Posted on 02/21/2005 12:08:24 PM PST by Willie Green
For education and discussion only. Not for commercial use.
With the prospect of declining reserves, rising extraction costs, and recent poor record of exploration in their traditional fields of operation the international oil 'majors' need better access to untapped oil fields in the Middle East and Russia. However, easy to express in words, the actual process itself promises to be rather arduous. While under heavy pressure from the need to preserve the returns their investors expect, the international oil companies (IOCs) are less welcome in oil-producing countries: increased nationalism and consistently higher crude prices have reduced many governments' need for international assistance.
At the same time the IOCs are dealing with the growing threat of national oil companies (NOCs)--currently controlling 72% of the world's oil reserves, 55% of its gas reserves and half of global oil and gas production--moving beyond their borders to scramble for transnational projects. Nowhere is this more evident than in the example of state-owned Chinese companies--regarded as "the real competitors for the future" by Lord Browne, CEO of BP--that are touring the globe in quest for energy security to feed their country's voracious appetite for hydrocarbons.
Such an outcome marks a structural transformation in the competitive landscape in the global oil industry. The interests of 'majors' such as BP and ExxonMobil, which until a few years ago enjoyed a considerable comparative advantage vis-à-vis the NOCs, are increasingly being challenged by the growing power and effectiveness of oil-producing governments and their companies, which are poised to play a more prominent role in the future of the industry at both domestic and global levels.
The oil industry has experienced frequent shifts in the balance of power between the NOCs and the 'majors'. Until the 1970's, a period when members of OPEC began a wave of nationalizations, the IOCs were overwhelmingly dominant with their power reaching its peak especially during the 1960's. Owing much to critical advances in technology and discoveries of the North Sea and Alaska oil fields the IOCs gradually enhanced their prestige and succeeded in taking over the commanding heights. That competitive scenario may now need substantial rewriting.
This year a drastic increase in international deals has brought the aspirations of some state-owned oil companies, and governments behind them, into sharper focus. China and India, neither a member of the International Energy Agency, and therefore anxious to expand their investment horizon, have entered into a breathtaking race for additional barrels of oil around the globe. Their national oil groups have recently signed multi-billion dollar gas and oil deals in Iran and are exploring further collaboration. Furthermore, latest reports indicate that China National Offshore Oil Company (CNOOC) is eying a $13bn takeover of Unocal, the US listed oil and gas producer, and that India's Oil and Natural Gas Corp. was in talks with Russian authorities about buying a $2bn stake in Yuganskneftegaz, now a possession of Rosneft. If realized successfully the CNOOC purchase of American Unocal--whose key attraction for China is that 70% of its production units are located in the Asian region--would be the largest overseas acquisition by a Chinese company. Not least important are the recent appearances of Chinese oil executives in Calgary, Canada's bustling energy capital, for negotiations on sending oil extracted from the oil sands of Alberta onward by tankers to eastern shores of China. This level of ambition would mean that China is entering territories traditionally perceived well within the American sphere of influence.
China's interest with those of the West are in clash in another energy rich region of the world-the Caspian-along the southern belt of Russia. Here, China is cooperating with Kazakhstan, a former Soviet state and the major producer of oil in the region, in an effort to connect the two countries with a pipeline financed mostly by the Chinese, with a capacity to carry up to 20 million tons of oil per year to western China and projected to end by the end the year.
Ambitious NOCs from countries such as Russia, Brazil and Malaysia, to name but a few, are also expanding international operations. In Russia, meanwhile, the Kremlin seems intent on turning Gazprom, the state-controlled gas monopoly and not only an economic but also a powerful foreign policy instrument, into a competitor to the oil 'majors' at the global level through the scheduled merger with the state-owned oil company Rosneft later this year and the takeover of much of the country's independent oil sector, including Yukos. Needless to say, such an action would further erode the integrity of financial and legal institutions in Russia and would underscore the vulnerability of corporations to the arbitrariness of executive power. Thus, Western oil groups looking to buy into Russian companies will find a more stubborn government on the other side of the negotiations table willing to concede only small stakes. On the outer front, Russia is eager to rebuild some of its lost power and influence in Central and Eastern European former communist and current European Union member countries, which together import 80% of their oil and 75% of their gas from Russia. In these regions Russian investment is almost exclusively concentrated in the energy sector-with Gazprom again acting as the major player-where it possesses assets vital to the smooth functioning of the host economies. Similar acquisitions, primarily of national energy distribution networks, are underway in the Balkans.
With respect to matters of liquidity and access to capital markets the NOCs appear to have little problem helped in large part by the upsurge in oil prices for the past six years. Pemex, the Mexican national oil company, PDVSA of Venezuela, and CNOOC, the state-controlled Chinese group, have raised $6bn, $3bn, and $1bn this year in the bond market respectively. Last month a group of six banks formed a syndicate led by Deutsche Bank that put together a $13.4bn loan to Gazprom to fund its much disputed acquisition of Yuganskneftegaz, the main production unit of Yukos, only to be averted by the decision of a Houston court at the last minute. This gives the NOCs a competitive edge to challenge their multinational rivals when paying for licences, and accept lower returns on capital because the main rationale behind their investments is to secure energy supply rather than to keep shareholders satisfied.
Moreover, the IOCs gradually came to realize that they have planned their business operations to fit the low-cost, low-price framework. Such an obsession with capital discipline and unrealistic estimates of long-term oil prices--which are still set at $20 per barrel--is more likely to hinder their growth and strategic investments at a time when they need to be quick in understanding the current requirements of the market and consequently be more innovative in their decisions and actions. According to the majority of industry analysts the 'majors' would be well advised to accept the rising challenges of the competitive environment and be more generous in deciding whether to invest in projects--or face the otherwise unavoidable prospects of declining production, shrinking reserves, and eventually weak profits.
At this time it is rather difficult to see in what form NOCs will be able to cooperate with their international counterparts. One of the major factors that pushes analysts to be more optimistic in this regard is that $16,000bn needs to be invested in the world's energy-supply infrastructure over the next 30 years (an International Energy Agency assessment) to meet rising global demand seems to be achievable only in the event of both sides' being willing to contribute. This sort of cooperation would lead to a more harmonious and efficient working of the international economic system by way of keeping the crude prices in control in the face of an ever increasing demand.
Drill ANWR before we get invaded.
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