Exxon, the Chase for Reserves, and the Oil Sands

Talking to corporate analysts over the several years that I've been back in the U.S. and covering oil, a recurring question I hear is how Exxon manages year after year without exception -- unlike its Big Oil rivals -- to replenish its cache of proven oil and natural gas reserves. That's what the company has reported in its news releases and annual reports for the last nine years -- an unbroken trajectory of replacing more than 100% of the oil and natural gas that it pumps out of the ground.

The answer is that it hasn't done so, not at least according to the rules of the Securities and Exchange Commission, which governs such matters. When you examine Exxon's annual filings for 1999-2008, the company has had a quite-normal -- for oil companies, that is -- four years of exceeding 100% replacement, and five years not. For instance, for 2008 the company issued a statement saying that it possessed 22.8 billion barrels of proven reserves; yet its 10-K filing with the SEC reported just 21.1 billion barrels in proven reserves (to get there, see page 7 of the 10-K, and tally up the developed and undeveloped reserves in the consolidated and equity categories).

So I gave Exxon a call. How do you get from 21.1 billion barrels to 22.8 billion barrels? I asked.

Add in the oil sands, was the reply.

That would be the approximately 1.8 billion barrels of oil equivalent that Exxon has booked so far in its Alberta, Canada, oil sand holdings (see pages 22 and 23 of the 10-K; add the Syncrude and Kearl reserves).

Strictly speaking, SEC rules don't permit comingling of oil that's pumped out of the ground, along with oil sands -- exceptionally tar-like material that in most cases isn't pumped, but instead is actually mined like a mineral, then mixed with chemicals in order to move it to a refinery for processing. But companies can comingle them in public announcements such as news releases and annual reports that are read by reporters, investors and Wall Street analysts, according to an SEC spokesman.

This isn't criticism of Exxon. Rather, it's simply evidence that Exxon, like all of Big Oil, is mortal. I wrote about this in a piece earlier this week for Business Week.

In fact, Exxon has been highly critical of how the SEC requires it to report reserves. It has said that it has its own, rigorous, internal methods of assessing its proven reserves, and that this process far more accurately reflects what it possesses.

Why does reserve replacement attract so much attention? Because investors and company analysts regard this metric as a primary measure of an oil company's health. If a company's reserve base is consistently stable or growing, then it's regarded as maintaining its assets as a base for growth. If the reserve base is consistently shrinking, a company can be thought to be cannibalizing itself.

For 2008, for instance, Shell says that it replaced just 95% of what it drilled. The year before, Chevron reported a replacement rate of just 10-15%. That attracted them much critical commentary.

And Exxon? It reported that it replaced 101% of its production in 2007, in addition to 103% in 2008. Yet its SEC report shows that its proven reserves actually dropped both years -- to 21.7 billion barrels from 22.1 billion barrels from 2006 to 2007; and, as mentioned above, on down to 21.1 billion barrels in 2008. The sands made the difference. Without the sands, Exxon's reserve replacement last year would have been about 27%.

The situation will change starting next year. The SEC is going to start allowing companies to combine the oil sands with other reserves. The decision came after oil companies argued strenuously that new technology makes unconventional oil equivalent to conventional reserves, so that now there is no reason not to permit companies to put them in the same basket.

Whatever the case, for the record below are the comparisons for the last nine years, including links for most of them to both the 10-Ks and the relevant news release or annual report.

Exxon's Reserve Replacement (in barrels of oil equivalent)

Oil sands

SEC-10K

In News Release

1999	577 mln		20.6 bln	21.3 b
2000	610 m		20.8 b	21.5 b
2001	821 m		20.79 b	21.5 b
2002	800 m		20.68 b	21.7 b
2003	781 m		21.1 b	22 b
2004	757 m		20.9 b	22 b
2005	738 m		21.6 b	22.4 b
2006	718 m		22.1 b	22.7 b
2007	694 m		21.7 b	22.7 b
2008	1.87 b		21.1 b	22.8 b

Exxon: Late, But Always the Bride

Exxon was late getting onto the Caspian in the 1990s, but it still ended up with pieces of prime real estate. On the Baku side, deputy Energy Secretary Bill White interceded to get it a piece of the offshore after Exxon stood on the sidelines while its rivals slugged it out. In Kazakhstan, even GOP heavyweight Jim Baker couldn't persuade Kazakh President Nursultan Nazarbayev to grant Exxon a piece of the ultra-supergiant Kashagan oilfield; Nazarbayev told Exxon the bidding was over. So Exxon simply bought Mobil Oil, which itself was one of the best old-fashioned horse traders on the Caspian and had grabbed huge slices of both Kashagan and Tengiz.

Yet none of that meant that Exxon had drunk the Kool-Aid on the Caspian. It was the only member of Big Oil present in Baku to refuse Clinton administration entreaties to help build the geopolitically minded Baku-Ceyhan pipeline.

It's a similar story with Exxon's announcement yesterday that it's investing up to $600 million in an algae-to-fuel venture with genetic biologist J. Craig Venter. I wrote about this for Business Week on-line today. Exxon waited until Shell, Chevron and others dipped their toes into algae, then dove in with Venter, the most famous private genomics scientist in the world.

Quite apart from the long-shot chance that the venture could actually succeed, Exxon benefits from being able to brandish an environmental pin on its lapel, and its association with an authentic biofuels rock star. As Deutsche Bank's Paul Sankey told me in an email, "I think it's part R&D, part PR." Venter himself needed the cash injection, and could earn $300 million from Exxon if he meets certain unspecified project milestones probably associated with the economics of the algae.

The announcement included an ominous note as well as far as I'm concerned. It was that Exxon took this step after a deep-dive evaluation of every alternative fuels technology currently being studied anywhere. Apart from algae, it determined that none of the other potential technologies -- not manipulation of microbes, not the use of yeast, not breaking down cellulose with enzymes -- would produce a commercial product.



Much is said about Exxon, but one indisputable thing about the company in my opinion is that it is deadly serious when it comes to studying how to do something, or how to do something better. Its execution and management of complex energy projects is unparalleled in Big Oil; that is the singular reason why it's so profitable. So if Exxon tells us effectively that, of the currently studied technologies, only algae is going to survive commercially, the opinion must be taken account of.

Is Exxon Right This Time?

I've written the cover story for BusinessWeek, which hit the stands today. The topic is Exxon. The premise of the story is to take a reading of Big Oil by examining the most successful by far of all the companies; if Exxon has got problems, the rest definitely do. The story points out that Exxon retains superlative cash flow, but has numerous weaknesses built in to its system.

Ultimately, Exxon has successfully navigated the real and supposed crises of the last several decades by sticking steadfastly -- some say rigidly -- to much the same highly cautionary formula devised in the 1870s by John D. Rockefeller, the founder of Exxon predecessor Standard Oil.

So where are we today? At the cusp of a fundamental shift in global energy, as many argue? Or, as Exxon asserts in continuing to adhere to its orthodoxy, are we in just another cycle?

Ripple From Russia: R.I.P. BP?

The stewards of Big Oil have to be watching the latest brawl in Russia with a sense of dread. For their brother, BP, is fighting not merely to save its assets in Russia; it's fighting for its life.

BP itself is rapidly becoming vulnerable as an acquisition target. And for the handful of companies of Big Oil, that's a picture of their own possible future.

For months now, we've been treated to a spectacle of three or four Russian oligarchs making BP miserable. These fellows -- the billionaire oligarchs and BP -- are 50-50 partners in a highly lucrative oil concern that they call TNK-BP. The company accounts for a full quarter of BP's entire global production, and a fifth of its reserves.

The oligarchs want something from the Brits, and the result has been the usual Russian treatment: visits from countless inspectors, summonses to the prosecutor's office, visa trouble.

Yet the TNK-BP dustup no longer has the ring of expropriation as usual.

In the latest development, the concern's BP-appointed CEO, Robert Dudley, fled Russia in secret and is now hiding out in some undisclosed place, prepared, according to BP, to continue running TNK-BP from a distance. I asked a BP adviser why Dudley is behaving so mysteriously. Couldn't he have set up shop like a normal CEO in London? Perhaps this is part of the antagonists' PR war? "I do not know anything about the location except that he is operating as CEO for both [the Russians and BP], and London might not be the most appropriate location," he emailed me in response.

After some three decades of petro-nationalism in the Middle East and elsewhere, Big Oil is accustomed to the puffed-out chest, the boot, and picking up the pieces. It has found a modus vivendi in most cases.

Recall previous bouts of trouble in Russia: In December 2006, Shell responded to a similar onslaught at Sakhalin II -- at the time the world's largest combined oil and natural gas project -- by going to the Kremlin and crying uncle. The response was some advice -- sell half your shares at below-market rates to Gazprom. The result is that Shell, now with 27% of Sakhalin II instead of 55%, is still in business in Russia. And just six months later, BP was forced to sell out entirely from Kovytka, a supergiant natural gas field. BP sold its expulsion publicly as a fair deal, considering that in exchange it was embarking on a worldwide partnership with Gazprom. This partnership was crucial, because BP and the rest of Big Oil is finding it almost impossible to acquire new reserves to replenish what they pump each year; combinations with national energy companies like Gazprom are one way of maintaining one's bulk.

But not so fast. That BP-Gazprom partnership has yet to materialize. Indeed, BP's hopes for this partnership seem not just wishful, but hubristic. Because part of its calculus appeared to be ceding control of TNK-BP to Gazprom, which ostensibly would buy out the oligarchs while leaving BP with a sizeable remaining chunk.

TNK-BP was never a stable grouping, and seems always to have been bound for divorce court. But BP's talks with Gazprom appear to have accelerated the estrangement. The oligarchs seem to have believed that BP planned to sell them out in exchange for a global lifeline from Gazprom.

And, as Yulia Latynina, the respected Russian commentator puts it, the oligarchs responded "in the most brutal manner. They effectively said ..., 'We're the big guys around here.' [What followed] was a shoot-out. The other side shot better."

Here is where the gunfight appears to diverge from Big Oil's prior confrontations in Russia. Previously, the Kremlin has halted the hostilities once a targeted Big Oil company surrenders. But not in this case: BP has made clear that it's prepared to surrender control to one of the state-owned Russian companies, yet that's not been enough.

One is led to the conclusion that control in fact isn't good enough. It looks like Russia may want all of TNK-BP. And it also may not mind Big Oil understanding that, even if the state stands aside in a turf battle, the BPs of the world aren't tough enough to hold their own in Russia's brutal business environment. It may be a warning to all foreigners doing business there.

Richard Gordon, an experienced observer of Russian oil, sees it slightly differently. He told me last week that the Russians want BP to reduce its share considerably -- to 25% or less. At that point, Gordon said, it's up to BP to decide whether it has faith that TNK-BP would be run well enough, and, "if they don't have faith in the company, why remain a partner?"

In The Guardian today, Oppenheimer's Fadel Gheit, one of Wall Street's most seasoned oil analysts, advised BP to get out. "It's a bit like Manchester United losing Ronaldo," Gheit said. "It would take time to recover -- a blow but not fatal."

What happens next? Wall Street would pummel BP's share price were it to lose or leave TNK-BP, which would make the company a highly attractive target for acquisition. In that case, Gheit thinks that ExxonMobil is the only Big Oil company with deep enough pockets to buy BP.

But both Gordon and Gheit think that BP might act first and seek out its own merger partner because, as Gordon put it, it's better to "do a deal than be done to." Gheit told The Guardian that a logical BP partner would be Shell, "with [BP CEO] Tony Hayward running both companies."

Yet why are the Big Oil companies the only perceived merger partners? As Big Oil seeks access to China and the Middle East, wouldn't their national companies and sovereign wealth funds seek equal treatment?

Harvard Business School will no doubt chronicle the brawl as a case for how the game of energy is changing. But Big Oil is observing more closely, because this is its own future.

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Rights: Creative Commons

The New World of Tumult

Here's the news today: Russian security officers have again raided BP's offices in Moscow. Nigeria has ordered Exxon and Shell to pay up $1.9 billion of their oil revenues. Exxon's Rex Tillerson is under mounting pressure to give up one of his titles, that of company chairman. And oil futures brushed up against $140 a barrel.

Welcome to the new world of energy tumult.

Taken separately, these events don't necessarily seem new -- the petro-powers have been flexing their muscles for some time; Exxon has put down previous attempts to appoint an independent chairman; and the surge in oil prices has seemed inexorable.

Yet the last two items merit attention.

The pressure on Exxon -- renown for going its own way regardless of attempts to influence it -- can no longer be put down to fringe dissidents. The more serious situation began with a push by the Rockefellers for an independent chairman and more attention to research on renewable fuels. And now, a growing number of investors are supporting the Rockefellers publicly ahead of next week's annual shareholder meeting in Dallas. Here is a piece about British investors posted by my colleagues at Business Week.

But today's $9.50 rise in oil futures, to $139.50 a barrel, resembles a panic. It looks like a tipping point in market sentiment about so-called peak oil -- traders seem convinced that indeed the tightness in world supply is a chronic problem, and not something to be overcome by added exploration and drilling.

Among the men of Big Oil, one of the most reasonable assessments is delivered by Christophe de Margerie, the chairman of France's Total. De Margerie says that the world has plenty of oil, but not the financial and technical means to deliver much more than it currently does to the market.

So the tightness in world supplies -- the fundamental reason behind this year's incredible runup in prices, and by extension the emboldened behavior of petro-powers like Russia and Nigeria -- is not going to lift any time soon, short of some economic debacle, or a dramatic public shift to the bicycle.

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Putin's Wealth

The FT's Catherine Belton and Neil Buckley weigh in with an impressive story that attempts to penetrate the question of Vladimir Putin's personal fortune. This enterprise -- the documentation of what Putin is worth -- will require a long, ongoing and determined effort. But Belton and Buckley try to peal away a layer.

The piece involves Gunvor, the Swiss-based oil trading company that has miraculously (Hey, we're just really good businessmen) grabbed control of a third of Russia's oil exports. One public owner of Gunvor is Gennady Timchenko, a reclusive and long-time buddy of Putin's. The FT links Timchenko to Surgutneftegas, which Russian polical analyst Stanislav Belkovsky has asserted to many of us for over a year partly belongs to Putin. As the FT reports, when Bill Browder -- until a couple years ago Russia's biggest foreign cheerleader as the head of Hermitage Capital Management -- sought to find out who really owned Surgutneftegas, he suddenly could no longer get a visa.

Putin swats away suggestions regarding his personal share of Russia's economic boom. But those who have hung around the former Soviet Union for awhile know that his dismissals are not exceedingly convincing. Personal wealth is a prerequisite to rule in this rough neighborhood; one simply is not taken seriously among former Soviet power brokers unless one has one's own, enormous cash stash. But the hard evidence is almost impossible to obtain; I think the only case of such proof has involved Kazakhstan's Nursultan Nazarbayev, and that emerged only after a perfect storm of bungling.

The trouble at BP: For some time, it has appeared that BP could lose control of its main asset in Russia, its share of TNK-BP. The thinking has been that Gazprom is intent on grabbing control of TNK-BP, by either forcing out BP or its Russian partners. The arrival of tax inspectors at TNK-BP's offices in recent months seemed to buttress this view, given that that's precisely what signaled trouble for Shell before it was forced to hand over control of the gigantic Sakhalin-II natural gas field to Gazprom.

But my former colleagues Guy Chazan and Greg White at The Wall Street Journal have a piece that embraces a contrarian view: that Gazprom isn't the villain; the partners themselves are in a catfight. Igor Yurgens, the adviser to President Dmitri Medvedev, told me the same thing in a phone chat a couple of weeks ago.

Robert Amsterdam does a good job of explaining the probable bigger picture -- perhaps there is infighting; but Gazprom is likely still pulling the strings behind the scenes. This Reuters piece about a phantom company suddenly suing TNK-BP is more evidence of this.

Gazprom's goal -- as expressed by Putin himself -- is to obtain energy assets overseas. In order to land a traditional oil deal in Russia today -- one that involves ownership of actual oil or natural gas reserves -- one has to give up similar assets abroad. BP is trying to work such a deal with Gazprom, and the trouble at TNK-BP seems a piece of that negotiation.

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Rights: Creative Commons

Accumulating Shoes

We now have a better understanding of why the consortium developing the biggest new oilfield on the planet has expeled its boss, Italy's Eni -- yet another two-year delay has been announced in first oil from the offshore Kazakhstan field. From a contractual startup of 2005, the Eni-led consortium now says it will produce its first barrels from Kashagan as late as 2013, according to a statement by Kazakhstan Energy Minister Sauat Mynbayev.

So yet another shoe drops in Kazakhstan. This pearl of a field -- depending how technology advances, Kashagan contains anywhere from 15 billion barrels of recoverable reserves and up. That's fifteen elephants, the industry term for a monster oilfield -- has been beset by so many delays that one wonders when it truly will come on line.

Mostly at fault are the problems bedeviling the entire industry -- spiraling production costs, and a shortage of equipment and labor (Note to college-age O and G readers: if you study engineering or geology, you are all-but guaranteed a well-paying job).

Yet Eni has long seemed far over-stretched. From a tiny state-run oil company in the early 1990s, it has grown into a hugely successful heir to the Seven Sisters, the most successful of the West's Big Oil companies at finding comfort with the world's autocrats. Where its brethren bicker with Hugo Chavez and Vladimir Putin, Eni has found a comfortable embrace.

But that's resulted in an embarrassment of riches. Eni has too much on its plate. A few months ago, Eni lost its operatorship of Kashagan. Publicly that act was attributed to Kazakhstan's new assertiveness and demand for an equal share of Kashagan. But it's clear that Eni's partners in the field themselves would have acted sooner or later.

The problem with banks: My former colleagues at The Wall Street Journal published a scoop yesterday on the ongoing saga of some $80 million in Swiss deposits belonging to Kazakhstan President Nursultan Nazarbayev and a couple of associates (since a subscription is required to view, I found this link to another site). It's written by Glenn Simpson, Susan Schmidt and Mary Jacoby.

Some nine years after the money was frozen in a money-laundering investigation (the cash came from U.S. oil companies that got deals in the 1990s in Kazakhstan, including at Kashagan), the Kazakhs have said they are willing to give up the money for charitable purposes. Yet the money remains frozen, according to the piece, in part because the U.S. says the charities that the Kazakhs have in mind are too closely linked to the Kazakh government.

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Rights: Creative Commons

Latest Score in Love versus War

In recent months, Italy’s ENI has seemed to have hit upon the winning formula in Big Oil’s battle for survival against the march of petro-states across the globe. ENI chairman Paolo Scaroni’s approach has been simple – jump in bed with your adversary. So you have had ENI saddling up with Russia’s Gazprom, Hugo Chavez’s PDVZA, and most recently Qatar Petroleum.

Scaroni’s strategy has been the polar opposite and, so far, more successful than ExxonMobil’s confrontational style toward the more assertive petro-states such as Russia and Venezuela.

But a scoop by Guy Chazan in today’s Wall Street Journal shows that co-habitation goes only so far. Turkmenistan, for instance, is so miffed with ENI that it refuses to issue visas to its senior executives. That’s important, because Turkmenistan is one of the world’s only largely untapped petro-states welcoming exploration offers from Big Oil. Chevron, BP and others have put much effort into winning access to fields there.

Based on ENI’s record, don’t be surprised if Scaroni himself tries to swoop into Turkmenistan to smooth over the situation.

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Rights: Creative Commons

The End of Big Oil

For those interested in the history and future of Big Oil, I've got a piece in The New Republic this week on how one or two of the companies might survive despite their stubborn resistance to change. TNR is a pay site but if you take a free trial subscription you can read the whole piece, plus a few other items that look interesting this week. Here are the first few paragraphs.


When historians one day dissect the long arc of humankind’s use of fossil fuels, they may very well zero in on October 9, 2006, as a turning point for Big Oil. That’s when it became clear that the major oil companies—the giants that had survived numerous predicted extinctions and gone on to ever-greater profit and influence—were undergoing a tectonic shift and would either reinvent themselves or die. It’s the day Moscow dashed the hopes of five major oil companies from three countries and announced that Russia itself, and not they, would develop the biggest new natural gas field on the planet, an undersea Arctic reservoir called Shtokman.

Shtokman is the oilman’s Angelina Jolie: much-coveted but out of reach. Experts believe it contains the carbon fuel equivalent of 23 billion barrels of oil—that in an industry that considers a field of one billion barrels gigantic. Shtokman alone contains sufficient energy to power all of Europe for several years, and the world’s big oil companies had sought rights to it for years.

In another time, Russia’s declaration that its natural gas behemoth, Gazprom, would develop such a field would have set off peals of laughter among Western oilmen. Gazprom lacked the know-how to keep production at its current fields from declining; how would it manage a technological feat under the deep, icy waters of the Barents Sea? But there was nothing humorous about Russia’s plans. Gazprom knew it wasn’t capable of drilling the field; instead, it planned to hire Big Oil to do so. Big Oil would be its employee.

That notion flew in the face of oil-industry orthodoxy, which says that big potential profits accrue to those who assume big risks. If a company developed an oilfield, it was rewarded with the gold star used by Wall Street to measure oil company value—the rights to “booked reserves,” in industry parlance. Booked reserves consist of how much oil and natural gas a company controls, and thus can sell at some point at, say, $95 per barrel or $260 per 1,000 cubic meters. The Securities and Exchange Commission measures booked reserves, and investors regard them as the main determinant of a company’s fundamental worth. Yet now Gazprom was suggesting stripping the Western oil giants of that incentive—they would be unable to book Shtokman’s natural gas. The industry mood has become even more somber over the last half-year as two European companies—France’s Total and Norway’s StatoilHydro— actually agreed to Russia’s terms.

The truth is that any of the oil majors—with the possible exception of Exxon Mobil—eventually would have. Why? Because oilmen know that, despite recent unprecedented profits—Exxon alone reported a record $11.7 billion in net income for the fourth quarter of 2007—they are on the decline. The combined booked reserves of the world’s biggest five companies have shrunk by almost 20 percent on average since 1999, according to a paper by Rice University’s James A. Baker Institute for Public Policy. Shtokman is a blueprint for how the major oil companies are increasingly being treated around the world. Today, state oil companies and ministries from countries like Venezuela, Saudi Arabia, and Russia control somewhere between 80 percent and 90 percent of the world’s known oil and natural gas reserves. And, over the next two decades and beyond, those countries are going to ask foreign oil companies to serve as their contract employees in the same way that Gazprom brought on Total and Statoil.

Big Oil, then—the indomitable giant symbolized by the pitiless John D. Rockefeller—is dying. At the very least, it will soon have to fundamentally change the way it does business. But the shock of Shtokman is merely a tremor compared with the coming revolutionary transition to a non- carbon energy economy. Big Oil could transcend its current woes and weather that future revolution—perhaps even lead it—if it reinvented itself as Big Energy, striving to develop renewable power sources like wind and solar, or even to deliver the industry’s holy grail: a clean energy mechanism that renders fossil fuels obsolete. True, no one yet knows what the revolution
will look like; but the odd thing is that, for the most part, the oil companies don’t seem to care.

continued (free trial subscription required)

Try That in Russia, Exxon

One lesson of recent years in Big Oil is that while most of the industry zigs, Exxon zags.

So it was last week, as the company won attention for court victories that froze some $12 billion in Venezuelan state assets abroad. This involves its dispute with Hugo Chavez over his demand for control over oilfields in the country. Exxon also got a judge to seize hundreds of millions of dollars due to Venezuela in a bond deal.

Is such confrontation wise corporate strategy? The rest of the industry – sitting conspicuously on the sidelines as spectators in this rumble – wants to know, too.

Some analysts have read the news as a warning to all the petro-nationalists out there that Exxon at least won’t be pushed around. And if Exxon is successful, the others might follow suit.

One sign that Exxon’s muscle-flexing is a limited tactic, and not a strategy, however, is its experience with its giant natural gas project in Russia, called Sakhalin-I.

Over the last year, the other big companies working in Russia – Shell, Total, BP – have all caved in to Russia’s demand for a controlling share of their projects. (In Venezuela, too, the other companies involved – Chevron, BP, France’s Total and Norway's Statoil – went along with the state demands and are still operating there)

So far Exxon alone hasn’t been forced to compromise. Specifically, the company is insisting on allegiance to an entirely reasonable contractual clause allowing it to sell Sakhalin’s gas to whomever it wants. It has seemed to want that customer to be China.

Russia’s behemoth Gazprom, however, has other ideas – it wants the gas. And according to a report by Reuters’ Denis Dyomkin, Gazprom at least believes it will get its way. The article quotes Gazprom's deputy head, Alexander Ananenkov, as reporting to Russia’s next president – Gazprom Chairman Dmitri Medvedev – that he expects to sign the deal with Exxon in April or May. In case there was any doubt previously, that means Exxon would be going head-to-head with the Kremlin.

Exxon knows the history of companies going to court to get their way in the former Soviet Union – despite “victories,” they mainly end up empty handed. The FSU states simply don’t honor the courts’ rulings, and leave it to the companies to figure out what to do next.

The distinction is that Russia is not Venezuela, and Vladimir Putin (and probably Medvedev) is not Hugo Chavez. Indeed, Putin and Exxon are fairly similar – both have been disagreeable about being pushed around.

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Rights: Creative Commons

Two Hours in Astana

My mother's lawyer boyfriend once offered up some legal advice when I was in a dispute with a contractor: It'll all be settled on the courthouse steps. In other words, even though logic says it's less stressful to resolve one's differences at once, and the final deal often doesn't differ much from what's offered along the way, the actual practice is that one or both parties simply won't walk over the line until the very last possible moment.

So it apparently was yesterday in a settlement of the months-long dispute over the supergiant Kashagan oilfield. Recall that new development of this 13-billion-barrel behemoth has been stalled since the summer over a five-year delay in first oil, and a huge cost overrun.

Take a look at the timeline of the weekend events. At the invitation of Kazakhstan's Nursultan Nazarbayev, the chairmen of most of the world's biggest oil companies had readied to pile in to the capital of Astana for a resolution last Friday. They were put off for two days before meetings finally commenced. The trouble was already apparent when Christophe de Margerie, CEO of France's Total, met with the state oil company on Saturday, then simply left town; that's something that a CEO simply doesn't do when an important president has summoned you.

That left Exxon CEO Rex Tillerson, Eni's Paolo Scaroni and Shell's Jeroen van der Veer meeting for nine full hours -- until midnight -- at a restaurant with Prime Minister Karim Masimov.

At 1:56 a.m. today local time, Bloomberg's Nariman Gizitdinov and Lucian Kim filed the following lead paragraphs in a story:

Eni and partners failed to reach an agreement with the Kazakhstan government over stakeholdings in the Kashagan oil field, Eni Chief Executive Officer Paolo Scaroni said, adding he doesn't expect to return to the central Asian nation ``for a long time.'' ``We haven't reached an agreement yet,'' Scaroni said in an interview early today in Astana, the Kazakh capital, after a nine-hour meeting with Kazakh Prime Minister Karim Masimov and the chief executives of companies including Exxon Mobil and Royal Dutch Shell.

Less than two hours later, at 3:49 a.m. local time, Reuters filed the following:

Kazakhstan's KazMunaiGas has reached a deal with an Eni-led consortium over developing the giant Kashagan oil field which will give it an equal share in the project with the largest shareholders. In a statement, the Kazakh company said all companies in the consortium … had agreed unanimously to the new terms.

What happened during those two hours?

The deal on the courthouse steps. Here is a pretty good Bloomberg piece on the deal. Here's Guy Chazan's from The Wall Street Journal.

By the look of things, Masimov and the state oil company pushed matters pretty far and seemed so unlikely to budge that, to put it bluntly, the CEOs of both Eni -- the field operator -- and Total threw up their hands.

At which point Nazarbayev probably stepped in and told his negotiators to agree more or less with the last deal on the table. This is conjecture, but seems likely in the context of how previous disputes in Kazakhstan have been settled.

“Now, a fair decision has been made,” the president’s official web site quoted him as saying in a meeting with company representatives today after the resolution was announced. He said, “After long and difficult negotiations, the Kazakhstani side has protected its interests. … We have prevented a breach of the contract, which was possible if we did not agree.”

Takeaways from the deal: According to The Wall Street Journal, the companies will make an immediate, good-faith payment of $300 million to Kazakhstan. Over the life of the contract, which expires in 2041, they will pay an additional $5 billion to the country, depending on the price of oil. And they will begin to pay the money earlier than previously agreed.

Kazakhstan will pay a sweetheart price of $1.78 billion for about 8% of Kashagan, raising its share of the field to 16.8%, the same as Total, Shell, Eni and Exxon.

After Kashagan comes on line in 2011, Eni will lose operatorship. Kazakhstan appear to have won the final say on how the field is run, with the four top shareholders divvying up duties for developing it.

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Rights: Creative Commons

Report: What the Kashagan Deal May Look Like

Milano Finanza, the daily in the home city of Italy's Eni, is reporting the skeleton of a final settlement of the Kashagan dispute that includes a surprising sweetener for holdout Exxon. The report quotes no sources. I found Thompson Financial's pickup of the piece but not the original.

With at least 13 billion barrels of proven reserves, Kashagan is the largest discovery in the world in the decades. New work there has been suspended for months in the dispute over a five-year delay in producing first oil, and a huge cost overrun.

The basics of the agreement as reported by Milano Finanza are a $3.5 billion fine and relinquishment of a total of about 8% of the supergiant field, which would double Kazakhstan's stake to about 16%, equivalent to top shareholders Eni, Exxon, Shell and Total.

But that's been more or less known for months. The more interesting part is that Exxon -- the squeaky wheel -- may have gotten a bit more than anyone else for its hard-nosed stubbornness. Recall that Exxon has been the holdout for weeks, seeking to make clear that, unlike its rivals, it's no pushover.

The report says that Exxon will receive unspecified new exploration rights plus an extension of the longevity of its deal at Kashagan's sister field, Tengiz. If that's accurate, one has to applaud the company. It would mean that it continues to challenge the newly powerful petro-states and at key times be treated differently from its competitors. Recall that so far it's the only major not to buckle under pressure in Russia.

Confirmation of the settlement may be known Friday, when Kazakhstan's President Nazarbayev has called together the representatives of all the foreign partners. When he makes such moves, he usually has the terms of a deal in mind.

Update: Gabriel Kahn at The Wall Street Journal reports that the Nazarbayev meeting is delayed until at least Sunday.

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What $100 Oil Means

Yesterday's runup in oil prices was a mere blip -- two publicity-seeking traders appear simply to have sought barroom talk as the guys who made history's first buy over $100, then quickly sold at a small loss. But, coming the first business day of the new year, it's dramatized the new energy world in which we live.

I recommend an excellent piece today by my former colleagues at The Wall Street Journal -- Neil King, Chip Cummins and Russell Gold -- that sums up the themes we've been discussing on this blog, and takes them further.

In the hundred-dollar carbon fuel world, Big Oil is no longer in charge. Exxon, Shell and Chevron have been overtaken by Gazprom, Aramco and Qatar Petroleum. If you're an investor, the best long-term bets are some of these majority state-owned energy companies, and the technology-rich oil services companies being hired to work for them.

One takeaway point from the Journal piece is that Exxon -- the most successful of any of the Big Oil giants -- has only the 13th-largest oil reserves among the world's oil companies. The twelve biggest are all state-owned. This is a hugely important factoid -- Wall Street bases its valuations of oil companies on the reserves they own. So, logically speaking, they are headed for lower valuations. "Western oil companies now control only about one in ten barrels of the world's proven reserves," the piece says.

Another point is the enormous shift of wealth to these petro-states from consuming nations such as the U.S. At current prices, the Middle Eastern and Central Asian producers will earn around $750 billion this year.

For motorists, all of this means that, short of a recession, gasoline prices aren't likely to go down this year, but only up. If there's a hard hurricane season, they're likely to go extremely high.

The causes are an enormous increase in demand from China and India, along with only slowly rising production from the petro-states. There's actually a lot of oil sloshing around the world, but much of it is the wrong kind. It's heavy and sulfur-laden crude, which most refineries can't process. New refineries that can are on the way, but it'll be three or four years before they come on line.

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Pakistan's Playboy and the Oil King

Who Will Succeed Bhutto? The clearest thing amid all the chaos in Pakistan is that the country's most likely kingmaker won't be Pervez Musharraf, and it certainly won't be the United States. It will be Benazir Bhutto's 51-year-old husband, Asif Zardari. The roguish Zardari isn't very well known in the West, but in South Asia he's a celebrity, a charming former playboy who was imprisoned by Musharraf for corruption during Bhutto's terms as prime minister. I've interviewed Zardari, and he's got a natural feel for politics, and has his own magnetism, something lacking in most of the other people Bhutto surrounded herself with. I strongly doubt that he himself could lead the party because of his tainted past. But, given the sympathy factor, and the disarray engulfing Bhutto's Pakistan People's Party, he is likely to choose who does. Dark horse: remember the name Aitzaz Ahsan, who led the lawyer's uprising against Musharraf. He broke with Bhutto but could emerge from the pack, that is should Musharraf ever release him from prison.

Exxon in Russia: The American company may be undergoing the Shell treatment. Last year, Shell was forced by Gazprom to hand over control of the giant Sakhalin-II natural gas field – that is if it wanted to keep doing business in Russia. Now, Russia’s respected business newspaper Vedemosti says that the two giants of the world – Exxon and Gazprom – have held talks about Gazprom taking a stake in the American company’s Sakhalin-I project. This isn’t a shocking report – Vladimir Putin has made it clear that Russians, and not foreigners, will control the country’s energy resources. And it could simply be a trial balloon, as the Russians are prone to float. But it comes after Exxon’s tough-guy negotiating style in Russia and Kazakhstan, insisting that it will never buckle under to resource nationalism. And it’s clear that ultimately the company will have to retreat and compromise in both countries as its roster of possible new global reserves shrinks.

Kashagan: Papa Calls Together the Families

It appears that Kazakhstan's Nursultan Nazarbayev is prepared to pronounce judgment on the long-running dispute with the foreign companies developing the supergiant Kashagan oilfield.

Gabriel Kahn, my former colleague at The Wall Street Journal, reports that Nazarbayev has summoned the companies for a meeting with him and Prime Minister Karim Massimov in the capital of Astana next month.

For Kazakhologists, that can mean only one thing -- he will announce to the companies how the settlement will look. Thus, the six-month-old dispute over this 13-billion-barrel field -- the largest discovery in three decades -- appears near a conclusion.

As Kahn quotes Eni chairman Paolo Scaroni, "For me it is difficult to imagine that President Nazarbayev and Prime Minister [Karim] Massimov meet the most important oil companies without a resolution."

Scaroni is right. This is Nazarbayev's style. He's been known, for instance, to scratch out a number on a piece of paper, and hand it to his foreign interlocutor. That's regarded as written on a tablet.

The meeting is scheduled Jan. 11th.

The dispute started because of the Eni-led consortium's over-budget spending and five-year tardiness in field development. As a settlement, Kazakhstan wants to double its current 8.3% holding in the field, plus a cash settlement, and to receive its oil profits on a bigger scale and faster than written into the current contract.

Nazarbayev's intervention is probably welcome news. He's no Hugo Chavez -- look for a decision that all parties can live with. Even malcontent Exxon may grudgingly accept.

Dumbest story on Kashagan: The leaks have been few from the inner chambers in which the Kashagan talks have taken place. Yet in my view the news coverage has been fairly impressive. Even if it hadn't been, I'm not a press-basher, and as a matter of habit almost never go after other writers.

However, a piece by Motley Fool I think begs scorn. This article, posted yesterday, attributes the stand-off to yet another example of "government heavy-handedness," and chalks it up as more proof that "those who follow energy carefully should be concerned about an expanding outbreak of government strong-arming in a number of important producing nations."

In other words, Motley Fool has precious little knowledge of this dispute, and rather than studying up on it so as to accurately inform its investor readers, has conflated Kazakhstan's position with those of other petro-states in the world. As if to underline this point, Motley Fool boasts that the analyst -- David Lee Smith (I am conveniently providing his email address) -- "really has never set foot in Kazakhstan."

For the record, the dispute has nothing to do with Russian- or Venezuela-style petro-nationalism, and a lot to do with incompetence on the part of the oil companies, and an inflexible contract written during the days of $15 oil.

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Earth to Exxon: Your World is Not Enough

Exxon Mobil has received a fresh message from Russia: We are in charge. Get used to it.

No doubt the oil giant -- which is in battle on two fronts in the former Soviet Union, not to mention in Venezuela -- will ignore the warning and crash-land blithely into the dinosaur pit.

I mean that only slightly tongue in cheek. Around the world, Big Oil is having to cut deals with petroleum-rich states that want to control their own resources. I've recently come around a bit to Exxon's view that resource nationalism will moderate -- petro-states like Russia will need high technology to arrest their declining production and develop difficult new fields -- but only a bit.

The direction of global oil is clear, and it's toward the demise of the Big Oil companies as we know them. In general, the petro-states that control more than 80% of global oil reserves can get what they need from technology-rich oil services companies, and will largely do without the Exxons, Chevrons and BPs of the world.

Yet Exxon seems to think that the old rules hold, those of prior decades in which Big Oil called the shots.

Forbes reports on the latest news on the Russian front. It's a salvo from a Gazprom deputy chairman named Alexander Ananenkov. In a news conference yesterday, he called Exxon's control of the giant Sakhalin-I natural gas field an "infringement of Russia's national interests." He added that Exxon's wish to sell its Sakhalin-I gas to China had made Russians "poor relations who see their gas siphoned off."

The fact is that, according to Exxon's contract, it can sell the Sakhalin production wherever it wants, and China is willing to pay a higher price than Russia.

But that ignores political reality. Russia wants the Sakhalin gas for the domestic market. Why? So it can keep selling its own gas for enormous profits to Europe. And, in case it must curtail its exposure to Europe because of growing alarm there over Russian market dominance, Gazprom itself wants to be able to sell to China.

Exxon would be wise to find a middle ground now rather than wait -- as Shell, BP and Total did to their chagrin over the last two years -- for Russia to build into a lather.

Exxon is also the lead rebel in a several-month-long dispute with Kazakhstan over the supergiant Kashagan oilfield. The Kazakhs are in a fit over a minimum five-year delay in first production at the Caspian Sea field, plus a huge budget over-run. The Kazakhs want more money, and they want it faster than they are contractually guaranteed.

The word is that the other foreign partners developing Kashagan -- Total, Shell and Italy's Eni -- are amenable to Kazakhstan's terms. But Exxon is holding out for an extension in the length of the forty-year contract.

The reason for Exxon's stubbornness is mainly its instinctual bloody-mindedness. But it's also highly concerned about what a concession on Kashagan will mean for its other former Soviet holdings -- 25% of Tengiz, a supergiant sister field to Kashagan; and of course Sakhalin-I. I personally think that the other companies sympathize with Exxon and are hiding behind its willing to play bully. But that's besides the point. Exxon is the lightning rod.

And Exxon doesn't want to look like a pushover as it stands firm, its back right at the edge of the dinosaur pit.

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A Possible Kashagan Settlement; Exxon Tries to Keep the Old Days Alive

The signs are that the Italian-led partners developing the suspended supergiant Kashagan oilfield are near a settlement with Kazakhstan.

The four-month-old dispute at Kashagan -- the largest discovery in the world in four decades -- has become emblematic of petro-nationalism that has shifted the center of gravity in the energy world.

So far, Kazakhstan has been different from belligerents such as Venezuela and Russia in that it hasn't sought to take back a controlling stake of its oilfields from big private companies. But, given $90-a-barrel oil, the state is highly irritated at the terms of the 1997 Kashagan, and is seeking a better deal. There is at least a five-year delay in first oil from the 13-billion-barrel field.

An excellent report by the U.K. firm PLATFORM provides the first credible numbers I've seen from the contract itself -- it seems to have gotten ahold of a copy. According to these figures, Kazakhstan effectively carries much of the financial risk -- it will get almost no money until the companies recover all the costs of developing the field -- while the companies are virtually guaranteed a profit.

News agencies are reporting that there's been agreement on the payment of a $4 billion fine by the companies as compensation for the delay. And all parties are agreed that Kazakhstan will become an equal partner with the largest shareholders, including Exxon Mobil, Shell, Eni and Total, although according to Kazakhstan officials Exxon has been a holdout on the undisclosed price the country must pay for an increase in its current 8% share.

Exxon -- playing its usual role of no compromise -- is convenient for the other partners because any seeming intransigence can be blamed on the American oil giant. But in the end they're all going to have to bend. What's their leverage?

The biggest stumbling block, as we've discussed previously, appears to be the upside. Meaning, how will Kazakhstan share in the profits should global oil prices remain so high?

The Kashagan deal was signed under an assumption of turning a profit on about $18-a-barrel oil. Meanwhile, power in the industry has shifted, with national oil companies like Kazakhstan's now in the driver's seat as oil has skyrocketed to $90 a barrel and more.

Kazakhstan wants a piece of that -- contractually. In other words, it's probably demanding a contract revision that gives them more profit when the price of oil rises -- an adjustment in the so-called upside clause.

The companies will try to keep the final agreement secret so as not to encourage others to be so bold. Exxon in particular is a stickler on this -- it's a 25% partner in the supergiant Tengiz field, a sister to Kashagan, and it won't want to encourage Kazakhstan to now shift its contract revision efforts there (expect Kazakhstan to do just that).

But the terms are bound to leak out. Petro-nationalism is a spreading disease.

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Prosecuting Foreign Bribery Under the Bush Administration

When they unveiled the indictment in April 2003, U.S. prosecutors portrayed their case against James Giffen as open and shut -- the largest foreign bribery case in U.S. history. And by the looks of the detail, they had reason for confidence. There they were -- six individual examples of U.S. oil company payments totalling some $80 million being coursed through European bank accounts linked to the president of Kazakhstan or his associates.

As regular readers of this blog recall, Giffen once controlled the biggest oil deals in the world as oil adviser to Kazakhstan President Nursultan Nazarbayev. He's the principal character in The Oil and the Glory.

Yet in a New York court hearing today, the case seemed a lot more complex. Judge William Pauley, who two years ago issued fiery warnings to both sides to accelerate the pace, was reduced to a mild rebuke of the prosecution, and scheduling the next hearing for April 18th. And jury selection? Not a hint.

There's also a strange moseyness about the prosecution. At one point, Pauley directed the government team to proceed with depositions of European witnesses who in previous hearings they mentioned requiring; the prosecutors themselves seemed to lack the initiative to grab these folks before they die or forget all they know.

That's not the main holdup. It's the defense, brilliantly led by former U.S. prosecutor William Schwartz, who wants documents from a handful of U.S. intelligence agencies to prove Giffen's contention that the whole time he was negotiating those oil deals for a fee, he was doubling as an effective agent for the American government.

This being probably the most secretive administration in U.S. history, dislodging such documentation takes time. Perhaps a friend of mine is right -- we may not see a trial until this administration is out of office.

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Don Quixote and Exxon's Contrarian Gamble

Does Exxon Mobil know something that the rest of Big Oil doesn't? Or is Exxon on a noble but ultimately quaint and quixotic quest for the old days?

Around the world, Big Oil has been knocked back on its heels by the assertiveness of state-owned oil companies that are both developing their own fields, and competing vigorously in auctions for the rights to oil and gas reserves elsewhere. The upshot is that major oil companies look to be on the verge of a long, unpleasant (for them) decline, with the result that some of them -- such as Italy's Eni -- are scrambling to adapt by forming alliances with the state-owned companies.

Exxon is not only refusing to play along with this scenario, but is in battle around the world in a claim that the prior rules hold.

In Kazakhstan, it was announced this week that Exxon is the lone holdout on an agreement to resume work on supergiant Kashagan, the largest new oilfield on the planet; the rest of the field's big partners -- Europe's Total, Shell and Eni -- have agreed to shave off a bit of their collective shares in the field so that Kazakhstan can become a full partner.

In Russia, too, Exxon is at odds with Moscow's insistence that the company sell natural gas from its giant Sakhalin-I development within Russia instead of at a higher price to China. Meanwhile, the rest of Big Oil has thrown in the towel and done compromise deals with Moscow.

And, as my friend Paul Sampson at Energy Intelligence notes in a story this week, the company is in conflict with Venezuela after abandoning participation in the Orinoco heavy oil project when Hugo Chavez demanded a larger piece of the pie. Exxon and Venezuela are in arbitration over how the company will be compensated. Meanwhile, Total, Chevron, BP and Norway's Statoil went along with Chavez's terms.

In a speech last month in Rome, Exxon Chairman Rex Tillerson said, "Some exporting and importing countries are losing sight of their interdependence. They are responding to the energy challenge by pursuing policies of resource nationalism."

Tillerson is betting that the current phase is a blip. Oil prices ultimately will moderate, his thinking goes, and state-owned companies in Venezuela, Russia, China and elsewhere will be back on Big Oil's doorstep.

Meanwhile, Exxon's strategy is to morph into more of a natural gas company. My former colleague Russell Gold at The Wall Street Journal reported during the summer that more than a third of Exxon's total proven reserves are in the Middle East and Asia; five years ago, Gold said, Exxon reported just a sixth of its reserves from that region. Exxon's biggest play on the planet is Qatar, which accounts for much of its growth.

It seems un-Exxonish to bet one's future on a single country or region. But it's not contrary to company culture to resist change. This is a company that until recently was the biggest corporate funder of the narrow club of greenhouse gas "scientist" deniers. Exxon reduced that funding when it became too public and too embarrassing.

It would be foolish to pass judgment on Exxon's strategy. But it does seem to be betting the house against the tide.

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Kazakhstan Wants Equal Ownership Status at Kashagan

The news today in one of the world's great oil disputes is that Kazakhstan has made public a demand for an equal share in the supergiant Kashagan oilfield. Bloomberg reports that six of the field's seven partners have agreed.

Work at Kashagan, the world's largest oilfield discovery in the last few decades, has been suspended while Kazakhstan and an Italian-led foreign oil consortium settle their differences. Kazakhstan is upset that, in a period of $90-a-barrel-oil, the field will be at least five years late coming to market; in addition, costs are nearly double what was originally estimated, and Kazakhstan will have to wait several more more years for some profit until those costs are paid off.

It's been clear that the Kazakhs want more control over the field, plus more money, and earlier receipt of it. The announcement today, however, is the first concrete statement that the country expects a full share of the field. That would approximately double Kazakhstan's current 8.3% holding.

What wasn't said is the terms: Does Kazakhstan intend to pay for the share? If so, are they talking cash? And if they are, how will the price be decided? Or will the companies carry the Kazakh interest?

And who is the holdout on agreeing? Given its record, a solid guess would be Exxon Mobil, which previously said it would consent only if the country extends the contract beyond its current 40-year life.

Kazakhstan is unlikely to agree to that condition when the dispute revolves around fault on the part of the foreign companies.

Exxon, which like Total, Eni and Shell has 18.5% of Kashagan, still behaves as though it's in the driver's seat. But the final settlement -- according to Kazakhstan it will be tomorrow; the companies say it will be later this month -- is likely to reflect a much stronger position for Kazakhstan.

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Sell Your Oil Shares

I just got back from Houston on the book tour, and managed to get in some private conversations with oilmen I know from the Caspian. As we've been discussing over the last week or so, the private talk within the industry is that short of an evolutionary shift in business plan the oil majors as we know them are done for.

Oilmen know that, short of an innovation of the magnitude of the invention of the transistor, Big Oil has little growth ahead of it in the next five years, and no growth – and probably absolute shrinkage – over the next decade and beyond.

The reason is that the oil majors can't maintain the foundation of their value – how much oil and natural gas they possess in total, or their so-called booked reserves. State-owned oil companies in Russia, Iran, Saudi Arabia, Venezuela and elsewhere control between 80% and 90% of the world's oil reserves, leaving the oil majors the remainder, and that is a slender reed indeed. Some of the majors may actually replenish their reserves for the short term, or even in some individual years beyond that. But they can't do so over the long term.

So why are oil shares largely buoyant this year? Because Wall Street hasn't yet seemed to absorb the fact that the current explosion in oil company profits is smoke – a deception. It's not company growth, but the oil price bubble. But it will figure it out.

And that's why, for those who own shares of the big integrated oil companies, it seems best in my opinion to pocket one's profit from the price run-up. Oh, there's some time, some more profit to be eked out because of the price bubble, now heading to break the inflation-adjusted 1980 record of $101 or so, depending who is doing the calculations.

But look for the smart money to start migrating elsewhere. If one wished to stay in oil, for instance, one could go for where the real, long-term growth will come – in the service companies like FMC, Schlumberger or Halliburton, or pure drilling plays.

These companies are going to be used more and more as a replacement for Exxon, Chevron, BP, ConocoPhillips, Shell, Total -- the states will identify the fields to be developed, and simply hire the service companies as contractors to bring them to market. It is they who will pocket the big margins, and not Big Oil.

The oil companies are innovators, so there is always the chance that one or more of them will discover some new way of making cars move, cities light up and factories work. But short of that, they are dinosaurs.

The Cheshire Grin in Kazakhstan

Talks under way between Kazakhstan and Big Oil are about much more than the nation's unhappiness with the work on the world's largest oilfield discovery of the last three decades.

It's about the future of oil. And what is it?

Despite their unprecedented profits, the Big Oil companies are on the decline, and in our lifetime -- except for those that manage to reinvent themselves -- will largely go the way of former industrial behemoths like United States Rubber, Goodyear and Bethlehem Steel.

Petro-states like Kazakhstan and Russia, meanwhile, are demanding and obtaining more control over their own fields, and increasingly marginalizing the once-omnipotent oil majors. In just two decades or a bit longer, they will be the world's big, self-contained providers of energy, and companies like BP, Shell and Exxon Mobil will either be transformed into something else, or be far smaller and mousier. They will be employees -- contractors -- for Kazakhstan, Azerbaijan, Russia, Nigeria and so on.

Already, the petro-states control between 80 percent and 90 percent of the world's oil reserves; the clock is ticking for the companies, based on reserves booked long ago, something that Wall Street will recognize at some point too.

The talks in Kazakhstan make it plain that at least Exxon -- long the most far-sighted of the companies -- understands this shift. The discussions are on the supergiant Kashagan oilfield, which is at least five years behind schedule for first oil and well over two-times over budget.

As partial compensation to irate Kazakhstan, the companies (Exxon, Shell, France's Total, Italy's ENI, ConocoPhillips and others) yesterday agreed to grant the state a larger share of the field. It's clear that Kazakhstan wants an equal share with the bigger companies, and since no dollar figures were mentioned there is still the question of whether it's willing to pay market price -- or anything at all -- for that increased stake.

In this gentlemanly form of back-alley extortion, Exxon had the gumption to insist of the man wielding the knife the equivalent of train fare home so as to live another day. Kazakhstan could have this increase, Exxon said -- but only if the contract were extended beyond its current expiry in 2041.

Kazakhstan so far has refused (it's not clear, for instance, if Exxon -- as brazen as any petro-state -- offered any money extension), but the demand is brilliant.

If such an extension is granted for, say, a decade or longer, Exxon and its partners would be on the road to extending their lives just that little bit.

There has seemed to be a Cheshire grin on some of the Kazakh and Russian oil officials in recent months.