Oil, oligopolies, and exploration
I've written before about how oligopolies tend to go from innovation to accumulation in order to keep their market edge. A large company is a lousy place from which to innovate, since the desire to take risks on truly innovative research and products gets muted in large, successful companies. It's safer to extend brands or copy others' innovations. Oligopolies therefore buy innovation with mergers and acquisitions of smaller companies that have been willing to gamble.
In the oil industry, innovation can take the form of exploration. Searching for new oilfields takes a combination of educated guesswork and entrepreneurial spirit that is in stark contrast to the more comfortable and relatively risk-free process of exploiting existing oil fields. What has happened, according to a Wall Street Journal story ("As Fresh Prospects Dry Up, Petroleum Industry Strikes Deals", 5/18/2004), is that big oil companies have given up on exploration and spend their time and expertise picking up and discarding already existing assets.
In the last ten years, there have been a number of big mergers: British Petroleum (BP)'s takeover of Arco and Amoco, Exxon's merger with Mobil, Conoco's with Phillips, Total with Elf Aquitaine, and Texaco's deal with Chevron. The focus in the article is on BP, which has been if anything the leader in the gin rummy game of collecting assets.
As the article puts it, BP is "at the forefront of a drive that is redefining the energy industry: a relentless shuffling of oil fields and other assets. Increasingly, the world's major oil companies operate like investment banks… selling tired fields or entire operations and replacing them with riskier but more-profitable ventures"
Over the past two decades, BP went from being a sorry conglomerate with holdings in everything from software to laundry detergent, to major holder of strictly oil-related cards, to become the #2 oil company after Exxon Mobil (at recently bypassed Royal Dutch Shell). In fact, BP was in serious merger talks with Mobil at one point before the Exxon deal came through. After getting burned in the early eighties on a major investment into an Alaskan well that turned out to be dry, BP started favoring the strategy of dealing for oil more than exploring it.
As the WSJ story points out, these shifts by BP, Exxon Mobil and others have a consequence for more than just their shareholders:
This emphasis on shifting around existing pools of oil and gas poses a problem: It does little or nothing to increase the world's overall petroleum stockpile. With U.S. oil prices hitting a record high of $41.55 a barrel yesterday on the New York Mercantile Exchange amid war worries and soaring demand, concerns are mounting about the industry's ability to ensure supply keeps up with consumption.
