It may seem odd, given their reputation for being only slightly less powerful than God, but independent oil producers like Exxon Mobile and British Petroleum are increasingly vulnerable to forces beyond their control. That is because these so-called oil “majors”—fully integrated companies that can locate, develop and manage energy fields on their own—produce only about ten percent of the world’s oil and gas and preside over just three percent of reserves. The balance belongs to governments in the developing world, and with the number of large virgin fields dwindling, that means they control the future of global energy consumption and the fate of the majors along with it.
“The outlook for the majors is a big question,” says Fareed Mohamedi, who heads the oil market analysis and country risk department for PFC Energy, a Washington-based energy consultancy. “Now it’s all about the petrostates and their state-owned oil companies.”
Welcome to the latest chapter in the history of resource nationalism. During the era of decolonization, it was a rite of passage for petroleum-rich governments to nationalize oil fields and cancel leases held in perpetuity by foreign oil companies. Yet they still had to rely on the international oil companies, or IOCs, to keep the rigs pumping and the fields maintained. That is rapidly changing, however, as was made abundantly clear in Iraq last month when state-run, national oil companies, or NOCs, emerged en masse from large oil auctions with lucrative contracts.
So successful have companies like China’s CNPC, Malaysia’s Petronas, and Russia’s Gazprom become at insinuating their way into the developing world that the majors have no choice but to partner up with them in consortia. What may appear to be a net-sum loss for the IOCs, however, may well help ease tensions over resource competition in the future. “A lot of the NOCs are working to persuade their financial managers that they need to invest in reserves with the help of an IOC,” says Guy Caruso, an oil expert at the Center for Strategic and International Studies in Washington. “Between the NOCs and IOCs we can get the kind of investment needed for a prolonged period of surplus capacity.”
Though most oil-producing states have no choice but to employ IOCs to manage their wells, a task that requires considerable skill and experience to properly execute the complex of tenders, the power structure of the global oil industry over the last decade has undergone seismic change. In late 2008, for example, Nigeria put tens of billions of dollars of old leases in play by re-writing its petroleum law, sparking a bidding war between lease-holders like Exxon Mobile and Chevron and newcomers like China’s CNOOC; in 2007, Venezuelan President Hugo Chavez signed a law that allows the government to transfer control over the crude-rich Orinoco Belt from a host of IOCs to the state-owned PDVSA, even as he turned to Chinese and Russian oil companies to evaluate plans for future exploration; in 2005, under pressure from Moscow, Shell agreed to swap 25% of its controlling stake in a massive petroleum field project on Sakhalin Island in the Russian Far East to Gazprom.
Their coffers brimming from robust oil sales during much of the last decade, NOCs have emerged as rivals to the IOCs, if not for the writ to manage new projects then certainly for the all-important lease agreements. As government-owned concerns, NOCs enjoy the vast resources of the state, which they can employ as sweeteners when negotiating contracts. China, for example, has launched what critics say is a neo-imperial thrust across the energy-rich developing world, offering to build and finance badly needed infrastructure projects as well as preferential trade deals, in exchange for access to reserves. Unlike the majors, which are accountable to shareholders who expect annual returns on a quarterly basis, their state-owned rivals are prepared to lose money for years before showing a profit from their investments. Nor are the NOCs restricted from doing business with pariah states like Iran and Sudan, which are under international embargo and thus off limits to the majors.
“NOCs are able to do things in securing contracts the IOCs cannot,” says William Ramsay, director of the French Institute for International Relations’ energy program. “They can spend more than the IOCs and they have no [transparency laws] to contend with.
According to the International Energy Agency, 90 percent of new fuel supplies will over the next four decades come from the developing world. That means new capacity will be controlled by state-owned companies—first and foremost Saudi oil giant Saudi Aramco, one of the few NOCs sophisticated enough to compete with the IOCs on every level of the productions stream. Aramco, however, confines itself to its home market, the world’s largest oil producer, where it is working to expand daily production capacity to 13 million barrels, or about nine percent of the world’s total daily consumption.
Saudi Aramco’s counterparts, meanwhile, spent much of the first two quarters of 2009 scrambling to extend their global reach in a scrum of corporate activity. In the first half of last year, according to PwC, the professional services firm, NOCs accounted for more than half of the oil industry’s largest mergers and acquisitions as measured by value, up from a fifth of the total in 2008. (Deal flow fizzled in the second half of the year once crude prices began to recover along with the global economy. Some analysts expect prices will test record levels again this year after they reached the all-time high of $147.30 level in June 2008.)
However humbling the rise of the NOC may be for the majors, most oil experts say it is a positive development for the industry as a whole. Recovery rates on existing oil fields, from the North Sea to the Gulf of Mexico, are declining steadily—so quickly, according to Mohamedi, that some of the big fields will be depleted within the decade—while investment in countries with abundant supplies like Iran and Kuwait are lagging. The IEA forecasts that oil-rich states are falling well short of the $20 trillion in new investment needed to ensure adequate energy supplies for the next quarter century.
Until now, the extraordinary profits reaped by many national companies were ploughed not into expanding capacity but into social services. Revenue from Venezuela’s PDVSA, for example has helped finance the country’s welfare state at the expense of the country’s oil fields. The same could be said for the burden Russia’s social contract is placing on Gazprom, which is badly in need of capital replacement. Though Iran controls the South Pars gas field, the world’s largest, it is a net gas importer because money that could be invested in the field is diverted to subsidize domestic petrol prices. Pemex of Mexico hobbles along on perhaps the stingiest of all NOC budgets; its giant Cantarell field is so poorly maintained that America’s third-largest oil supplier could become a net-oil importer within ten years.
Not all energy-rich states are so abusive of their precious resources, however. Petronas of Malaysia is now a major extractor and exporter of liquid natural gas, while Brazil’s Petrobas has positioned itself as a global leader in locating and producing oil from deeps-sea fields, as well as in extracting fuel from shale and tar sands. China’s CNOOC, Sinopec, and CNPC, all state-owned but run as autonomous and often competing corporations, are also on track to becoming world-class oil companies.
The December oil auction in Iraq, a dangerous but potentially huge market with reserves that rival those of Saudi Arabia’s, was something of a milestone in the evolution of the word’s top NOCs and their growing convergence with the majors. CNPC, already part of a BP-led group that is exploiting the Rumaila oil field, Iraq’s largest, co-led with Total a consortium that won the mandate to exploit another major field, at Halfaya. Petronas also did well in the auction, earning for itself a seat in the CNPC-Total consortium as well as a junior partner role in a Shell-led effort to exploit the giant Majnoon field. Even Sonangol, Angola’s NOC, emerged from the bidding with two respectable concessions.
For ambitious state-owned companies, Iraq is the ideal market. Extracting oil there is a relatively inexpensive and straightforward affair. The NOCs are more risk-tolerant than the well-established majors, which with a few exceptions are keeping the war-torn country at arm’s length. Perhaps most importantly, the Persian Gulf lies at the heart of a growing commercial relationship between the vibrant economies of Asia and the Arab world, a fact not lost on BP, which is so keen to tap the growing Asian-Arab nexus that it has agreed to relatively unfavorable terms for the privilege to work with CNPC, a partnership that could serve as a gateway to markets throughout the developing world.
“Everyone was surprised that BP accepted the deal on Iraq’s terms, but it makes sense,” says PFC’s Mohamedi. “First, BP’s costs will be lower because they’ll be using Chinese contractors and the second thing is they want a global partnership with China….So here’s an IOC becoming subsidiary to an NOC in that pan-Asian grid.”
There is more to be gained through enhanced cooperation between Asia’s public oil companies and the independents, however. The tighter CNOOC, CNPC, and Sinopec, as well as Petronas and Indonesia’s Pertamina, with which China has close ties, are woven into the fabric of international consortiums, the less likely Beijing is to militarize the sea lanes connecting Asia with the Persian Gulf. In addition to investing time and treasure trolling for energy supplies in the Middle East and Africa, China is also in the early stages of building a deep-water navy to transport them safely home. The prospect of an expeditionary Chinese fleet represents an implicit challenge to the U.S., which has for decades assumed responsibility for policing the world’s vital sea lanes. India, China’s ancient rival, is upgrading its own naval force in large part out of anxiety over energy security.
If, in the last decade, the NOCs arrived as prominent energy-industry powerhouses in their own right, the next decade may find them at the center of a competition between two dueling energy doctrines: security of stock versus faith in the marketplace. For now, China, Southeast Asia, and to a lesser extent Russia and some Latin American countries clearly believe physical possession of fuel reserves is of vital national interest. Over time, however, as NOCs modernize and expand their operations worldwide, they may well develop trust in the market as a more efficient—and less confrontational—way of guaranteeing adequate reserves.
Despite the political instability associated with so much of the petroleum-producing world—the Middle East first and foremost—the market has proved itself a reliable guarantor of access to supply. The few cases of disruptions occurred as a result of tensions between the West and the Persian Gulf states, a region with which Beijing has been shrewd enough to nurture close and uncomplicated ties.
“Generally the market has been efficient in making supplies available,” says Ramsay. “Eventually, the NOCs will be less proprietary and go with the market.”
If so, they would be following a well-trodden path. Both Britain and the U.S. responded to the dawn of the petroleum era by aggrandizing oil fields worldwide, rewarding local leaders who collaborated with them, and destroying those who did not. London even partitioned the Middle East, the easier to play one energy-rich emirate against the other, while the U.S. acquired for itself a lucrative franchise in Saudi Arabia by creating the progenitor of Saudi Aramco. Both powers were eventually chased out of the countries that hosted them and they are now hearty proponents of commodities markets as agencies for resource allocation. It is an instructive lesson for the next generation of energy giants, one they may already be taking to heart.
