High oil prices and the bumper profits they bring mask major underlying threats to the biggest oil companies from higher taxes, difficulties in gaining access to new fields and soaring costs, analysts say.

Chief executives meeting in Vienna this week were divided on whether technology, alternative energy sources, riskier exploration or better dialogue with resource holding nations were the best way to retain their global dominance.

The past decade has seen a dramatic shift in power toward the owners of oil, and away from the supermajors, as the top tier of fully publicly quoted oil companies - Exxon Mobil , Royal Dutch Shell Plc, BP Plc, Total, Chevron Corp and ConocoPhillips - are known.

Growing resource nationalism has led to higher taxes and restrictions on access to reserves in many countries including Russia, Bolivia and Venezuela.

Double-digit inflation in the oil services sector is also eroding margins, while an aging workforce is creating fears that even if the supermajors can secure access to new fields in the future, they won't have the staff to drill them.

Some analysts fear the implications for the supermajors' stock prices.

While single-digit price-earnings ratios create the illusion of value, this needs to be balanced against concerns that momentum for the group is slowing...aggregate earnings are close to peaking while returns likely already peaked in the first half of 2006, Merrill Lynch said last week in a research note.

Of six oil industry sub-sectors that Morgan Stanley tracks, the investment bank considers the supermajors the least attractive class after, in order of preference, oil services companies, Russian oil majors, independent explorers, smaller integrated companies and refiners.

The last time the industry was faced with such pessimism - when oil prices languished around $10 in the late 1990s - the supermajors reacted with a series of mega-mergers. Some analysts now advocate M&A as a solution to the industry's ills.


Exxon CEO Rex Tillerson would not rule out further mega-mergers, replying not necessarily when asked by Reuters if this was how the supermajors could retain their preeminent position. However, he is more focused on other areas.

You've got to look at costs, Tillerson said, speaking on the sidelines of an OPEC-organized conference in Vienna.

Tillerson also emphasized the importance of technology. Nations with oil traditionally needed the big western international oil companies (IOCs) because they had the technology and expertise needed to exploit big fields.

Now, service companies are increasingly able to offer this, allowing national oil companies (NOCs) to develop fields without the supermajors. Tillerson said Exxon invested $700 million in research and development last year to ensure it had something to offer.

Shell Exploration and Production boss Malcolm Brinded agreed that technology was key to gaining access to reserves but for Shell much of the focus is on technology that would allow the Anglo-Dutch company to develop alternative energy sources.

We're investing in tar sands in Canada and gas to liquids, Brinded told Reuters.

However such technologies are expensive, making margins uncertain.

As yet that project (oil sands) is unproven. It's a massive cost, and you require oil to be at this price or slightly less, for it to be viable. Therefore you wonder whether the equation can be balanced, said Julian Chillingworth, fund manager at Rathbone Investment Management, which has assets of $11 billion.

Chillingworth suggested companies needed to return to taking more risk with the drill bit.

Maybe the buybacks and hefty dividend increases need to be reined back and maybe they need to invest more in new projects, Chillingworth said.

Christophe de Margerie, Total's head of exploration and production, and CEO designate, agreed oil companies needed to look more at new frontier exploration. That's why Total is drilling in Mauritania, he said.

But de Margerie added that supermajors also needed to explore for new types of agreements with resource holders. Instead of just offering money, companies should offer to help with development.

Training, desalinization (plants), the environment, are all things that need to be discussed, de Margerie said.

Chevron CEO Dave O'Reilly appeared to agree, telling the conference: Collaborative thinking between NOCs and IOCs is more important than ever.

A more understanding and creative approach could even help the supermajors gain access to the richest oil reserves, in countries like Kuwait and Saudi Arabia, from which they have been blocked in the past, analysts said.

However, the power shift in the industry means even this won't guarantee an easier ride.

Quite often we are asked to respect and understand but that needs to be mutual, de Margerie told the conference.