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THE NEW YORK TIMES: Oil giants empowered, majors weakened

THE NEW YORK TIMES: Oil giants empowered, majors weakened

3 May 2005


PARIS (Reuters) – State-owned oil giants in producing nations are cementing control over much of the world’s reserves, intensifying fears too little investment will be made in new energy supplies.

Barriers to foreign investment in the world’s biggest oil producers are expected to be among issues broached at a two-day ministerial conference of the International Energy Agency starting in Paris on Monday.

As today’s high prices resolve the single biggest problem for producers’ national oil companies (NOCs) — low returns on capital — the multinational majors face an uphill struggle to gain access to new sources of supply.

“There is a gradual recognition on both sides of the table that the NOCs hold most of the cards. It’s a difficult position for the international oil companies,” said Seth Kleinman, analyst at Washington-based PFC Energy.

At a meeting of OPEC and oil majors in Vienna last year, the big six majors — ExxonMobil, Shell, BP, Total, ChevronTexaco and ConocoPhillips — got a cool reception when they met OPEC and called for easier access to Middle Eastern reserves.

The majors argued they could bring not only massive financial muscle to potential partnerships, but also technical expertise that allows them to extract oil more efficiently and more cheaply.

They were soundly rebuffed by Saudi Arabian Oil Minister Ali al-Naimi who spelled out that state-owned Saudi Aramco has a wealth of expertise and was entirely capable of developing Saudi’s oil resources without the need for the foreign capital.

Elsewhere in the Middle East, Kuwait does not permit foreign participation in its oil sector, Iraq’s post-war reopening has yet to get under way and Iran’s tough investment terms have limited the scope of its ventures with international firms.


Analysts say these barriers have played no small part in helping to drive up world oil prices as they have forced oil majors to look where finds are smaller, more risky and expensive to develop and decline faster from peak production.

That leaves the world poorly placed to meet rising fuel demand from Asia’s emerging economies. Last year, the IEA said the energy industry needed to invest $16 trillion to meet energy demand over the next quarter of a century.

The signs are that producer companies and national oil companies are making access more, not less, difficult.

The revenue windfall from record high prices has both reduced their need for foreign capital and made them wary of building costly new facilities that would ultimately bring prices down.

Venezuela and Nigeria, for example, are limiting the access of foreign commercial companies or making terms of admission less favorable.

In the largest non-OPEC producer Russia the concept of the “people’s oil” re-emerged last year in the form of plans for higher taxes — Moscow’s tax take was 33 percent in 2001; this year, it is expected to be higher.

Some analysts say the NOCS are as likely to work with each other as with international companies. That would allow investments on a scale no single NOC could undertake and head off potential unease over foreign ownership of strategic resources.

If the oil majors who were thrown out of the Middle East in a wave of nationalization in the 1970s are to regain a foothold, they will have to be more flexible on terms.

“The majors used to be rather arrogant,” said Manouchehr Takin, analyst at the Center for Global Energy Studies in London. “Gradually they are becoming more flexible. They can’t have the good old days when they were awarded licenses or production sharing agreements.”

Meanwhile, the national companies have got much better at extracting more oil and not being commercial gives them advantages as well as disadvantages.

“They are less commercially constrained. They don’t have the straight-jacket of shareholders and city analysts. They are prepared to invest in the longer term,” Takin said.

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