Blackbeard’s return

For some years — and long before the Gulf of Mexico spill — Big Oil has seemed to be in existential peril. These gargantuans have been starved of new resources and wrong-footed by state-owned oil companies like China’s Sinopec and Malaysia’s Petronas, which are also competing around the world for drilling rights. At stake has been not only Big Oil’s good health — after all, how many people really care whether Chevron or Shell thrive, apart from their shareholders? — but also the power of nations. It’s part of the narrative of the rise of the East, and the decline of the West.

Which brings us to the brouhaha that’s descended upon Washington this week, and a Gulf of Mexico oilfield called Blackbeard.

Two days ago, a Florida congressman named Cliff Stearns made a seemingly throwaway reference to the well in a congressional hearing. But the remark was more important than it seemed: It was a window into how the rest of the West’s oil giants hope to transcend BP’s unprecedented catastrophe, and hold off their own descent.

In a cover story for BusinessWeek last year, I recounted the story of Blackbeard: In 2005, Exxon Mobil set out to drill the reservoir 28 miles off the Louisiana coast, which required what was at the time the world’s deepest well, some 32,000 feet below the seabed. Estimates were that the field might hold more than 1 billion barrels of oil, which, if accurate, would make Blackbeard a supergiant — or an "elephant," in industry argot. In addition, a successful well would prove out an entire new oil frontier in this part of the Gulf. That generated much excitement as the oil industry watched Exxon’s progress.

But what really got the industry talking was 18 months later when, after the company had spent an estimated $180 million drilling to just 2,000 feet from the target depth, Exxon halted the operation and walked away. Insiders told me that rig hands reported a natural gas "kick" that shook the platform, and spooked company management.

That was the first act of the drama. The second act came a year and a half later when a wildcatter named Jim Bob Moffett, co-chairman of the small Louisiana-based company McMoRan Exploration, walked in with his own crew. Moffett said Exxon had misread the situation, and proceeded to drill straight through to target depth. When he was done, he crowed that he had found at least half a billion and perhaps several billion barrels of oil. I quoted one oil analyst who said that Exxon simply "didn’t have the guts" to complete the well.

In Tuesday’s congressional hearings, Exxon CEO Rex Tillerson, sitting next to his contemporaries at Shell, Chevron and ConocoPhillips, threw BP to the wolves. Tillerson spoke for Exxon, but also effectively for the others, when he said his company "would not have drilled the well the way [BP] did."

The reason for this club expulsion is that BP has jeopardized the only remaining advantage enjoyed by Big Oil as it competes against state-owned oil companies for scarce oil resources: its supposed technological superiority. If Big Oil is robbed of that ace, it has no cards to speak of. Though the super-majors would retain plenty of oil and natural gas assets on their balance sheets, they would be challenged to replenish the reserves they produce every year, and thus would rapidly wither away.

Exxon’s decision at Blackbeard adds meat to Big Oil’s attempt to hold onto this high ground — it projects the notion that the super-majors are the responsible operators on the oil patch.

In the BusinessWeek story, I quoted Thomas Hamilton, a former executive of both BP and Exxon, and an original investor in the Blackbeard project who was critical of Exxon’s performance. Today, I e-mailed Hamilton, and he agreed that Exxon’s caution looks better in hindsight. He said:

It is their huge balance sheet that allows them to operate as risk-free as anyone in the industry.  If you don’t have such a strong balance sheet, you are forced to take on more risk to compete.

Not that Wall Street appears to notice. BP’s share price surged in early trading today on the back of his handshake deal with President Barack Obama yesterday, which suggested that Washington would not seek to wipe out the company, as some had feared. Yet BP is far from out of the wilderness, and remains in danger of being broken up after the spill is repaired (everyone hopes) in August.

But Exxon, too, is faring poorly in this regard. Even though it has the smallest Gulf of Mexico operation among the super-majors, its share price has plunged along with BP’s since the April 20 spill. It is trading near its 52-week low.

Since Exxon doesn’t grow and pays miserly dividends, I still wonder why anyone would invest in the company. But that is a subject for another day.

For now, look for Blackbeard to emerge as a well-worn talking point as Big Oil defends its right to survive.