Thursday, March 20, 2008

Closing the Doors on Oil’s Big Boys

Commentary - Executive magazine

The halcyon days of cheap energy, pliable governments and a public that didn’t give a damn about pollution or global warming are over for the international oil companies (IOCs). This we all know, or are slowing coming out of a somnambulant state to realise, but recent trends in the oil industry are presenting further concerns for IOCs at the very same time as IOCs report bumper profits on the back of high oil prices.
Energy giant ExxonMobil reported a $39.6 billion profit for last year, BP $17.39 billion and Shell $27.6 billion. Such profits were deemed ‘obscene’ in the British popular press, as indeed they might be perceived to be, but what was less noted amid the hullabaloo was that BP saw profits plunge 22% on 2006 – and is now laying off employees - and that Shell is to sink $26 billion of its profits into developing new projects. Likewise ExxonMobil spent $21 billion in capital expenditure last year, but production increased by less than 1%.
So what is behind this change in fortunes? After all, the IOCs had enjoyed year-on-year record profits for the past five years, demand is still rising and oil looks like it will continue to hover around $100 a barrel.
The problem that IOCs are facing is production and access to energy reserves. The cost of production has surged from $5 a barrel in 2000 to $14 in 2006, largely due to the rising costs of extraction as well as construction of upstream and downstream facilities.
This was evident in the amount Kuwait’s National Petroleum Company (KNPC) had to shell out to build the 615,000 bpd Al-Zour refinery, the world’s largest purpose built facility of its kind.
The original budget was $6.3 billion, but with the cost of raw materials doubling and even tripling in the Gulf, no construction firm would touch the project and the refinery was on the verge of being shelved. But so important is the refinery to the Kuwaitis that the government eventually capitulated last September, earmarking a staggering $14.29 billion to get the job done.
“We are now touching un-chartered territorial waters, the value of contracts in the billions of dollars,” said Ahmed Al-Jemaz, KNPC Deputy Managing Director of the Shuaiba refinery.
Such spiralling costs are naturally of concern to IOCs – Shell admitted a 10% annual increase in inflationary costs - but of more pressing concern is the access to energy rich countries.
One by one doors are being closed to the IOCs as countries re-nationalize resources. Last year Russia put the screws on BP and Shell to hand over majority stakes in gas operations to the state-run Gazprom, Bolivia nationalized gas and oil fields, Ecuador used military force to take over Occidental Petroleum’s holdings, and Hugo Chavez gave IOCs a choice: handover majority stakes to Venezuela’s national oil company or face complete nationalization of operations in the Orinoco River basin.
In the case of Venezuela, BP and Norway’s Statoil Hydro opted to stay but for ConocoPhillips, which pulled out, the loss of its Orinoco holdings saw the American company’s second quarter earnings plummet 94%.
The loss of these countries, coupled with growing competition from national oil companies (NOC) around the world – a cursory glance at the countries NOCs operate in is more than ample to see they are not confined to exploiting their own national resources – is what Jeroen van der Veer, Shell's chief executive, was quoted as saying is a dangerous trend.
IOCs can be thankful then that the MENA region is not part of this re-nationalization phenomenon, but Arab governments are savvy enough to know they don’t have to be taken for a ride.
IOCs are having to face the reality that to access the likes of recently de-nationalized Libya, with proven oil reserves of 41.5 billion barrels and only 30% of the country explored, deals are getting tough.
This was apparent at the last round of bidding in December, where 35 companies were pre-selected to bid for 41 gas blocks, but only 13 companies put in bids and only four blocks were awarded out of 12 licences.
The lack of interest by IOCs was attributed to ‘uninteresting’ blocks offered by Libya’s NOC, but most notably it was Tripoli hand-picking companies that would provide the highest share of production, with Gazprom offering 90.2% of any production in finds in western Libya and Shell offering 85% to search for gas.
Such tight restrictions were not there to access Palestine’s recently discovered gas, with only 25% going to the Palestinian Authority, and Iraq’s oil law looks like it will hand over the lion’s share to IOCs, but Libya is not alone in the region with its tough stance.
The only thing that the IOCs have on their side right now is the skills and technology that NOCs don’t – as of yet – have.
All in all, it looks as if 2008 will be another roller-coaster year for the IOCs while NOCs, albeit not necessarily laughing all the way, can at least show some bravado on their way to the (central) bank.
Photo courtesy of BP

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