For the companies are not finding enough new oil to replace the oil they pump. US stockbroking firm Sanford C Bernstein estimates that the reserve replacement ratios for the biggest companies will have fallen to 75 per cent last year from 100 per cent in 2003 and are at their lowest levels since 1995. In other words, the oil majors are shrinking.
The black stuff is getting harder, and more expensive, to find. As fields such as the North Sea mature and Opec production falls compared with output in non-Opec countries such as Russia, companies are having to seek exploration opportunities in countries that carry a higher financial and political risk.
Accompanying Shell's record results was the latest instalment in its reserves debacle. Despite having cut its proven reserves figure by more than a fifth last year, it wiped another 1.4 billion barrels off the figure last week. The Anglo-Dutch company warned that it had only replaced between 15 and 25 per cent of the oil it pumped last year.
Jon Rigby, analyst at UBS Warburg, says the furore over Shell's reserves scandal has made others nervous about booking reserves themselves.
"Greater scrutiny of reserves accounting from the [US] Securities and Exchange regulator means that however much companies were compliant with the regulations, they will go back through their books to make sure they are squeaky clean," explains Mr Rigby. "We are unlikely to see strong additions to proved reserves this year as a result." So if oil companies are making record profits, but face shrinking reserves, won't they drill like mad for more oil wherever they can find it? Not necessarily, says Peter Hitchens at stockbroker Cheuvreux. The oil price assumptions that majors make when they draw up their exploration budgets remain at around $20 a barrel, even though prices are more than twice that level, he says. This means that companies are not yet prepared to pay significantly more to find new oil.
Even if they were to change their assumptions, companies do not have carte blanche to blow their record profits on exploration projects that would be big enough to plug the holes in their reserves balance sheets. Unlike in the days when Western governments owned stakes in their oil companies, which often acted as a quasi arm of the state, companies are accountable to their institutional shareholders, which have shorter-term goals and judge performance on measures such as return on capital employed (ROCE). Sinking billions into a project which won't start producing oil for many years is not an option, says Manouchehr Takin from the Centre for Global Energy Studies, the think-tank set up by the former Saudi oil minister Sheikh Yamani.
As a result, oil companies want quick fixes to their reserves problem. And increasingly, if they can't boost their reserves organically (through exploration), they are prepared to do it by risky acquisitions. And in this spirit, BP achieved a coup, much to the envy of its peers, when it formed a $8bn joint venture with Russian oil group TNK two years ago.
BP owes much of its recent impressive growth in production and reserves to BP-TNK, but the deal is not without its risks. BP was ripped off once by its Russian partners in a previous deal, and Russian law is notoriously selective in its application (witness the Kremlin's destruction of the once- mighty Russian oil giant Yukos).
Carl Hughes, UK head of energy at accountants Deloitte, says: "Companies are more prepared to invest in countries with a higher economic or political risk than, say, 10 years ago because of the greater need to find reserves and higher oil prices. They prefer to do this than to overpay for more mature assets."
But the risks surrounding these kinds of investment are not just financial. Corporate governance and lobby groups are becoming more influential. Juliette Atham, responsible shareholding manager at Co-operative Insurance Society, estimates that ethical investors such as the CIS hold around 5 per cent of most FTSE stocks. She says CIS is currently preparing to demand that one oil group (she declined to name it) in which it is a shareholder pull out of a developing country over ethical concerns.
Typically, investors do not sell up in protest if companies breach their ethical investment guidelines, but exert their influence as shareholders instead. "Selling our holdings would be too easy," she says. "They would be quite pleased to see the back of us."
According to The New Economy of Oil, a book written by John Mitchell, a former BP special adviser, some 40 per cent of the world's oil production comes from countries where human rights, as defined by the United Nations, are either not recognised or they are violated. In effect, oil firms often bankroll despotic governments. A company typically makes two payments for extracting oil in a foreign country.
The first is "rent" to the government for drilling for oil, and in this area vast sums often go missing from state coffers. Between 1997 and 2002, according to Human Rights Watch, some $4.2bn of oil money paid to the Angolan government vanished. This figure equalled the humanitarian aid pumped into the country over the same five-year period.
The Extractive Industries Transparency Initiative, championed by Tony Blair, encourages oil and mining groups, and host governments to disclose their financial dealings. However, it is voluntary - and not always welcomed overseas. When BP and Shell complied in Angola, the government threatened to withdraw their concessions.
The second payment made by oil companies is to local communities for exploration rights. Again, these payments can cause serious conflicts. A report published on Friday by Human Rights Watch revealed that an escalation of murder and violence in Nigeria last year was due to local armed gangs fighting over oil money.
"The oil companies operating in the region, including Shell's joint venture with the Nigerian government, should ensure the transparency of payments to local communities so that funds are not used to further violence," the Human Rights Watch report said.
Oil groups have always done business in undemocratic countries with poor human rights records. That is often where the oil is. But as companies' reserves shrink, the temptation to tap relatively unexplored areas in North Africa and the Middle East, previously off limits, will be too strong to resist regardless of the ethical - and economic - risk.
NEW FRONTIERS FOR THE BIG BOYS OF THE BLACK STUFF
The world's eighth-largest oil producer has untapped reserves of up to 35.2 billion barrels. Among the Western oil companies, Shell has the biggest presence. Through a joint venture with the Nigerian state-owned NNPC company, it controls around half the oil production in the African country. However, Nigeria is gripped by unrest. Kidnapping, violence, sabotage and vandalism are commonplace, fuelled by the revenues distributed by the oil companies.
The South American country's proven oil reserves are 1.84 billion barrels, but Colombia is abundant in unexplored oil regions. Of the Western companies, BP has a large presence in the country. However, Colombia is a dangerous place to work because of violence, a spate of kidnappings and bombings. Guerrilla groups have in the past targeted oil companies along with their employees.
Emerging from years of civil war, Algeria's economy is growing on the back of the oil industry. The north African country has proven reserves of 11.3 billion barrels, but it is thought a further 31.7 billion barrels could be recovered. It is still seen as dangerous, underlined by recent kidnappings. So far Algeria has attracted independent energy firms such as Amerada Hess and Burlington Resources.
This is sub-Saharan Africa's second-largest oil producer, behind Nigeria. Oil accounts for 60 per cent of the country's GDP and Western groups like ChevronTexaco, ExxonMobil, TotalFinaElf, BP and Shell have a presence. Angola is recovering from a 27-year civil war and peace is fragile.
With troubles in the Middle East, the importance of Russia's vast oil fields - with proven reserves of 60 billion barrels - has grown. Controlled by a handful of Russia companies, British and American groups are keen to find ways of getting in on the act. BP's 2003 joint venture with TNK was expected to open the floodgates to similar deals. But President Vladimir Putin's pursuit of former Yukos chief executive Mikhail Khodorkovsky may have scared off some Western companies.
A no-go area for Western oil firms because of the security risks following the US-led invasion of the country. But its oil resources are vast, with proven reserves of 115 billion barrels. Shell and BP have commissioned studies, but Western countries are unlikely to sign deals until late 2006 at the earliest because of the fragile political situation.
With 10 per cent of the world's proven oil reserves - at 125.8 billion barrels - Iran is sitting on more oil than Iraq. But its strict rules on how contracts are awarded have meant that production has been slow. The US trade embargo has stopped the biggest oil companies from working in Iran, but TotalFinaElf, Lukoil, Eni/Agip and Statoil have a presence.
With reserves of 36 billion barrels, Libya has the biggest proven oil resources in Africa. Last month, it granted 15 new exploration licences in the first auction since US-led sanctions ended last year. The permits went to US companies including Amerada Hess, ChevronTexaco and Occidental Petroleum.Reuse content