China Changes Calculus for Petro-Rulers

Much has been written on how low oil prices will help to reverse the fortunes of resource-strapped Big Oil – if not precisely jolly over their new penury, closed-armed petro-powers, it's said, will now allow western oil companies at least to make a case why they should be permitted to conduct exploration and production. Atop the list of this ostensible new state of affairs have been Venezuela, Libya, and Russia.

But so far, the opposite appears to be happening -- resource-rich countries are not opening up to new deals with western oil companies. One reason is that the analyses appear to have played down two factors – the depth of discomfort among the petro-powers with Big Oil; and the deep-pocketed willingness of China to step in.

The implications of China's entry as cash savior include not only trouble for non- state oil companies; it also could exaggerate an expected resumption of relatively high oil prices once the global economy recovers.

In the last week, we have seen China lending Russia's Transneft and Rosneft $25 billion in exchange for a guaranteed oil supply of 300,000 barrels a day for 20 years. The price of the oil wasn't disclosed. Look next for Gazprom to borrow from the Chinese to finance its ongoing operations.

Even more conspicuous was last Thursday's announcement that China is lending Brazil up to $10 billion to help develop its oil company Petrobras's deepwater oilfields. The deal is in exchange for up to 160,000 barrels a day of oil. Again, the price of the oil wasn’t disclosed.

The Brazilian case is perhaps more important because it appears on the cusp of the country becoming a huge petro-power on the backs of an estimated 12 billion barrels of offshore oil; Brazil itself says it may possess an additional 100 billion barrels of oil.

Because the oil has been found in extremely deep water, analysts have forecast that Petrobras will need Big Oil’s cash and capabilities in order to develop it. Indeed already Exxon Mobil, Amerada Hess and BG are among companies working offshore in Brazil. But if China remains open-walleted, there will probably be less need for more cooperation with multi-nationals.

Interestingly, both Russia and Brazil were willing to be on the hook to China for guaranteed reserves while at least for now remaining closed to new cooperation with Big Oil.

The ramifications for future oil prices stems from the nature of the deals. The price of oil is set to a large degree on the availability of supply during moments of man-made or natural crises, such as war or hurricanes. To the degree that the available supply is already tied up in long-term contracts, there’s less wiggle room during these crises, and thus more of a chance of a price spike.

Already, oil companies are significantly reducing new exploration projects, and shutting in uneconomic oilfields in the U.S. and elsewhere. This means that, once the economy and oil demand recover, there will be less supplies of oil and natural gas. China's new oil deals will exacerbate the supply tightness. And any geopolitical or weather-caused crisis will more likely drive oil and ultimately gasoline prices higher.

Try That in Russia, Exxon

One lesson of recent years in Big Oil is that while most of the industry zigs, Exxon zags.

So it was last week, as the company won attention for court victories that froze some $12 billion in Venezuelan state assets abroad. This involves its dispute with Hugo Chavez over his demand for control over oilfields in the country. Exxon also got a judge to seize hundreds of millions of dollars due to Venezuela in a bond deal.

Is such confrontation wise corporate strategy? The rest of the industry – sitting conspicuously on the sidelines as spectators in this rumble – wants to know, too.

Some analysts have read the news as a warning to all the petro-nationalists out there that Exxon at least won’t be pushed around. And if Exxon is successful, the others might follow suit.

One sign that Exxon’s muscle-flexing is a limited tactic, and not a strategy, however, is its experience with its giant natural gas project in Russia, called Sakhalin-I.

Over the last year, the other big companies working in Russia – Shell, Total, BP – have all caved in to Russia’s demand for a controlling share of their projects. (In Venezuela, too, the other companies involved – Chevron, BP, France’s Total and Norway's Statoil – went along with the state demands and are still operating there)

So far Exxon alone hasn’t been forced to compromise. Specifically, the company is insisting on allegiance to an entirely reasonable contractual clause allowing it to sell Sakhalin’s gas to whomever it wants. It has seemed to want that customer to be China.

Russia’s behemoth Gazprom, however, has other ideas – it wants the gas. And according to a report by Reuters’ Denis Dyomkin, Gazprom at least believes it will get its way. The article quotes Gazprom's deputy head, Alexander Ananenkov, as reporting to Russia’s next president – Gazprom Chairman Dmitri Medvedev – that he expects to sign the deal with Exxon in April or May. In case there was any doubt previously, that means Exxon would be going head-to-head with the Kremlin.

Exxon knows the history of companies going to court to get their way in the former Soviet Union – despite “victories,” they mainly end up empty handed. The FSU states simply don’t honor the courts’ rulings, and leave it to the companies to figure out what to do next.

The distinction is that Russia is not Venezuela, and Vladimir Putin (and probably Medvedev) is not Hugo Chavez. Indeed, Putin and Exxon are fairly similar – both have been disagreeable about being pushed around.

Photo: ynskjen
Rights: Creative Commons

Don Quixote and Exxon's Contrarian Gamble

Does Exxon Mobil know something that the rest of Big Oil doesn't? Or is Exxon on a noble but ultimately quaint and quixotic quest for the old days?

Around the world, Big Oil has been knocked back on its heels by the assertiveness of state-owned oil companies that are both developing their own fields, and competing vigorously in auctions for the rights to oil and gas reserves elsewhere. The upshot is that major oil companies look to be on the verge of a long, unpleasant (for them) decline, with the result that some of them -- such as Italy's Eni -- are scrambling to adapt by forming alliances with the state-owned companies.

Exxon is not only refusing to play along with this scenario, but is in battle around the world in a claim that the prior rules hold.

In Kazakhstan, it was announced this week that Exxon is the lone holdout on an agreement to resume work on supergiant Kashagan, the largest new oilfield on the planet; the rest of the field's big partners -- Europe's Total, Shell and Eni -- have agreed to shave off a bit of their collective shares in the field so that Kazakhstan can become a full partner.

In Russia, too, Exxon is at odds with Moscow's insistence that the company sell natural gas from its giant Sakhalin-I development within Russia instead of at a higher price to China. Meanwhile, the rest of Big Oil has thrown in the towel and done compromise deals with Moscow.

And, as my friend Paul Sampson at Energy Intelligence notes in a story this week, the company is in conflict with Venezuela after abandoning participation in the Orinoco heavy oil project when Hugo Chavez demanded a larger piece of the pie. Exxon and Venezuela are in arbitration over how the company will be compensated. Meanwhile, Total, Chevron, BP and Norway's Statoil went along with Chavez's terms.

In a speech last month in Rome, Exxon Chairman Rex Tillerson said, "Some exporting and importing countries are losing sight of their interdependence. They are responding to the energy challenge by pursuing policies of resource nationalism."

Tillerson is betting that the current phase is a blip. Oil prices ultimately will moderate, his thinking goes, and state-owned companies in Venezuela, Russia, China and elsewhere will be back on Big Oil's doorstep.

Meanwhile, Exxon's strategy is to morph into more of a natural gas company. My former colleague Russell Gold at The Wall Street Journal reported during the summer that more than a third of Exxon's total proven reserves are in the Middle East and Asia; five years ago, Gold said, Exxon reported just a sixth of its reserves from that region. Exxon's biggest play on the planet is Qatar, which accounts for much of its growth.

It seems un-Exxonish to bet one's future on a single country or region. But it's not contrary to company culture to resist change. This is a company that until recently was the biggest corporate funder of the narrow club of greenhouse gas "scientist" deniers. Exxon reduced that funding when it became too public and too embarrassing.

It would be foolish to pass judgment on Exxon's strategy. But it does seem to be betting the house against the tide.

Photo: spotter_nl
Rights: Creative Commons

Trolls and Hugo Chavez

On one of my favorite websites, The Oil Drum, I often see the commentary, "Don't feed the trolls." I had no prior idea what this meant, but learned from context (and Wikipedia) that a troll is a person who goes out seeking unprovoked trouble, in this case inserting unpleasant lines onto a discussion group designed to send blood pressure into the stratosphere.

We have trolls large and small in our midst, and they have one thing in common: a desire to make themselves larger by attacking established beings with huge credibility. One who comes to mind is the Rolling Stone's tiresome Matt Taibbi, whose trolldom against three-time Pulitzer Prize winner Thomas Friedman has even earned him a Wikipedia listing. Everyone knows a troll.

But there are also trolls in politics, which is what triggers this post, and a question: Why do ordinarily smart people fritter away their time dissecting and vilifying buffoons with no impact on their lives?

I speak in this case of Roger Cohen at the International Herald Tribune, who has now wasted two consecutive columns trashing Venezuelan leader Hugo Chavez. In his article today, Cohen leads off by saying, "An oil-rich country bent on humbling the United States is an instructive place from which to view the world, so here are eight rules of modern political life as seen from President Hugo Chávez's Venezuela."

Who cares what Chavez is bent on? Can he do it? No.

We definitely have a world changing because of oil nationalism. But do the other oil nationalists -- Putin and Nazarbayev, for instance -- themselves take Chavez seriously? No sign of it.

When I returned to the U.S. from the Caspian and covered oil for The Wall Street Journal a couple of years ago, the Chavez phenomenon was one of the first things that struck me, that is: Why were my friends vexed over a fellow in a tiny country whose main crime, as far as I could tell, was running his economy into the ground in the name of patriotism?

Why indeed. The reason is his big mouth. Americans get really irritated by foreigners with that indiscretion, against which we've been known to order assassinations and even go to war.

Why, Chavez may even be as dangerous to the United States as, as ... Fidel Castro!

To which I can only say, Don't feed the trolls.

Photo: snarkhunt
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

Sign of the Times

Russia has provided evidence for the direction in which Big Oil is headed: smaller and humbler.

This indication comes with Russia's announcement that it's selling a 24% stake in one of its most strategic natural gasfields -- Shtokman -- to Norway's Statoil. Read AP report on WSJ.com

That deceptive news release by the Kremlin hides a bitter fact for the company -- the likelihood that Statoil will be a mere contractor; it will not occupy the accustomed role of developer.

The fine print is what the industry calls booked reserves. These are the standard underpinning of an oil company's worth -- how much oil and natural gas they themselves control, and thus can sell at some point at, say, $90 a barrel or $260 a thousand cubic meters.

In the Russian case, Moscow is denying the companies the right to book the reserves. Hence, there is no real reason to celebrate. That's the deal that France's Total got in July, when the Kremlin gave it a 25% stake in the operating company developing the field, and though no details were released on the Statoil deal, one would expect them to get the same terms.

Why do the companies go along? Because they are desperate for any entree into places like Russia, and hope (without basis) for better terms later.

This is a blueprint for how Big Oil is likely to be increasingly treated around the world. Somewhere between 80% and 90% of the world's oil and natural gas is controlled by countries like Venezuela, Saudi Arabia and Russia, not Exxon, Shell or BP. And, over the next two or so decades, those countries are going to turn the big oil companies into employees.

Is that bad or good for the buyers of the actual end product -- motorists and homeowners? It could very well mean even higher prices than Big Oil commands since the countries are not under the same competitive or cost pressures as the companies.