Wall Street Jounal
June 27, 2007
Host Nations Escalate Demands on Oil Firms;
Exxon Mobil Corp. and ConocoPhillips are walking away from their multibillion-dollar investments in Venezuela, further evidence that the relationship between Western oil companies and oil-rich countries is more troubled than at any point since the 1970s.
The rising tension is forcing companies to choose whether to accept less control of investments and smaller returns in order to remain in countries with ample natural resources. That could have big implications for Western oil companies, which are having trouble tapping new reserves, as well as for global consumers and their growing thirst for oil.
The companies feel they won't get adequate value from the Venezuelan government, so they may pursue arbitration rulings that, even if favorable, mean a long wait for compensation. But the need to replace significant holdings could intensify exploration and result in new finds elsewhere, as happened after the last widespread purge of Western majors from developing nations.
Yesterday, Exxon and Conoco refused to join four other oil companies that signed over majority stakes in giant oil projects to Venezuela's state oil company. That company, Petróleos de Venezuela SA, or PdVSA, roughly doubled its stake in four major projects, with a combined value of $31 billion, to about 78%. Venezuela's energy grab parallels similar moves by Russia.
Conoco isn't throwing in the towel in Venezuela yet. By not signing a deal, the Houston company kept open the option of pursuing compensation through arbitration. Exxon declined to say if would consider arbitration. Western companies successfully used the tactic after Libya nationalized its oil fields in the early 1970s.
In recent months, amid intense regulatory pressure from the Kremlin, both BP PLC and Royal Dutch Shell PLC have ceded control in big, lucrative Siberian projects to Russian gas monopoly OAO Gazprom, essentially tightening the Kremlin's grip over that nation's vast energy reserves. Exxon is also beginning to face similar pressure at its big Sakhalin-1 natural-gas project in Siberia.
Amid surging demand for everything from energy to metals to foodstuffs, nations with abundant natural resources have begun to exercise their growing clout. They are revisiting contracts signed years ago when commodities prices were low and the same nations offered generous terms to attract Western investment. Recent high prices have emboldened these nations to seek more favorable terms and higher prices as they increasingly discard old contracts and dictate new terms of investment.
For the most part, Western oil companies have accepted the new terms. The old contracts enabled today's windfall profits, and companies could give back some of the upside and still earn good returns. Moreover, oil companies have relatively few options to move their investments elsewhere, since many of the best-known deposits of raw materials in stable, industrialized nations have already been tapped. But the new contracts, combined with higher taxes, steeper royalty rates and rising costs, are beginning to erode profitability.
To bolster output and keep investors happy, Western companies must find ways to address this growing political and economic clout while at the same time strike profitable terms and ensure steady supplies. As margins get squeezed, oil-rich nations in search of better terms run the risk of pushing too far. "Governments can overprice themselves," says Richard Gordon, an energy consultant in Overland Park, Kan., "and when they do, companies have to make some tough decisions."
One response is to move aggressively to find opportunities in politically stable nations. The wave of nationalization that swept the Middle East in the 1970s led to the development of the giant fields in Alaska and Europe's North Sea. Conoco pursued a similar path by creating a joint venture to tap Canada's heavy-oil deposits, which hold enormous reserves of oil but are expensive to produce.
"We expect restricted access to large energy resources and unstable fiscal and political regimes to force major oil companies to reshape their business strategies with increased focus on North America," says Fadel Gheit, an oil analyst at Oppenheimer & Co., in a research note.
Conoco isn't washing its hands of its assets in Venezuela, though it says it will take a $4.5 billion impairment charge in its second-quarter earnings. The company's assets there represent about 5% of its oil-and-gas equivalent production last year. Exxon's Venezuelan assets are about 1% of its overall output for 2006.
Conoco shares fell $2.24, or 2.87%, to $75.80 in New York Stock Exchange trading yesterday, while Exxon's slipped 55 cents, or 0.67%, to $81.82 on the Big Board.
However, even if a Conoco arbitration claim is successful, it could be years before the company gets any money. Still, Venezuela has considerable international assets that Conoco could attach. These include PdVSA's ownership of Citgo Petroleum Corp. -- which has several valuable refineries in the U.S. -- and of tankers full of crude oil landing in ports along the Gulf Coast and elsewhere. A Citgo spokesman declined to comment.
If the companies prevail, says James Loftis, chairman of the international dispute-resolution practice at law firm Vinson & Elkins LLC, Venezuela's assets are vulnerable because it has an export-oriented economy. "These awards will be enforceable because Venezuela will have to export goods in order to survive....Sovereign immunity will make it more difficult to collect, but I don't think given the reality of their economy it will make it impossible."
BP won an arbitration case against Libya in the 1970s after the North African nation nationalized, and chased tankers of Libyan crude around the world to seize them as payment. Within the past year, Western companies that purchased debt for unpaid for construction work in the Congo have tried to seize tankers of Congolese oil to satisfy arbitration awards.
The situation in Venezuela remains murky. Energy Minister Rafael Ramirez said Exxon and Conoco will lose their stakes in the oil fields altogether. Irving, Texas-based Exxon said it would continue discussions "with the Venezuelan government on a way forward."
Other Western companies agreed to new deals for their oil ventures in the Orinoco River region. France's Total SA agreed to lower its stake in the Sincor project to 30.3% from 47%. Norway's Statoil ASA's stake in Sincor will be reduced to 9.7% from 15%. Chevron Corp. of San Ramon, Calif., will retain its 30% stake in the Hamaca project, but wouldn't offer any additional details. Britain's BP also came to terms as well. Chevron and Total have significant investments in offshore Venezuelan gas fields that are unaffected by the new terms.
Exxon is simultaneously facing pressure in Russia. Gazprom Deputy Chief Executive Alexander Medvedev yesterday said an Exxon-led consortium's plan to export gas from its Sakhalin project to China was unrealistic and should be coordinated with Gazprom's plans for the region.
Russia last year turned Gazprom into a formal export monopoly for its gas industry. An Exxon spokeswoman said the company is in talks with Gazprom on alternative plans, and is keeping its options open.
The move against the Sakhalin-1 project comes as Moscow has targeted several deals struck in the 1990s, when Western oil companies secured a number of lucrative deals amid low global energy prices and near anarchy in Russia.
Gazprom has already taken control of two of the largest energy projects in Russia's eastern regions against a background of intense regulatory pressure on their former owners, albeit with deals that were still acceptable to the Western companies involved. Last week, it agreed to buy a 63% stake in east Siberian gas field Kovykta from BP's Russian joint venture, and in December it bought a controlling stake in Sakhalin Energy, operator of a project named Sakhalin-2.
Indeed, Russia and Venezuela are among the leading proponents of taking greater control of natural resources. Generally, the terms offered by Venezuela are somewhat worse than those offered by Russia, which may help explain why oil companies are pushing back harder against one than the other.
Geoffrey T. Smith and John M. Biers contributed to this article.