Nigeria currently holds the world’s tenth largest reserves of crude oil and is the fifth highest supplier to the United States. She also boasts the world’s seventh largest natural gas deposits. The country is currently a battleground of sorts in a contest that has pitched International Oil Companies, IOCs, against a Chinese National Oil Company, NOC, for a significant proportion of Nigeria’s 36 billion-barrel crude oil reserves.

A Petroleum Industry Bill, currently before the country’s legislature is the first major restructuring of the country’s (hitherto notoriously inefficient and corruption-laden) oil and gas sector in decades. The bill among other items provides for an increased take by the Federal Government, from companies’ production proceeds, a situation that the IOCs have decried as economically asphyxiating. The timing for the bill could not have been more inauspicious for the IOCs and for four reasons: First, most of the IOC-held oil mining licences are currently up for renewal. Secondly, over the past ten years, major IOCs have seen increasing difficulty to profitable discovery and production of crude oil. Third, the recent economic recession has even more significantly reduced their earnings, with recovery rather precarious. Finally, CNOOC, a Chinese NOC (one of two or three, currently flaunting intimidating financial arsenal) has dramatically raised the stakes by offering as much as US$50 billion for a significant portion of Nigeria’s reserves (including some of those licences due for renewal); an offer that has left many of the operating IOCs griping.

While the Federal Government of Nigeria is unlikely to grant CNOOC all its requests, that company’s offer has strengthened Nigeria’s hand in her negotiations with IOCs, trumping the cavalier attitude of many. ExxonMobil is reportedly paying as much as US$600 million for a 20-year renewal of licences for three oil blocks (currently producing 580,000 barrels per day) which the company has operated for about four decades. Chevron and Royal Dutch Shell (the latter had sought restraining orders from the courts on the Nigerian government with regard to some of the company’s assets pending the determination of a substantive suit) are reportedly, still negotiating with the government. Uncertainties about the precise content, as well as passage prospects, of the Petroleum Industry Bill, have also led some IOCs to moot the sale of some of their oil assests. However, the Nigerian government, perhaps in an oblique warning to such other IOCs, has declared that Royal Dutch Shell has no right to sell jointly held assests without her prior consent.

These essentially typify the worldwide challenges that the major IOCs currently face. With about 70% of global crude oil reserves only about three decades ago, they have seen that value slashed by a full order of magnitude. Global petroleum exploration and production is moving into the more (financially, geologically and technologically) challenging regimes and countries with the largest reserves are increasingly domiciling (or nationalizing) them while exacting steep returns from producing companies. In the recently concluded oil licensing round in Iraq for example, companies bid for service (rather than production sharing) contracts or outright concessions. The result is that the Iraqi government, while retaining control of the oilfields, will pay producing companies between US$1.15 and US$1.40 per barrel of crude oil produced above current levels of production; these comparatively low values are attributed to the keen competition among the forty odd companies that bid for the licences. Three of the largest U.S. IOCs were essentially absent in the bid round, reportedly for financial and strategic reasons: ExxonMobil, due to low payment rates offered by Iraq, Chevron due to perceived risks and ConocoPhilips due to recent cost-cutting measures.

In contrast, National Oil Companies such as CNPC (China), Petronas (Malaysia), Sonangol (Angola), Gazprom (Russia) and Norway’s state-controlled Statoil were very successful. The oilfields were one of the last, largely untapped, cheaply and easily exploitable reserves.

Nigeria’s bid to increase her proved reserves to well above 40 billion barrels by the year 2010 suffered serious setbacks chiefly from militant insurgency in the Niger Delta region, the country’s dominant petroleum-producing province; but a presidential amnesty and rehabilitation program for the militants is creating a gradual return to normalcy. It is estimated that Nigeria has earned more than US$450 billion in proceeds from crude oil, but she still lacks adequate infrastructure in such areas as power, water supply, healthcare, education among others; in addition more than five inhabitants out of ten live on less than a dollar a day. The opacity in the country’s oil and gas sector has not only short-changed the nation (particularly the citizens of the oil-producing regions), but has bred a festering rash of wealthy, cultic goons malevolently bearing over it. With crude oil accounting for more than 90% of the country’s foreign exchange earnings, a swift and thorough restructuring of the oil and gas sector would be necessary for any meaningful national development.

Iraq currently boasts the world’s third-largest proven reserves of conventional crude oil, behind Iran and Saudi Arabia. Figure 1 shows countries with the largest crude oil reserves. If Canada’s tar sands were factored in, then Iraq would be edged into fourth place. Oil and gas data for Iraq, however date back more than three decades, long before the technological improvements that have transformed the oil and gas industry. The implication then is that the figures for the country’s recoverable reserves are most likely, significantly higher than previously reckoned. This may have informed the bids entered by companies in the second Iraqi oil block auction, which was held last week.

The auction for ten oil service contracts (as distinct from outright concessions or production sharing contracts) was a testament of sorts, to the increasing dominance of National Oil Companies, NOCs in the global oil and gas sector. West Qurna Phase 2, the largest oilfield (about 12.9 billion barrels) offered by the Iraqi government at the licensing round was won by the Russian privately held company, Lukoil in association with Statoil, Norway’s state-controlled oil company. This was closely followed by the Majnoon (about 12.6 billion barrels) field won by Royal Dutch Shell (45%) in association with Petronas (30%), the Malaysian NOC. The Halfaya field (about 4.1 billion barrels) was won by a consortium led by the Chinese NOC, CNPC in association with Malaysia’s NOC, Petronas and the major, Total (the Iraqi government took up the balance). Petronas won the bid for the Garraf (about 863 million barrels) field in association with Japex. Sonangol, the Angolan NOC won bids for the Najmah (about 800 million barrels) and Qaiyarah (about 858 million barrels) fields. Even the smaller field Badra (about 109 million barrels), was won by a partnership of four NOCs.

In all, Petronas and Sonangol were involved in five successful bids. Only three European International Oil Companies, IOCs, were successful, while no U.S. IOC was successful. Angola, on the southwest coast of Africa recently joined the Organization of the Petroleum Exporting Countries, OPEC and has since ramped up her production. The country’s offshore fields are part of the massive Atlantic petroleum provinces of Africa. China’s NOC entered the most bids by any company and won two majority stakes while two Russian companies (the NOC Gazprom and the privately held Lukoil) were successful.

The auction provided for the Iraqi government to pay the companies a bid amount for each barrel of crude oil produced by the companies above current production levels. The comparatively low bid values entered by the companies were indicative of the keenness of the competition. For example, the winning bid by the Royal Dutch Shell and Petronas partnership (which pledged to raise production to 1.8 million barrels per day, bpd, from the current 46,000 bpd) for the Majnoon field was US$1.39 per barrel, well below a delighted Iraqi Oil Ministry’s expectation. That for the Halfaya field entered by the CNPC consortium was US$1.40 per barrel. The latter pledged to raise production from the current 3,000 bpd to 535,000 bpd.

In a previous post, l discussed the challenges facing International Oil Companies. Essentially, in addition to the increasing difficulty to profitable discovery and production of crude oil, they face increasing threats from NOCs. For example, the Chinese NOCs, bolstered by an intimidating financial war chest (often procured on more favorable terms than IOCs can), lower operating costs (in terms of labor and materials) and the leverage of state (which can confer the ability to operate even in the world’s high-risk zones, and that, without shareholders’ scrutiny) are increasingly unassailable. Other NOCs (and many of them with very large, state oil and gas reserves domiciled with them) are not too far behind.

Many of the IOCs such as Royal Dutch Shell, BP and ConocoPhilips have recently reduced staff strength and spun off assests in initial cost-cutting and restructuring measures. Synergies in partnerships (such as these) with NOCs also offer IOCs avenues for viability in the face of fierce competition. A partnership between BP and the Chinese NOC, CNPC for example, for the development of the Rumaila field (Iraq’s largest, with about 17 billion barrels), was the only successful bid in Iraq’s first licensing round which held in June. Mergers and acquisitions (such as the recent acquisition by ExxonMobil, of XTO Energy) may be next. The said recent acquisition may provoke a series of M&A activity involving major IOCs and shale gas companies. The not-too-good news is that questions remain about the viability of shale gas though technological advances may just do the trick. In a related development, Royal Dutch Shell reportedly reached agreement with the Republic of South Africa to carryout a preliminary study on a prospective hydrocarbon field in the Karoo Basin, which will grant the company exclusive exploration rights to the field, believed to be a natural gas field.

Current natural gas inventories in the U.S. are still high, while the price regimes are not at their best. With high levels of financial exposure by some of the shale gas companies, ExxonMobil, with a much larger financial war chest and reputable research and development facilities, may be better placed (than these smaller shale gas companies) to develop the shale gas technology and perhaps extend to foreign shale formations.

Iraq’s second, postwar, oil licensing round was widely believed to be successful. Many oil companies keenly vied for one of the world’s largest, largely unexploited, easily accessible and cheaply exploitable crude oil reserves remaining. The process is expected to boost the country’s production capacity to more than 11 million bpd from the current 2.4 million bpd within ten years; and this could top the dominant Saudi Arabia. Since Iraq is also an OPEC member, what adjustment this would necessitate among OPEC members’ production, remains to be seen. Such substantial addition to global production may also significantly moderate prices subject of course to geopolitical considerations.

That said, it is “not yet Uhuru” for Iraq’s oil and gas sector. For example, these contracts still have to be ratified, and that, probably after next year’s elections. All parties to the auction remain cautiously optimistic that a new regime would respect the contracts and not nullify them.

In addition, several hotly disputed fields such as those in the Kurdish areas remain flash points, while fields such as the massive (eight-billion barrel) East Baghdad situated in politically unstable and terrorism-prone areas were largely avoided.

Even where bids have been successfully held, the sheer size of production, distribution, finishing and exportation infrastructure remains a challenge; but these are of less concern than political instability.

One of the most crucial tools for making proper investment decisions is access to relevant analytical data. When such data are withheld or inappropriately manipulated, investment interests may be impaired. While such acts are not new, a sampling of three recent reports is informative:

First is the case of natural gas exploitation from the shale formations (Barnett, Haynesville, Marcellus, etc) of the United States. A lot of investment capital has been ploughed into these projects but just as investors braced for a “shale gas explosion”, some analysts raised concerns about the viability of the plays. For example, there have been concerns about the environmental impact of hydraulic fracturing or “fracing” (the extractive technolgy for shale gas) and more worrisome, the reported, steep rates of production decline (due perhaps to associated, high pressure gradients). The analysts claim that shale gas numbers may not add up and that producers have not been forthcoming with vital production data. One of the shale gas sceptics, energy consultant Arthur Berman, is reportedly no longer published in the U.S. trade journal, World Oil, because of his strident and public dissent. The journal’s publisher reportedly said that Berman had been there for a year and it was time for him to move on. There have been (and expectedly so), investment concerns about the real cost, as well as the actual growth rate, of shale gas production.

Secondly, a substantial proportion of corporate, institutional and private investment capital has been (and is still being) channelled into the development of climate-change technologies as well as economies; and this for sustainable global development. It is estimated that about US$10.5 trillion worth of additional investment is needed between now and the year 2030 to set the world on a low-carbon development path, a target at which the current global meeting in Copenhagen aims. The recent allegations of data manipulation (or “hoaxing”) by researhers to bolster the argument for anthropogenic climate-change must therefore be unnerving for just about any investor. Climate-change dissenters (or sceptics) are arguing that the series of leaked e-mail correspondences at the Climate Research Unit, CRU, of the University of East Anglia, United Kingdom, provide evidence of collusion among some scientists to foist climate change on the world and suppress data to the contrary. While research data from CRU reportedly corroborate those from the other acclaimed research centers (namely, National Aeronautics and Space Administration, NASA, and National Oceanic and Atmospheric Administration, NOAA, both in the United States), parts of the leaked e-mails are quite suggestive; even if technical explanations as well as the truth behind them have been adduced.

Finally, just last month, it was revealed by a whistleblower that has since left the Paris-based International Energy Agency, that the United States exerted undue influence on the agency to underplay rates of production decline in extant oilfields while overplaying prospects of discovery of new reserves. While this has been denied, it does raise issues of credibility.

One rather curious observation about some victims of the Bernie Madoff scandal was that quite a number of them occupied very senior levels in major financial institutions around the world especially the United States. The implication then is that they were certainly capable of subjecting most of those fraudulent schemes to proper financial scrutiny. Many of them rather, relied on the advice of a “credible” colleague that relied on that of another, that relied on another that… According to Professor Sydney Finkelstein of Dartmouth’s Tuck Business School, such inappropriate attachment often conduces to business failure.

During the oil price shock of 2008, oil prices were spiralling higher while the market was well-supplied with crude oil; in other words the strident price rally was against market fundamentals. There was a handful of analysts that warned of the unsustainability (and subsequent crash) of those prices; but their warnings were largely drowned out in mainstream media reportage that seemed to be hooked on a decidedly “credible” majority opinion. The subsequent global economic slump must rank as one of the most devastating in decades and from which many economies are still trying to crawl out.