The Old Game is the New Game in Big Oil
Russell Gold, my former colleague at The Wall Street Journal, has an interesting piece today describing how, as contrarian as it can possibly appear, the Middle East is open for business to the oil majors. The upshot: Russia and the Caspian states have a lot of leverage, but not wholesale negotiating power with the western oil companies, which do have options in terms of replenishing their reserve base.
The first paragraph of Russell's piece: Since the 1970s, major oil companies have been shut out of oil production in much of the Middle East. Now, the doors to foreign investment are opening again, this time for natural gas. Read rest of story
Steve's comment: Russia in particular but also Kazakhstan have been wringing concessions from the western oil companies, which have fewer and fewer places to go around the world for new reserves as national oil companies and ministries take control of their own energy supplies.
Though the big-earning companies will deservedly generate little public sympathy, they have been on the front lines of the combat under way at the intersection of geopolitics and commerce.
But the willingness of countries like Qatar and the UAE to grant equity shares in their natural gas fields to western majors is a poke in the eye of the former Soviet petro-states.
Why after making such a fuss over their economic independence are the Middle Eastern countries willing to go back into an equity relationship with the previously expeled majors? In an e-mail exchange, Russell says the majors are "very wary" of Russia now, along with Venezuela, while in their view the Middle East offers some welcome stability.
Russell goes on: "Most of the natural gas projects open to western investment are technically challenging, including Abu Dhabi's $10 billion sour gas project and BP's work in Oman. The Saudi exploration isn't so much technically challenging, but offers the Saudis an opportunity to cement ties with a number of companies from powerful nations, including Shell (UK/Netherlands), Lukoil (Russia), Sinopec (China), Eni (Italy). Add in the big export refinery projects under consideration and you have ties with Total (France) and ConocoPhillips (the U.S.). That's most of the permanent members of the U.N. Security Council."
The first paragraph of Russell's piece: Since the 1970s, major oil companies have been shut out of oil production in much of the Middle East. Now, the doors to foreign investment are opening again, this time for natural gas. Read rest of story
Steve's comment: Russia in particular but also Kazakhstan have been wringing concessions from the western oil companies, which have fewer and fewer places to go around the world for new reserves as national oil companies and ministries take control of their own energy supplies.
Though the big-earning companies will deservedly generate little public sympathy, they have been on the front lines of the combat under way at the intersection of geopolitics and commerce.
But the willingness of countries like Qatar and the UAE to grant equity shares in their natural gas fields to western majors is a poke in the eye of the former Soviet petro-states.
Why after making such a fuss over their economic independence are the Middle Eastern countries willing to go back into an equity relationship with the previously expeled majors? In an e-mail exchange, Russell says the majors are "very wary" of Russia now, along with Venezuela, while in their view the Middle East offers some welcome stability.
Russell goes on: "Most of the natural gas projects open to western investment are technically challenging, including Abu Dhabi's $10 billion sour gas project and BP's work in Oman. The Saudi exploration isn't so much technically challenging, but offers the Saudis an opportunity to cement ties with a number of companies from powerful nations, including Shell (UK/Netherlands), Lukoil (Russia), Sinopec (China), Eni (Italy). Add in the big export refinery projects under consideration and you have ties with Total (France) and ConocoPhillips (the U.S.). That's most of the permanent members of the U.N. Security Council."
Labels: big oil, Caspian, chevron, conocophillips, Exxon, Kazakhstan, oil, qatar, Russia, saudi arabia, uae
2 Comments:
The trend is in the gas extraction industry. It won't change energy companies' position in oil deals. Moreover, energy companies are being offered equity in technically difficult gas projects. Implicit is the suggestion that more mainstream gas deals are still not becoming more open to those companies. Therefore, the trend is confined to a specific type of energy deals. Thus it won't affect the situation in East Caspian states where gas projects are not technically difficult and represent only a portion of overall energy opportunities.
The big picture will be similar to what's happening in Russia: foreign energy companies are being squeezed out of gas projects of average difficulty (Sakhalin). At the same time, they are being invited back into the deals that are more difficult (Stockman).
Hi Alex, let's separate out the issues.
There is no true natural gas industry on the east Caspian, namely because of Russia's lock on transportation -- Chevron/Exxon (Tengiz), and the Kashagan and Karachaganak consortia will at no time in the forseeable future be able to exploit their considerable natural gas reserves; their consolation is only to increase oil production by gas re-injection. So what is happening in the Middle East vis-a-vis natural gas has no bearing, as you suggest, in terms of negotiating competition on the east Caspian.
In terms of field difficulty in Russia, it has has not demonstrated a current willingness to grant an equity share of its natural gas fields; the Shtockman deal does not grant Total equity, and one is pressed to find any evidence to validate CEO Christophe de Margerie's contention at the time of the deal that Total can book Shtockman reserves -- Total will be a glorified contractor, owning part of the operation that develops the field; but Gazprom explicitly will own the gas. So, in Russia, too, there is not parallel negotiating competition in the natural gas sector.
There is leverage, however, and it comes on the margin. Every year, the oil majors as you know are more and more challenged to replace their reserve base, the booked reserves that are one of Wall Street's key evaluative components for the companies' share value. As long as the companies have nowhere else to go to book oil equivalent (oil and natural gas), the former Soviet petro-states are utterly in the driver's seat. The question becomes -- how far do we have to go in order to get (or retain) these reserves? Can we walk away?
Exxon is one of those that has figured out this wrinkle early -- much of its replacement reserves in recent years has been in the form of newly available Qatari natural gas, not crude oil.
I don't mean to leave the impression that the Middle East natural gas game changes the equation fundamentally. But it is an unignorable shift given the location of the reserves, and could become more important.
Thanks as usual Alex for your comment.
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