Yearbook 2011: 2010 energy review - International oil companies are scaling back in the Gulf

09 December 2010

International oil companies withdraw to pursue more lucrative opportunities in less-developed markets

The relationship between the world’s major international oil companies (IOCs) and the oil-rich Gulf states has never been a simple one.

The way IOCs and the region’s national oil companies (NOCs) work together has undergone a long, often difficult evolution. It began with the era of the so-called ‘seven sisters’ – an alleged IOC cartel, which controlled the region’s oil production and the price governments got paid from it before moving to the multibillion dollar joint venture refining and petrochemicals projects of today.

State nationalisation of natural resources from companies run by former colonial powers caused no end of strife after the formation of the international oil cartel Opec in 1960. Many ministers and industry workers from that time still remember it as a difficult period for both sides.

Changed oil market

It seemed to work out better for the NOCs than their international counterparts. In 1960, the seven sisters controlled around 90 per cent of the world’s oil, today NOCs account for 93 per cent of global production, with 45 per cent of proven reserves located in the Gulf.

At the start of the new millennium, the right balance seemed to have been struck. As demand and prices for crude oil, gasoline, petrochemicals and gas soared it was easy for IOCs and NOCs to find a common cause.  One side had oil and gas, and wanted to sell as much of it as efficiently as possible; the other wanted access to new reserves at a low cost, and had the technology and marketing nous to extract and sell it.

But that era of apparently harmonious relations is now over and, if senior sources at both NOCs and IOCs working in the region are to be believed, state firms now have the upper hand in the control of their resources, while the presence of their former foreign masters is set to diminish over the next two decades.

IOC executives, consultants and business development managers at major engineering firms say that they are reassessing their approach to working in the region as the aftermath of the financial crisis of 2008-09 exposes the weaknesses of projects conceived in the boom years. It has become, says a senior engineer and former IOC worker, “a different world” as the priorities of each side become increasingly divergent.

“The basis on which a lot of projects and partnerships were planned was unsustainable [for IOCs],” says a senior executive at an European IOC. “A combination of production and feedstock issues along with the global financial crisis meant that they just weren’t going to work in terms of the return on investment they wanted.”

In the mid-2000s, IOCs were prepared to take low cuts of production from multibillion dollar upstream developments. At the same time, they were happy to move into giant, costly, refining and petrochemicals projects which only offered the kind of return on investment they wanted when prices and demand for commodities were high, he says. But the exuberance of that period is over, and NOCs are not willing to lose out on potential profits just to subsidise their partners’ optimism. Meanwhile, Gulf states’ reasons for continuing with mega projects is often less to do with potential profits which attract their partners, but to help drive the diversification of their economies.

Profits down

“Huge profits aren’t the order of the day in the Gulf,” says a UK-based consultant who has worked with most of the region’s major players.

“Where the big IOCs expect to make mega bucks from these projects, a lot of the time their partners have their eye on creating jobs as much as earning money from them.”

The fallout from the crisis, the demand and price crash, and the divergence of views on acceptable economics have hit a series of high-profile projects in the region.

In April, the US’ ConocoPhillips quit two projects in the Gulf, citing a change in strategy. The first was a joint venture refinery project with the world’s biggest oil producer, Saudi Aramco, at Yanbu on the kingdom’s Red Sea coast. The second was a sour gas development partnership with Abu Dhabi National Oil Company (Adnoc). Both were valued at $10bn.

In June, the UK’s BG Group quit the project to develop the Block 60 gas concession in Oman. In August, MEED reported that the US’ ExxonMobil was also leaving a $6bn petrochemicals joint venture in Qatar.

Looking further back to December 2008, an even bigger deal was cut short when the Kuwaiti government cancelled the planned creation of a $17.4bn joint venture petrochemicals company with the US’ Dow Chemical. In this case the state felt it was not getting a fair deal from the merger.

In each case, the reason was the commercial basis of the projects, says Sadad al-Huseini, an independent consultant based in Saudi Arabia and former head of Aramco’s exploration and production division. “ConocoPhillips basically looked at the projects and decided that they weren’t very attractive, given the contract prices and feedstock prices in question,” he says. “Oman is struggling to maintain gas production. They are going for deeper and harder to access wells [like those of Block 60], and the BG decision was also right for them commercially.

“Exxon is a company with a global strategy, and maybe they just don’t want to commit more to this region.”

This is true of a number of major international firms, says the IOC executive. “The Gulf countries are relatively mature in their upstream and there isn’t a huge amount they can do, so from an exploration and production perspective they want to look to new places where oil and gas is just being discovered. In terms of petrochemicals, they increasingly want to integrate existing production with the downstream to get the most efficient use of feedstocks. If they can’t do that, then maybe it isn’t that interesting to them.”

At the same time, he adds, IOCs want to maintain relationships with their nationalised Gulf counterparts. They realise their share in global production is falling and those fears are mounting over new regulations on drilling for harder-to-access ‘unconventional’ oil and gas after the Macondo oil spill in the Gulf of Mexico. Working with NOCs in the Gulf will allow them to work on the production and distribution of downstream petrochemicals or liquefied natural gas products. The question is what shape these relationships will take. “The IOCs have to find a niche in terms of expertise and value that they bring for NOCs in order to maintain their presence in market,” says a senior executive at a major engineering firm. 

The Gulf states are no longer worried about falling demand as Asia becomes an increasingly big client and production in the US declines, meaning that access to market will not be a selling point for IOCs, Huseini says. The IOCs will now have to look for ways of leveraging their operational and technical expertise to access oil and gas in the region.

Future roles

“They have an opportunity to be both an operator and a technical partner,” he says. “Each country has its individual needs, and in 2020 or 2030, the [oil and gas] fields will become more mature and more complex to operate.”

Executives in Kuwait, which constitutionally does not allow IOCs ownership of oil or gas and limits their roles to technical advisories, believe that their model, much maligned in the past because of the lack of commercial attraction, will become more common in the future.

“Nobody can disagree in Kuwait that there is a need for outside expertise,” says an executive with close ties to the management of Kuwait Petroleum Corporation (KPC). “But the best they can have is technical agreements.”

Elsewhere, those production sharing deals that are on offer will likely be for smaller, more technically complex projects. Huseini believes that the bigger IOCs, so-called ‘super majors’ like Exxon, Conoco and Chevron in the US, UK/Dutch Shell Group and the UK’s BP, will find these kind of deals unattractive.

Other, less risk-averse firms like the US’ Occidental, which is working on challenging projects in Bahrain, Libya, Oman Qatar and even Yemen, or Apache, also of the US, which just took over a number of BP’s upstream assets in Egypt, will have more success in the region in the future as a result.

Whatever happens next, the ever-changing relationship between IOCs and NOCs will continue to evolve over the next decade.

ConocoPhillips basically looked at the projects and decided that they weren’t very attractive

Sadad al-Huseini, Saudi-based consultant

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