Earth to Exxon: Your World is Not Enough

Exxon Mobil has received a fresh message from Russia: We are in charge. Get used to it.

No doubt the oil giant -- which is in battle on two fronts in the former Soviet Union, not to mention in Venezuela -- will ignore the warning and crash-land blithely into the dinosaur pit.

I mean that only slightly tongue in cheek. Around the world, Big Oil is having to cut deals with petroleum-rich states that want to control their own resources. I've recently come around a bit to Exxon's view that resource nationalism will moderate -- petro-states like Russia will need high technology to arrest their declining production and develop difficult new fields -- but only a bit.

The direction of global oil is clear, and it's toward the demise of the Big Oil companies as we know them. In general, the petro-states that control more than 80% of global oil reserves can get what they need from technology-rich oil services companies, and will largely do without the Exxons, Chevrons and BPs of the world.

Yet Exxon seems to think that the old rules hold, those of prior decades in which Big Oil called the shots.

Forbes reports on the latest news on the Russian front. It's a salvo from a Gazprom deputy chairman named Alexander Ananenkov. In a news conference yesterday, he called Exxon's control of the giant Sakhalin-I natural gas field an "infringement of Russia's national interests." He added that Exxon's wish to sell its Sakhalin-I gas to China had made Russians "poor relations who see their gas siphoned off."

The fact is that, according to Exxon's contract, it can sell the Sakhalin production wherever it wants, and China is willing to pay a higher price than Russia.

But that ignores political reality. Russia wants the Sakhalin gas for the domestic market. Why? So it can keep selling its own gas for enormous profits to Europe. And, in case it must curtail its exposure to Europe because of growing alarm there over Russian market dominance, Gazprom itself wants to be able to sell to China.

Exxon would be wise to find a middle ground now rather than wait -- as Shell, BP and Total did to their chagrin over the last two years -- for Russia to build into a lather.

Exxon is also the lead rebel in a several-month-long dispute with Kazakhstan over the supergiant Kashagan oilfield. The Kazakhs are in a fit over a minimum five-year delay in first production at the Caspian Sea field, plus a huge budget over-run. The Kazakhs want more money, and they want it faster than they are contractually guaranteed.

The word is that the other foreign partners developing Kashagan -- Total, Shell and Italy's Eni -- are amenable to Kazakhstan's terms. But Exxon is holding out for an extension in the length of the forty-year contract.

The reason for Exxon's stubbornness is mainly its instinctual bloody-mindedness. But it's also highly concerned about what a concession on Kashagan will mean for its other former Soviet holdings -- 25% of Tengiz, a supergiant sister field to Kashagan; and of course Sakhalin-I. I personally think that the other companies sympathize with Exxon and are hiding behind its willing to play bully. But that's besides the point. Exxon is the lightning rod.

And Exxon doesn't want to look like a pushover as it stands firm, its back right at the edge of the dinosaur pit.

Photo: Kim Scarborough
Rights: Creative Commons

Is America's Dethroned King of Kazakhstan on his Way Back?

After four years of ignominious exile from his powerful perch in Kazakhstan, New York lawyer James Giffen may have an opening for a revival.

Those who have read The Oil and the Glory are familiar with the outsized Giffen, its garrulous principal character. Born to relatively humble roots in Stockton, Ca., the 66-year-old Giffen had a spectacular rise after marrying into American society, eventually becoming the go-to man for American blue chip companies wishing to trade in the Soviet Union. After the Soviet collapse, Giffen gained a similar gatekeeper role in Kazakhstan, where at one point he controlled the world's biggest oil deals.

All that crashed in 2003 with Giffen's indictment in the largest foreign bribery case in U.S. history, what's known in Central Asia as Kazakhgate. On Friday, there's a hearing in New York in the case, in which Giffen is accused of channeling some $80 million in payments from U.S. oil companies to Kazakhs including President Nursultan Nazarbayev and former Prime Minister Nurlan Balgimbayev. Meanwhile Giffen is stuck in New York, his passport confiscated, and by appearances no longer in contact with his old pal Nazarbayev.

It's Balgimbayev who's the key to my suspicion that Giffen may regain, or have already regained, some influence in Kazakhstan. Yesterday, Farkhad Sharip at the Jamestown Monitor reported that Nazarbayev had appointed Balgimbayev as an adviser. And that is Giffen's opening.

The 60-year-old Balgimbayev lost his power at about the same time as his mentor, Giffen. The two were rightly seen as a pair, with Giffen providing intellectual heft to Balgimbayev -- who headed Kazakhstan's oil industry when he wasn't prime minister -- and Balgimbayev supplying Giffen a place to channel his genius. Balgimbayev gave Giffen a hilltop house overlooking Almaty right next door to his, the properties connected by a gate. After the U.S. bribery scandal, Balgimbayev also vanished; some said he had moved to Dubai for awhile.

But now that he's back, I'd say Giffen may not be far behind.

As long as we're on the topic, I had already sensed Giffen's presence over the last couple of months in Kazakh affairs, specifically in the country's dispute with the Italian-led consortium developing the Kashagan oilfield.

The original Kazakh demands, and the style in which they've pursued them, remind me of previous, Giffen-led battles with the companies. One of Giffen's signatures is the use of meticulously prepared reports, done usually by western contractors in London and elsewhere, containing every conceivable profit formula, cross referenced for every conceivable production volume, and so on, all of them beautifully packaged in color and with the rest of the graphic design bells and whistles. Another is the juxtapositioning of these reports with extremely well-reasoned, breathtakingly ambitious, hardball demands.

Sound familiar?

We know that the Kazakhs have allowed Giffen's company, Mercator, to continue operating in Kazakhstan because they don't want him to become tempted to spill some of his many secrets about the First Family. So it's not a stretch to imagine the former King of Kazakhstan providing expert strategic advice from his distant exile, either directly or through his representatives.

Whatever the case, the Kazakhs have clearly been holding their own.

Photo: Andy Freeburg

Chevron and Exxon: Concession on the Caspian

A fresh concession by Chevron and Exxon Mobil in Kazakhstan is evidence of the shrinking influence of Big Oil.

After years of playing tough guy on the Caspian Sea, the two companies have knuckled under and paid their share of a whopping $309 million environmental fine to the country, according to an announcement yesterday. The story is posted on the Forbes website.

Just a few years ago, the companies went to the mat when Kazakhstan levied a $71 million fine for alleged violations at the supergiant Tengiz oilfield, in which they hold a combined 75% interest. They hollered, griped to journalists, deployed their lawyers, and the fine was reduced to $7 million.

But that was four years ago. Now, Big Oil has been knocked on its heels around the world, as national oil companies from Russia, Venezuela, Saudi Arabia and China have become the new, big and swaggering force in global energy.

So when Kazakhstan offered a cut of almost half in a newly levied $609 million fine for fresh alleged violations at Tengiz, Chevron and Exxon agreed.

This comes on top of conspicuous concessions the companies have made in recent months in Russia. There, Shell and France's Total have surrendered majority positions in oilfields, and Total and Norway's Statoil have agreed to be effective contractors at the giant Shtokman natural gas field.

Their calibration is that their bargaining position simply is too weak at the moment. Perhaps when crude oil prices drop they can talk tough again.

Photo: Niklas
Rights: Creative Commons

How to Aggravate the Petro-States

If you want to know why the Kazakhs and Russians are irritated with the major oil companies -- and why Big Oil is in trouble all over the world -- look at this quote from a former oil executive in Venezuela.

In the latest New York Times Magazine, Tina Rosenberg asks this fellow why his company didn't do much for the average Venezuelan while at work in the country. The man replies, "It shouldn't have. It was an oil company."

The perverse part of this breathtaking remark is that it wasn't from a western oil executive, but Ramon Espinasa, former chief economist for the country's state oil company, known by its acronym Pdvsa (pronounced ped-uh-VAY'-suh).

Why has Hugo Chavez gone after Pdvsa as remorselessly as Big Oil? Because Pdvsa was behaving as haughtily as the foreigners -- it had learned to be Exxon.

The jury is still out on Chavez's Oil Socialism. But Espinasa reminds me of why Chevron, for instance, is in hot water in Kazakhstan (which though not fully apparent now, will become so in the coming months).

One reason is that at key, needy moments over the years -- needy on the Kazakh side, that is -- the California company declined to accelerate the payment of huge bonuses it owed to the government, to help the Kazakhs obtain cheap loans, or to lend them money itself.

In other words, before Kazakhstan's bonanza struck, when it needed cash, the biggest game in town -- Chevron, Exxon and the Tengiz oilfield -- declined to help. Why? "We're not a bank," one Chevron man once told me. In other words, like Espinasa, Chevron and Exxon are oil companies, businesses, and not a welfare society.

This attitude is blind. It misunderstands the history and enormity of Big Oil in the countries where it works. Oil executives saunter into these poorer nations like heads of state, and the contracts they sign are often seen within the countries themselves as the equivalent of a treaty with a superpower -- as a means of protection and prosperity.

Oil executives and negotiators of course know this, and use it to their advantage to get the deal. Then they conveniently forget, even when a favor sought by the host country isn't welfare, but reasonable need that would be no big deal fulfilling.

And the attitude is currently tripping up both Chevron and Exxon. At $95 oil, they would sorely love to triple production at Kazakhstan's 300,000-barrel-a-day Tengiz oilfield, in which they have a collective 75% stake. But Russia is blocking expansion of the 1,000-mile pipeline that would take that larger production to market.

Russia's condition for going along with the companies? That they effectively finance the construction of another pipeline that would serve Russia's interest -- one that would link the Black and Mediterranean seas through Bulgaria and Greece.

So far the companies have refused. Why? Because they are oil companies, not arms of the Russian strategic policy group.

The companies eventually will have to bend. But meanwhile they are also irritating the Kazakhs. Expect demands for contract renegotiation soon after the Kazakhs are finished with the dispute at the sister Kashagan field.

Photo of Chavez by henribergius
Rights Creative Commons

Gentlemen on the Caspian

Kazakhstan President Nazarbayev and Italian Prime Minister Romano Prodi have engaged in the latest round of mutual shoulder-massaging amid the Caspian Sea country's recent oilfield muscle-flexing. What does it mean?

We can still be friends.

That's important as contract renegotiations become a principal theme in the former Soviet Union.

The two leaders met today in Astana to talk over Kazakh demands that the Italian-led consortium developing the supergiant Kashagan field cough up some compensation for its miserable performance.

Nazarbayev came out of the meeting saying that he had no intention of revising the decade-old Kashagan contract. That means precisely nothing in terms of the final agreement -- the demands on Kazakhstan's menu involve no contract revisions.

Specifically, Kazakhstan wants big cash much earlier than the consortium had in mind; and, to foreclose future such misunderstandings, it wants to keep the foreigners on a much shorter leash -- meaning some form of joint operatorship of Kashagan.

Rather than any softening of Kazakhstan's demands, what the remarks signify is that both sides would like to conclude this unpleasant business in as civilized a manner as possible, so as to maintain a basis for workable future relations.

Eni Chairman Paolo Scaroni, the field's operator, has done exactly the same thing with Nazarbayev in recent weeks-- gone in, polished the president's apple, then engaged in informal, smiley-face post-meeting news conferences. Chevron Chairman Dave O'Reilly, facing a $609 million environmental fine for his own supergiant Kazakhstan field (Tengiz), did his own diplomatic rounds two weeks ago.

Tengiz: Rattling the Cage

The last time Gani Kasimov attracted big attention, it was for throwing a vase at a television interviewer while running for president of Kazakhstan back in the late 1990s. Now the Kazakh parliamentarian has targeted Chevron, calling for the suspension of its supergiant Tengiz oilfield for alleged environmental violations.

Given the perilous atmosphere for oil majors in the region -- the erosion of Big Oil's positions in Russia, and the threat of the same at a sister field in Kazakhstan, the supergiant Kashagan -- Chevron Chairman Dave O'Reilly hopped on the corporate jet to see President Nazarbayev.

Whatever was said in their meeting today, O'Reilly obviously asked Nazarbayev whether he could tell journalists -- and by extension shareholders -- that Chevron was not in a similar fix as its industry rivals. Here is a paragraph from the Reuters story: Mr. O'Reilly quoted Mr. Nazarbayev as telling him that “Tengiz is an excellent example of how the government and a foreign investor can work together successfully,” according to the Kazakhstan Today news agency. “Today during our meeting both the president of Kazakhstan and the prime minister expressed support for our company's activities,” he said.
Read story

Here is the first paragraph of The Wall Street Journal account of the Kasimov remarks that triggered the stir yesterday: In a sign of rising nationalism and intensifying pressure on foreign investors in oil-rich Kazakhstan, a senior Kazakh lawmaker called for a huge oil project run by Chevron Corp. to be shut down over alleged environmental violations. Read story

Steve's comment: Tengiz is part of the same geologic structure as Kashagan, the field that is currently under suspension for alleged environmental violations and contract demands. The two fields are among the biggest in the world.

It is in fact probable that at some point the Kazakhs will deliver demands for contract revisions involving profit-sharing to Chevron. That is the direction of events in the region, and around the world, and there is no reason to presume that Chevron will be exempt.

But it is premature for that to happen now. Kazakhstan is already embroiled in an enormous flap with many of the world's biggest oil majors over Kashagan. Nazarbayev is no Hugo Chavez -- a seasoned strategist on the geopolitical stage, he will settle one battle before moving on to the next.

So what is Kasimov up to? It is quite possible that, as with his antics during the 1990s presidential campaign, he was simply mouthing off in order to attract attention. For now, I go with that explanation -- Kasimov is not in the ranks of Kazakhstan's serious figures.

But the impact is important. In the past, Chevron has carried with it effective diplomatic status -- Washington has been fully behind its Kazakhstan venture since it first embarked on it in 1990 -- and the field is a huge portion of the company's future and current reserves. Its share price would plummet if its share of the field were threatened.

One must also take into account that the biggest company of all -- Exxon Mobil -- also owns 25% of the field. Exxon has so far stood firm against contract erosion in both Venezuela and Russia.

Whether or not he sanctioned Kasimov's statement, Nazarbayev has no doubt taken note of what happened when he rattled Chevron's cage. That will be incorporated into his strategy in the probability of higher demands down the road for Tengiz.

Kazakhstan: Lining Up More Ducks

In case the point were not yet ultra-clear, Kazakhstan wants to make it so – it is deadly serious about getting its way on the supergiant Kashagan oilfield.


Kazakhstan wants cash and effective control of the field -- the largest discovery of the last three decades -- and is in discussions with the Italian-led consortium developing it.

As of now, Kazakhstan has suspended new work on the field for three months. Italian Prime Minister Romano Prodi plans to visit Kazakhstan early next month on a charm offensive.

But given the current state of the industry -- with the demand curve on oil far exceeding expected supply, and Western oil majors locked out of most oil-exporting countries -- Kazakhstan one way or the other will probably get close to what it seeks. The companies will request, and may be able to obtain, some concrete assurance that whatever new deal is set will not be a wedge for an ongoing series of ever-tougher demands down the road.

The Caspian republic’s latest communication of its posture is a law making its way through the rubber-stamp Parliament.

The Wall Street Journal on-line has a piece on the topic today. Here are the first two paragraphs: A proposed law that would allow the Kazakh government to annul natural-resources contracts appears aimed at pressuring Kashagan oil developers led by the Eni SpA amid tense negotiations, rather than as a broad-based threat to energy and mining companies, analysts and a person familiar with the matter said. The proposed amendment, which would give the Kazakh government the right to pull out of natural-resources contracts if there is a threat to national security and economic interests, is expected to be adopted in the next two weeks, lawmaker Valeriy Kotovich said. Read story

The assurance that the law is deal-specific -- meaning only for Kashagan -- cannot be regarded seriously. A renegotiation of terms on Kashagan is bound to whet Kazakhstan's appetite. Russia has led the way in this more assertive attitude. Look for future demands for better terms at both the supergiant Tengiz and Kashagan fields.