is based as much on technology as discovery. Huge pools of oil have been found off Brazil, in the Gulf of Mexico, and in the seas of western Africa. Technology may not be advanced enough yet to reach crude that is miles below the bottom of deep oceans.

The more relevant concern, at least in the short-term, about oil should not be how much there is but who will own it. The fight for crude ownership has picked up recently. Two decades from now there may be as much annual supply as there is this year, but the Chinese may have doubled or tripled their share of that market. The obstacle to that happening is that Western oil firms such as Exxon Mobil (NYSE:XOM) and BP (NYSE:BP) will get into bidding wars with China-based oil operations for new deposits but that bidding could become extraordinarily expensive.

A month ago, Exxon agreed to buy a stake of one-quarter in the Jubilee field in the ocean off Ghana for $4 billion. China oil company Sinopec (NYSE:SNP) and BP came in later bidding for the same ownership. The fight over a deposit which could turn out to be one of the largest in the world is likely to become more heated as the competition moves into next year.

China’s oil interests are busy in every region of the world where large new crude deposits are in the early stages of exploration and recovery. Early this year China Development Bank made a $10 billion loan to Brazilian oil company Petrobras to help it produce crude from its recently discovered deep-sea deposits. Sinopec will buy 150,000 barrels a day from Petrobras in the first year of their partnership and 200,000 barrels a day in the nine years after that as part of the deal.

Exxon and its smaller peers have access to capital and strong balance sheets. They will not be shut out of every bidding process and may win a reasonable number of the competitions. But, they do not have the treasury of the People’s Republic nor are they sovereign nations that can give developing or underdeveloped countries holding large oil deposits with forms of aid which may be political, military, or humanitarian.

China means to control the playing field when global crude supply peaks and other sovereign nations like the US and UK will not help the oil companies that are headquartered within their borders to offset China’s goal. That gives an immeasurably large benefit to the world most populous country.

Douglas A. McIntyre