Master of Advanced Studies in International Oil and Gas Leadership The international oil companies Giacomo Luciani IEA Energy Training Week Paris, April 5, 2013
What are Oil Companies? Companies are the main protagonists in the international oil and gas industry Companies are living organisms that take time to develop and grow, acquire a specific know-how and develop their own culture Companies are different main cleavage between IOCs and NOCs, but certainly not the only important distinction 2
Evolution of contractual relations Concession: Company pays royalty and taxes but is in full control of production and marketing Production sharing agreement: IOC carries all investment costs; if a commercial find is declared, production is divided: cost oil to IOC, profit oil shared bet. IOC and NOC Service contract: IOC develops field and gets a fee 3
Concession vs PSA A concession is more likely to lead to conflict because of issues of tax assessment or management of production. A PSA is more easily enforceable but it is very difficult to write a PSA that will be fair at any level of oil price. Both can be combined with NOC participation 4
The PSA is versatile A PSA is a very versatile contract it can mean anything, depending on the numbers. Key issues are: How much of early production will be considered as cost oil? What is the split of profit oil? Is it a function of volumes produced and/or oil price? 5
Obsolescing bargain The bargaining position of the parties inevitably evolves during the implementation of the contract Uncertainties are reduced, investment is put in place, prices fluctuate widely Terms that ex ante appeared to be equitable now look exploitative Government can nationalize or more rarely companies walk away
Nationalisations Early nationalisations: Russia and Mexico Mossadegh nationalises APOC Qaddafi nationalises BP, Hunt Kuwait, Algeria, Qatar, Iraq: 100% nationalisations Abu Dhabi, Libya: IOCs remain Saudi Arabia: negotiated takeover 7
Resource nationalism Resource nationalism is the tendency to reserve access to national entities (NOCs) Resource nationalism has ups and downs depending on circumstances Examples of fluctuations: Venezuela, Algeria, Qatar, Brazil
Following 1973 Following 1973, the International Oil Industry was forcibly dis-integrated: the 7/8 sisters lost most of their reserves. Some disappeared fast; other attempted to recreate a vertical equilibrium by divesting downstream and looking for new reserves. Hence came the investment boom in non- Opec countries but not all were open. 9
Consequences of disintegration Notwithstanding moves to recreate vertical integration, the industry continues to be disintegrated. NOCs have divergent attitudes towards downstream integration (PDVSA and KPC vs. Aramco) The IOCs concentrate their investment in the upstream. A lot of crude is exchanged at arm s length 10
Oil Market Development Disintegration encouraged oil market development and vice versa Oil market development changed the concept of security and eroded the rationale for NOCs of the importing countries Privatisation, profit maximisation, shareholders value 11
Pressure from financial analysts The financial market has become increasingly demanding Companies have made imprudent promises The M&A logic The opportunistic behavior of shareholders and managers preference for the short term 12
Vertical Integration in Doubt The development of crude and other markets raises doubts on the benefits of vertical integration Companies have tended to get out of less profitable/more volatile segments: transport, refining, petrochemicals Investment has been heavily concentrated on the upstream 13
Persistence of vertical integration Nevertheless vertical integration has persisted Pure upstream companies have not fared very well Independent refiners have also succumbed Pure retailers are rare Service companies have multiplied 14
New actors on the scene The process of disintegration, outsourcing, reliance on markets and arms length transactions has created conditions for the emergence of new kinds of companies: Contractors Traders Consultants Engineering and technology companies
Blurring boundaries The boundaries between the various types of companies are becoming increasingly blurred: Contractors sometime participate in financing and take equity stakes in projects Traders are investing in physical assets such as depots, refineries, retail networks; and are financing deals Banks also trade on their own account
Smaller oil companies We also see the emergence of two kinds of smaller oil companies: Aggressive explorers, whose specialty is to explore in frontier areas that the large IOCs overlook, then farm out entirely or partially when they have a discovery Companies specializing in enhanced oil recovery (EOR): these take over fields from majors when production declines and maintain production even at low levels
A more competitive environment Overall, the environment has become much more competitive National oil companies or governments of oil producing countries can hire or attract various service providers to have an alternative to IOCs IOCs have an increasingly hard time staying competitive and demonstrating that they can deliver value