Big Oil sees big risks as it places big bets

John W. Schoen • Profile • E-mail

HOUSTON - Big Oil has always been a big gamble, with high stakes and the potential for big payoffs. And despite a recent stretch of winning hands and big pots, the risks haven’t gone away. If anything they’ve gotten bigger.

Those high stakes — and strategies for managing them — are the talk of a weeklong industry conference here that has attracted some 2,000 CEOS, analysts, investors, suppliers, consultants and press from 55 countries.

For over a century, oil companies have wagered billions of dollars punching holes in the ground, with varying odds and mixed success, hoping to find a new pocket of oil or natural gas that might be deliverable years in the future, at a market-driven price that would cover costs and generate a return on its investment.

Now, after its most profitable year on record, the oil industry faces some new risks — including the potential impact of a widening consensus that the use of its main product is responsible for irrevocably changing the planet’s climate.

Some companies seem to be embracing the challenge. Until recently, you wouldn’t expect to hear much about conservation or alternative energy sources in a roomful of oil executives. But those were hot topics at this week’s conference, “Strategies for a High Stakes World,” hosted by the consulting firm Cambridge Energy Research Associates. With energy supplies barely keeping up with the growth in the demand, even the optimists were quick with sobering reminders of scope of the task.

“People lose sight of the timing and the scale of infrastructure involved,” said David O’Reilly, Chevron CEO. “It’s a massive undertaking.”

To keep the world’s economic engine running, some in the oil industry are looking to develop alternative fuels — a notion that not long ago would have been dismissed as heresy here in the Oil Patch. But major investment is now pouring into production of corn-based ethanol and other biofuels; some $7 billion in venture capital last year, double the level of 2005. Since no one expects corn to supply enough biofuel to meet the White House target of 35 billion gallons of alternative fuel by 2017, the race is on to develop other feedstocks — from municipal waste biomass to so-called “cellulosic” ethanol made from grasses and other plant material. Far from a threat to their core business, many in the oil industry see an opportunity.

“The world is going to need every molecule (of fuel),” said Richard Zelensky, vice president of Chevron’s biofuels program. “There’s plenty of room for everybody.”

Brazilian energy giant Petrobras offered a glimpse at what increased reliance on petroleum alternatives might look like. Company CEO Jose Sergio Gabrielli told a luncheon group that at least 25 percent of all motor fuel sold in Brazil is ethanol, which his company has been producing from sugar cane for decades. Owners of flex-fuel vehicles can now drive past the gasoline pump altogether, he said.

“In Brazil, you can not put pure gasoline in your car,” said Gabrielli. “And every station has at least one pump that has pure ethanol.”

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