Big Oil Companies Could Lose Out on Exploration Deals

The role of “big oil” companies such as Exxon Mobil (NYSE:XOM) in oil and gas exploration is coming under increasing pressure, according to Oxford Analytica.

International oil companies [IOCs] offer technological expertise, operational capacity and project management as core strengths in striking oil and gas deals.  However, they are finding it increasingly difficult to provide a value proposition that is acceptable to the owners of natural resources and in terms of shareholder return, OxAn says. Despite record oil prices and rising levels of capital expenditure, the overall trend in both oil and gas production from the oil majors is down.

In IOCs Face Increasing NOC Challenge, OxAn says national oil companies‘ technological and overall operational capacity has increased substantially in the last decade. Oil services companies are also able to expand more easily into state-controlled oil and gas sectors. Their business models are based on service provision rather than asset ownership and hydrocarbon production. In August, Schlumberger  (NYSE: SLB) agreed a deal with Enafor, the exploration subsidiary of state-owned Algerian oil and gas company Sonatrach. In other cases, NOCs have successfully developed their own technology, the most notable example being Brazilian state oil company Petrobras’s leadership in deepwater drilling.

It is becoming increasingly difficult for IOCs to provide a value proposition, unless it is for the most technologically complex resources. Where relatively easy prospects are on offer, the level of competition between IOCs themselves and between IOCs and NOCs is fierce, as in Libya. Where political, security and other risk factors are the main barriers to investment, NOCs often have the edge, as their investment criteria are less commercially driven. IOCs can offer value most effectively where NOCs have very low operational and technological capacity — for example in West Africa — or where they retain a significant technological edge, for example in deepwater, or other harsh environments.

Competition from increasingly expert NOCs is pushing IOCs towards the most technologically challenging prospects. This is likely to put further pressure on costs over the next decade.

OxAn ays that even in areas where IOCs can clearly add value, deals can be hard to broker on acceptable terms:

•    In Mexico, state oil company Pemex faces rapid rates of decline in its onshore fields but lacks the technological ability to exploit its potentially rich offshore. For the moment at least, it is proving impossible to change the constitution to allow the participation of foreign firms in the country’s hydrocarbon sector.

•    In Iran, the country’s state-owned oil and gas companies have no access to LNG liquefaction technology, and have failed to entice any partners that might have provided it to develop the giant South Pars gas field, owing to UN and US sanctions against the country.

•    In Russia, StatoilHydro (NYSE: STO) and Total (NYSE: TOT) have been accepted as partners with Gazprom to develop the giant Shtokman offshore gas field, which will include the construction of a 7.5 million metric tonnes per year LNG liquefaction plant. Gazprom is also looking to Japanese companies for support, not in the upstream but in downstream and gas chemical projects. These cooperative projects reflect Gazprom’s need for technological expertise in certain areas, but also the fact that it will likely use the experience to become increasingly independent in the future.

Comments

[Alex Filonov:]

This is a part of oil cycle. When oil goes down in price, NOCs will have no option but invite IOCs back. Or governments will be forced to accept IOCs participation. Happened before, will happen again.

2008 Sep 11 03:25 PM

[Paul Killinger:]

With the exception of the Saudis (who have more oil and money than God), NOC's are a dismal joke (with the possible exception of Brazil, which has so far had the sense to utilize the expertise of the IOC's).

Russia, Venezula, Iran, et al, are all sacrificing efficient energy development in the name of propping up their socialist political regimes.

We're lucky we haven't done that here (so far!). But don't take my word for it. The U.S. now has 100+ years of NG reserves after Jimmy Carter told us we'd run out!

2008 Sep 12 12:07 PM