Wednesday, February 10, 2010

Feeling Exxon's Pain

Yesterday I noted with interest an article in the Wall Street Journal about the nation of Ghana blocking the $4 billion sale of an ownership interest in the country's successful offshore Jubilee field from Kosmos Energy to Exxon Mobil Corp. because it wants its own state-run energy company to buy the stake for a song.  And that's Ghana, a relatively stable country.  Think of what it must be like to do business in Nigeria or Iraq.

I can't say I can empathize with having $4 billion that someone won't let me spend, but I certainly feel for a company that wants to make a major investment but is essentially locked out by a foreign government.  It gives yet another indication as to why Exxon is buying XTO Energy and getting into the domestic gas shale business.  We in the U.S. don't often fully appreciate our combination of political transparency and free market economy.  We bitch and moan about the daily complaint, but we don't truly understand how blessed we are until we read about shenanigans like this.

Exxon and the other supermajors, for all their wealth and power, are in something of a jam.  While they used to be the biggest players worldwide in the energy business, they are now overshadowed by foreign governments and their national oil companies that control about 95% of the remaining reserves of oil and gas.  Supermajors are still needed because of their expertise and experience, but they serve at the pleasure of the government and are always at risk of being jammed down in a deal or nationalized (see: Venezuela).  These massive companies will have lots of trouble increasing reserves and growing annual production even by small amounts.  Access to resources will be a challenge for the foreseeable future.  All of this suddenly makes shale gas in the U.S. more attractive.

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