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Financial Times: Resource nationalism: State groups give majors a run for their money

By Dino Mahtani
Published: November 9 2007 04:36 | Last updated: November 9 2007 04:36

With the steep rise in oil prices over the past four years, a new group of companies has risen to the fore. National companies, from Saudi Aramco, to Russia’s Gazprom and Venezuela’s PdVSA control about 80 per cent of the world’s oil reserves and 50 per cent of gas reserves, and have become increasingly important as resource nationalism has resurfaced as a global phenomenon.

The multinationals that have traditionally dominated oil and gas operations are shut out of some of the world’s most prolific hydrocarbons basins, notably in Saudi Arabia, which expects to entrench its position as the global swing producer of oil by expanding output over the next years. International oil companies everywhere are struggling to pump more from maturing fields elsewhere and are increasingly under pressure from governments, such as Venezuela and Russia, to accept harsher economic terms.

Even the biggest international companies, from ExxonMobil and Chevron to BP and Royal Dutch Shell, have seen their profits squeezed by rising industry-wide costs while struggling to book extra reserves. A recent study by John S Herold, an oil and gas research company, and Harrison Lovegrove, an industry advisory group, found spending by 228 global oil and gas companies increased 45 per cent to $401bn in 2006. But reserves grew just 2 per cent.

In the meantime, high oil prices have deepened the pockets of national oil companies that are not subject to the taxes or capital expenditure requirements of the many international companies they deal with. “There is an enormous tectonic shift going on,” says Robin West, chairman of PFC Energy, the consultancy. “There is a difference between oil business and oil wealth and the initiative is shifting away from the international oil companies.”

Recently, there have been a number of high-profile expropriations that illustrate just how that balance is shifting, most notably Gazprom’s acquisition of a majority stake in Shell’s Sakhalin-2 project in Russia late last year. Since then other countries have flexed their muscles. Venezuela’s PdVSA in June took over ExxonMobil’s and ConocoPhillips’ assets in the country after the companies chose to walk away and seek compensation rather than hand over greater control.

Kazakhstan has also stepped up pressure on a consortium led by Eni to hand over a greater share of its stake in the Kashagan field, one of the world’s biggest, to the state owned company KazMunaiGaz.

Even a country such as Nigeria, long considered by industry executives as having relatively easy commercial terms, is looking to review contracts on offshore developments as part of a strategy of revamping its national oil company, NNPC.

While national oil companies everywhere try to redefine themselves, many are far more advanced than others when it comes to their scale, scope and competence. “Some are clearly determined to be significant international players,” says Daniel Yergin, chairman of Cambridge Energy Research Associates. “But others do not have the global perspective.”

Saudi Aramco is regarded as the best upstream operator among the state companies, having retained personnel from its original partners, but it is only a significant operator on the world stage in the downstream sector, where it is set to spend $7bn on expanding a US refinery with Shell. PetroChina, the state-controlled Chinese oil and gas group, this month overtook ExxonMobil to become the world’s biggest company by market capitalisation, but more than 90 per cent of its production is domestic.

By contrast, Brazil’s Petrobras and Malaysia’s Petronas are both examples of national groups to have picked up the know-how and become competitors to international companies. Petrobras is a recognised leader in deepwater technology and derives 30 per cent of corporate revenues from abroad.

But not all national oil companies are success stories. Iran’s Nioc and Venezuela’s PdVSA are examples of groups that operate as little more than bureaucracies struggling to maintain production targets amid their countries’ difficult investment climate, wasteful fuel price subsidies, and in PdVSA’s case, huge social spending bills to foot.

Both Nioc and PdVSA, nevertheless have plans to form the Venezuelan-Iranian Oil and Gas Company, which they envisage becoming an important operator on the global exploration and production scene. Some analysts are sceptical over just how far the joint venture will go, but it is undeniably part of a wider trend of increasing technical co-operation or supply agreements among state entities.

Over the past three years, such deals have increased markedly, with Chinese state-owned companies Sinopec, CNPC and CNOOC and India’s ONGC partnering with the likes of Gazprom, Algeria’s Sonatrach or Mexico’s Pemex to name a few.

In such a context, international oil companies could become more marginalised, squeezed by escalating costs and emerging operators capable of dealing directly with the oil service companies that are essential contractors for the major multinationals.

Copyright The Financial Times Limited 2007

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