The plunging crude prices have begun to play out in favour of Western oil companies in one regard, giving them leverage with oil-rich countries that only months ago had no reason to compromise. Countries like Venezuela, Libya and Russia have kept a tight grip on their vast oil reserves in recent years as crude prices soared above $100 per barrel, translating into big revenues. Much of that money, rather than going back into the oil industry, was spent on unrelated political and social programs.
At $50 per barrel, these countries are far more constrained and can’t adequately fund some oil and gas projects.
Experts say Western oil corporations, who stockpiled cash when profits were flush, can shift operations to any corner of the globe and have the capital that allows them to strike deals with state-controlled producers on very favourable terms. When that might happen is uncertain, but energy experts and some executives have said deals are imminent if prices remain at current levels.
The new opportunities for the major Western oil companies come even as the United States attempts to shift away from fossil fuels. Just this week, President Barack Obama said the nation must free itself “from the dangerous dependence on foreign oil.”
Still, the International Energy Agency and other forecasters have said fossil fuels will be the primary source of global energy for decades to come, and national oil companies control roughly three-quarters of the world’s proven reserves. So, for Western oil companies, it makes sense to strike deals in places where they know there’s crude. When oil was $100 a barrel, “these national companies were saying, ‘What the hell do we need the majors for? We’ve got gobs of cash,'” said Amy Jaffe, an energy expert at Rice University’s James A. Baker III Institute for Public Policy.
Now, some fields are not economical to develop with oil at current prices. In other cases, crumbling infrastructure makes the work more difficult and expensive, if not impossible, for state-run companies. “As the economy and prices collapsed, it’s a different picture,” Jaffe said.
Chevron Corp, Royal Dutch Shell PLC and others have said they expect greater access to reserves in countries with nationalized oil and gas industries, something that could help them stem declining production. But there are risks involved.
As recently as two years ago things went so badly in oil-rich Venezuela that ExxonMobil and ConocoPhillips fled the country, leaving behind billions in assets. Libya’s Moammar Gadhafi also threatened earlier this year to nationalize his oil industry, again. The reaction to oil prices, which recently hit five-year lows, is varied by country.
Saudi Arabia, the OPEC powerhouse, said it won’t cut funding at its state-run Aramco. But oil production is dropping in other countries, slashing revenues that fund national budgets. Contractors are shutting down rigs in Venezuela because the government has stopped paying them.
“The longer we’re in this global downturn with weaker prices, the more those governments are going to need the international oil companies,” said Dan Yergin, an author and chairman of Cambridge Energy Research Associates, an energy consultancy. The world’s big oil corporations already do some business in countries with nationalized industries, but the terms are often slanted heavily in the country’s favour. In the current environment, Yergin said, companies like Exxon and Shell will be looking for more favourable and “durable contracts, where the rules won’t change.”
In particular, they’ll be looking for deals that offer lower royalty and tax rates and a greater share of production. “We’re always looking for other large resource owners and national oil companies that might be situated where we could bring a lot of value,” ExxonMobil chairman and chief executive Rex Tillerson told Wall Street analysts this month.
Even with the Obama administration’s stance on oil dependency and the potential backlash for doing business with leaders like Venezuela’s Hugo Chavez closer partnerships with oil-rich countries could help avert energy spikes like the one last summer, when gasoline in the US soared above $4 a gallon for the first time.
The IEA has said more than a trillion dollars in annual investments will be needed for the next two decades to expand the supply of oil and avoid an energy crisis that could choke the global economy.
The Paris-based energy watchdog said state-run companies are projected to account for about 80% of the increase of both oil and natural gas production to 2030.
The potential for Western oil producers to sign new exploration and production deals with resource-rich nations comes as oil majors are finding it increasingly difficult to find new reserves in part from limited access and boost production. Big Oil output, in fact, has largely been in decline in the past few years. And it doesn’t look like the Obama administration is going to open up any new acreage at home anytime soon.
“That brings into question: Can you produce more here?” said John Felmy, chief economist for the American Petroleum Institute, the oil industry’s trade association. “Certainly, (US producers) would love to do that first and foremost, but they’re not going to sit on their hands.” Still, no one is likely to rush into new agreements without some assurance of stability.
The American chief executive of a joint venture between a Russian oil company and BP PLC was forced to flee Russia last year because officials there would not renew his visa.
Additionally, ExxonMobil and ConocoPhillips remain in international arbitration nearly two years after Venezuela’s Chavez nationalized that country’s last privately run oil fields in Orinoco, shouting “Down with the US empire!” as Russian-made fighter jets streaked overhead. ConocoPhillips wrote off $4.5 billion in assets lost to Venezuela.
Other companies including Chevron remained and the government reduced them to minority partners. Now, Venezuela is again pursuing foreign investment to help it pump oil. So is Iraq as it tries to reinvent its oil industry, sweetening contracts terms but demanding that oil companies start drilling now.
Analysts say Brazil is among those also likely in need of foreign investment to spur oil and gas development. “The lessons are very, very recent,” Yergin said. “Let’s put it this way: The (international oil companies) are going to pay an awful lot of attention to their arbitration clauses this time around.”