Oil Market: The Good, The Bad and The Ugly

In the oil game, you've got countries and companies playing together on the same playing field. The countries need the companies'expertise and investment to pull the oil out of the ground, and the companies need access to that oil. In the fine art of negotiation, the oil companies used to have the upper hand, but times they have been a-changing, and more countries are flexing their power ... for good and for ill.

The Good

Recently, Saudi Arabia started hiring more security forces for its oil fields. In fact, they are planning to take their existing force of 5,000 and grow it to 35,000 within the next few years. It seems that they are getting a little nervous the stability in the region and feel the need to make some changes before something happens - or fear grows that something will happen. Fear, remember, can move markets sometimes more effectively than news. Since Saudi Arabia is the largest oil exporter, a successful attack on their oil fields could send the world oil market into a panic - a failed attack back in February 2006 bumped prices up $2 a barrel. Saudi Arabia is trying to secure its position as "the ultimate guarantor of oil stability," and while it might costs a bit more money, generally speaking, the world will stand back and applaud.

The Bad?

We've written about it before ... the recent upheaval in Venezuela's oil fields resulted in Exxon and Conoco leaving the country rather than try to deal with a government that decided it would be better served by owning more of the profits from its natural resources. From the people's point of view, they are probably right - Venezuela can use the money to help its people, or to spread around the world in Chavez' unique form of largesse. But for the companies on the other side of the transaction, or for companies contemplating investments, it was the epitome of a country using strong arm tactics to negotiate a better deal. And that puts long-term downward pressure on new investments in promising (but politically tenuous) regions.

The Ugly?

In the latest development of the "its our oil and we'll change the terms if we want to" game, Eni was ordered by Kazakhstan to stop work on the Kashagan oilfield, reportedly due to "environmental violations." On one hand, enforcing environmental rules is all good and warm fuzzy feeling producing, especially in these days of An Inconvenient Truth. But were those same violations given a blind eye before because the government wanted Eni's initial investment in the oilfields? And now that the project is experiencing cost overruns and long delays, does the government sees a way to follow Russia's lead and make a better deal for itself? Russia "negotiated" to boost its share of profits from key energy fields from ten percent to forty percent. Are the Kazaks thinking about green politics, or green petrodollars.

In the end, it doesn't really matter. Kazakhstan is using the bargaining power available to it. Some would call it a form of blackmail, others, business. But it does raise the question for the oil companies. As oil prices continued to rise and companies are forced to look in unstable countries for natural resources, are they going to be facing more and more of this type of negotiating tactic? And will that crimp development down the road? Ultimately, oil is about how much oil we can get out of the ground ... not how much oil is there in the first place. And that process of extraction is looking a bit more unstable these days in many parts of the world.

Kazakhstan Orders Eni to Halt Work on Biggest Field (Update 4) Bloomberg.com August 27, 2007

Saudis set up force to guard oil plants FT.com August 27, 2007 0:300