As the battle to dominate energy resources continues, the endeavor to resist domination by all means is also getting manifested in more than one ways. And thus despite the stress to allow more acreage and free hand to international oil companies (IOCs), there seems to be growing resistance to assigning them a stake in the energy riches.
Winds of nationalism appear today in direct conflict with oil majors. Oil majors, already struggling to get a foot, and a major one, in the Middle East and marching hand in hand with the invading forces, are now faced with the specter of being pushed to sidelines in regions they had remained entrenched for decades.
IOCs today are facing structural, cyclical and political challenges. Several governments are bent upon challenging the prevalent world order. And the ongoing tussle is evident.
Nigeria, Africa’s largest oil producer, is to renegotiate contracts with foreign oil companies, so as to boost the government’s share of oil revenues. Nigeria has long been looked as one exception honoring its contractual obligations. That is now set to change. Rewriting those contracts will affect several major oil companies, such as Exxon Mobil, Royal Dutch Shell, Chevron, Total SA and Eni SpA. Shell, the biggest foreign oil operator in Nigeria, and Total are the most exposed to changes in contracts in Nigeria in terms of reserves.
With proven reserves standing at 36 billion barrels, Nigeria is the world’s 11th biggest oil producer, pumping about 2.2 million barrels a day.
In the meantime, ConocoPhillips is set to file for arbitration over assets it formerly owned in Venezuela. The Houston-based company abandoned two heavy oil projects in the Orinoco Belt in June after the Venezuelan government took majority ownership of all projects of international oil companies in the region.
US oil major Exxon Mobil Corp., which also didn’t agree to new contract terms put forward by Venezuela, has also filed a request for arbitration. President Hugo Chavez’s government assumed majority control in May of the Cerro Negro heavy oil project. The oil fields and heavy crude upgrading plants in the Orinoco River basin were run for more than a decade under contract by six major international oil companies. Chevron Corp., Britain’s BP PLC, France’s Total SA and Norway’s Statoil ASA agreed to stay on as minority partners in new joint ventures controlled by state-run Petroleos de Venezuela SA, or PDVSA. But Exxon Mobil and ConocoPhillips balked at the tougher terms.
On the other hand Kazakh authorities have fined Chevron $609 million for alleged environmental lapses, the latest in a number of moves against foreign investors in the Tengiz oilfield. Agip KCO, the international consortium developing the huge North Caspian project in the Kazakh sector of the Caspian Sea, is also under pressure to revise the production sharing agreement (PSA) governing the development. The consortium shareholders have once again delayed the start of commercial production and increased the expense budget associated with the project. Agip KCO regards these as the result of significant complexities in developing a unique series of deposits. The government, on the other hand, sees it otherwise. Kazakh authorities are dissatisfied with the delay, which destroys government projections for oil extraction. Astana now the wants to revise PSA conditions long considered unfavorable from Kazakh standpoint. The new requirements are simple-maximum control of the project by Kazakhstan and a major increase in profits going to the state.
Kazakh MPs recently approved a law allowing the government to break contracts with foreign firms. The move threatens to undermine existing commercial deals in the oil-rich country. In the past, Russia has also arm-twisted Shell and other global majors. Once Russian officials stepped up complaints about environmental breaches, Shell and its partners got the message and had to sell majority stake in the project to Russian state-owned Gazprom. Something similar also happened to TNK-BP, a BP joint venture that owned a majority share in Kovykta, a huge gas field in eastern Siberia. The oil draft in oil rich Iraq, allowing international oil companies major stake in the oil industry of the country, is also under severe strain and the possibility of it being enacted is remote, despite tremendous pressure and lobbying from Washington. The draft, once passed, could be the first in the region, allowing oil majors a stake in the industry, awarding foreign oil companies coveted, long-term 20-35 year contracts of just the sort that neighbors have rejected for decades. It also places the Iraqi oil industry under the control of an appointed body that would include representatives of international oil companies as full voting members.
As the trend denying stake in the key energy assets to oil majors continued gaining momentum, many within the industry, argued that IOCs’ superior technical ability, particularly in deep-sea and Arctic exploration and production, would force NOCs to offer them access to reserves that would otherwise lie dormant.
Total’s recent deal with Gazprom over the huge Shtokman gas field — the first between a Russian NOC and an IOC since 2003 — heralded precisely this new model. However, Gazprom’s monopoly position allowed it to negotiate, aided by a teleconference between Presidents Vladimir Putin and Nicolas Sarkozy, a deal that effectively relegated Total to the role of an oil services provider like Schlumberger or Halliburton, contracted to provide technical assistance to the asset owner.
And that’s it!
With national oil companies undertaking ever more challenging exploration, competition between oil services providers and IOCs to provide technical support will intensify. Such competition is likely to radically reshape the oil industry over the next two decades. Total’s deal over Shtokman may represent the beginning of the end of the supermajor. Global economy is enduring a process of adjustments. From the ashes of the New World order, and against the very wishes of sole, surviving superpower is blossoming a new era. Asset holders seem to have lost confidence on the current setup. With winds of nationalism blowing all around — from South America to the Middle East, the sole surviving superpower too needs to adjust to the emerging realities.