The world of energy is peculiar in many senses. While the forward march of capitalism continues unabated — despite some major setbacks — this crucial sector is starting to see the other side as green, too.
Earlier this week firebrand Hugo Chavez arrived in Tehran to meet his “ideological brother” Ahmadinejad, following visits to Russia and Belarus, generating ripples throughout.
Movements in the industry suggest the tide is changing — as far as this important sector of the global economy was concerned — toward resource nationalism.
South America and Russia seem to be leading this trend. Hugo Chavez has been the bete noire of the capitalist in Washington, for some time now, President Putin also does not seem to be far behind.
Since Vladimir Putin’s ascent, Kremlin has continued to strengthen its grip on energy assets that were sold during the chaotic privatizations of the 1990s by bringing them under the control of state-run companies, one after the other. Moscow’s intentions are very clear. It wants to turn Gazprom, the state-owned energy giant from a “coordinator” of gas issues into a “formal export monopoly” of it energy assets.
Gazprom is currently engaged in a war of words with ExxonMobil, the operator Sakhalin-1 off Russia’s Pacific coast. Earlier last week the Russian gas giant OAO Gazprom wrested control of a huge Siberian gas field from BP. It then agreed to buy a 63 percent stake in the east Siberian gas field Kovykta from BP and only last December it also bought a controlling stake in Sakhalin 2, the world’s largest liquefied natural gas project, from Royal Dutch Shell Group.
Almost in the same spirit, the South American country of Bolivia has also now taken full control of two oil refineries from the Brazilian state-owned energy company, Petrobras. The head of the Bolivian state energy company, YPFB, said Bolivia had taken back “what we never should have lost.”
Bolivia has South America’s biggest natural gas reserves after Venezuela. The $112 million buy-back is part of President Evo Morales’ wider energy nationalization, giving the state more control and a larger slice of profits. President Morales has pledged to reduce poverty by increasing state revenues from the energy sector, which was privatized in the 1990s. The refineries, in the eastern city of Santa Cruz and central Cochabamba, were sold to Petrobras for $104 million during that period.
After protracted negotiations, Petrobras, the biggest foreign investor in Bolivia and leading natural gas producer, accepted $112m for the refineries, which process about 40,000 barrels of crude oil a day.
On the other hand, Venezuela under the leftist Chavez continues to generate ripples all around. Energy Minister Rafael Ramirez said the state-controlled PdVSA was increasing its share in the four projects, on some of the largest heavy crude oil reserves in the world, from an average 40 to 78 percent. He announced Chevron, Total, BP and Statoil had agreed to sign agreements on terms proposed by the government, allowing them to continue operating in the area, which can produce 600,000 barrels of oil a day, a quarter of Venezuela’s output.
However, the Venezuelan state-owned oil company was taking over multi-billion-dollar projects owned by oil majors ConocoPhillips and ExxonMobil, he announced.
These two companies refused to sign an agreement on how PdVSA would take majority control of heavy crude oil projects in the Orinoco belt, valued at least at 30 billion.
Venezuelan President Hugo Chavez had announced the state takeover of majority control of operations in the Orinoco belt this year, along with the nationalization of Venezuela’s largest electricity and telephone companies, as strategic policy direction. Chavez argues a larger state role is necessary to ensure that industry profits and services benefit Venezuelans instead of enriching private companies. His detractors argue he is violating contracts and ruining the investment climate to Venezuela’s long-term detriment.
Confronted by Hugo Chavez’s determination, the international oil companies were apparently between a rock and a hard place.
They could either accept participation on the new terms, in which they would be junior partners to PdVSA and expected to write checks for new investment over which they would not have full control — or walk away from assets worth billions of dollars.
Faced with that decision, Chevron of the US, Total of France, BP of Britain and Statoil of Norway chose to bite their lips, swallow the bitter pill and stick around.
ConocoPhillips and ExxonMobil of the US decided to walk away.
For Exxon, the calculation, while painful, was straightforward. It has built a reputation for being a company that regards contracts as sacrosanct and expects its partners to do the same. With delicate negotiations over its Sakhalin-1 project in Russia under way, it would have been madness to throw that reputation away. If it could not do a deal with Venezuela on acceptable terms, the cost — losing about 1 percent of its production — was a price worth paying.
For Conoco, however, the cost of leaving is much higher and analysts had generally expected it would try to stay. Its operations in the Orinoco belt were valued at about $6 billion and accounted for 10 percent of the company’s reserve base and 4 percent of its worldwide production. The company now expects to write off 5.3 billion in lost assets.
Nationalization of assets is catching up and capitalism is on retreat, at least in the crucial energy sector. Some may not agree, yet for a change, it may not be that bad.
