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Petroleum News: Soaring energy prices fuel takeovers

Soaring energy prices fuel takeovers

Nationalization of Bolivian natural gas is part of a broader global wave souring investment climate for international companies

Brad Foss

Associated Press Business Writer

First Russia. Then Venezuela. Now Bolivia.

Soaring energy prices are fueling a global wave of natural-resource nationalization that is souring the investment landscape for international oil companies and reshaping energy politics for years to come.

While it is anyone’s guess as to which energy-rich developing nation will be next to assert greater state control over its oil or natural gas assets, analysts say it is only a matter of time before the actions of Russia’s Vladimir Putin, Venezuela’s Hugo Chavez and Bolivia’s Evo Morales inspire a copycat.

“If you’re an international oil company and see this trend, it must be worrying,” said Yasser Elguindi, senior managing director at Medley Global Advisors in New York.

Analysts: trend should worry consumers

It should also be worrisome to energy consumers when global supplies are already extremely tight, analysts said. They noted that non-OPEC oil production has not lived up to its potential since 2003, when Venezuelan President Hugo Chavez began tightening his grip on Petroleos de Venezuela and, before that, Russian President Vladimir Putin jailed the ex-chief of Yukos, paving the way for its prized assets to be acquired by state-owned Rosneft.

As a result, world oil markets were even more vulnerable to supply disruptions stemming from violence in Nigeria, war in Iraq and hurricanes in the Gulf of Mexico. On May 2, crude futures shot up to almost $75 a barrel as traders fretted about the possible outcome from escalating tensions between the West and oil-rich Iran over Tehran’s nuclear ambitions.

“High prices have given all producing countries a lot more leverage,” Elguindi said.

From a pure energy-supply perspective, Bolivia’s decision May 1 to threaten seizing natural-gas fields from companies that refuse to renegotiate production contracts will have little impact on the world stage. But its symbolic significance cannot be understated, analysts said.

Coming on the heels of petroleum-sector power plays by political leaders in Russia and Venezuela, the grip-tightening in Bolivia underscores the rising influence of national oil companies and the increasing difficulty private companies face as the world’s energy hunting grounds become less hospitable.

Majors shifting business

Elguindi said major oil companies, such as Exxon Mobil Corp. and Royal Dutch Shell PLC, have already begun shifting their businesses in response to the changing landscape. He said multibillion-dollar investments in Canada’s tar sands and Qatar’s natural gas reserves are as much a reflection of the industry’s interest in these projects as they are evidence of companies “investing in things they have access to.”

“If you gave oil companies a choice between the tar sands in Canada or oil in Saudi Arabia, which do you think they’d choose?” Elguindi said.

Some analysts say energy-rich nations the world over clearly have the upper hand now — in contrast with the late 1990s, when oil traded at about $11 a barrel — and that it will be up to individual companies to decide if they can live with less control over their foreign operations while getting less revenue per barrel.

For example, ExxonMobil chose to sell its stake in a Venezuelan oil field rather than accept less desirable financial terms. Many companies, including Chevron Corp., Royal Dutch Shell and BP, agreed to convert some of their Venezuelan oil-field contracts into state-controlled joint ventures, betting that the ventures would still be profitable even with a larger share of revenue going to the state.

Some analysts believe this approach will only embolden more countries to follow Venezuela’s lead, arguing that the world’s largest private oil companies — with diplomatic support from Western governments — should resist being strong-armed out of existing contracts.

“Either you hang together, or you surely will hang one by one,” said Larry Goldstein, president of the Petroleum Industry Research Foundation, an industry-financed think tank.

“I’m not sure Bolivia is the end of this game,” said Goldstein.

Disputes in Ecuador, Chad, Nigeria

Ecuador is arguing with Washington over a new oil royalties law. Last week, the World Bank tentatively resolved a financial dispute with Chad, which had threatened to shut off an oil pipeline.

The rebels threatening Nigeria’s oil infrastructure have gained clout because of high oil prices, and analysts said they would not be surprised to see Angola try to renegotiate some of its contracts with foreign oil companies.

“When you start polling the world for where major oil companies can do business, you have West Africa, Russia, the Middle East and Latin America. What they all share is that they’re becoming more and more difficult operating environments,” said A.G. Edwards oil analyst Bruce Lanni.

The European Commission said May 2 it would study the impact of Bolivia’s action on foreign investors. Besides Brazil’s Petroleo Brasileiro SA, or Petrobras, most of the biggest natural gas players in Bolivia are European, including Britain’s BG Group PLC and BP PLC; Spanish-Argentine Repsol YPF SA and France’s Total SA.

Bush administration worried

For its part, the Bush administration said it was worried about U.S. corporate interests being trampled upon abroad, though it stopped short of any direct criticism of the Bolivian government.

“When the issue of privatization does come up, or renegotiating contracts, certainly our concern is that any government meet or fulfill its contractual obligations,” State Department spokesman Sean McCormack said. But McCormack would not say whether any contracts had been violated because “we don’t have a complete picture of the situation.”

What is known is that Morales ordered troops May 1 to surround 56 natural gas installations throughout Bolivia, threatening to evict foreign companies that did not give control over production to the nation’s cash-strapped state-owned oil company, Yacimientos Petroliferos Fiscales Bolivianos, or YPFB, within six months.

Morales was elected late last year on a populist platform, promising to return to the country natural resources that had been “looted” by foreign companies. Bolivia has South America’s second-largest natural gas reserves after Venezuela, and is a critical supplier to Brazil and Argentina.

Daniel Yergin, chairman of Cambridge Energy Research Associates, said Morales’ action might be expedient politically, but warned that it could backfire down the road.

“It will hardly promote the investment Bolivia needs to monetize its gas reserves,” Yergin said. “Whatever the short-term gains, there will be long-term costs.”

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