Are Big Oil's tanks running dry?

The world's big private oil companies are reporting record profits on the back of high oil prices. Exxon Mobil enjoyed $36 billion in net profit in 2005, the largest of any American company ever. Shell reported $23 billion, a UK record. However, the oil wells that generate the big bucks are drying up. Shell's profits came despite a decline in its oil production; Exxon also suffered a small decline. Shell replaced only 70-80% of the oil it pumped with new reserves. In 2004 the replacement rate was even lower (under 50%) - and the firm suffered a scandal over the misreporting of its reserves. BP replaced 95% in 2005 according to a formula set by the SEC. Exxon replaced 83% by the same measure.

Replacing reserves is one of the most pressing problems facing the world's leading oil firms. Production from fields in the North Sea, the Gulf of Mexico and Alaska is in decline. The companies have had to search further a-field, including West Africa, the Caspian and other out-of-the-way places. Most of the world's oil is located around the Persian Gulf, but this is the preserve of giant state-run producers. And President Putin's dismemberment of Yukos led to a cooling of relations with western oil companies, which are now all but shut out of Russia.

The big oil firms are also suffering from Chinese and Indian oil firms which are snapping up smaller rivals around the world to satisfy their economies' seemingly ever-growing demand for energy. And unlike Exxon, Shell and the like, they don't have to answer to inquisitive shareholders.

The western oil firms do still have some advantages. The technological advances forced upon them as they seek out oil in difficult places may help with the exploitation of unconventional hydrocarbons, such as Canada's tar sands. And they also have the capital and know-how needed to extract and transport natural gas in liquefied form. But if the big western firms lose the battle to replace reserves, the era of mega-profits will come to end - however high the price of oil climbs.

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