MOSCOW Sep 21, 2006 (Dow Jones Newswires from the Wall Street Journal)
Oil-producing nations demanding contract concessions or seeking outright expropriations have created a split in the petroleum industry, with some companies insisting a contract is a contract and others saying they are willing to renegotiate some terms to reflect higher oil prices.
Oil companies have pushed back as developing countries have asked for a bigger share of what they regard as windfall profits from contracts negotiated during the days of $10-to-$20-a-barrel oil in the late 1990s. But senior executives of Chevron Corp. and France's Total SA last week publicly said that they are ready to consider giving more of the profits to the countries.
Royal Dutch Shell PLC and Exxon Mobil Corp. are among the companies still adhering to the tough public posture toward changes in contract terms. They are rejecting suggestions by Moscow that they alter early 1990s contracts under which they obtained rights to natural-gas fields in Russia's Far East. This week, Russia raised the pressure by revoking an environmental permit for Shell, threatening to halt the project.
It isn't clear whether the tough-guy or nice-guy approach will prevail, though both present significant risks. Ripping up agreements to give a bigger cut to oil-producing nations will hurt companies' bottom lines. But if oil companies don't comply and get booted out of oil fields, the impact could be bigger still.
Four years ago, Chevron, of San Ramon, Calif., temporarily shut down its Tengiz oil field in Kazakhstan rather than accede to what it called an attempt to violate the "sanctity" of the contract by the government levying hundreds of millions of dollars in new taxes. Chevron eventually agreed to pay $810 million in new taxes, but it fought the measure for several months and never acknowledged it had effectively agreed to altered contract terms.
Last week, Chevron Chief Executive David O'Reilly, addressing the issue of greater demands for renegotiation, told the Organization of Petroleum Exporting Countries, "it is natural that governments seek a greater share of the economic pie in good times." He added: "However, it is very important that changes be carefully considered in the light of increasing costs, more sophisticated technology and the inevitability of a cyclical downturn in prices at some time in the future."
In another speech at the OPEC meeting, Christophe de Margerie, president of exploration and production at Total and its designated future CEO, said: "At $70 oil, there is room for renegotiation. But we have to be careful that it's a real negotiation and not new fiscal terms imposed on us."
Developing countries haven't been the only ones making demands. Last December, Britain raised taxes on North Sea oil and gas to 50% from 40%. And Congress has had hearings on boosting royalties from oil companies drilling in federally owned waters in the Gulf of Mexico.
The greatest pressure is coming from the developing countries. In a report issued Monday, Standard & Poor's Corp. cited six countries that have unilaterally increased royalties and taxes on oil revenue and profit this year. "In the end, what can the companies really do?" John Thieroff, the author of the report, said in an interview. "At the end of the day, you pay the taxes."
In April, Ecuador passed a law requiring oil companies to give back half their oil revenue above a benchmark price contained in their original contracts. Algeria is imposing a windfall tax on companies and now also wants its state-owned company to take a central role in oil and gas developments. Chad wants a 60% stake in oil deals. Venezuela, which has led the charge for concessions, has been raising taxes and royalties, and it is also requiring oil companies to give majority control of their fields to the state-owned oil company. Italy's Eni SpA and Total, which balked at the demand, have seen their fields in that country confiscated.
In Russia, the hardest-hit so far has been Shell's $20 billion project, known as Sakhalin-II. The Anglo-Dutch company has said environmental issues raised in the dispute don't constitute legal grounds for nullification of permits. Russian officials had said they wouldn't take unilateral moves in the Shell and Exxon cases, but they suggested the companies voluntarily subject themselves to Russia's regular tax system, which analysts say would take a bigger chunk of profits. Yesterday, Russia's Ministry of Natural Resources said it is considering canceling the license for Total's Kharyaga production-sharing agreement, claiming the field hasn't been adequately developed.
Exxon's project also has faced increased scrutiny from environmental regulators. Exxon, of Irving, Texas, has said that if it has to back out of the field, it would send the wrong signal to the market.
Copyright (c) 2006 Dow Jones & Company, Inc.
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