Cobalt: Aggressive Governments Unexpected Obstacle

Joseph Bryant, chief executive of Cobalt International Energy LP, doesn't buy the below ground version of peak oil - a theory that global crude production has entered a period of unstoppable decline.

But as the head of a two-year-old exploration company looking to acquire its first leases outside the U.S., he knows all about how politics above the surface can get in the way.

As an example, Bryant offered up a recent auction in the Congo basin. Several blocks were up for relicensing, in a region where Cobalt is looking to gain a foothold. But the Houston-based firm, backed by Goldman Sachs Group Inc. (GS), the Carlyle Group LP (CAY.XX) and Riverstone Holdings Ltd. (AP4.SG), was shut out from the get-go by a $3 billion entry fee into the bidding process.

"You had to pay the government simply to have the right to explore (a bid)," Bryant said in an interview during the Cambridge Energy Research Associates annual conference in Houston. "There are things, not just in West Africa, that looked attractive two years ago that are not attractive now."

Record oil prices have emboldened resource-rich countries to seize the upper hand when negotiating the entry of foreign companies, or in some cases, to renegotiate existing deals. Combined with the ever-present threat of disruption from war, surface politics invariably trump declining reserves as the greatest threat to supply, said John Watson, president of International Exploration and Production at Chevron Corp. (CVX), speaking at the conference.

West Africa has become one of the biggest battlegrounds between companies and countries, as impoverished nations with little energy infrastructure seek to exploit massive offshore oil reserves for the first time.

Cobalt recently acquired 10-year leases on 24 blocks in the Gulf of Mexico, but is looking to balance that low-risk, high-tech acquisition with leases off the coast of Africa, somewhere between the Niger Delta and Namibia. Those blocks would be cheaper to explore, but fraught with potential political issues with local governments.

The less favorable lease terms offered by foreign governments worldwide took Bryant by surprise. But Cobalt is considering diving in anyway off the coast of Equatorial Guinea - a country that as recently as last fall sought to reduce the share of production foreign companies receive on oil in its waters.

Bryant wouldn't comment on the bidding process there. But of foreign governments in general, he said he understood why the above-ground situation had shaped up the way it had. "They do it because they can," he said.

West Africa's Promise, Risk

Chevron's chief economist Edgard Habib said energy producers were naturally acting in their own national interest but that this presents challenges for private oil companies. "The question is, how does that impact our investments?"

He said many oil producers, including those in the Middle East, depend economically on a single commodity. "That renders oil a very political commodity, even aside from war premiums and political disruptions," he said. "Resource nationalism is an issue today across the board, not just in the energy sector."

Venezuela and Russia have garnered perhaps the most attention for their attempts to toughen contracts with foreign investors, but they're by no means alone. In Equatorial Guinea, where production has increased over the last decade from 5,000 barrels a day to 385,000 barrels a day, the government passed a law in November mandating a 20% share in future production for the state. Past developments set aside only 5%.

Angola, another oil giant in the making, moved in December to join the Organization of Petroleum Exporting Countries, just as that group was looking to reassert its influence over world oil prices.

Nigeria, the most established of West African oil producers, is battling corruption at the national level and militant attacks in the Niger Delta. A presidential election in February has a high potential to disrupt oil production, said James Burkhard managing director of CERA's global oil group, speaking at the conference.

"Over the past couple years there's an unmistakable trend for (national oil companies) to overreach," Bryant said.

And yet, international companies continue to invest. The potential rewards are that great, especially in relatively unexplored regions such as West Africa, Bryant said.

"We're looking for the next great thing, where (other companies) have not bid up the price ... only the Gulf of Mexico and West Africa at the end of the day" fit that description, he said.

Copyright (c) 2007 Dow Jones & Company, Inc.