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The Dallas Morning News: Big Oil countries hold upper hand

11:24 AM EDT on Friday, September 15, 2006
By Jim Landers 

The oil kings gathered Wednesday in the Hofburg Palace of Vienna. It was a clear, sunny day in the Austrian capital, but a storm darkened the palace chambers.

Exxon Mobil Corp. chairman Rex Tillerson warned his audience of OPEC ministers and guests that high passions of nationalism could leave the world short of the energy it needs for economic growth.

“It is precisely at times such as these that we must strive to strengthen our energy interdependence by fortifying our partnerships, freeing market forces, expanding access, and sustaining investment,” he said.

But some ministers weren’t buying it.

Venezuelan Energy and Oil Minister Rafael Ramirez declared “a new petroleum regime” and announced his country’s intent to assert control over three more oil projects.

One of those projects was developed by Exxon Mobil.

Moscow, meanwhile, growled about squeezing more money from Exxon Mobil and Royal Dutch Shell PLC for the giant oil and natural gas fields beneath the icy waters off Sakhalin Island.

Ten years ago, oil was cheap, and the Big Oil countries were trying to woo the Big Oil companies to invest.

Generous terms were offered. Venezuela agreed to an initial royalty of 1 percent on the Orinoco heavy oil projects. Russia’s parliament approved agreements for Sakhalin that deferred nearly all of the government’s take until after the companies recovered their multibillion-dollar investments.

Even the U.S. Congress gave the companies a royalty holiday on deepwater discoveries (and forgot the clause that would end that incentive if prices soared).

The companies signed, and then went to work.

New oil

Today, new oil is flowing from the deep Gulf of Mexico, the Orinoco and Sakhalin. Oil prices have soared, and the Big Oil countries have buyer’s remorse.

Congress wants to cap the deepwater royalty break.

Venezuela, under President Hugo Chávez, is renationalizing the oil business. Big Oil companies can stay, spend their money and apply their technology, but most of the profits and power will go to Mr. Chávez.

Russian President Vladimir Putin seems to prefer the same type of arrangement. He broke Yukos Oil Co. over his knee and sent its chairman, Mikhail Khodorkovsky, to a Siberian prison camp.

In July, Mr. Putin lobbied fellow presidents and prime ministers in the G-8 club of rich industrial democracies to let Russia’s state energy companies buy utilities and pipelines in the West.

But he balked at breaking up Gazprom, Russia’s natural gas monopoly, and shrugged off criticism over Gazprom’s January disruption of European gas supplies.

Now the Kremlin is staring balefully at the Big Oil companies’ Sakhalin operations.

Sakhalin II is nearing production of massive amounts of oil and natural gas that will be liquefied and shipped across Asia.

Under the current terms of the deal, pegged at an oil price of $34 a barrel, Shell and its partners would give Russia $50 billion over the 40-year life of the project.

Russian share

Russia would get up to 70 percent of revenue from prices above that. (Oil is now selling at about $64 a barrel).

First, Shell and its partners get to recover their costs, about $20 billion now. That means Russia will have to wait a lot longer to get its money.

Russia’s environmental regulator has sued to stop the project.

Exxon Mobil is the operator for the Sakhalin I project, where crude oil exports began at the end of August.

Spending on Sakhalin I, where Exxon Mobil has a 30 percent stake, so far comes to $4.5 billion.

New exploration has turned up lots more oil from the field now in production, but Russia says the new discoveries should be auctioned rather than added to the original deal.

Exxon Mobil responded by saying that “any failure to honor [the original deal] could inevitably undermine the confidence of foreign investors and have a significant negative impact on the Russian investment climate.”

But it’s the countries that have the clout right now, because they’ve got the oil.

Big Oil companies, though rolling in money, are struggling to find new fields to replace the ones depleting through high global demand.

Exxon Mobil has done well with replacement reserves. Most of the other companies have struggled.

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