Memo to US, Canadian, and other Western nations’ oil and gas producers: Russia and Caspian Basin nations are renegotiating agreements with stricter terms. Production-sharing agreements with incentives to attract outside investment in exchange for assuming certain initial risks are rapidly becoming history. But the deals are still better than in the Middle East.
“Russia is phasing out PSAs, and in Kazakhstan a PSA for Kashagan, one of its biggest fields, has been reopened for negotiation,” said Ariel Cohen, an energy security analyst, last month at the Center for Strategic and International Studies. “Some Western companies may not like what is happening. But with oil prices close to $90/bbl, we cannot afford to ignore any major producing basin.”
With about 80% of the world’s remaining reserves held by government-owned companies, the relationship between resource-rich nations and outside exploration and development partners has changed.
Clearer agreements
Future agreements will have to be clearer than they have been, said Cohen, a senior research fellow at the Heritage Foundation.
“Parties will have to be more specific about costs and recovery mechanisms, about tax regimes, and about relationships between government leaders and energy projects. Leaders now are becoming involved at the highest level,” he said.
Kazakhstan, he said, apparently grew unhappy with Eni’s performance as Kashagan operator as cost estimates rose two-and-a-half times and initial production was delayed until 2010. The government is seeking a bigger share and, possibly, a new operator.
Russia has taken a harder line with its outside partners because it apparently believes it has enough resources and financing, Cohen said. Central Asian governments are likelier to seek technology agreements, “but it’s a shifting landscape.”
He said he hopes those countries’ leaders “don’t put all their geopolitical eggs in one basket,” although it appears inevitable they’ll be pressured by their larger neighbors to do just that.
Multinational oil companies and large service and supply firms still have marketing, financial, and technical advantages. But Cohen warned that without coordinated national policies they’ll continue “to try to beat each other to the next barrel.
‘Don’t over-promise’
“To these companies, I say: Please don’t over-promise. If a project will take 7 years to develop, please don’t say it will take 5 and hope you can talk your way out of it. This will simply hasten tighter control by government-owned companies of the world’s remaining resources,” he said.
Western companies also should recognize that government representatives might be more than they appear, Cohen said. “The Russian sitting across the table might be a venture capitalist, internal security agent, and crime syndicate member simultaneously. The Russians apparently are comfortable with this,” he said.
“Companies need to recognize that their employees have to understand government relations. There have been instances where blue-chip companies placed production engineers in charge and wound up with egg on their faces.”
