On the surface, times could hardly be better for the petroleum industry. Surging demand and a tight global supply have pushed oil prices to record heights, with no downturn in sight. The major oil companies, even while investing at record levels in renewed exploration and development efforts, still have enough cash left over to return huge sums to shareholders. And projects now in development will keep production growing for the next five to eight years.

Yet all is not as it seems: Big Oil confronts its most far-reaching test in decades. The top five companies—Exxon Mobil, BP, Royal Dutch/Shell, ChevronTexaco, and Total—face increasingly tough challenges finding new sources of oil and natural gas to replace existing reserves. Access to the Middle East, which holds half the world's known petroleum reserves, has been difficult—especially for oil—since the 1960s and 1970s, when governments there nationalized the assets of Western oil companies. Many of the world's remaining potential new sources of oil and natural gas are in countries with relatively high political and legal instability, such as Nigeria and Russia, or technically challenging regions such as the Arctic and Asia-Pacific. The complex refineries needed to process the world's vast reserves of heavy, sulphur-laden...