=DJ LATIN BEAT: Oil Majors Face Creeping Nationalization
05/01/2006
Dow Jones News Services
(Copyright © 2006 Dow Jones & Company, Inc.)
By Charles Roth
A Dow Jones Newswires Column
NEW YORK (Dow Jones)--Soaring oil prices swelling the bottom lines of big oil companies make it hard to feel for the likes of Exxon Mobil Corp (XOM) and Chevron Corp. (CVX), but with the vast majority of the world's crude and natural gas deposits restricted to national oil firms of often inhospitable nations, the good times won't last forever.
This is especially true in Latin America, where regulatory flux has become the rule of thumb from governments trying to extract as much of the earnings from oil and natural gas production as they can.
It's hardly surprising that left-wing populists in Venezuela, Bolivia, Argentina and Ecuador would squeeze Big Oil - many members of the U.S. Congress are again baying for higher taxes on them, too - but the creeping nationalization of oil production underway in these countries won't just mean less future profit for the energy firms, but also less investment and, ultimately, less output. That, in turn, will ensure that pressure on energy prices stays high.
The oil majors invested heavily in the region to begin with because most national companies didn't have the money and technical expertise to effectively develop their reserves, and they still don't. Previous, more pragmatic governments acknowledged as much, and paved the way for foreign investment in the sector in the 1990s.
But the current crop of nationalists in those four countries - not to speak of Mexico and Brazil, where state-run companies still enjoy monopolies on oil production - are turning back the clock.
On Monday, Bolivian President Evo Morales decreed the nationalization of the Andean nation's natural gas industry by ordering foreign companies to turn over their production to state-owned firm Yacimientos Petroliferos Fiscales Bolivianos for sales and industrialization, or leave the country. "The time has come, the awaited day, a historic day in which Bolivia retakes absolute control of our natural resources," Morales declared.
To underline the point, he ordered the country's military to occupy gas fields and gave foreign companies six months to sign new contracts, the Associated Press reported.
Brazil's Petroleo Brasileiro SA (PBR), or Petrobras, Spain's Repsol YPF (REP), British Gas, Britain's BP (BP) and Total of France (TOT) are all exposed to the move.
Investment has already plummeted in Bolivia, where a year ago a new hydrocarbons law hit the books. The law raised taxes and royalties and mandated that hydrocarbon resources belong to the state. But the country hasn't spelled out how it will work in practice, though perhaps Morales' decree will clear things up. He had said a coming nationalization wouldn't involve asset seizures.
He is also pressing for increases in natural gas prices for customers in neighboring Argentina and Brazil. But given that the two countries represent the only outlets for Bolivia's natural gas, Morales may have much less leverage than he thinks. Brazil, especially, may be willing to play hardball, as Petrobras, which is federally controlled, is the biggest foreign investor in Bolivia.
Morales has clearly taken a page out of Venezuelan President Hugo Chavez's playbook, which included a hydrocarbons law in 2001 that nearly doubled royalties on private firms making new investments in conventional oil fields and limited the firms to minority stakes. Venezuela recently forced the migration of 32 pre-existing field operating contracts to the new law, and seized two fields without compensation from Total and Italy's Eni SpA (E) when the two firms resisted the newly imposed terms.
After unilaterally raising royalties on production from Venezuela's extra-heavy crude in the country's Orinoco basin from 1% to 16.7% in 2004, the government is now indicating that companies operating the four projects involved in converting the tar-like oil into synthetic crude should also migrate their pre-existing contracts to the new law, implying diminished returns on investment amounting to an estimated $17 billion. ConocoPhillips (COP), Exxon and Total all have significant exposure to this latest grab at their income and assets.
Ecuador also has a newly minted hydrocarbons law that requires private firms to relinquish 50% of extraordinary profits, defined as those coming in above established levels in previously signed contacts. Companies that don't agree, officials say, should leave the country.
This from a nation whose national oil company has seen its production steadily decline for years, and where local residents often take to sabotaging oil infrastructure to press demands for more local investment and spending.
In Argentina, meanwhile, Repsol earlier this year cut its proven reserves by 509.3 million barrels of oil equivalent for technical and accounting reasons, the latter representing the future uncertainty regarding hydrocarbon concessions that expire around 2016. Companies won't simply be able to extend them another decade, but rather will have to negotiate new deals with provincial governments.
Argentina's top producing province, Neuquen, decreed royalty hikes on oil and natural gas production a few months ago. The federal government also imposes heavy oil export taxes and effectively controls domestic fuel prices. Foreign oil companies still interested in major exploration in Argentina will have to look offshore, though a recent requirement forces them to form partnerships with the country's newly established state-oil firm Enarsa, which apparently has just two-dozen employees.
These countries may believe that they have every right to disregard contracts or otherwise put the squeeze on foreign oil producers. But when expropriated profits undermines investment, output volumes will suffer. If that proves supportive of prices, though, populist regimes may not care.
As for Exxon Mobil, Chevron and other oil majors, they likely won't benefit as much from future oil price rises as they do now, especially if U.S. lawmakers join their Latin American counterparts in taxing more and more of their income.
(Charles Roth is assistant managing editor for Dow Jones Newswires' Latin America and New York-based emerging markets groups.)
-By Charles Roth, Dow Jones Newswires; 201 938 2226; charles.roth@dowjones.com
(END) Dow Jones Newswires
05-01-06 1558ET |
