Industry leaders see challenges as energy business changes

Feb. 13, 2001
International business leaders warned of tough challenges facing the energy industry Tuesday in the keynote plenary session at the twentieth annual energy conference here, sponsored by Cambridge Energy Research Associates.

HOUSTON, Feb. 13�International business leaders warned of tough challenges facing the energy industry Tuesday at the Cambridge Energy Research Associates� energy conference in Houston.

�We are witnessing a historic shift from oil to natural gas and a growing business commitment to sustainable development,� said Jeroen van der Veer, president of Royal Dutch Petroleum Co. and vice-chairman of the Royal Dutch/Shell Group�s managing directors.

By 2050, gas and renewable energy could provide half of the energy requirements among the most developed nations, he said.

Meanwhile, the disparity between the massive tax revenue that governments of consuming countries reap from refined petroleum products and the �tiny fraction� that producing countries get for the sale of their oil is a �time bomb� that threatens the system, said Herbert Detharding, CEO of Wintershall AG, a subsidiary of the BASF Chemicals Group.

Members of the Organization of Petroleum Exporting Countries and other oil producers are tired of being pressured to hold down the price of crude oil while other governments pile on taxes at the pump, Detharding said.

While Saudi Arabia got $45 billion for the sale of its oil in 1999, the German government took in $48 billion for taxes on petroleum products in that country. Although final figures are not available, Detharding said, higher prices in 2000 probably shifted that division a little more in Saudi Arabia�s favor.

Germany is �not much different� from other European countries in that regard. �European governments have discovered the enormous flexibility of car drivers to absorb tax payments,� Detharding told reporters after his speech. Therefore, while the industry itself lives on a profit margin of just pennies per gallon, he said, the German finance minister gets a few dollars from each gallon of gasoline sold.

Governments of large energy consuming nations are making a mistake in relying to heavily on energy taxes to fund government programs, Detharding said.

�It�s a system that can�t last,� he warned. �We will see aggressive steps by the producers to change the balance in their favor.�

If new non-OPEC production comes on stream as a result of higher oil prices, he said, �OPEC will play the $10/bbl game again� to eliminate those high-cost alternative sources.

At that same session, Vittorio Mincato, CEO of Eni SPA of Italy, said the oil and gas industry lost its �frontier spirit� in the 1990s �when it ceded too much to the outsourcing theorists and too readily eliminated people with specialized abilities� in engineering and project management.

�In an industry as unique as ours, even today project management, technological ability, and financial strength cannot be disassociated from geopolitical sensibilities, cultural adaptability, and global vision. The importance of adequately trained human resources is a must,� he said.

Mincato also warned, �We are seeing the first strong signs of a cultural backlash to globalization by people who are seeking to reclaim their identity.�

He said megamergers among oil companies can�t resolve industry-wide problems, such as the relative scarcity of good assets, increased global competition, and regulatory pressures. Nor have they strengthened companies vis-�is producing countries, he said.

�Megamergers can in some cases help improve a company�s competitiveness and cost structure�when all goes well,� Mincato said. �But this is a very short-term phenomenon and can be misleading, because megamergers also allow companies to avoid confronting basic problems.�

It�s not enough for the oil and gas industry to meet minimum standards to secure a �license to operate� as a result of public tolerance, said van der Veer.

Instead, he said, the industry must interact positively with all stakeholders to revive its credibility. It must obtain a new �license to grow� by winning public trust, he said.