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More than a decade after founding the Organisation of the Petroleum Exporting Countries, Juan Pablo Perez Alfonzo fell out of love with oil.
Deeply disappointed by the destructive impact high oil prices had had on petroleum-producing nations such as his native Venezuela, in 1976 he branded it the “devil’s excrement”.
Thirty years on, the price of oil is soaring again and oil-rich countries are following the same route of aggressive nationalism that led the father of Opec to disown his creation.
In the latest manifestation, Bolivia last Sunday nationalised its energy industry, sending in the army to seize gas fields and threatening to expel international oil companies in 180 days if they did not agree to new – and far less favourable – contracts. Evo Morales, its recently elected leftwing president, declared: “The time has come, the awaited day, a historic day in which Bolivia retakes absolute control of our natural resources.”
As energy-rich countries have become wealthier and less dependent on foreign investors, they have also grown increasingly assertive. Russia has threatened to cut off supplies to its biggest customers unless they agree to higher prices while others, such as Venezuela, have jeopardised investment by imposing onerous new contracts on international companies.
The ambitions of these countries have consequences that resonate far beyond the boardrooms of investors. When national governments strengthen their grip, the outcome is more often than not a deterioration in the country’s industry and a drop in output – a trend the world can ill afford. “The rise of nationalism is a concern for future [oil and gas] production,” warns William Ramsay, deputy director of the International Energy Agency, the western oil watchdog.
Mr Ramsay is in no doubt that the surge in nationalism in Latin America and elsewhere is self-defeating. “They are embarking on a dangerous path,” he adds. “Look at the production capacity of Venezuela – it has fallen dramatically. This is the price to be paid. If you don’t get the balance right between the companies’ interest and the country’s interest, the country ultimately will lose.”
Not just the nations involved but consumers worldwide suffer when this happens. Julian Lee, of the Centre for Global Energy Studies in London, estimates that factors involving geopolitical crisis and nationalism in Iran, Iraq, Nigeria, Russia, Kuwait and Venezuela have reduced oil supply since 2000 by as much as 7.8m barrels a day – equivalent to the combined consumption of Germany, France, Italy and Spain.
Frederic Lasserre, chief energy analyst at Société Générale in Paris, adds: “Latin America is the perfect region to witness the impact of nationalism on production. Mexico and Venezuela have stated for the last 10 years that they should be able to increase their oil production. In both cases, the production has not really increased and is even showing some signs of decline.”
The backdrop to all this muscle flexing is a doubling in the price of oil in the past three years, to around $75 a barrel. That has spurred government demands that international oil companies hand over a bigger share of the spoils. Christophe de Margerie, head of exploration and production at Total, the French energy group, says: “Two years ago I said $33 a barrel was the worst thing I had seen, that it was a nightmare. Now I can call it a nice nightmare; a dream.”
In some countries, such as the UK, the tussle between international oil companies and the government has resembled an orderly Olympic wrestling competition. In others, most notably Venezuela and Russia, the contest is no-holds-barred. But moves in the west can be tough too. In December Gordon Brown, chancellor of the exchequer, increased the tax rate for companies producing oil and gas in the UK to 50 per cent, regardless of an increased need for investment to stem the decline of the ageing North Sea fields.
Even where governments remain friendly to international investors, the demands on oil companies sometimes come from rebel groups. In Nigeria, for example, militants have sought direct payments for local communities from oil giants such as Shell.
In Venezuela, the consultancy Wood Mackenzie calculates, the state has seized back $5.4bn from international oil companies by changing contract terms. The country’s energy ministry argues that the old contracts were written at a time when oil prices were low and the previous regime, which negotiated them, was far too eager to attract international oil companies to Venezuela with generous agreements.
But Caracas’s tone under president Hugo Chávez is becoming increasingly nationalistic. Rafael Ramirez, Venezuela’s oil minister, late last year accused Repsol YPF, the Spanish energy group, of colonialism for including on its books the reserves it holds in the country. Under the new contracts PDVSA, its national oil company, has increased its stake in joint ventures with international oil companies from around 20 per cent to about 60 per cent.
“That is a problem because PDVSA has control. Do you trust the government to decide your future? How, when, where, how much, how fast do you invest?” worries one oil company executive. Mr Chávez has even engaged in confiscation. He ceremonially hoisted the flag over Total’s and Eni’s fields following a dispute over back taxes with the European companies.
Now the oil ministry is going after contracts in the expensive, heavy oilfield of the Orinoco belt, prompting some foreign executives to assume the worst – the full nationalisation of Latin America’s second biggest oil industry.
Why would that be such bad news for production levels? International energy executives argue that when a national oil company takes over, it does not have access to the technology needed to maximise oil recovery.
Meanwhile, other potential fields – such as heavy oilsands – or transport routes, like a project to send Bolivian gas to the US, may not see the light of day because investors are unwilling to commit the amounts needed while the threat of nationalisation hangs over them.
In other countries, production is stagnating because the energy sector is closed to foreign oil companies. Kuwait, which holds the fourth largest oil reserves in the world, has acknowledged that it would be unable to increase production without the technical expertise of companies such as ExxonMobil.
But with local opposition mounting, it has missed several deadlines to sign contracts to develop the geologically difficult fields in the north of the country. Meanwhile, Mexico faces problems in accessing reserves in the deep waters of the Gulf of Mexico.
Venezuela’s production, which plummeted to almost nothing during an opposition-sponsored national strike in 2002, is still far below the levels seen before Mr Chávez took office in 1999. Not all of this is the fault of the current administration. Workers at PDVSA who opposed Mr Chávez’s presidency sabotaged production and refinery facilities.
But few believe Mr Chávez will be able significantly to expand Venezuela’s output. “The plan under Luis Guisti (head of PDVSA under the previous regime) was to increase Venezuelan oil production to 6.6m b/d. Now we are at 3m b/d and they are not going to be able to boost that. They have announced plans to boost to 5m but I do not see that,” says one industry executive.
Russia’s oil production, now controlled by an increasingly heavy government hand, is also in question. Until two years ago Russia enjoyed double-digit growth in oil output. But the country’s ageing fields, together with Moscow’s dismantling of Yukos – once Russia’s most dynamic energy group – its increase in export taxes and its decision to limit international oil companies’ involvement have dramatically slowed that trajectory. Production growth fell last year to 2.3 per cent from 9 per cent in 2004 and 10.7 per cent in 2003.
In Iran’s case, its nationalist bent and increased aggressiveness in pursuing its nuclear ambitions despite the opposition of the US and Europe has generated not only diplomatic uncertainty but also a large opportunity cost.
The country with the world’s second largest oil reserves also sits on South Pars, the largest gas field ever discovered. But its unattractive terms for foreign investors and the threat of US sanctions have stymied its development. Tiny, peaceful Qatar, which owns the other end of the field, has in less than a decade grown into a gas exporting powerhouse, raking in billions of dollars by agreeing deals with just about every big international oil company.
As the oil price rises, and countries become even warier of taking on foreign partners, the balance of power is shifting between international oil companies and the countries in which they are based, Mr de Margerie of Total argues.
No longer can companies get away with asserting their right to exploit oil riches simply on the grounds that they are the best at what they do. “You can’t just say. I am good, so I will survive. In the recent past we were all focused on our core business. That was not enough. The host country expects more,” he says.
This could include sharing know-how on building desalination plants and other industrial complexes not necessarily directly connected with the exploitation of oil and gas. “If we think it’s good for the country, it’s good for the company,” he adds, in a statement that would have sounded alien during the cost-conscious 1990s.
Malcolm Brinded, head of exploration and production at Shell, says international oil companies must now ask themselves: “How are we going to make this marriage work?” He adds: “IOCs have changed – we are much less paternalistic than in the partnerships of 20 years ago.”
There remains the ultimate prize: Saudi Arabia, which holds the world’s largest oil reserves. But with every dollar rise in the oil price, Riyadh has grown less interested in an alliance with foreign oil companies. Ali Naimi, energy minister, argues more forcefully than ever that Saudi Aramco, the national oil company, has all the money and expertise it needs to develop the country’s oilfields.
But Saudi Arabia may be one of just a handful of oil producers that can make this argument convincingly. As the rest undermine their industries to extract rent from the rest of the world, they risk the kind of oil price spike that would spark a global recession – or at least persuade consumers that the way to ensure energy security is by managing with less of the stuff in the first place.