The major International Oil Companies, IOCs, ― Royal Dutch Shell, BP, ExxonMobil, Chevron, Total, ENI and Statoil ― have seen a marked decline in fortune over the past few years. During the late 1960s for example, the group held more than four-fifths of global crude oil reserves; currently, their share is less than one-sixth. In addition, the group has over the past decade and half, grappled with growth challenges, to wit, profitability and reserves addition. The recent dip in crude oil prices to multi-year troughs has only added to such challenges.
Two principal issues, in the main have driven the change in fortunes:
- Resource Nationalism
Major IOCs operating in oil-rich countries have over the past few years been required by host governments to cede greater proportions of assets and, or production proceeds. In 1979 for example, Nigeria under the leadership of General Olusegun Obasanjo, nationalized the British oil company BP; the action was consistent with the country’s policy of economic nationalism and afro-centric liberation. In Venezuela, assets belonging to ExxonMobil and ConocoPhillips were expropriated in 2007 for their failure to restructure in accordance with the provisions of President Hugo Chávez’s “21st Century Socialism”; Chevron and BP among others relinquished majority shares in their Venezuelan projects. Though there was some financial compensation for the requisitioning, the impact on these IOCs was substantial.
With the expropriation of the group’s assets came the establishment of wholly-owned National Oil Companies, NOCs, in which acreages and other petroleum assets were vested. These assets, in addition to seemingly limitless state-funding without the restrictive shareholder accountability, set up these NOCs as formidable competitors. Some of the NOCs such as Brazil’s Petrobras and Columbia’s Ecopetrol have since listed in stock exchanges, having restructured and boasting high operational efficiencies as well as cutting-edge technological proficiencies.
2. Spiraling Costs
Access by IOCs to production acreages in these oil-rich countries, has largely been through Production Sharing Contracts, PSCs, and Joint Venture Agreements, JVAs, and at very high costs. Production Sharing Contracts in general, require the IOCs to bear exploration ― even where there are no discoveries ― and production costs and then share production proceeds with host countries if and when discoveries are made. However, such proceeds often come under very steep, royalty and other tax regimes sometimes as high as 80% to 90%; and since they are on a sliding scale, usually indexed to oil prices, rising global crude oil prices offer no relief to the IOCs.
Joint Venture Agreements have become rare. A recent licensing round for Iraq’s massive onshore oil acreages was for service contracts; one of the winning bids, a partnership between Royal Dutch Shell and Petronas was for a mere US$1.39 per barrel of marginal production increase, to the great delight of the host government. Continue reading