By Simon Pirani
National oil companies are rapidly reclaiming resource wealth from the private sector. But funding longer-term investment in the industry has never been a bigger concern
DNO, a Norwegian company pumping oil in Iraqi Kurdistan under a controversial deal with local political leaders, has received a $700 million offer for its fields there from an international oil company (IOC).
The offer to DNO was a stark reminder of the IOCs’ desperate shortage of production assets, and the extent to which they have yielded domination of the world’s hydrocarbons reserves to the national oil companies (NOCs). This shift in the geopolitical landscape of oil is driving fundamental changes not only in the IOCs’ business strategy, but in the international community’s attitude to investment in oil and energy security.
In June, DNO became the first foreign company to pump crude in Iraq since oil nationalization in 1972. Its minimal production from the Tawke field – about 6,000 barrels per day – is now being sold domestically, although it hopes to start exporting via Turkey later this year. DNO is working under a production sharing agreement (PSA) signed in June 2004 with the Kurdish regional government, which has never been approved by authorities in Baghdad. And, despite the Kurdish authority’s uncertain constitutional basis and the precarious security situation in the region, DNO chief executive Helge Eide announced in August that DNO had been offered $700 million for the asset.
Some observers speculate that the offer may have been made by Shell, which has signed an agreement with Baghdad to study the oilfield at northern Kirkuk, an area disputed by Iraqi and Kurdish authorities. Shell declines to comment. Whichever of the IOCs is interested in the Tawke field, it is a sure sign of their concern at the shortage of resources, and the fact that most reserves are now controlled by the NOCs.
The rise of the national oil companies
NOCs that allow no equity participation by foreign oil companies control 77% of the world’s total oil reserves, and partly- or fully-privatized Russian companies control another 6%, a recent study by the Baker Institute showed. The IOCs collectively control just 10%, and another 7% are held jointly between IOCs and NOCs.
The top ten reserves holders internationally are state-owned enterprises. The largest IOCs – ExxonMobil, BP, Chevron and Royal Dutch Shell – rank 14th, 17th, 19th and 25th respectively by reserves holdings, the annual survey of the top 50 oil companies by Petroleum intelligence weekly shows. And the IOCs’ problems are still more apparent from reserves-production ratios: Rosneft, the Russian state-owned giant, has 28 years’ reserves at current production; Lukoil, the largest Russian producer owned privately by Kremlin loyalists, has 24 years’ – while the IOCs are ranged between seven years’ (Royal Dutch Shell) and 14 years’ (ConocoPhillips).
This shift in the balance of power over resources, plus five years of high and rising oil prices, have encouraged governments in some resource-rich countries to tilt the terms on which oil and gas are produced against the IOCs. Russia and Venezuela, in particular, have taken administrative measures against IOCs and renegotiating contracts.
Two incidents this summer highlighted the extent to which the adoption of harsh measures against IOCs is an international trend:
* In September, Algeria dismissed a consortium led by Repsol YPF of Spain from the $7 billion Gassi Touil natural gas project. This blow to Repsol came on top of state control measures in Bolivia and Venezuela that had forced it to write down reserves there.
* In August the Kazakh government halted work by a consortium led by Eni of Italy at the Kashagan oilfield in the Caspian Sea, one of the world’s largest untapped deposits. Kazakh officials claimed to be “immune to resource nationalism”, but demanded a greater share of the project.
Politically, such disputes provoke accusations of “resource nationalism” – often, ironically, from rich countries that historically have been prepared to support claims to energy resources with military action. For the oil industry, though – and the IOCs in particular – these incidents are part of a larger problem: the decline of easily-exploitable resources, which drives fiercer competition for them.
With every passing decade, the most accessible oil and gas is used first, and the remaining reserves present ever greater geographical and technical challenges. This is where the IOCs, which have the best technology and often scarce human resources to use it, remain indispensable.
In fact, one of the triggers for the Kashagan dispute was the unprecedented technological problems at the field. It finally spilled into the open when Eni told the Kazakh government that the first-stage development costs had doubled, to $19 billion, and that first oil would come two years late, in 2010.
Shell’s dispute with the Russian government over the Sakhalin II natural gas project, which ended with the sale of a majority stake to Gazprom, was also aggravated by a huge cost overrun – from $10 billion to about $20 billion – caused not only by rising prices, in particular of steel, but also by unforeseen technical problems at the field.
The IOCs shift direction
The IOCs now see the development of technology, in which they remain the world leaders, as central to their strategic response to the NOCs’ primacy in reserves, and a key element in their negotiations over projects with NOCs. At Russia’s huge Shtokman gas field in the Barents Sea, for example, the deepwater conditions present unique technical challenges that IOCs may be best equipped to meet. Having last year disbanded a foreign-dominated consortium set up to exploit the deposit, Gazprom earlier this year invited Total, the French IOC, back as a partner in the project.Patrick Pouyanne, senior vice-president (strategy and exploration) at Total, tells Emerging Markets that, while IOCs have been “accused by some countries of benefiting from excessive profits and an unfair sharing of the hydrocarbon rent”, the “classic trio” of technology, money and project management remains something that they can contribute to resource development.
Pouyanne argues: “Technology is an area where we strongly believe that the IOCs, and especially majors such as Total, can bring an expertise not available from other sources. “While service providers can offer technological advances in certain specialities and are making efforts towards integrating focused technical progress into a wider range of know-how, it remains a core competency of the major IOCs and NOCs to combine all techniques and technologies” in long-term reserve management – and the IOCs’ capability “remains unrivalled”.
Michael Daly, BP Group vice-president for exploration and long-term renewal, says that ever since the 1970s, as competition has intensified for “land” – the industry term for property with oil and gas resources, or a good chance of finding them – some private companies have prospered by “accessing ‘land’ outside of the core global oil and gas resource base”, by “operating on the technological frontier”.
He believes that this frontier will continue to be pushed by “those private companies able and willing to take on the next difficult energy developments, e.g. ultra-deepwater, deep stratigraphy, unconventional oil and gas, enhanced oil recovery, coal and gas conversion technologies, biofuels and clean coal and carbon capture”.
The IOCs’ change of focus doesn’t stop with seeking oil and gas opportunities outside the traditional resource base. They are also diversifying into other types of energy. The scale of their strategical rethink was made clear in July in a report by the USA National Petroleum Council, Facing the hard truths about energy, which surprised and impressed observers with blunt calls for moderating demand and diversifying away from conventional fuels.
Whether it is environmental hard truths or economic ones that have finally reached big oil’s heart, it is now engaging in a change of direction that could be the beginning of the end of IOCs in their present form.
Fears about investment
Although the geopolitical shift towards non-OECD resource-rich countries gets all the headlines, for the energy industry, a much more serious problem associated with the rise of the NOCs is how future long-term investment will be funded. The International Energy Agency, which speaks for the OECD countries on energy, says that, while its member countries – along with China, India and other developing-world oil guzzlers – must implement energy saving measures more quickly, an equally serious danger, that insufficient investment will be made in existing resources, must be tackled. The IEA argues that energy security (the danger of insufficient secure resources being available at affordable prices) is a priority to be tackled in parallel with energy saving (the need to curb growth in fossil-energy demand for environmental reasons).
The IEA estimates that in the quarter century 2005-30, the world requires about $20 trillion of energy investment, including more than $4 trillion in oil. “The ability and willingness of major oil and gas producers to step up investment in order to meet rising global demand are particularly uncertain,” it warns.
Didier Houssin, the IEA’s director of oil markets and energy preparedness, tells Emerging Markets that the agency is “less optimistic” about investment in upstream production than in refining and other downstream activities. “The IOCs have to cope with declining rates of production in the OECD, for example in the North Sea fields. Many of the countries that have the most interesting assets are closed to investment from the outside. And there have been problems in countries where not long ago there were high expectations, such as Venezuela and Russia.”
The lack of investment in non-OPEC, non-OECD producers is one of the factors in current supply tightness, Houssin says. This year, they collectively increased production by only 1%, half of expected demand growth.
On future investment, he expressed “fears” that companies such as Pemex of Mexico and PdVSA of Venezuela would be able to “cope with the decline of production”. “The problem is not that countries follow their own policy: it arises when such policies jeopardize investment. We need stable regulatory frameworks and more cooperation between IOCs and NOCs.”
The Gazprom-Total deal on Shtokman shows that the trend towards shutting out investors is “not all one way”, Houssin believes. Whether this knot can be severed to ensure sufficient investment over the longer term, only time will tell.