Running on empty

The leading energy analysts who foretold Enron's demise have an alarming new claim: The world's major oil companies are almost tapped out.

By Robert Bryce

Mar 15, 2005 | Four years ago, the analysts at John S. Herold Inc. were the first to call bullshit on Enron. On Feb. 21, 2001, three Herold analysts issued a report that said Enron's profit margins were shriveling, the company had too few hard assets, and its stock price was way too high. Less than ten months later, Enron filed for bankruptcy.

Today, the analysts at Herold -- a research-only firm that issues valuations on several hundred publicly traded energy companies -- are making predictions even bolder than their call on Enron. They have begun estimating when each of the world's biggest energy companies will peak in its ability to produce oil and gas. Herold's work shows that the best minds in the energy industry are accepting the reality that the globe is reaching (or has already reached) the limit of its own ability to produce ever increasing amounts of oil.

Many analysts have estimated when the earth will reach its peak oil production. Others have done estimates on when individual countries will hit their peaks. Herold is the first Wall Street firm to predict when specific energy companies will hit their peaks.

Since last fall, Herold has done peak estimates on about two dozen oil companies. Herold believes that the French oil company, Total S.A., will reach its peak production in 2007. Herold expects 2008 to be critical, with Exxon Mobil Corp., ConocoPhillips Co., BP, Royal Dutch/Shell Group, and the Italian producer, Eni S.p.A., all hitting their peaks. In 2009, Herold expects ChevronTexaco Corp. to peak. In Herold's view, each of the world's seven largest publicly traded oil companies will begin seeing production declines within the next 48 months or so.

Executive vice president Richard Gordon, who heads Herold's global strategies team, says the firm's goal in doing peak-production estimates for individual oil companies is simple: "If the dinosaurs are going extinct, we are trying to figure out which ones are going to go extinct the soonest."

Herold's projections have enormous ramifications both for stockholders in the major oil companies and for every energy consumer on the globe. If Herold is correct, and the world's biggest oil companies cannot increase their production in the coming years, then several things appear certain:

Oil prices -- which are already at record levels -- will continue rising as demand outstrips supply. In a few years, gasoline prices of $2 per gallon could seem like a bargain.

State-owned oil companies like Mexico's Pemex, Venezuela's PDVSA (Petroléos de Venezuela) and Saudi Arabia's Saudi Aramco may be unable to increase their production enough to meet burgeoning global demand.

The producers who belong to the Organization of the Petroleum Exporting Countries, and Saudi Arabia in particular, may have even more leverage over the global oil market in the coming years.

The United States will be ever more reliant on oil imported from countries filled with people who don't like George W. Bush or his policies.

While Herold's projections provide ammunition to the growing chorus of analysts who believe peak oil is imminent, they are not being welcomed by the oil companies. Last month, when I asked ChevronTexaco's chairman and CEO, David J. O'Reilly, to respond to Herold's projection that his company would reach its peak production in 2009, he replied snappishly, "I'm not going to comment on that."

A spokesman for Royal Dutch/Shell in London was similarly coy, saying in an e-mail that the company had "no comment" on Herold's projection. However, the company's spokesman, Simon Buerk, pointed to a September 2004 report published by Shell that predicts the company will be producing the equivalent of 4.5 million barrels of oil per day by 2014, not the 4 million barrels per day that Herold foresees for that time frame.

Charley Maxwell, an analyst at Weeden & Co., a Connecticut brokerage, says oil industry officials are loath to discuss Herold's projections because doing so would "circumscribe their future prospects and the future growth of their stock, and executives have no interest in doing that since so much of their compensation is tied to their stock options." Maxwell, one of the most respected stock pickers in the energy business, believes the non-OPEC oil producers will hit their peak oil production in the next five years. And he applauds Herold's research, saying that no other reputable firm "has been willing to make this type of prediction."

Another energy industry veteran, John Olson, co-manager of Houston Energy Partners, an energy hedge fund, agrees. Olson believes that Herold's predictions about peak production are "very significant. It is perhaps the first cannon ball over the bow of a big tanker."

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