Energy sector’s shifting balance of power

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The FT’s ‘New Seven Sisters’ rankings highlight how much the oil and gas industry has changed from the days when it was dominated by western companies. Today, companies from the emerging world - China most fully or predominantly state-owned - are the key players in oil and gas.

Nader Sultan has worked for 33 years in the Kuwaiti oil industry, including as chief executive of Kuwait Petroleum Corporation from 1998 to 2004. He is now the director of the Oxford Energy Seminar and of F+N Consultancy.

Luis Giusti was chief executive of PDVSA, the Venezuelan state-owned oil company, from 1994 to 1999, during which time Venezuela’s underwent major reform, including opening up to private investment. He now works as a senior adviser at the Center for Strategic and International Studies.

Carola Hoyos is the FT’s chief energy correspondent and compiled our ‘New Seven Sisters’ rankings after extensive research and consultation within the industry. You can read about her methodology and about the history of the ‘Seven Sisters’.

Q: Do you agree that the shift of the balance of power from the old Seven Sisters to the new Seven Sisters has even broader security implications for western leaders than global warming and should provide a greater incentive for them to shift energy sourcing to renewables and nuclear?
Melville Guest, UK

Carola Hoyos: This is a fabulous question and one I think about a lot. Both issues are deadly serious. For me the environment outweighs the security issue in overall gravitas. However, there is a very important difference between the two that gives energy security a big leg up: energy security is a more current problem than the environment and is therefore likely to be the one politicians act on first.

My concern is that this will prompt China and US to revert to their vast, dirty, domestic coal reserves. It makes the need to price the cost of carbon into our energy use all the more urgent so that carbon-capture technology is accelerated and cleaner alternatives tapped or discovered.

Nader Sultan: There is an implication in your question that dependence on the new Seven Sisters is the same as being vulnerable to them. I would argue that the energy world is growing towards mutual dependence, or interdependence, which actually enhances security. The national oil companies need the markets of the west and Asia, security of demand, in the same way as the world needs their oil supply, security of supply. We have to find the appropriate mechanisms to foster this growing and mutually beneficial relationship.

Luis Giusti: I agree with the medium-term risk of high volatility if no real co-operation between national oil companies and independent oil companies develops. This co-operation will not be philanthropic but the result of factual economic attractiveness. With very high prices ($60+ a barrel) it will be difficult. Prices of $50 p/b or less will certainly help.

Q: My understanding is that Saudi Arabia uses its considerable influence in the oil industry to ensure a dependable, long-term supply, and hence demand, of fossil fuels. The idea is that shortages and price spikes will motivate the search for alternative energy sources and prevent the Saudi Arabians selling off all their oil under ideal market conditions.

But if the IEA estimate is true, and the world is falling 20 per cent short of making the $20,000bn investment needed to ensure adequate energy supplies for the next 25 years, can the Saudi Arabians succeed by themselves in creating long -term stability in the fossil fuel market?
Zoyd Huemer Munich, Germany

Carola Hoyos: The world has long relied on Opec, and particularly Saudi Arabia, to supply it with all the oil it needs that can’t be supplied by non-Opec countries and IOCs. In the past quarter of a century the kingdom has been relatively reliable. But even Saudi officials quietly warn that going past 15m b/d would be very, very difficult. Others doubt they can even get that high, especially on a sustainable basis. So, you are not the only one to raise the question.

Demand forecasts are notoriously inaccurate, but if the ones we are making today do come true, then we will need Saudi, Iran, Iraq and Kuwait to grow their oil production capacity substantially. Politics in the region have made that difficult and look like they will continue to get in the way. This means the alternative is for consuming countries to look inward and work on reducing their demand, beginning with the huge amount they waste every day. If we price carbon into the cost of energy, we will not only do the environment a favour but also begin to reflect in energy prices the true costs in terms of political stability, human rights, etc.

Nader Sultan: For stability to be assured, many elements need to be managed. Amongst them, geopolitics, demand side policies, above the ground resource capacity (manpower, EPC contractor etc), as well as supply side investments. But the investment the world needs is not just the investment in Saudi Arabia. So you are right in that the Saudis cannot succeed by themselves.

That is why they emphasise that the investment challenges are global but at least they will ensure that for their share they will put the maximum effort to make it materialise. The Saudis have spent a lot of effort, and will continue to do so, to mobilise all the stakeholders in meeting what is a new global energy challenge, putting in place timely investments to deliver above ground the adequate fossil fuel reserves which are available below ground in the world today.

Luis Giusti: If we believe the demand predictions of IEA and even if we discount them by say 20 per cent, the challenge in terms of supply of oil and gas is huge. Although many people talk about peak oil that is not the real issue, because if you take the proven reserves of 1.3 trillion barrels we have 28 years of oil and if you add the probable and get to 2.2 trillion barrels we have 48 years.

The real issue is if those reserves will be available to meet the predicted demand. Will independent oil companies and national oil companies be able to do the job? What are the risks for the capitals to be invested? In almost every exercise at the end the missing volume is assumed to come from Saudi Arabia (18 to 20 millionb/d). Is that in the best interest of Saudi Arabia?

These are the questions that should be addressed. The co-operation has been hurt by the very high prices.

If for different reasons the independent oil companies and national oil companies combination cannot deliver, we are in for high volatility and instability in the medium term, say some eight to 10 years from now.

Q: Who has the money to build the 20 billion pipeline in S.A; new refineries, and drilling deep into the Caribbean? The US sure doesn’t.
John Perris, Washington State

Luis Giusti: The 20 billion gas pipeline being trumpeted by the Venezuelan president can be defined as follows: A very large and costly project that will never be built, to transport reserves of gas that do not exist, to markets that do not exist.

Venezuela does not have the 54 TCF of free gas required, and the markets down south which are heavily regulated and inefficient could not possibly pay the 12-15 $ per million BTU to make breakeven. Chavez doesn´t really care if it is ever built, because he already achieved the effect he wanted, which is that the big “integration project” proposed by Venezuela would be crucial for the Latin American brotherhood.

Q: Some oil industry observers suggest that the Caspian/central Asian arena will soon become (5-8 years) the real centre of gravity of the oil business where the main actor would be Kazakhstan and its huge production potential. (The implication here requires for fundamental export routes to be developed together with the production capacity....)

In your opinion, are we going to see Kazmunaigas (KMG) as perhaps the 8th new sister to be dealing with early next decade?
Guido Losi

Carola Hoyos: Kazmuneigas is an interesting company to watch as is the Caspian as a region. However, I think the euphoria of the late 1990s-2000 has subsided a bit. The region is hugely important, but perhaps not as super-promising as had been hoped. In terms of Kazmuneigas, it has a ways to go. But on the other hand, this is the perfect time to for the company and government to make sure it chooses a route that will eventually turn it into a success case, such as Statoil, or Petrobras, rather than a more troubled example, such as the one of Pemex.

Q: Increasingly the NOIs have the geological resources and the IOCs have the financial resources but the standoff between them seems to be leading to increasing inefficiency in the industry. How can this growing gap be bridged?
Robert Price, Tampa, Florida

Carola Hoyos: I believe the standoff in many countries is quite serious. The money is there, but governments need to make a choice: Either allow the NOC to reinvest its earnings into production and exploration, or allow it to tap financing and any other help needed from the outside.

The IOCs are one avenue, but companies that are state owned, such as Statoil of Norway are another. My concern is that politicians are not good at looking ahead, especially when their treasury coffers are full. But once their fields decline and they can no longer produce as much oil and revenue as they want, it may be too late. The result is likely to be a more volatile oil price and therefore a more fragile world economy.

Nader Sultan: There are two major parties missing in the equation, namely the banks and the oil service companies. With the resources, the NOCs can obtain the financing. At the same time the service companies can assist on the technical side. The preferred solution is for the NOCs to work jointly with the IOCs as well as the two other parties in joint ventures.

Luis Giusti: I believe that the new balance between IOCs and NOCs is still in unsteady state. I don’t think that the old 7 sisters have lost so much ground to force a major shift in their emphasis during the next 5-10 years. The perception that now the NOCs have mastered the above-ground resources to such an extent that they don´t need the IOCs is overplayed (the very high prices have a lot to do with it). Oil will remain king for a long time still and the IOCs will remain the masters of that domain because of technology-financing-managerial expertise-operational expertise-market saavy.

On the other hand, with the exceptions of Statoil, Petrobras, Petronas and Saudi-Aramco, all the rest are weak in many ways.

However the penetration into nuclear and renewables have their own dynamic inertia and no doubt the IOCs will increase their emphasis on those irrespective of their mainstream.

Q: How do you explain the sustainability of Total results this year (20 per cent abroad) and the probable going into nucs?
Mamoudou, Reims

Carola Hoyos: I’m no analyst, but the ones I talk to have a positive view on Total’s future projects. However, there are some grey clouds, such as a difficult diplomatic environment in Iran, corruption allegations that go to the top and the Erika trial impacting the company’s reputation in France.

Q: Great article that highlights a key industry trend. One question: Given an increasingly nationalistic industry, how can the supermajors best adapt to this new world order by adding most value to the NOCs thereby maximising their own profits? Is it through offering project mgt/technical expertise, or monetising the oil and gas down the value chain through access to refineries/regas terminals etc?
Marc Howson, Edinburgh

Carola Hoyos: One thing I would add though is that IOCs should not lose sight of their responsibility directly to the people and the environment of the country in which they work. They can often not satisfy that responsibility through the host government and NOC, because of corruption, weak governance, etc. This makes it tricky. But there’s a responsibility there they should not ignore.

Q: In Venezuela there are over 12,000 open waste pits with more than 6 million bbls of waste crude oil, some of which are close to local communities and emit toxic gas. Fresh water aquifers in East Venezuela are contaminated with chloride hydrocarbon containing produced water that has been injected underground and got into local water supplies. Lake Maracaibo, once one of the most beautiful fresh water lakes in the Americas is now an environmental disaster.

In 2007 can we believe that the natural environment is safe in the hands of international and state oil companies? Please elaborate...Particularly, I would be interested to hear Mr Guisti’s opinion on the current situation in Venezuela given that some of this was obviously going on during his leadership of PDVSA.
Fag du Clooner, Caracas

Luis Giusti: The dismantling of PDVSA is a tragedy whose consequences will become more and more evident sooner than later. Its production capacity has fallen from 3.4 to 1.5m b/d since 1999. that crash is partially concealed by new oil in the amount of 1.1m b/d coming from the JVs and operational agreements in charge of the IOCs partnering with PDVSA.

The high prices have allowed the government to keep up the spending spree, but squandering has grown so large that the days are counted fiscally. However, the government may still have breathing space, since it has shown that there are no institutional barriers for it to tap into the international reserves of the Central Bank.

What will happen? PDVSA cannot increase production because it doesn´t have the execution capacity even if it gets the money, which is not happening either. The IOCs cannot increase their production significantly either, because of the uncertainty and frequent arbitrary changes of rules and contracts. So at best Venezuela will remain at some 2.5 million BD. The only possible positive evolution under the current government would come if their cash flow starts sputtering and they are forced to open new spaces to private capitals again, but this doesn’t seem likely for the time being.

Concerning the environmental problems in pits and others: every country with longtime oil industry has its quota of pits of sludge. In Venezuela the problem had been addressed by cleaning a number of the each year with a long haul vision. However, under the current government this problem as well as many other have been neglected. Lake Maracaibo was in a clear environmental recovery after years of cleaning and protection policies, but now this has been reversed and its condition is the worse in a century. One more of the costs for the country resulting from disastrous and incompetent management.

Carola Hoyos: I will just say that the perception is that IOCs are under more pressure than most NOCs to be careful of the environment, human rights etc. Statoil, however, is an example of an exception to that.

Q: Brilliant article, I hope PEMEX’s representatives are looking at it. They are always so proud of the bubble they are creating. How do you think is Statoil from Norway perceived by National oil companies? A NOC or IOC, and why?
Jose Navarro, Mexico

Nader Sultan: I would consider Statoil as a very efficient HYBRID! It almost has the best of both worlds. It is run on a commercial basis, has some private shareholding, and has the full support of its Government. It is also a very good role model for other NOCs of how to separate the role of the state and NOC in the 21st century.

Carola Hoyos: Statoil sells itself as an IOC, when that suits it s purposes and NOC, when that would make life better. So it’s hard to say. My guess is that it varies, but in general NOCs see Statoil as an NOC, but one that has developed into a company that hardly resembles the typical NOC (if there is in fact such a thing).

Q: In this contemporary world where alternatives means of energy are being constantly pushed and pursued, perhaps by the world’s known dependence on crude oil, do you agree that, up at some point, third world countries will start to divest their ownership in oil and gas companies and give control to private companies? Perhaps grow out of the false sense of nationalism in natural reserves? Or do you still agree with the principle that the energy sector, as strategic, should be state owned and controlled? Diego Gonzalez Crespo, London

Nader Sultan: A key consideration for countries to give up their ownership of their respective NOC’s is the contribution that oil/ energy makes to the country’s GDP. So in the case of Kuwait, where at today’s oil prices, oil constitutes some 60 per cent of the GDP, the government would be nervous about passing the control to the private sector.

So for third world countries, where the role of oil is less than 10 per cent of GDP, I see no problem in them divesting their ownership to the private sector. Interestingly, in the case of India and China, who I would not call third world, even if oil is a small per cent of their GDP, they are very concerned about energy security as they will not be able to sustain their current GDP growth levels without access to energy.

So in their case this is another consideration to maintain some ownership in their NOCs, for strategic reasons as you have put. One recent report indicated that India needs a GDP growth of some 8 per cent per annum to meet its objective of eradicating poverty by 1 per cent every year. For this they must be assured of energy supplies.

Carola Hoyos: I don’t necessarily believe the energy sector should be state controlled. What is important is that it is run in a way that takes into serious consideration the best interest of the people of that country, the world as a whole and the environment. IOCs and NOCs both have strength and weaknesses in that regard. Broadly – for the moment, at least, - I see countries with natural resources strengthening their wish to control those resources, rather than weakening it.

Q: In 1928, after the Achna carry agreement some of the old Seven Sisters managed to stabilise oil prices quite effectively. Do you see the new Seven Sisters trying to do something similar? And secondly, how can we make sure that proper investments are made and not wasted by Head of States from producing countries?
Emmanuel Yoka, London

Nader Sultan: Taking the first part of your question, the IOCs do not control enough of the world’s oil production to stabilize prices. Even Opec, which controls slightly less than 40 per cent of the world’s production, has difficulty doing so! Of course, in the 20s/30s the IOC effectively managed most of the world’s production.

Regarding the second part, as Carola pointed out in her article, in some countries it is the governments sovereign right to redirect the oil revenues to other social needs at the expense of re investing into oil production, as we see in Venezuela and Mexico, but both are democratic governments.

Carola Hoyos: I’ll take a stab at the first part, but let the real experts cover the second. I’m chasing oil ministers in Vienna at the moment as it’s time for yet another Opec meeting tomorrow. Representatives of Saudi Arabia, Iran and Venezuela are all actively participating. Many of them have senior officials of their national oil companies with them. So I can say, yes, the new Seven Sisters are trying to stabilise oil prices. They may not always be successful and they may be gunning for prices that are higher than the US and other consumers would like, but they are working on it.

Q: It is all good and well pointing out that the national oil companies mentioned in the report have plenty of reserves but what about the technology and finance to exploit those reserves? For example how can NIOC continue to keep the existing production levels, and add new ones, if she cannot attract the likes of the Japanese or other western companies that are fearful of US sanctions and what are the implication of US sanctions on the purchase of parts and equipment by NIOC?
Borzou Aram, London

Nader Sultan: You are correct. It is not enough to have the reserves. However, today most NOCs can secure the financing, especially where they have international partners. Some would argue that even technology you can get from the service companies but I believe the best access to technology is a combination of the IOC and service companies. The other necessities are policies which encourage foreign investment, and as well as stable economic and political relations with the world.

Carola Hoyos: Thanks for your question. You make a very good point, which I had hoped was also clear in the story. You’ll find if you read the NIOC company brief I wrote, you’ll find that we are kindred spirits on this issue.

Q: Ms. Hoyos you mentioned that the Old Sisters say that they have the know how. Petronas has its own university and it offers more courses in a wide array of hydrocarbon pertinent subjects than most if not all American Education Institutions.

What about the other New Sisters who are spending millions educating their local employees abroad, donating to Western Educational Institutions for knowledge sharing purposes, forcing various work programs on Western Oil/Gas Companies that work within their limits, paying big bucks to Old Sister employees to jump ship and the list of tactics they use to close the knowledge gap between them and the Old Sisters is only limited by their creativity, because capital is nothing they are short of at the moment.

I have even heard of Petronas-bankrolled Petroleum Engineering students studying abroad are encouraged to intern at Old Sisters knowing all well that they will work for Petronas upon graduation. If you ask me this knowledge gap will be closed sooner than later even if these Oil/Gas prices are not sustained for long. Do you think this knowledge gap will last in favour of the west?
Arash Nazhad, Austin, University of Texas

Carola Hoyos: Thank you for your excellent description of Petronas. Indeed, Petronas’s substantial ability to nurture and train oil and gas personnel comes at a very important time when labour shortages and the advanced age of the average oil engineer in places like the US and UK are already causing serious problems for the industry. Andrew Gould, head of Schlumberger, likes to say ‘we are going to run out of people before we run out of access to oil’. I believe him. This is why Petronas made it onto our new Seven Sisters list even though forecasters say the company will significantly slip downward in the rankings of the worlds top lng suppliers in coming years.

Q: Where would you put Statoil in your rankings, an national energy company which has a proven record as a leader in technology and project execution, is a preferred partner for many countries and companies developing energy resource and has won the Dow Jones World Sustainability Index for the last three years?
Bruderer Carouge / Geneva, Switzerland

Carola Hoyos: If our list had included companies in OECD countries, Statoil would have almost certainly made it for several reasons. To me, the most compelling is that it is the best example of a company that has helped a country avoid the oil curse. Interestingly it is now trying to teach this lesson to others around the globe - a noble cause and one I hope succeeds against the considerable odds.

Q: You answered that IOCs did not control enough of the production to stabilize price when my question had to do with the NOCs. Do you see them trying to behave as a cartel since many of them are already transferring know how and developing each other’s fields?
Emmanuel Yoka, London

Nader Sultan: I am sorry I missed the distinction between the “old” and “new”. Carola is getting me confused. She has to change the term so those of us who grew up with the “old” can distinguish between the two! Actually, to the extent that 3 of the new 7 are already owned by OPEC members, they are part of the OPEC stabilisation process.

Gazprom is essentially a gas producer and there is a dialogue at the moment as to whether there will be a gas OPEC, although I personally doubt it. For the others, in today’s world of high prices and with OPEC already there, I do not see the benefit of creating a new entity or joining one where you have to cut production.

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