Major Oil Cos Eye Chance with Nationals

NEW YORK (Dow Jones Newswires), Mar. 23, 2009

Low energy prices are making some oil companies ripe for the picking by bigger rivals, but the large international oil companies are signaling they would rather knock on the door of state firms weakened by the oil bust.

Chief executives of Exxon Mobil Corp., Chevron Corp. and BP PLC have recently played down the idea of corporate mergers and said they might do better by partnering with state-owned companies struggling to meet capital needs.

While such efforts have been rebuffed in the past due to a surge of nationalism fueled by high commodity prices, the drastic drop in oil prices may force some national oil companies to reconsider.

"Given the need these countries have for investment, the need they have for technology, the need they have to keep their economy going, this is the time they need companies like ours more than ever," Chevron Chief Executive David O'Reilly said at the company's recent analyst meeting.

A Changing Relationship

The economic downturn and oil prices, which have fallen below $50 a barrel from all-time highs above $147 last summer, have hit the finances of oil exporters from Russia to Venezuela. Many state-owned energy firms are running out of cash.

Meanwhile, last year's oil boom has left international oil companies flush with money and poised for acquisitions, which some analysts have said could take the shape of the 1990s mega-mergers that resulted in the likes of modern-day BP, Chevron and Exxon Mobil.

Although these companies are much larger than ever, all have trouble increasing production and reserves in the dwindling oil provinces they control. Thus, major oil company executives are finding it more appealing to strengthen ties with national oil companies, which own the vast majority of the world's untapped resources, than to buy private companies facing similar challenges.

BP Chief Executive Tony Hayward recently told reporters that the industrial logic for consolidation among the international oil companies isn't compelling. He said putting BP and Shell together won't add anything to the resource base; it will just make the challenge twice as big.

Exxon Mobil CEO Rex Tillerson echoed that view last week, saying the oil giant is open to opportunities, but it won't buy a company with a decreasing resource base.

Tillerson, speaking at the company's annual analyst meeting, also pointed out Exxon Mobil's desire to replicate its success with state-owned Qatar Petroleum in Qatar, where the Texas firm operates huge liquefied natural gas projects. Exxon's success there is rooted in the stability of the country, which, unlike oil exporters such as Venezuela or Ecuador, didn't alter contract terms when commodity prices skyrocketed.

Other Areas Of Interest

Analysts say oil majors could infuse cash into state-run firms in exchange for resources. A partnership with Brazil is seen as a particularly good fit for Exxon Mobil, which is drilling wells in a promising offshore area where Petroleo Brasileiro SA, or Petrobras, has recently made significant discoveries.

Petrobras, which is state-run and publicly traded, has big capital needs. Brazil's government wants to develop offshore resources as soon as possible at a time when financing is tight and low oil prices have put a lid on the company's cash flow. Petrobras has so far been receptive to foreign investment, including recent deals that could lead to more concrete involvement by foreign companies in the future.

"Petrobras is always evaluating opportunities for partnerships in its diverse areas of operation," a company spokesman told Dow Jones Newswires in an email. Petrobras cited as an example a recent accord with China Development Bank and Sinopec that includes crude-oil sales and a possible financing package to develop an offshore oil field.

But there is some risk involved for foreign companies eyeing Brazil, with the government currently studying possible changes to oil laws that would give the state a larger stake in promising new reserves. Government officials, however, have repeatedly said current concession contracts would be maintained.

Another area of interest to the oil majors is Venezuela. The country is open again to foreign investment in its oil-rich Orinoco region almost two years after it changed the contract terms of international oil companies operating in the area, giving more control to its national oil company Petroleos de Venezuela SA, or PdVSA.

The company is facing difficult financial times since oil prices plummeted in late 2008. Eulogio Del Pino, PdVSA's vice president for production and exploration, said Wednesday the company may seek as much as $4 billion in financing this year as it adjusts its investment strategy and cuts costs.

Nonetheless, Oil Minister Rafael Ramirez insisted this week in Vienna that although oil-rich countries are aware of the need to increase production to secure global energy supply, they need to demand their right to manage and regulate access to their natural resources without restrictions.

Major oil companies may also court Iraq. There is a bill being considered to revive Iraq National Oil Co., which had been suspended under Saddam Hussein. Investment conditions in the country are still unclear, but as oil prices go down, Iraq is displaying a growing urgency to speed up the entry of foreign companies into its oil fields.

Iraq's oil minister Hussein al-Shahristani said Wednesday the country is considering production-sharing agreements for oil-exploration blocks. These agreements would allow oil companies to get a share of oil production in exchange for covering costs.

But when asked if lower oil prices gave more bargaining power to international oil companies in Iraq, Falah Alamri, Iraq's OPEC governor, said "not at all." He said Iraq is currently benefiting from higher demand for lower-quality oil, the type of crude the country produces, which is trading at a premium to light blends.

(Jeff Fick in Rio de Janeiro, Benoit Faucon in Vienna, and Raul Gallegos in Caracas contributed to this article.)  

Copyright (c) 2009 Dow Jones & Company, Inc.

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