Big Oil Is Getting Pushed Around

Exxon Mobil's biggest competitor in the quest for oil reserves is not BP or Royal Dutch Shell. It is the governments of China, South Korea and India.

Chevron and Exxon Mobil lost an auction for Nigeria's most promising oil and gas fields last year to companies controlled by South Korea. In Venezuela, Royal Dutch Shell's bid to develop an offshore gas deposit collapsed when Brazil's state oil company stepped in.

The world's biggest publicly traded oil producers are losing reserves to state-run companies willing to pay higher prices for energy needed to fuel growing economies. Petroleo Brasileiro, Cnooc of China and Oil & Natural Gas of India have all bought reserves in the past year.

State-controlled oil companies represent "unpredictable competition," said David Pursell, an analyst at Pickering Energy Partners in Houston. "All of a sudden, Cnooc shows up. What's their cost of capital? I don't know. What's their strategy? I don't know."

The increasing competition for oil and gas fields is driving up costs, hurting corporate profits, while bolstering crude oil prices by inflating the cost of production. In the early 1990s, less rivalry for fields existed because countries like China produced more oil than they consumed and prices were lower.

Last year, Chevron bought Unocal for $17.8 billion, $1.4 billion more than initially planned, after Cnooc made a counterbid. Cnooc at one point offered $18.5 billion for California-based Unocal, which holds reserves in Thailand, Indonesia and Myanmar.

Unocal shareholders accepted Chevron's lower offer after the U.S. Congress threatened to block Cnooc's bid.

Demand for reserves is helping to lift prices for oil and gas. Crude oil in New York is around $67 a barrel, more than three times the average of about $20 during the 1990s. New York natural gas is around $8 per million British thermal units, four times the average of about $2 during the 1990s.

More than half the oil and gas reserves that changed hands since 2003, through corporate acquisitions or the sale of drilling rights, went to state-owned companies, BP's chief executive, John Browne, said in a speech in Singapore in November.

"Energy is an issue of national security in which governments, and the state companies that they have established, are likely to be involved for a long time," Browne said.

National oil companies did about 15 major transactions outside of their borders last year, up from two in 2000, said Saad Rahim, an analyst at PFC Energy in Washington. The state companies are a "new breed of competitor" that are driving prices higher and squeezing returns on international projects, Morgan Stanley's oil analysts said in a report in November.

Oil industry participants say government-controlled companies will continue to increase in importance.

Rebuffed in the United States, Cnooc last month paid $2.3 billion for a stake in a Nigerian oil field. Another state-controlled company, China National Petroleum, in October acquired PetroKazakhstan for about $4 billion

Buying PetroKazakhstan, based in Calgary, Alberta, gave the Chinese control of about 12 percent of the petroleum production in Kazakhstan. The price per barrel China National paid was about double the price in transactions earlier last year.

Oil output is rising in Kazakhstan, which has about 3 percent of the world's proven reserves.

Nigeria's top oil official, Edmund Daukoru, has said that ties between governments are a legitimate part of the process of selecting partners to develop energy projects. He spoke last August after Korea National Oil won the auction of offshore oil and gas development rights with an investment package that included promises for power plants and railways.

Nigeria has a right to choose an investment package that will foster "good economic relations, government to government, with another country that promises to do major infrastructure projects," Daukoru said.

Korea Electric Power said in a filing to the Korean Stock Exchange in October that its part of the Nigerian package would be $571 million, and it put the total at $5.3 billion for all the companies involved.

"Having some kind of political alignment between nations and their oil companies is bringing a distinct competitive advantage," John Knight, senior vice president of international business development and acquisitions at Norway's state-owned Statoil, said in an interview. "That advantage will not be going to the stateless multinationals."

While Statoil is run more like a private company than an arm of the Norwegian government, its ties to the state can help, Knight said. For example, the company is on the short list to work with Gazprom of Russia to develop its massive Shtokman gas field near the Arctic.

When Shell's negotiations with Venezuela to develop the Mariscal Sucre offshore gas field faltered in November 2004, the company played down the possibility that a competitor would step in. Company officials said Venezuela would have to sweeten the terms for development because the gas will primarily go to a domestic market where prices are regulated.

Brazil's state oil company is now Venezuela's partner on the project, an arrangement cemented by ties between the presidents of the two nations. The plan to have Petroleo Brasileiro drill the prospect was announced at a joint appearance by President Hugo Chavez of Venezuela and Luiz Inacio Lula da Silva of Brazil.

"State companies winning deals because of government-to- government interaction has become a rule rather than an exception," said Arjuna Mahendran, chief economist and strategist at Credit Suisse Private Banking in Singapore. "This will increase competition for multinational companies in acquiring oil and gas assets."

(C) 2006 International Herald Tribune. via ProQuest Information and Learning Company; All Rights Reserved

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