New relationship balance for international and national oil companies

12 October 2010

National oil companies and international majors will need each other for the future of global oil

Since its formation, the international oil group Opec has shifted the balance of power away from international oil companies. When exploration first began in the 1930s, it was Western firms that benefited most from the region’s abundant hydrocarbons reserves.

Dissatisfied with this, five leading oil producers, including Iran, Iraq, Kuwait and Saudi Arabia, announced the formation of Opec in 1960 with the aim of regaining control over their assets and oil prices.

This was made possible through joint ventures, production sharing agreements and technical service contracts. Fifty years later and the national oil companies are themselves becoming international oil companies investing in projects overseas, in particular in Asia. But it is too early to sound the death knell for the Western oil majors in the Middle East.

They still provide much needed capital, access to market and technical expertise. With the easily extractable deposits mostly exhausted, the national oil companies are increasingly having to turn to geologically complex oil and gas fields. Only the Western oil firms that have spent heavily on research and development in the past 30 years are adept at handling these reservoirs.

But equally, the international oil companies are still heavily reliant on business in the Middle East. Although in recent months several have walked away from projects in the region, this is more a symptom of firms scaling back on their capital investment commitments in the wake of the global financial crisis, rather than a reflection on the attractiveness of the opportunities on offer.

The Middle East still holds the majority of the world’s unexploited hydrocarbons reserves. The balance of power has indeed shifted, but it is more a state of mutual dependency than the national oil companies having gained the upper hand.

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