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Olsen gives al-Kasim much of the credit: he pushed the government to increase extraction rates; insisted that companies try new technologies, such as water inje

by miked 17y ago

Olsen gives al-Kasim much of the credit: he pushed the government to increase extraction rates; insisted that companies try new technologies, such as water injection in chalk reservoirs or horizontal drilling; and threatened to withdraw operating licences from companies that balked. “It is this culture, a culture of ‘squeezing the last drop out’, which he cultivated,” says Olsen. As it stands, this makes no sense. If a cost-benefit analysis showed that investing in technology to increase extraction efficiencies would pay off (given the volatitlty of future prices, etc.), then it should have been done regardless of his urgings. If it didn't, he should never have pushed the idea. In the first case, StatOil would need new managers. In the second, the subject of the story would be wrong. You'd think that the editors of The Financial Times would have pursued that issue in a bit more depth.

Luc 17y ago
What is good for Norway is not necessarily good for the oil companies, which have opportunities elsewhere.
furyg3 17y ago
Pay off now, or pay off later? The incentive structure for a CEO or other executive at a large multi-national oil firm is likely such that he/she would much rather have a lot of oil drilled in the short-term, rather than a smaller ammount of oil in the short-term and a larger total ammount over the long-term. The same goes for the board members and investors. "Long-term" here is decades, possibly generations, not next quarter. That means that a large chunk of the profits may be realized well after you're retired (or dead), which is not so great for your bonus structure, promotion schedule, or the ROI timeframes that most investors are concerned with (but fantastic for a nation-state). Furthermore contract structures over that kind of timeframe become a bit unpredictable, especially contracts with a sovreign nation, so better to get what you can now and get out. This kind of long-term thinking is where corporations fall short. Even if it's the best interests of the 'corporation' to invest in the long term (which clearly ended up being the case here), it's not in the best interests of the individuals working there. Very few institutions are capable of that mode of operation (nations, monarchies/family dynasties).
- miked 17y ago
  While I largely agree on most of your points, I think there's a porblem with this: The incentive structure for a CEO or other executive at a large multi-national oil firm is likely such that he/she would much rather have a lot of oil drilled in the short-term, rather than a smaller ammount of oil in the short-term and a larger total ammount over the long-term. That seems to me a bit of a strawman, though I confess I know little about how the oil business works. The issue here comes down to a present value calculation for proposed investments. You seem to be implying that the Iraqi engineer pushed for short-term maximization thru the use of new technologies. But those technologies cost money, now. That would reduce the company's profit and (if he's a shareholder) his (short-term) return.
  - Estragon 17y ago
    I confess I know little about how the oil business works So basically you're arguing from the axioms of free-market fundamentalism. \yawn\
    - anamax 17y ago
      > So basically you're arguing from the axioms of free-market fundamentalism. Since he was responding to an argument with even less basis, it's curious that only the response rated the above comment.
    - miked 17y ago
      I'm curious, are you saying that you know a lot about the oil business. And do you think that calling someone's position names (free-market fundamentalism) is a strong argument?
  - vitaminj 17y ago
    The risks associated with introducing new technology need to be taken into account. An oil company may not think it's worth the risk to try untested technology (or rather, try standard techniques on untested reservoir conditions). But the Iraqi engineer / regulator, who isn't bearing the costs of failed forays into new technology, may think its a good idea. So their incentives are different.
hristov 17y ago
Well, the term "pay off" may mean different things. It may mean "pay off" for Norway or "pay off" for the oil companies.
vitaminj 17y ago
The oil industry generally isn't very innovative, nor do they tend to test costly, untried technologies on their assets that already make billions of dollars. Take water injection for instance, which is a standard method for maintaining reservoir pressure, ie. the pumping of water into the oil/gas reservoir to raise the pressure. In order to implement such a scheme, a well slot would be needed for the source water pump, and at least one other well slot for the injection well. Typically, these are done on separate water injection platforms. Add the cost of the workover drill rig to drill the wells and the increased cost of water/oil separation on the production platform, and it's a very expensive exercise... especially if it may not actually work (which is what is implied in the article with water injection in chalk reservoirs, which could potentially cause reservoir fracturing). An oil company, especially a relatively new one like Statoil in the 70s/80s, would be justified to balk at costly experimentation with their fields, and would probably wait for others to prove the concept first. This is even more justifiable when the field is gigantic (like the Ekofisk field). Oftentimes, cutting edge technologies are used on smaller, marginal fields with relatively high lift prices, and where oil price volatility is the difference between profit and loss (I worked on a project in 2002/3 when oil was around $25 a barrel and this field was only profitable at a price of $30 per barrel... the field actually needed water injection right from first oil, which means that it was definitely marginal... so they were lucky when oil prices shot past $100). In any case, you don't see much innovation happening in the huge saudi fields that have very low lift prices.

by miked 17y ago

Luc 17y ago

What is good for Norway is not necessarily good for the oil companies, which have opportunities elsewhere.

furyg3 17y ago

Pay off now, or pay off later? The incentive structure for a CEO or other executive at a large multi-national oil firm is likely such that he/she would much rather have a lot of oil drilled in the short-term, rather than a smaller ammount of oil in the short-term and a larger total ammount over the long-term. The same goes for the board members and investors. "Long-term" here is decades, possibly generations, not next quarter. That means that a large chunk of the profits may be realized well after you're retired (or dead), which is not so great for your bonus structure, promotion schedule, or the ROI timeframes that most investors are concerned with (but fantastic for a nation-state). Furthermore contract structures over that kind of timeframe become a bit unpredictable, especially contracts with a sovreign nation, so better to get what you can now and get out. This kind of long-term thinking is where corporations fall short. Even if it's the best interests of the 'corporation' to invest in the long term (which clearly ended up being the case here), it's not in the best interests of the individuals working there. Very few institutions are capable of that mode of operation (nations, monarchies/family dynasties).

miked 17y ago
While I largely agree on most of your points, I think there's a porblem with this: The incentive structure for a CEO or other executive at a large multi-national oil firm is likely such that he/she would much rather have a lot of oil drilled in the short-term, rather than a smaller ammount of oil in the short-term and a larger total ammount over the long-term. That seems to me a bit of a strawman, though I confess I know little about how the oil business works. The issue here comes down to a present value calculation for proposed investments. You seem to be implying that the Iraqi engineer pushed for short-term maximization thru the use of new technologies. But those technologies cost money, now. That would reduce the company's profit and (if he's a shareholder) his (short-term) return.
- Estragon 17y ago
  I confess I know little about how the oil business works So basically you're arguing from the axioms of free-market fundamentalism. \yawn\
  - anamax 17y ago
    > So basically you're arguing from the axioms of free-market fundamentalism. Since he was responding to an argument with even less basis, it's curious that only the response rated the above comment.
  - miked 17y ago
    I'm curious, are you saying that you know a lot about the oil business. And do you think that calling someone's position names (free-market fundamentalism) is a strong argument?
- vitaminj 17y ago
  The risks associated with introducing new technology need to be taken into account. An oil company may not think it's worth the risk to try untested technology (or rather, try standard techniques on untested reservoir conditions). But the Iraqi engineer / regulator, who isn't bearing the costs of failed forays into new technology, may think its a good idea. So their incentives are different.

hristov 17y ago

Well, the term "pay off" may mean different things. It may mean "pay off" for Norway or "pay off" for the oil companies.

vitaminj 17y ago

The oil industry generally isn't very innovative, nor do they tend to test costly, untried technologies on their assets that already make billions of dollars. Take water injection for instance, which is a standard method for maintaining reservoir pressure, ie. the pumping of water into the oil/gas reservoir to raise the pressure. In order to implement such a scheme, a well slot would be needed for the source water pump, and at least one other well slot for the injection well. Typically, these are done on separate water injection platforms. Add the cost of the workover drill rig to drill the wells and the increased cost of water/oil separation on the production platform, and it's a very expensive exercise... especially if it may not actually work (which is what is implied in the article with water injection in chalk reservoirs, which could potentially cause reservoir fracturing). An oil company, especially a relatively new one like Statoil in the 70s/80s, would be justified to balk at costly experimentation with their fields, and would probably wait for others to prove the concept first. This is even more justifiable when the field is gigantic (like the Ekofisk field). Oftentimes, cutting edge technologies are used on smaller, marginal fields with relatively high lift prices, and where oil price volatility is the difference between profit and loss (I worked on a project in 2002/3 when oil was around $25 a barrel and this field was only profitable at a price of $30 per barrel... the field actually needed water injection right from first oil, which means that it was definitely marginal... so they were lucky when oil prices shot past $100). In any case, you don't see much innovation happening in the huge saudi fields that have very low lift prices.