Petroleum Review Editorial June 2006
It’s all geopolitics now
The last month has been little short of traumatic for the international oil and gas industry, with oil prices testing the $75/b mark and anti-industry politics the order of the day.
In Bolivia, President Evo Morales did exactly what he’d said he’d do in his election manifesto and nationalised Bolivia’s oil and gas industry. The dispossessed corporations – BP, BG, Repsol YPF and Petrobras – have apparently felt largely unable to actively contest the takeovers and now have 180 days to make the best deal possible with the Bolivian government.
Opposition seems to have been largely confined to a torrent of perjoratives in western pro-business media. Petrobras, as the principal loser in the takeover, and also Bolivia’s largest customer for its gas, may be able to secure some redress in the form of advantageous gas prices.
This, however, was only the start of the industry’s Latin American woes. The Bolivian news was barely digested before Ecuador, citing infringements of concession terms, nationalised Occidental’s assets, currently producing over 100,000 b/d. And that, in turn, was rapidly followed by President Chavez removing all the preferential terms accorded to the four Orinoco heavy oil projects. The companies who had invested billions of US dollars in the heavy oil projects (partially in the expectation of favourable tax treatment) now find themselves with the same highly taxed minority status as all other Venezuelan oil operators. Argentina ran up a trial balloon about nationalising oil and gas assets and then denied it had any intention, while the principal political challenger – Ollanton Humala – in the Peruvian elections, appears to take the Chavez/Morales approach to the oil and gas industry.
Industry woes are not, however, confined to Latin America. In Africa, the troubles in the Niger Delta remain as intractable as ever and, with elections for the President in 2007, the situation is as likely to deteriorate as improve. The underlying problems go back to the Biafran War of 1967–1970, which caused 100,000 military casualties and between 0.5mn and 2mn civilian casualties by starvation. The central government achieved its aim of stopping the oil-rich delta region from seceding and becoming a separate Biafran state. The legacy has been a reluctance by the central government to invest in the delta region, which, in turn, has led to the low-level civil war currently raging, in which the poor and dispossessed have allied themselves with local war lords and criminals to try and better their lot. Throw in lots of guns and corrupt politicians and you have an explosive and intractable situation.
Meanwhile in Chad, the less than savoury government of Idriss Deby has effectively torn up the World Bank’s carefully crafted safeguards to ensure the population benefits from the new oil wealth and is brutally asserting its right to spend as it sees fit.
Clearly, in a world of tight supply, however worthy western hopes of forcing good behaviour appear largely forelorn. Maybe the brutal disinterest in internal politics manifest by the Chinese government at least has the merit of consistency.
In the Middle East, the sabre-rattling by both Iran and the US continues, with oil traders making a steady living by raising and lowering prices as the political temperature rises and falls, and as various nightmares and their oil impacts are examined and evaluated.
On p14 of the June issue of Petroleum Review we examine the US-Iran crisis in detail.
In a speech straight out of the ‘Cold War’ days, US Vice President Cheney berated Russia for undemocratic tendencies and using oil and gas as a political weapon. Russia, which has already dispatched anti-aircraft missile systems to Iran, responded – or rather Gazprom responded – by delaying the award of the Shtokman contracts to the summer.
Meanwhile, Cheney’s visit to Kazakhstan was followed – according to Kommersant – by the news that the Russian and Kazakh Presidents had agreed on 20 May that Gazexport (Gazprom’s export arm) will import gas from Kazakhstan at $140/mn cm versus the current $50/mn cm. As Gazexport onsells this gas to RoskUkrEnergo, the dominant supplier to Ukraine, higher Ukrainian gas prices appear inevitable.
At the same time, there were reports that Russia was linking its entry to the World Trade Organisation (WTO) with access to the Shtokman contacts for US oil companies. Central Asian gas supplies are becoming a truly tangled web – with Russian now paying more to ensure supplies flow through Russia; the US promoting trans-Caspian and trans-Afghanistan egress for the gas; while China is offering to buy the gas and build the pipelines to China. In effect, Central Asia is no longer a low cost distressed supplier of gas.
It is quite incredible that, in a very short space of time, the international oil and gas industry has become at least as political as it was in the 1970s. One consequence of this is that governments now need to equip themselves with powerful and well informed energy departments and ministries.
The logic of an increasingly political oil and gas market is that government-to-government bilateral deals will become increasingly important as nation states seek to protect their national interest. It can reasonably be argued that Germany’s close links with Russia, its investment inthe sub-Baltic North European pipeline and its investment in the development of the Yuzno-Russkoye gas field is the latest bilateral deal. Poland, and to a lesser extent Ukraine, certainly see the move as one at their expense. This is the challenge of the emerging bilateralism – it produces losers as well as winners.
However regrettable to those who would like to keep the industry open and international, it is unlikely to be the last bilateral deal in a world where oil and gas are increasingly perceived as being scarce and expensive. The real challenge, however, is to the private oil and gas companies. As we show on p46, they are already struggling to grow production.
If the companies cannot find the resources, or get access to the resources, do they now have to become the agents of governments? Is the future one in which a bilateral deal will be done between a consuming country’s government and the government of a producing country, and the traditional private oil companies will then bid the project execution? It would level the playing field versus Russia and Chinese companies, but is it a viable way forward? The events of the last month and the upheavals on currency and stock markets have been so great that totally new approaches may be necessary to give consumers reliable energy supplies and producers a fair reward for their resources.
On p26 we have an article from Richard Pike, Chief Executive of the Royal Society of Chemistry. He suggests that poor science may mean oil reserves are larger, and therefore environmental challenges greater, than generally suspected. He notes the necessity of care when adding reserve numbers that are expressed as probabilities.
The problem may now be quite as severe as he fears, however, as the IHS database is based on P50 reserve numbers, which are additive and their world reserve totals are in the public domain.
The survey-based numbers from World Oil and the Oil and Gas Journal (the latter republished in BP Statistics of World Energy) do contain a degree of ‘apples’ and ‘pears’ as there is no definition of proven. Over the last two or three years, the IHS estimate of global remaining reserves have been between 10% and 15% higher than the ‘survey’ numbers.
Dr Pike’s warnings do, however, apply to stockbrokers and analysts whose enthusiasm to promote a company’s reserves tends to outrun their knowledge of how to sum probabilities.
The SEC reserves definitions, which still have no probability attached to them, look increasingly anachronistic, and the case for moving to 2P (proved + probable) – or, better still, a true P50 – now appears overwhelming.
Chris Skrebowski
The opinions expressed here are entirely those of Chris Skrebowski, Editor of Petroleum Review, and do not necessarily reflect the view of the EI.
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