International oil companies (IOCs) find themselves in new and complex relationships with their government-owned counterparts. As noted in the first part of this two-part series, national oil companies (NOCs) have gained regulatory and commercial influence from the combination of resource ownership and finances strengthened by elevated oil and gas prices. Many of them are using that influence to change terms of participation with IOCs and, in some cases, to become international competitors in their own right (OGJ, Mar. 26, 2007, p. 18).
Increasingly, IOCs work with NOCs as primary contractors on projects to provide technical and oil field management expertise as well as financing. They also compete with entrepreneurial NOCs-those that have been partly privatized and that, being run like commercial entities, have joined the global search for reserves and other assets.
In the future, IOCs and NOCs will collaborate and compete with each other on two fronts: The first is the international market, where NOCs can be competitors and sometimes collaborators with IOCs. The second is the country-specific market, where NOCs represent the state and where IOCs act more than before as contractors and partners and less as resource owners in developing host-country resources.
IOCs must plan for the unfair advantage NOCs receive from host-government backing. During the bidding war over Unocal, for instance, Chevron complained that China National Offshore Oil Corp. could offer more money because the Chinese government was helping finance the bid by providing low and no-interest loans.
There is no doubt that with NOCs controlling over three fourths of the word’s oil and gas resources, markets will become more politicized. Oil markets have been politicized for a long time, but the actions of groups such as the Organization of Petroleum Exporting Countries are constrained by the demand for oil and long-term supply responses to price.
Recently, gas markets have become increasingly politicized in response to European concern over energy security due to curtailments in supplies from Russia that appear politically motivated. Venezuela clearly would like to use oil as a political weapon and has been courting allies throughout South America with varied success.
Some NOCs are also moving down the supply chain, expanding downstream into refining, distribution, and retail, particularly in Europe and the US, to secure markets for their oil and gas and to provide insulation from upstream price volatility. Cases in point are Gazprom’s movement into European wholesale gas markets and the takeover of Getty service stations in the US by Lukoil. This provides greater competition to IOCs in traditional markets as they become increasingly squeezed in both production as well as downstream and in wholesale and retail markets.
IOC responses
IOCs are responding and adapting to the challenges laid down by NOCs in a number of ways. For example:
- IOCs are focusing exploration and production (E&P) activities in regions where they can operate outside NOC territory, such as the Gulf of Mexico, Australia, and in areas with favorable partners such as Africa.
- As their equity-share production declines, IOCs are changing their role from suppliers of energy to suppliers of technology. NOCs seek to collaborate with IOCs on projects that clearly need the IOCs’ technological and financial expertise.
- IOCs will need to continuously develop upstream and downstream technologies to remain valuable to NOCs as partners or contractors.
- IOCs will adjust their focus further down the supply chain and move more into downstream activities, building and expanding refineries and retail operations outside the US to capture wholesale and retail markets in Europe and Asia.
- IOCs will be involved in greater collaboration with NOCs and other commercial companies in downstream activities in order to increase global refinery capacity. This will reduce bottlenecks that have become apparent in some major consumer markets and are putting upward pressure on oil prices.
- IOCs will move from their traditional role as operators of oil and gas fields to oil-field managers and primary contractors for developing major projects. NOCs will tend to place greater reliance on IOC expertise in coordinating all aspects of complex project execution. IOCs may be expected to preselect traditional service companies, experts, local manpower, consultants, and miscellaneous service providers in order to provide end-to-end service on oil field development.
- IOCs and NOCs will have to work as partners in order to provide sustainable long-term development within the host country. This means IOCs will have to put much greater emphasis on understanding the long-term needs of NOCs. This may involve IOCs providing a supporting role for NOCs in maximizing the benefits for the country economy as well as optimizing resource development for the benefit of future generations.
Currently, IOCs’ equity stakes and, by extension, reserves replacement are the primary bases for market evaluation. As IOC roles change in response to NOC changes, however, Wall Street likely will consider other yardsticks. They may, for example, focus less on short-term revenue maximization and more on value creation for NOCs, long-term sustained partnerships with NOCs, and new technology development. These factors may become more important indicators of future profitability and sustained revenue growth for IOCs.
NOC strategies
Working less as equity owners and operators and more as partners and technology providers, IOCs will find familiarity with NOCs’ energy as well as economic needs increasingly important. Following are descriptions of the strategies of four of the most aggressive NOCs:
Gazprom
As the world’s largest integrated natural gas producer, reserves holder, and exporter, Gazprom explores for, produces, transports, processes, and markets gas in the Russian Federation and is a product of the Soviet-era, state-owned company of the same name. Gazprom was privatized in the mid-1990s, but the Russian government is still the largest shareholder, with 38%. The company has over 103 tcf of proved gas reserves and access to almost 1,200 tcf of potential gas resources. It produces about 19 tcf/year, almost 86% of Russia’s gas production and 20% of global gas production.
Gazprom’s goal is to complete its transformation from a Soviet-era gas monopoly to a world-class, international gas company able to compete globally. Its major goals are to:
- Develop new fields in Russia and Asia and new export routes to Europe and Asia via pipelines and LNG.
- Invest in downstream distribution, trading, and power assets in Europe and Asia.
- Realize greater value by raising gas prices to international norms.
Gazprom plans to improve production from existing fields and develop new fields on the Yamal Peninsula, on the shelf of the Arctic seas (Shtokman), and in East Siberia (Kovytka and Sakhalin-2).
Internationally, Gazprom is active in Central Asia, India, Vietnam, and Venezuela. The company also conducts European trading operations as a way to integrate its operations along the entire value chain. Gazprom has talked about entering the US market via LNG from Shtokman and Sakhalin-2. These plans appear to be on hold, given the slowdown in Shtokman development and the effort currently expended on selling Sakhalin LNG to China, Japan, and other Asian countries.
Central Asia is a point of major competition between Gazprom and IOCs over control of export routes. Gazprom’s preference is to exert market control by shipping Central Asian gas through Russia. IOCs are backing alternative routes through the Caspian Sea area to Turkey.
Most of Gazprom’s new developments must wait for major export pipelines or LNG facilities to be built, including:
- The Yamal-Europe gas pipeline, a 2,500-mile pipeline to Germany across Belarus and Poland, with a projected capacity of 1.2 tcf/year.
- The Nord Stream pipeline, [formerly called North-European Gas pipeline], a submerged pipeline that will cross the Baltic Sea from Vyborg to the German coast and possibly to the UK, with a projected capacity of 700 bcf-1 tcf/year.
- Central Asia-Center (CAC) gas transportation system delivering up to1.6 tcf/year from Central Asia to supplement Russian gas production in Russia, elsewhere in the Former Soviet Union, and China. This system was built during 1967-85 and needs upgrades. Gazprom currently is making direct investment in the system.
PDVSA
Petroleos de Venezuela SA (PDVSA) is the eighth largest oil producer in the world and is 100% owned by the Venezuelan government. It is also the third largest seller of crude and products to the US.
PDVSA is a classic state-owned oil company in the mold of Mexico’s Petroleos Mexicanos (Pemex) in that it has a dual business and social role. Revenues from PDVSA’s energy activities are reinvested in nonenergy sectors and in promoting Venezuelan government policy. Initiatives include construction of hydro and thermoelectric power plants, a new national airline, housing and infrastructure developments, agricultural development projects, education, and health care.
PDVSA also is making political rather than economic investments in the oil and gas infrastructure of Cuba. Consequently, like Pemex, PDVSA doesn’t generate enough revenue to cover needed oil and gas activities as well as meet its other obligations, and it increasingly will become a finance and technology seeker.
PDVSA has large downstream investments overseas, including refineries and service stations that serve as outlets for its oil production. Major investments include:
- Citgo-the American refining and distribution company 100% owned by PDVSA.
- Ruhr Oel GMBH-in which PDVSA controls 50% in association with Deutsche BP AG.
- AB Nynas Petroleum-in which PDVSA and Neste Corp. of Finland hold equal interests. The company runs refineries in Sweden, Belgium, and the UK.
- Isla Refinery-a 335,000 b/d PDVSA-affiliated refinery 36 miles north of Venezuela in Curacao, part of the Netherlands Antilles. Isla processes PDVSA heavy crude and exports products to American, Central American, and Caribbean markets.
- Bahamas Oil Refining Co. International Ltd. (BORCO).
A major thrust of PDVSA investments over the next several years is its “Oil Sowing Plan.” The plan includes six development projects and consists of two stages-one to be executed in 2005-12 and the other during 2012-30. PDVSA estimates an investment of $56 billion in the first phase, of which PDVSA will finance 70% and private investors, the balance.
PDVSA’s Oil Sowing Plan 2005-12 includes:
- Development of heavy-oil reserves in the Orinoco Belt.
- The Delta-Caribbean project to develop gas reserves on the Deltana Platforma off eastern Venezuela and in the Paraguana Peninsula in the northwest area of the country. The Deltana Platforma development would be linked to PDVSA’s joint venture with Petrobras to develop the Mariscal Sucre LNG export project.
- Increasing refining capacity to 700,000 b/d.
- Construction of domestic filling stations and oil and gas pipelines.
Venezuela’s efforts to nationalize four heavy oil projects in the Orinoco basin will give PDVSA a majority stake in the projects, and IOCs will have to relinquish their stake or stay on as minority partners. At the present time, the terms of the takeovers are being negotiated, but it is doubtful that IOCs will obtain the full value of their investment so far.
Petrobras
Petroleo Brasileiro SA (Petrobras) is a publicly traded, integrated oil and gas company and a leading player in Latin America’s oil and gas industry. The company was founded in 1953 as a government monopoly, although the government has since reduced its share of ownership to 32%. The Brazilian government is still the largest shareholder, and Petrobras continues to enjoy monopoly status in many aspects of Brazil’s oil and gas industry.
This entrepreneurial NOC is expanding internationally through large exploration and development ventures in the Gulf of Mexico, West Africa, and Latin America. Petrobras has become a technology leader and provider in deepwater operations and directional drilling, which it has applied successfully off Brazil and is now deploying in deep waters of the Gulf of Mexico and off West Africa.
Petrobras’s 2006-10 business plan allocates 87% of investment capital to the domestic market, including E&P ($28 billion); refining, processing, and retail ($12.9 billion); and gas pipelines and power generation.
Active in South America’s gas markets, Petrobras has new offshore finds and major investments in Bolivian and Argentine upstream gas assets and pipelines. Petrobras also has new upstream investments in most other Latin American countries, West Africa, Iran, and China.
In 2004, Petrobras acquired major deepwater exploration prospects in the Gulf of Mexico and has explored for deep gas in shallow water. In the gulf, Petrobras holds 36 million boe of reserves and produces 6,700 boe/d of oil and gas.
Earlier this year, Petrobras started production from its Cottonwood gas field in the Gulf of Mexico. Cottonwood represents Petrobras’s largest producing field in the US and is its first operated Gulf of Mexico deepwater field to achieve production.
In West Africa, Petrobras has deepwater projects off Angola and Nigeria where it has teamed with IOCs such as ConocoPhillips and Shell. Petrobras also operates in deep waters off Libya where it was successful in the first round of bids held by the Libyan NOC.
Statoil
Partially privatized Statoil of Norway has interests around the globe as well as in the Norwegian North Sea. The company conducts exploration, production, transportation, refining, and marketing.
Its international E&P activities include operations in or off the coasts of Azerbaijan, Algeria, Venezuela, Western Europe, Angola, and Nigeria. Russian Gazprom has recently shown interest in working with Statoil in developing Shtokman gas and condensate field in the Barents Sea.
Statoil is considered a leader in arctic offshore operations, subsea production technology, and deepwater LNG facilities. It developed its LNG expertise in the North Sea and with the Snøhvit liquefaction plant.
Statoil has several key operational objectives:
- Maintain oil production at 1 million b/d from the Norwegian continental shelf beyond 2010 through improved recovery in existing fields and exploration in the northern Norwegian North Sea and in the Barents Sea.
- Build up an international portfolio of prospects and producing fields, which will help the company achieve a long-term production growth rate of 2-4%/year in 2007-10.
- Double sales of natural gas to Europe to around 1.8 tcf/year by 2015 through investments in new fields and infrastructure. Statoil expects to supply European gas markets from several sources, including the North Sea, North Africa, and the Caspian Sea. Statoil also expects to supply US markets from the new Snøhvit LNG terminal, providing LNG to the Cove Point terminal.
- Use its comparative advantage in the development of offshore technologies to develop new projects in deep waters and LNG.
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