Archive for the ‘china’ Category

Global Crude Oil Prices: Why Volatility Is Likely to Endure

Crude oil, albeit in decreasing proportions, will likely remain significant in the global energy utilization mix for the next few years. The impact of the commodity’s price on the global economy is therefore palpable. The issue of peak oil is resurgent and  there are current concerns — even if somewhat mitigated — about an oil price shock.

Speculations were also rife in 2009 — amid the global economic decline — about an imminent crude oil price shock. The argument then was that the extant, low-price regimes constituted a disincentive to upstream capital expenditure (capex) and that when the global economy began to rebound, oil demand growth would vastly outstrip supply capacity. The International Energy Agency, IEA, even boldly projected a price shock by the year 2012, to wit this year.

Four points then are noteworthy:

Fundamentals

 First, current crude oil prices though high, do not derive from such fundamental imbalance. In a 2009 post, Oil Price Shocks and Market Fundamentals, l argued that even if there were an oil price shock in 2012, it would most likely hold no fundamental support. The IEA reports that oil stocks rose by about 1.2 million barrels per day, bpd, through 1Q 2012 even as supply by Organization of the Petroleum Exporting Countries, OPEC, went ahead of demand. Oil consumption by member-countries of the Organization for Economic Cooperation and Development, OECD, has been declining since 2005 (Figure 1) and growth is projected to remain largely flat through 2030.

In the United States, the world’s top oil consumer, Department of Energy data show that crude oil stocks have been on an upward trend and for the week of 13 April 2012 stood at a 35-week high, while consumption has been declining. Even in China, a major driver-country for global oil demand, Financial Times reports that consumption for December rose by only about 1% year-on-year, compared with the year-ago level of about 10%. The country’s demand growth for diesel for example has slowed and is projected to remain weak through 2Q as its construction, transportation and manufacturing industries pull back a bit. In addition, recent increases in official diesel prices have not helped demand. The Center for Global Energy Studies, CGES, has reported an increase in the country’s February 2012 oil imports to 5.9 million bpd, from 5.3 million bpd for year-ago levels; however such increase may well reflect a strategic inventory build-up in the light of declining supply from troubled and sanctions-buffeted Iran.

Both the United States and Russia have accounted for a significant proportion of the non-OPEC oil production. Between 2008 and 2011, U.S. total domestic oil production rose by about 19% to about 10.1 million bpd according to data from the country’s Department of Energy. CGES reports show aggregate Russian production at about 160,000 bpd above year-ago levels; the country which has become the world’s largest producer has been upping production levels.

Fiscal Breakeven Levels

Driven largely  by higher oil prices, oil-exporting countries in both the Middle East and North Africa (MENA) as well Sub-Saharan Africa regions are projected by the International Monetary Fund (IMF) to grow by 4.8% and 7.3% respectively in 2012. These countries accounted for nearly 60% of global oil exports in 2010. However, such growth has meant increased fiscal expenditure, requiring even higher crude oil prices for fiscal breakeven (Figure 2). Some of these countries for example put out billions of dollars as palliatives during the wave of regional unrest that led to the ouster of leaders such as Muammar Gaddafi of Libya.

High fiscal breakeven prices make major exporters reluctant to boost supply save for a spike in demand. While acknowledging the deleterious effects of, and the necessity for ameliorating very high oil prices, many of these exporters have also emplaced sliding tax scales which provide for higher effective rates at higher oil prices, a plausible disincentive for lowering of prices. However, oil production companies operating in such countries do not seem to do very badly: when oil prices are high, such companies often declare substantial profits even with high tax rates or reduced output. When opprobrium has been raised over oil price volatility, many of these countries have therefore received a significant share.

Spare production Capacity

The issue of spare production capacity has been of greater concern. Saudi Arabia is believed to hold about two-thirds of global, spare oil production capacity and its oil minister has boasted of the country’s capacity to pump an extra 2.5 million bpd into the market within four or so weeks. Over the past few years however, growth rate for global oil production has been largely flat  even as many analysts still question that Saudi claim especially in the event of any major supply disruption such as in the Strait of Hormuz; and with Saudi Arabia’s projected rise in domestic oil consumption as well as a reported pull back on the country’s plans for capacity expansion, such sentiments will likely sustain oil price volatility.

Speculative Trading

Analysts hold different views on the impact of the U.S. quantitative easing on dollar-denominated assets such as crude oil; or the effect of speculative trading on crude oil prices. However, it can be safely said that weaker dollar  values can translate to higher oil prices and large market influx of speculative investment can drive up prices. For example, during the oil price shock of 2008, oil prices were spiraling higher even when the market was well-supplied, an argument OPEC adduced in laying the blame for the shock on weak dollar values, rising inflation and a massive influx of speculative investment into the commodities market. 

According to Bloomberg Businessweek, speculative trading helped lift crude oil prices 30% in the last six months. It adds:

The amount of speculative money in the oil market hit a record high in mid-March, when money managers held a net long exposure to oil through 642,724 futures contracts. At 1,000 barrels per contract, that’s roughly equivalent to 643 million barrels of oil — more than the entire world uses in a week

Concerns about a major supply disruption — due for example to an armed Israel-Iran conflict or even a unilateral Iranian action in the Strait of Hormuz — may have added to unease in the oil market. Today it is Iran but tomorrow it could be Bahrain or Nigeria or even more nightmarishly, Saudi Arabia. The recent-weeks spikes in premiums for front-month gasoline contracts may well reflect that sentiment; and in the light of current geo-political or other considerations, such sentiments are unlikely to disappear any time soon.

 

 

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Renewable Energy: Gradually Coming of Age

The 17th Session of the Conference of Parties (COP 17) to the United Nations Framework Convention on Climate Change (UNFCCC) is currently holding in Durban, South Africa. It aims to agree on a successor to the Kyoto protocol which expires next year. A recent report by the International Energy Agency (IEA) reinforces the urgent need for that agreement. According to the IEA, if the world is to stand a better chance of keeping the rise in global temperature below 2o C — and therefore avoid the deleterious effects of climate change — it must maintain a (universally-accepted) carbon emission ceiling of less than 450 parts per million, ppm; however, many scientists maintain that significantly lower values are more realistic.  With the current, global, carbon-emissions trajectory, that ceiling will be breached by 2017, due principally to fossil fuels. Fossil fuels account for more than 70% of global electricity generation and as a result, electricity accounts for about 40% of energy-related carbon dioxide emissions.

A rapid increase in renewable or “clean” energy’s proportion of the global energy mix therefore becomes imperative. Global investment in clean energy has grown at a compound annual rate of 29% since the year 2004, to more than US$1 trillion, Bloomberg New Energy Finance reports.

China which leads the world, spent US$54.4bn in 2010 according to Pew Charitable Trusts. The country, which currently derives more than 92% of its primary energy consumption from fossil fuels, has set a target of 15% share for clean energy in its energy mix by the year 2020; this is almost quadruple ExxonMobil’s projection of a 4% share for renewable energy in the global energy mix by the year 2040. BusinessGreen, in a recent publication, reports that, “The IEA predicts China’s electricity demand will grow by an average of four per cent per year to reach 9,000 terawatt hours (TWh) by 2035, which represents a tripling of its 2009 demand and equates to 18 times that of France.”

Of the world’s largest wind energy and solar energy companies by capacity, three and seven respectively are Chinese. Chinese entry into the sector has bred steep competition, driving down equipment costs. Bolstered by lower equipment costs as well as vast improvements in technological and operational processes, production economics for some subsectors of the renewable energy industry is already at par with coal, nuclear and natural gas in some locations and will most likely attain global parity in the very near future. According to Bloomberg New Energy Finance for example, wind energy produced by the average wind farm will be at price parity with natural gas by the year 2016, just about five years away.

Growth of the renewable energy industry has not come without challenges which in recent times have stemmed principally from the industry’s own success story: a rapid capacity expansion which, with falling demand — due to the global economic decline — has led to a large supply overhang. The case of Solyndra, a recently-bankrupt manufacturer of solar energy components in the United States is typical. The effects can be collateral. For example, some manufacturers of batteries for electric vehicles also became insolvent when demand for particular vehicle lines slipped due to the global economic decline. There are also concerns that First Solar, one of the world’s largest solar companies may be under viability pressures following the earnings downgrade just a few weeks ago.

Some commentators have derided the state subsidies extended to the renewable energy sector; it is noteworthy however, that in  2007 for example, fossil fuel subsidy in the United States was more than three times that for renewable energy, according to the Energy Information Administration (EIA). Even large corporations such as those in the financial and automotive sectors, have been beneficiaries of massive government financial assistance. In addition, complaints about the whirring of wind turbines in residential areas for example, pale in comparison to outcries over incidents such as the infamous Macondo well explosion or the despicable degradation of the Niger Delta environment, all associated with fossil fuels production.

Growth in renewable energy is expected to be driven by government policies especially among the Organization for Economic Cooperation and Development (OECD) countries. In addition, a global economic rebound is expected to see an uptick in numbers of the more efficient electric and hybrid vehicles at the expense of standard gasoline- or diesel-powered ones.

All said, while fossil fuels will most likely remain the dominant form of energy consumed over the next few years, renewables will take increasing proportions of that consumption.

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Three Reasons Why Crude Oil Prices Will Stay High

Global crude oil prices have risen significantly since the beginning of the year, largely driven by the unrest in the Middle East and North Africa (MENA) region. Brent prices for example, rose by more than 21% between the beginning of the year and the end of March; but with the seeming adaptation by markets to the risks associated with the unrest, as well as the recent advice issued by Goldman Sachs to its clients to sell their investments in oil, investment decisions have focused on a possible crude oil price collapse and its implication for oil stocks.

Fundamentals

The MENA unrest has undoubtedly added to recent global crude oil prices but it is worth noting that the latter were already on an upward trend since 2009 (See Figure 1 below), bolstered largely by strong emerging market demand in a rebounding (even if sluggish) global economy.

However, recent spikes such as the thirty-month highs seen about a fortnight ago may reflect more of a risk premium than any fundamental tightening since there were, and currently are no near-term shortfalls in supply projections. About the same period for example, Energy Intelligence reported that global crude oil production exceeded demand by about 500,000 barrels per day, bpd; and last week, the Saudi Oil Minister revealed that the country’s crude oil production for the month of March fell by 833,000 bpd from February’s production levels due to lower demand.  Though the International Energy Agency, IEA, in its latest report held that growth in global oil consumption for 1Q’11 dropped to 2.6% from the 4.1% recorded in 4Q’10, that may be set to change; the second quarter typically sees an uptick in crude oil demand even as refineries return from maintenance.

Outlook

That said, high crude oil prices boosted energy stocks during the first quarter of the year. The Energy sector at S&P for example, showed better than threefold return over the market average (See Figure 2 below).

Though there may be dips or corrections, crude oil prices would probably remain high and for three reasons:

First, emerging market demand has been a strong driver for oil prices in recent years and even when the economies of China and India declined in 2008 for example, their total petroleum consumption increased. Oil demand in many of the emerging economies is driven in the main, by subsidies, which, given their rather low socio-political flashpoints may not be removed anytime soon; and that raises fears of inflation. China, in an attempt to curb inflation recently increased banks’ reserve ratios by 50 basis points to 20.5% but only allowed domestic fuel prices to rise by a smaller rate (5%) than the rate of increase (14%) for its reference crude oil basket. These may not translate to any significant reduction in the country’s oil consumption though the longer-term sustainability of these subsidies remains to be determined.

In spite of rising oil prices, the Asian Development Bank expects a growth in the region’s economy, of 7.8% and 7.7% for 2011 and 2012 respectively. According to Financial Times, while European crude oil demand for February was largely flat, that for Asia was up 5.9% (China’s up 9.6%) and that for the U.S. up 2.9% (possibly rising higher in the summer or driving months).

Secondly, despite pockets of problem zones, the global economy is seemingly set for growth, and with it crude oil demand, even if in the medium-term. The International Monetary Fund, IMF, in a recent report for example, expected global economic growth for 2011 to be 4.4%. In addition, the Organization for Economic Co-operation and Development estimated the annualized 1H’11 growth rate for its G7 member-countries (exclusive of Japan) to be 3%. However, a major oil price shock, especially if sustained, would most probably end all such growth prospects. Current crude oil price levels inevitably draw comparisons with the record values of 2008. Energy Information Administration (EIA) data show that in 2008, average prices for Brent and West Texas Intermediate (WTI) crude oil grades were US$96.94 per barrel and US$99.64 per barrel respectively; for 1Q’11, the values were US$104.96 for Brent and US$93.54 for WTI.

Finally, quite a few members of the group, Organization of the Petroleum Exporting Countries, OPEC, have embarked on various elaborate short- to medium-term projects which require certain oil price levels to break even. Estimates for these levels range from US$79 per barrel to US$92 per barrel and would be significant factors in setting target crude oil prices. This is compounded by the group’s rising domestic oil consumption profiles which, if sustained, would amount to between 35% and 40% of its total production in a little more than a decade. The consequent reduction in available export volumes would further tighten global supply, putting upward pressures on prices.

 

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Big Oil: In Dire Need Of A Survival Strategy

Integrated International Oil Companies, IOCs, have over the last decade grappled with increased difficulty to reserves addition and profitability. For some, shareholder returns have been worrisomely skewed towards share buy-backs. In comparison for example, the non-Integrated or Independent Oil Companies have delivered much higher capital growth from smaller base: according to the energy consulting firm PFC Energy, the Independents showed an average value growth of 18% (Year-on-Year) in 2010 compared with just 4% for Big Oil. NOVATEK, the Russian Independent for example had a 94% share price increase in 2010.

While the Independents may be asking questions about Big Oil’s business model, the greater threat has come from their state-controlled counterparts, Integrated National Oil Companies, NOCs. According to PFC Energy rankings, of the ten largest Integrated Oil and Gas Companies by market capitalization at the end of 2010, five were NOCs and two of them among the top three. At the end of 2004, only two NOCs were ranked among the top ten. At Petrobras, Brazil’s NOC, for example, market capitalization grew by a 27% compound annual rate to raise the company from 27th position in 1999 to its current 3rd position in PFC’s rankings. In terms of share price gains, figures for the six largest NOCs outstripped those of the six super majors in each of the last five years, except 2008 (Figure 1 below); in 2006 it was by a multiple of about two and half, in 2007 about five, in 2009 about ten and in 2010 that multiple was about two.

In terms of structure, size and scope, NOCs are steadily transforming into super IOCs of sorts, threatening the positions of major IOCs as we know them today. This rising dominance rests in the main, on three planks:

1. Reserves

Petroleum reserves are fundamental to any oil and gas company’s operations and such company’s ability to grow reserves often defines its viability. Among petroleum-rich countries, these reserves have seen increasing domiciliation and quite often through their respective NOCs. At the end of the year 2009 for example, the proved reserves (in terms of barrels of oil equivalent) held by just two NOCs, were more than six times the combined value for the six super majors; in addition, the Saudi Arabian NOC, Saudi Aramco, alone in 2009, produced more oil than ExxonMobil, Royal Dutch Shell and BP combined.

For IOCs, access to these reserves has largely been through Production Sharing Contracts (PSCs) and Service Contracts (SCs). Many PSCs on one hand, require the IOCs to bear exploration and production costs (including those for dry wells); when discoveries are made however, proceeds come under very steep, local royalty and tax regimes. In petroleum-rich Nigeria for example, provisions of the Petroleum Industry Bill currently pending in the country’s legislature, left some IOCs threatening to exit the country’s oil and gas sector, if their demands were not met — that may just be good news to the Chinese NOCs which have been angling to get in. SCs on the other hand, provide for a fixed amount payable to the IOCs for a unit of production; in some Middle East countries that value is a little more than US$1 per barrel of oil while in others oil and gas activity is restricted to petrochemicals.

2. Capital

Capital expenditure (capex) is fundamental to the growth of any company in the oil and gas industry. From their onset, most NOCs had easy access to large national treasuries and for many, expenditure was not subject to any legislative oversight nor was any external accounting scrutiny permitted. In addition, such funds were obtained under much more liberal terms than markets could offer; while this bred a lot of corruption, the comparative advantage over IOCs was enormous.

This comparative advantage persists and constitutes a solid plank on which their rising dominance over IOCs rests. While for some NOCs it is still business as usual, a few have undergone remarkable transformation (as discussed below). The latter have been able to attract more public capital investment to fund their massive expansion projects. According to a study by Evaluate Energy, capital expenditure by NOCs increased by a massive 131% between the years 2005 and 2009, compared to just 59% for the seven largest IOCs. Capex by NOCs was more than twice that of Big oil in 2009 and the study expects this trend to continue. In addition, NOCs raised US$108 billion for capex just between June and November of 2010. In Mergers and Acquisitions (M&A), NOCs have also been dominant; according to Platts, NOCs outspent the majors by US$16 billion in 2010 gaining significant entry into the U.S. and Canada. Such capital outlays have enabled them to make quite extensive inroads to projects that were hitherto dominated by IOCs. For example, during many of the oil-block licensing rounds held around the world (particularly Iraq’s second licensing round), NOCs and even Independents have come out winners.

The challenge for Big oil is that even with their capex, return on investment has in the main, been much lower than for example that for the Independents as well as many NOCs.

3. Management and Technology

On the upside, the increasingly tight fiscal regimes in which IOCs have been forced to operate, has led to the development of advanced management and technological systems to optimize and drive their industry-wide processes. But some NOCs are either in step or arguably one step ahead. Petrobras, for example is in the vanguard of cutting edge ultra deep-water production technologies. The company operates some of the world’s largest oil platforms and has successfully drilled wells much deeper than the ill-fated Macondo well. Statoil, Norway’s state-controlled NOC also holds widely acknowledged deep-water technological expertise.

A few years ago, reference to NOCs often conjured images of oil-drenched institutions presided over by rash, despotic kleptomaniacs. Well, yes there are a few left (and no prizes for correct answers), but while many have realized the need for — and are in the process of — restructuring, some have completely restructured. They have undergone significant reorganizations employing total quality management principles among others. Transparency and accountability have been introduced and political environments tweaked to allow for investor friendliness; and these have made for favorable stock listings. Asian NOCs have held significant share offerings, cashing in on the appeal of Asian stocks. KNOC, South Korea’s NOC, for example has planned significant upgrade and expansion. Ecopetrol, Columbia’s state-controlled NOC, has since undergone reorganization and just announced a 4Q10 net profit increase of 47%, Financial Times has reported; its share price gain (Y-o-Y) for 2010 was 77%, the second-highest among the top 50 energy companies, according to PFC Energy rankings. Petrobras also announced a 38% net profit increase to US$6.4bn for 4Q10. Petrobras’ share offering  of about US$70bn in September of 2010 was a record.

Much of the technological advancement by NOCs has been by joint ventures, acquisitions and adaptation. Targets have included companies with unconventional and deep-water production expertise among others. The Chinese NOCs armed with a large financial war chest have been at the fore, and often at a premium. Recently in unconventionals for example, Reuters reports that the almost US$11,000 per acre paid by CNOOC for the Chesapeake’s Eagle Ford acreage was higher than Wall Street’s expectation of US$10,000 per acre. Chinese NOCs have also targeted oil sands players such as Suncor Energy and Cenovus as well as Seadrill, the Norway-listed deep-water operator. The fact that production from some of the Chinese acquisitions is sold and not repatriated, strengthens the argument that technology acquisition, increased global profile and economic returns are the main drivers for their positions.

The potential tie-up between Independents and NOCs portends a lethal body blow for Big Oil. Independents have shown much greater efficiency than Big Oil in both upstream Exploration and Production (E&P) and downstream Refining and Marketing (R&M) subsectors.  In addition, the planned acquisition by some NOCs, of deep-water operating companies will hasten their complete transformation into super IOCs.

Finally, one of the more powerful operational tools employed by some NOCs, has been the leverage of state which has enabled them to operate in high-risk areas such as Sudan among others.

For Big Oil then, while these challenges are certainly “life-threatening”, there may be some lifelines available and these shall be discussed in a subsequent post.

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National Oil Companies: The Challenges Ahead

National Oil Companies, NOCs, are seemingly set to define the future of global crude oil supply (and therefore price) levels. Major International Oil Companies, IOCs, have over the past decade, witnessed an increasing difficulty to profitable reserves growth and most have resorted to a series of staff rationalization and divestment. The recourse to severely challenging prospects such as some in the Gulf of Mexico, is a response to dwindling access to acreages especially in the reserves-rich but unstable or less agreeable regions. Revised regulations arising from the recent explosion on a rig operated by the oil major BP in the Gulf of Mexico, may add to deep offshore production costs.

NOCs, however, with easy access to state funds on terms that are more favorable than for the IOCs, as well the increasing domiciliation of national reserves with them, have shown rising dominance in the global oil and gas industry. For example, according to PFC energy, in the 2009 financial year, NOCs outperformed IOCs, having gained an average of 66% in market value compared with 1% for the six largest IOCs. In addition, a Chinese NOC became the world’s largest energy company by market capitalization.

That said, most of these NOCs face in the main, three, broad challenges, even if in varied degrees:

State Interference

First is the excessive meddling by their respective states. The recent history of Petróleos de Venezuela S.A., PDVSA, which manages that country’s petroleum resources, is informative. A 2002 strike by the employees of the company, protesting the country’s leadership style resulted in the dismissal of thousands of them (including highly rated professionals) amid reports of torture. The company subsequently became an instrument of president Hugo Chávez’s “21st Century Socialism”. The latter involved nationalization of companies in the petroleum, electricity and communications sectors as well as massive wage hikes and other ambitious projects funded from proceeds of an inappropriately managed petroleum sector. With severely reduced revenues (crude oil accounted for about 90% of export earnings in 2008), a series of crises ― spiraling inflation, successive currency devaluations, acute power and water shortages, political turmoil, etc ― rendered the country nearly dysfunctional.

Prior to the submission in 2008, of a Petroleum Industry Bill to her legislature, transactions in Nigeria’s crises-ridden oil and gas sector were notoriously opaque, seemingly shrouded in cultic secrecy. The bill, which is still pending, is expected to usher in a regime of transparency to the industry and a complete reorganization of the state-owned company, the Nigerian National Petroleum Corporation, NNPC, which largely manages the country’s petroleum resources. However, records of the country’s petroleum proceeds have been the subject of much contention. For example, the Central Bank of Nigeria would render its own account, as would the Ministry of Finance, the Revenue Mobilization and Fiscal Commission and the NNPC, each at variance with the others. Inability of previous regimes to account for significant proportions of these proceeds, as well the accusations of inequitable distribution of wealth have been sources of internal strife, especially recently in the Niger Delta region, where some correlation was seen between oil production breaches and global crude oil prices. With total crude oil proceeds estimated at nearly US$600 billion, about 6 out of 10 people in Nigeria live on less than a dollar a day, only about 4 out of 10 have access to adequate electricity, less than 5 out of 10 have pipe-borne water, infant mortality is high and educational standards are poor.

By contrast, a few NOCs such as Malaysia’s Petronas, Brazil’s Petrobras and the parastatals, Statoil of Norway and Sonangol of Angola have fared much better. For example, at Petronas an internationally respected CEO that put in fifteen years was strident about the company’s autonomy and accounting standards. He is credited with keeping the company’s finances from state incursion and leading the company to global prominence with a significant proportion of its reserves held internationally. The company was successful in various bids in the recently concluded second bidding round for Iraq’s massive fields as was Sonangol.

Development Funds

Second, is the ability to generate the requisite funds for the massively, capital-intensive projects, especially with state revenues dipping in the wake of a global economic slump. Perceived risks associated with a restrictive investment environment, often impede capital inflow. The case with Iran is particularly informative. According to the U.S. Energy Information Administration, EIA, Iran is the world’s fourth highest producer of conventional crude oil and holds the world’s third largest reserves. If the country’s political past has been unfavorable to the influx of international investment, the current regime of international sanctions is asphyxiating both her oil and gas industry and her economy. (For example, Iran has to import 30% to 40% of her domestic gasoline needs.) It is crippling the country’s efforts at a much-touted program for a twenty percent increase in domestic crude oil production – necessary for addressing both the surging domestic energy demand and foreign exchange requirements.

In Russia, licences for the development of the country’s sorely-needed offshore fields have been effectively limited to two companies (and both are NOCs, Gazprom and Rosneft), but the capex capability of these companies may be grossly inadequate for proper development of the fields. The country’s natural resources ministry has made proposals for attracting foreign investment for development of the country’s fields. The minister, according to Platts, recently said, “The amount of money that the two companies (Rosneft and Gazprom) have been investing today in the development and exploration of offshore fields is not enough to develop them within any real time frame”. Development of strategic reserves in Russia has been limited largely to companies in which the Russian stake exceeds 50%, but the grueling experience of the oil major BP with the Russian company TNK remains a source of concern for many a foreign investor.

Nigeria’s NNPC has also had problems fulfilling its cash call obligations in its joint venture with major IOCs, a situation that stalled various production projects.

In contrast, Petronas was able to attract stakes from large U.S. asset managers, despite the company’s involvement with crude oil projects in Sudan, a country widely condemned for grave human rights abuses.

Chinese integrated energy companies however, currently do not share others’ cash flow problems. With an intimidating financial war chest, they have “forcefully invaded” the Atlantic petroleum provinces of Africa, Canada’s tar sands projects, Australia’s mines as well as those of South Africa and parts of South America; in most of these cases, threatening the hitherto dominance of the majors. Such has been China’s influence that a mere report of domestic financial tightening would send currencies and crude oil prices on a downward slide, even if that drive has tempered somewhat.

Technology

Finally, there are technological deficits to be addressed. Major IOCs, with decades of activity in the full spectrum of oil and gas operations in just about every part of the globe, have developed efficient and specialized technologies for various exploitation processes. Exploration and production activities, for example, are fast moving to the more (geologically, financially and technologically) challenging, ultra-deep offshore regimes and apart from a few (such as Statoil and Petrobras), NOCs generally lag major IOCs in the requisite technologies. Such gaps however, are set to narrow significantly, and rather quickly too. In collaborative synergies (which were also seen in Iraq’s second oil licensing round), NOCs and IOCs have been forming consortia for exploiting both offshore and onshore oil and gas fields around the world: NOCs generally boast vast domestic reserves as well as lower operating (mainly personnel and materiél) costs while IOCs (really struggling to grow reserves) are happy to provide the requisite technological processes. For example, the recent set of agreements between Chevron and Rosneft, one of Russia’s state-controlled oil companies, integrates Chevron’s vast technological and financial resources with Rosneft’s rights for the development of fields in the Black Sea region of Russia.

Sinopec, the Chinese NOC recently announced its discussions with BP, on the use of the latter’s technology for the exploitation of China’s shale gas reserves, believed to be quite significant. (The fate of BP in the wake of the Gulf of Mexico oil well disaster, however remains uncertain). Sinopec aims for a shale gas exploration breakthrough in three years, and industrial development in five. BP recently acquired stakes in Chesapeake Energy, the US shale gas company. In November 2009, the Chinese NOC PetroChina also signed a contract with Royal Dutch Shell for shale gas exploitation in one of China’s fields.

Late last year in Venezuela, a seemingly repentant president Hugo Chávez in conceding financial and technological constraints to PDVSA’s capacity to exploit perhaps the world’s largest (about 513 billion barrels) reserves in the Orinoco (ultra-heavy oil) Belt, auctioned off two major projects to different consortia. Prior to the auction, Chávez offered the consortia guarantees on the safety of their investment; but some analysts have remained skeptical. In both projects (Carabobo 3 and Carabobo 1), the initial provision was for the host NOC, PDVSA to hold a 60% stake while the investing consortia would hold the balance.

Brazil’s Petrobras on the other hand has been in the vanguard of global, ultra-deep offshore well technologies. The company operates a fleet of rigs some of which have drilled wells deeper than BP’s disaster-stricken, Gulf of Mexico Macondo well.

All said, a quick-stepping cluster of just a few companies leads the march of NOCs but, save for any technological (for example oil from algae) or (access to) acreage breakthroughs, even the reserves-rich stragglers will still be relevant in the global crude oil supplies of the future.

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