By John Kemp
LONDON Jan 15 For a decade, the oil industry
has worried about rising resource nationalism in producing
countries. Host governments have imposed tougher terms, demanded
bigger exploration bonuses and extracted a higher share of
revenues, in some cases expropriating foreign oil companies when
they failed to develop new fields fast enough.
Now the wheel may be turning as the prospect of big new oil
and gas finds from shale and in deepwater trigger a competition
among potential host countries to attract investment.
Between 2002 and 2008, the oil and gas sector was
characterised by a scarcity of deposits, giving host countries
the whip hand. Now deposits are plentiful but there is a
scarcity of capital and technology needed to exploit them fully,
which has shifted the balance of power in favour of the major
international oil companies and leading independents as well as
oilfield services companies.
Britain and Argentina are just two examples of countries
hoping domestic shale resources could transform their economies
following the example of Texas and North Dakota, and willing to
reduce their share of the revenues in order to develop new oil
and gas resources.
"We've decided to give incentives for gas production,"
Argentina's President Cristina Fernandez said in November. The
country became notorious after expropriating Repsol's
stake in YPF earlier last year, but exploration and production
terms are being softened to attract investment.
Domestic prices remain controlled, but firms will be allowed
to sell new production at $7.50 per million British thermal
units (mmBtu), up from the previous ceiling of $5.00, and almost
twice the prevailing price in the United States, to spur
development of the country's giant Vaca Muerta shale deposits
Britain's government has promised to develop a "targeted tax
regime" to stimulate the development of shale deposits. "With
the shale gas industry at an early stage of development, the
government believes that a targeted tax regime will help unlock
investment," according to Britain's finance minister.
"The use of field allowances to encourage investment in the
North Sea has demonstrated the effectiveness of a targeted tax
regime in stimulating investment and production that would not
otherwise have gone ahead" ("Government action to stimulate
shale gas investment" Oct 8).
In October, Britain announced the successful completion of
an offshore licensing round, an investment by Talisman to extend
the life of ageing fields in the North Sea, and the development
of big new fields by Shell -- all after a series of changes to
tax laws that would introduce more generous field allowances and
tax rates for fields that are old, small or particularly deep,
and would otherwise be marginal or uneconomic to develop.
Other countries, including Brazil, Mozambique, Tanzania,
Kenya and Uganda, are also competing for investment by offering
more generous terms than before.
Even Russia, which has been cited for the past decade as the
ultimate example of resource nationalism, has expanded its
cooperation with Exxon and BP, reversing a
decade-long trend in which it was taking projects back from the
international oil companies.
It is too soon to say whether these are isolated examples or
part of an industry-wide trend. Fiscal terms in the main
producing countries of the Middle East, with the largest and
cheapest resources, remain very tough.
But as the industry shifts from developing existing fields
to finding and developing new resources in new areas (Latin
America, Africa, Arctic) and using new technologies (shale,
offshore) fiscal terms will have to become more generous.
Exploration and development of new resources entails a much
higher level of risk than continued production from mature
fields, as Peter Nolan and Mark Thurber from Stanford University
explain in a recent article "On the state's choice of oil
company: risk management and the frontier of the petroleum
"Frontier petroleum activities by definition are those
characterised by the highest risk," they write.
"Over many decades, the industry has seen the frontier
progress from exploration and development of onshore sedimentary
basins through shallow offshore basins and into deep and
ultra-deep water basins today ... Emerging frontiers include the
challenge of commercialising vast resources of unconventional
oils and gas."
In mature fields, with low risk, the temptation for the
government to toughen existing fiscal terms or even expropriate
private operators (especially if they are foreign) is high. The
objective is to extract as much rent as possible. The government
may feel a national oil company can produce from these fields as
well as one of the major international oil companies or a
But with prospective new resources, the geological,
technical and economic risks are much higher. The host
government may need access to specialist technology and
expertise, and may not have the capital required or the appetite
for risk to try to develop the resources itself.
Foreign companies become the only option for development.
The choice is between offering generous terms acceptable to
foreign investors or not developing the resource at all.
Attitudes towards resource nationalism and openness to
foreign investment therefore tend to match and amplify the
industry's underlying investment and pricing cycle. Waves of
expropriation alternate with periods in which foreign investment
is welcomed, as the industry switches between developing
existing resources and opening up new frontiers.
For the moment, with the industry and host governments
focused on opening up new supplies, terms are becoming more
generous. High prices, intense exploration and the revolution in
oilfield technology have caused the cycle to turn.
On current trends, prospective oil and gas resources are
more than sufficient to meet projected demand over the next
decade, while development technology and expertise remain
scarce, so host countries will have to compete to ensure their
resources are developed.