Coined by Italian energy magnate Enrico Mattei, the term "Seven Sisters" referred to the seven international oil companies that dominated the world's oil production after World War II. Their ranks included Standard Oil of New Jersey, Royal Dutch Shell (NYSE:RDS.A), Anglo Persian Oil Company, Standard Oil of New York, Standard Oil of California, Gulf Oil and Texaco. Mattei could not have imagined how the power would shift away from these Titans barely half a century later.
Today, a whole new group of oil and gas companies have become today's Titans. The "New Seven Sisters" -- selected recently by the Financial Times [FT] -- highlights how largely state-owned companies from the emerging world have become key global players in oil and gas. The FT ranked the New Seven Sisters on the basis of resource base, level of output, company's ambition, scale of their domestic market, and influence in the industry. In order of prominence, they are Saudi Aramco , Russia's Gazprom, CNPC of China, NIOC of Iran, Venezuela's PDVSA, Brazil's Petrobras and Petronas of Malaysia.
The New Seven Sisters control about one-third of the world's oil and gas production and reserves. In contrast, descendants of the Seven Sisters -- ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) of the U.S. and Europe's BP (NYSE:BP) and Royal Dutch Shell -- produce only about 10% of the world's oil and gas and hold just 3% of its reserves. And if anything, the New Seven Sisters are set to grow even more powerful. The International Energy Agency [IEA] calculates that over the next 40 years, 90% of new supplies will come from developing countries.
The New Seven Sisters: The Saudi Prince... And His Little Sisters
With 25% of the world's oil reserves and with nearly triple the capacity of any other group, Saudi Aramco is the world's largest and most sophisticated national oil company. Think of Saudi Aramco as the world's self-appointed central banker of oil -- turning taps on when there is a shortage of global supply -- and off when prices are falling below its comfort level.
In 2002, Saudi Aramco launched its most ambitious expansion program in a generation. By investing $50 billion over 15-20 years, Saudi Aramco aims to boost production capacity from 11 million barrels to 15 million barrels per day, thereby consolidating its position as the world's most powerful oil company.
Although less powerful than the Saudis, the other sisters now dominate the familiar Western majors in terms of influence. Russia's Gazprom is the industry bad boy, never reluctant to flex its muscles on the battlefield of business. China's CNPC owns 88% of PetroChina (NYSE:PTR) and is active in about 20 countries from Azerbaijan to Ecuador. NIOC, Iran's national energy company, has partnerships with Italian, French, Dutch and Norwegian companies and collaborates with Chinese and Russian groups. PDVSA is Venezuelan President Hugo Chávez's political pawn. The company's profits are subsidizing London commuters. Brazil's Petrobras is a global leader in finding and producing oil from deep waters. Petronas is Malaysia's national oil company and may be the slickest and most commercial organization of the bunch.
The New Seven Sisters: Natural Resource Nationalism
Saudi Aramco's dominant role in oil and gas has long been accepted by the Western majors. But the recent rise of smaller national oil companies has caught them off guard. By the end of 2006, Russia's Gazprom and PetroChina had become the second and third most valuable listed energy groups in the world, overtaking companies such as BP and Shell. ExxonMobil now remains alone at the top.
Even more disconcerting is national oil companies in Russia and Venezuela systematically clawing back control of their natural resources. Scenes of Western oil majors' chief executives traveling to Moscow and Caracas to head off expropriation of oil fields they thought were theirs is now a regular occurrence. The last time this happened in the 1970s, Western majors decamped from the developing world back to North America and the North Sea. But with oil supplies drying up, that's no longer possible. A few years ago, the Western majors had hoped that Central Asia would provide an alternative. Today, the euphoria of the late 1990s-2000 has subsided, as the region has not lived up to initially high expectations.
The New Seven Sisters: "Bottomless Piggybanks?"
Some of the New Seven Sisters have become little more than their home country's bottomless piggybank, funding politically expedient social ventures. The poster child of irresponsible profligacy is President Hugo Chávez of Venezuela who spends two-thirds of PDVSA's profits on his populist social programs. The result? PDVSA's production capacity has fallen from 3.4 to 1.5 million barrels per day since 1999. In Iran, NIOC cannot boost its oil production or fix its refineries because its profits go toward keeping gas at 40 cents per gallon for Iranian consumers. In Russia, too, little of Gazprom's earnings go towards upgrading Russia's antiquated, leaking pipeline system.
This mismanagement has global consequences. The IEA estimates that the world is falling 20% short of making the investment needed to ensure adequate energy supplies for the next 25 years. And governments' unwillingness to allow their national oil companies to reinvest profits back into industry is the primary culprit.
Among the New Seven Sisters, only Saudi Aramco, Petrobras, and Petronas have turned themselves into international players able to compete with the likes of BP, Chevron and Royal Dutch Shell. That's why the revenues of the new Seven Sisters noticeably lag those of the Western majors.
The New Seven Sisters have the natural resources. The Western majors have financial resources and technical and managerial know-how. At some point, the New Seven Sisters will need the help of the Western majors to develop their reserves. But once their fields decline and they can no longer produce as much oil and revenue as they want, it might just be too late.
Disclosure: Author has no position in the above-mentioned securities