Nice article from yesterdays Financial Times, a tad long.
SE Comment & Analysis
HD From minor to major
BY By Robert Corzine
PD * 08/19/97
SN Financial Times
ED London Edition
LP The sleepy giants of the world's oil industry are stirring. Some of
them, anyway. The giants are the state oil companies of Asia, the Middle
East and Latin America.
For years most stayed at home, growing rich on their position as the
landlords of the oil business. A few, such as those from Kuwait and
Saudi Arabia, made occasional forays into their main export markets to
buy refineries or filling stations. But when it came to building global
businesses, searching for, producing and selling oil and oil products,
western majors had the world to themselves.
TD Now, that may be changing. Companies such as Petronas of Malaysia and
China's National Petroleum Corporation are using their political
connections to challenge western oil majors at their own game. Both have
bought companies as far afield as Kazakhstan and South Africa, as they
move into that last and most lucrative bastion of the western oil
majors: the international exploration and development business.
Meanwhile, Venezuela's state-owned oil company has become the largest
retailer of petroleum products in the US.
The state companies are hoping to benefit from their political
advantages in emerging markets. They are willing to do deals in
countries that are out-of-bounds to many of their western competitors.
They have the backing of their governments and, in some cases, their
national treasuries.
Success is far from assured. Earlier -- albeit less ambitious --
attempts to expand in the US and Europe came to little. And the
companies still have considerable disadvantages to overcome, in
particular a shortage of technical skills and of senior managers with
international experience.
As Mr Mark Moody-Stuart, chairman of Shell Transport and Trading, the
UK arm of the giant Anglo-Dutch group, says: "The competitive landscape
has changed a lot because of the state oil companies." And if they
continue to use their advantages to expand abroad, they could well
provide the first big challenge that the western majors have seen for
years.
Asia, the world's fastest-growing oil market, is home to the two most
aggressive state oil companies: China's National Petroleum Company
(CNPC) and Malaysia's Petronas.
This summer CNPC, which has a near monopoly of China's oil market,
bought a 60 per cent stake in the Aktyubinsk oil field in western
Kazakhstan for $325m in cash, plus a promise to invest a further $4bn
over 20 years. Much of this will be spent on a pipeline to the east that
will reduce Kazakhstan's dependence on Russia (much Kazakh oil goes to
world markets through Russian pipelines).
Despite strong US diplomatic pressure on the Kazakh government, CNPC
won out over a consortium led by Amoco, the US oil group, for the
exclusive right to negotiate a contract to develop Kazakhstan's giant
Uzen field. Recently CNPC outbid several western oil groups to secure a
$358m deal to develop two Venezuelan oilfields. It also has a $1.3bn
agreement with Iraq to develop the Al Ahdab field when UN sanctions are
lifted.
The motivation for CNPC's aggressive expansion appears
straightforward. Although it is the world's third-largest oil producer,
China's rapid economic growth is outstripping CNPC's ability to find new
reserves to replace older fields. Some forecasts suggest China, which
until a few years ago was self-sufficient in oil, may need to import 4m
barrels a day by 2015; that is equivalent to half of Saudi Arabia's
total current output.
"China fears a growing vulnerability," says Mr Fergus MacLeod, oil
analyst at NatWest Markets in Edinburgh. He believes China may view
neighbouring, oil-rich Kazakhstan in the same way as the US looks on
Saudi Arabia, as a "captive" source of future oil supplies.
In Malaysia, declining domestic oil production is also one reason
behind the international expansion of Petronas. From his office in the
88-storey Petronas twin towers that dominate the Kuala Lumpur skyline,
Mr Mohamad Hassan Marican, the president and chief executive officer,
oversees an ambitious plan to turn the company into the first "Islamic
major". By 2005, he says, Petronas will derive about 30 per cent of its
revenues from overseas operations, compared with less than 10 per cent
today.
Earlier moves by Middle Eastern producers to diversify were motivated
largely by a desire to secure specific markets in the main
industrialised countries. Even Kuwait, which diversified most
ambitiously did so slowly and somewhat half heartedly. By contrast,
Petronas wants to translate its political and religious connections into
a broad-based international energy group, with much of its investment
directed at Moslem and developing countries.
Earlier this year Petronas defied US sanctions on Iran by joining with
Total of France to develop two offshore Iranian oilfields. It is also
* active in North Africa, Syria and Sudan and is keen to enter Burma,
another country which is becoming a no-go area for US companies.
Companies such as Petronas and CNPC have several advantages over their
western competitors. The most important of these is their willingness to
invest in countries that are seen as politically embarrassing for their
western counterparts. "In areas where western companies find it
unattractive, many national companies simply say: 'whoa, here's an
opportunity,'" says Art Smith, chairman of John S. Herold, a US oil
consultancy.
Some analysts think Pertamina of Indonesia and PTT of Thailand will
eventually follow CNPC and Petronas into the international arena, buying
upstream assets. They too face declining domestic reserves and
fast-growing economies.
But others wonder whether they have the political support, or the
technical competence and the large amounts of cash that such a step
requires. Pertamina could also be hampered by its membership of Opec.
Members of the exporters' group may be reluctant to invest in production
capacity in countries not subject to the group's restraints lest they
are accused of undermining the Opec production ceiling. That may explain
why some of the biggest state oil producers in the Gulf have made only
tentative steps into the upstream business internationally. It is true
that the National Iranian Oil Company has recently joined international
consortia developing giant fields in the Caspian Sea off neighbouring
Azerbaijan. "But that is driven by the geopolitics of that region," says
Julian Lee, an analyst at London's Centre for Global Energy Studies, and
should not be interpreted as a sign of a general international
expansion.
In the downstream sector, however, matters are different. Here, Gulf
companies have argued that foreign investment in refineries and
marketing outlets secure long-term markets for their crude oil. So in
these areas, Opec members have been adding to the pressure on the oil
majors.
The trend towards greater international downstream investment by Gulf
producers is expected to accelerate. Arab Petroleum Investments
Corporation, the finance group owned by 10 Arab oil producers, this
month announced that for the first time it will expand beyond the Middle
East.
The downstream business has also been the preferred method of
expansion for Petroleos de Venezuela (PDVSA). Over the past few years
PDVSA has focused on the US, which consumes 70 per cent of Venezuela's
output.
The expansion of large producers into the international downstream
industry has coincided with a general retreat from downstream operations
by western oil majors, which complain about low margins and fierce
competition in this part of the oil business. In contrast, the state
companies seem willing to accept low rates of return in order to secure
markets for their crude.
But it is the entry of the state or newly privatising companies into
the international upstream sector that poses the greatest threat to the
western majors, which are enjoying their highest returns from
international oil development projects since 1984. BP, for instance,
recently reported a 19 per cent return on capital employed.
The battle is likely to be tough. There does not appear to be room for
all the newcomers and the established companies. Mr Franco Bernabe,
chief executive of ENI, the partly privatised Italian oil group,
believes that "the explosion of the number of competitors" will prove
unsustainable. It is possible that, to avoid what they see as damaging
competition, the two sides will seek alliances, linking the advantages
of western majors -- such as technical and marketing skills -- with
those of the newcomers, especially their reserves.
But that is unlikely in the short term. "The problem is that the
newcomers are all following the same strategy," says Mr Bernabe.
"Everyone wants to be an international oil major."
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