Reopening the door to foreign oil Companies
Just over a year ago, Venezuela’s President Hugo Chavez announced that he would nationalize his country’s oil industry, closing the door on foreign control of Venezuela’s oilfields. Bolivia had done the same the year before. But as the price of oil continues to climb dramatically and unconventional oil and gas sources increase in importance, some resource-rich but cash-poor countries are quietly reopening their doors and inviting international investors to come in. They need the technologies that foreign investors have.
Oil and natural gas resources are evolving, says Scott Tinker, director of the Bureau of Economic Geology at the Jackson School of Geosciences, University of Texas at Austin. “There’s a neat thing going on. Over one-third of natural gas [in the United States] comes from unconventional sources, and it’s climbing, while conventional is declining overall,” Tinker says. “So we’re building a whole different natural gas resource, and the world’s starting to follow that.” Other unconventional resources — such as heavy oil, oil shale, natural gas liquefaction, gas or coal to liquids and biofuels — are on the rise too. “International oil companies are moving into those areas because that’s where the molecules are,” he says.
But getting to those resources requires new drilling and other technologies, both onshore and offshore, such as “turnizontal” drilling, which involves turning the direction of a well both laterally and vertically, and hydraulic fracturing, Tinker says. “What the big oil companies have to offer is systems management, integrated solutions and experience of large offshore technologies,” he says. When it comes to unconventional plays and new techniques, “the learning curve is steep and expensive, so these partnerships make good sense.”
In response to both rising oil prices and resources that are becoming more challenging to access, some countries are actively seeking such partnerships. This year, Indonesia, a member of OPEC since 1962 and the only Asia-Pacific member, pulled out of the organization of oil producers. The move was the result of the country’s shift in 2005 from being a net oil exporter to a net oil importer. And as an importer, the high price of oil was hitting Indonesia hard. The government took other steps too: It normally subsidizes oil, but when prices hit $130 a barrel in May, the government was forced to raise fuel prices by almost a third.
To reduce its dependence on foreign oil, Indonesia is therefore opening its borders to foreign investors to develop a different resource — coalbed methane, the natural gas trapped within seams of coal. Indonesia possesses an estimated 453 trillion cubic feet of coalbed methane resources, primarily in South Sumatra. Since November, the country has tried to lure foreign contractors to come in and develop this vast resource, by offering them a 45 percent share — rather than the usual 30 to 35 percent — of the natural gas production.
Meanwhile, Mexico, which nationalized its oil industry in 1938, is currently locked in a fierce internal debate about whether to open up to private investors — a move that Mexico’s President Felipe Calderón supports, but many Mexicans don’t. “Mexico has tremendous offshore potential,” as well as onshore, Tinker says. Its oil export revenues are vital to the economy, but they have declined dramatically in recent years, he says. “They need expertise and experience.” In return, he says, “[international] companies need not just to be paid but to have some component of ownership.”
But in some countries — including Mexico and resource-rich Russia — that ownership is precisely the rub. Russia’s energy industry is key to its modern economy: The country experienced an oil boom in the early 2000s, with its rich oilfields in western Siberia, but recent economic forecasts suggest that Russian oil production will begin to taper off by 2010 if no new fields are developed. So in May, the country proposed $4 billion in mineral extraction tax cuts to boost investment in its oil industry, a nod to complaints from industry executives that high taxes — intended to keep strong national control over its resources — are slowing investment. More tax cuts may be on the way, Russian analysts say.
Russia has played push-pull with foreign investors, however. The government recently approved draft legislation that, while not directly prohibiting foreign participation in development of its resources, places restrictions on Russian companies that have significant foreign investment.
That might deter some companies from investing in Russia, but others may still see an opportunity to make a profit, says Robert Ebel, a senior advisor on energy and security issues at the Center for Strategic and International Studies in Washington, D.C. “People are a little reticent about going into Russia today. It’s been pretty rough going for the international oil companies for the last couple of years,” he says. “Russia says, ‘come in and bring money and we’ll be in charge.’”
Even in countries more open to foreign investment, there may be significant risks. Iraq, for example, has invited back major oil companies with the expectation that modern technology and expertise will give its oil production a much-needed boost. And on June 30, four major oil companies — ExxonMobil, Shell, Total and BP — and several smaller companies signed short-term no-bid contracts to service Iraq’s oilfields. Those contracts are meant to lay the groundwork for future investment; but with Iraq’s ongoing safety and logistical difficulties, “it’s going to take time,” Ebel says.
Other countries, such as Angola, are also looking for investors, Ebel says, but oil companies have to ask themselves whether the conditions will allow for a reasonable profit. “That’s one of the major risks.”
Given the technical realities, fewer countries may be able to nationalize their industries. “Any sovereign nation is free to nationalize,” Ebel says. But outside of South America, he says, “I don’t see much of that going on right now.” The tide may not be exactly turning toward denationalization either, and the political risks make investment tricky, he says. “Oil companies have to make a profit for their shareholders, and have to make sure the deals are seen in their favor. If they think they can make it and overcome the risks, they’ll go ahead.”