Energy-Rich Nations Are Raising Price of Foreign Admittance
It might appear to be an exceptional episode of revolutionary zeal translated into energy policy. But Bolivia is just the latest of several oil-and-gas-producing countries in Latin America and beyond that are squeezing energy companies as never before.
With prices of crude oil and natural gas at record highs, and ideology increasingly propelling government policy makers, producing nations are demanding a larger part of the mineral wealth. In some cases, they are canceling long-term contracts that gave energy companies highly favorable terms.
"They think that since there is more revenue coming in, they can take a much harder line in negotiations," said Lawrence J. Goldstein, president of the Petroleum Industry Research Foundation, an industry-financed analysis group in New York. "In some cases, they don't even need to negotiate."
Many of the world's giant energy producers, among them Saudi Arabia, Kuwait, Iran and Mexico, play no role in the trend because their state-owned companies either fully control or dominate production. But Russia, Venezuela, Kazakhstan, Nigeria and Algeria, together accounting for 20 percent of the world's supply but dependent on foreign and private domestic companies, are another story.
They are among the countries that are tightening the terms - sending a message that has reverberated in the industry at a time when supplies are tight. Some industry representatives call the new terms a chokehold that will slow investments, just as consuming nations need more oil to reduce prices.
"Both the tighter terms and the fluidity of contract terms will cause companies to second-guess further investment," said Michelle Billig, director of political risk at the PIRA Energy Group, a New York consulting firm. "The willingness of countries to change the terms halfway through the project complicates any type of investment decision because you don't know what terms you're going to have at the end of the project."
To governments, though, the squeeze is justified because of the huge amount of money that oil companies are generating. A barrel of oil traded above $60 last week, before settling Friday at $58.75. Natural gas, which has doubled in price in the United States in five years, is in high demand the world over.
"They've never had earnings of this order," said Victor Poleo, a left-leaning oil economist in Venezuela. "So this awakens an insatiable appetite in governments for that income."
The increasing prices have been a windfall for oil companies, which are registering record profits.
The Exxon Mobil Corporation saw profit jump 44 percent to $7.86 billion in the first quarter this year, while Royal Dutch/Shell's profit climbed 28 percent. The combined net income of the four biggest oil companies - Exxon Mobil, BP, Shell and ConocoPhillips - increased 39 percent from a year earlier, the companies reported in April.
Measured another way, Exxon Mobil's revenue for the first quarter - $82.05 billion - is nearly as much as the $107 billion gross domestic product in Venezuela, which supplies much of its crude oil to the United States.
The big profits are not lost on people like Abel Mamani, the leader of Fejuve, an influential antiglobalization group in Bolivia that has fought oil companies. Angry protests against the country's energy policies have already led two presidents to resign in 20 months.
The latest resignation came last month after the Bolivian Congress sharply raised taxes on foreign energy companies, but not enough to placate some groups - the protests continued and talk of nationalization was in the air.
"This is a necessity," Mr. Mamani said in an interview. "We are tired of these companies taking advantage of our resources."
Energy analysts say such a hard line could backfire in struggling countries like Bolivia or Ecuador, where energy reserves are large, but the industry still needs to be developed.
Repsol YPF, a Spanish energy giant whose Bolivia holdings account for a small part of worldwide production, has publicly said that it is considering legal action against Bolivia for changing contracts.
"The problem in Bolivia is companies are just now making investment," said Ed Miller, the president of Gas TransBoliviano, a pipeline group owned in part by Shell, Petrobras and British Gas, adding, "This is going to have disastrous effects in the long term."
That may not be the case in most countries that are tightening terms. "Countries like Venezuela, which are in a class on their own, can be more demanding in pushing for a government take," said Roger Tissot, director of countries and markets at PFC Energy, a consultant group based in Washington.
In a sense, companies are captives of their own success. Big oil may have invested billions in technologically challenging areas, like the Orinoco Belt of Venezuela or the Caspian Sea region, but now they are reaping the benefits, with oil flowing out and petro-dollars flowing in.
They are not about to abandon those projects now. Nor do they have unlimited options for new investments, since many of the world's top energy-producing countries restrict foreign investment.
"There are very few countries with attractive reserves that are open to foreign investment," Ms. Billig of PIRA Energy said. "Those which are open recognize their bargaining power."
PIRA, which has completed a report on the trend, says some of the toughest new policies are in Russia, by some accounts the world's second-largest oil exporter. In its drive to assert control over the industry, the Kremlin aggressively sought back taxes last year against Yukos, the country's largest private oil company, leading to its sale in a state auction.
The move stifled the political ambitions of Mikhail B. Khodorkovsky, the founder of Yukos, who was sentenced in May to nine years in prison.
In 2004, Russia increased the production tax rate by 15 percentage points and raised the export tax for crude oil that sells for more than $25 a barrel, while maneuvering to give state-run Gazprom, already the world's largest producer of natural gas, greater reach over the country's energy resources.
More ominously for oil companies, Russian legislators are discussing whether to limit foreign participation in certain large-scale projects.
Kazakhstan, a former Soviet republic, is also toughening terms, with a new law calling for a 90 percent minimum government share of all profits when oil is selling above $27 a barrel and at least a 50 percent state participation in projects.
In Nigeria, Africa's largest oil exporter, the government is levying new royalties, and its new offshore contracts are expected to be far more restrictive than past agreements.
No country's energy policies have attracted as much attention as those of Venezuela, whose government has turned the state oil company, Petróleos de Venezuela, into an engine for social change, while increasing taxes and royalties and changing long-term contracts with foreign multinationals.
Venezuela's government, led by its leftist president, Hugo Chávez, is planning to spend up to $4 billion of the oil company's budget this year on a range of programs, from clinics to literacy programs to subsidized markets. Foreign companies, which produce 1.1 million barrels a day out of a total of 2.6 million barrels daily, are needed to help generate that revenue.
The shift could not be in sharper contrast to the early 1990's, when the government opened the energy sector to foreign investment and offered sweet deals to companies like ConocoPhillips, Chevron, Total of France and Statoil of Norway. In the vast Orinoco Belt, companies paid only a 1 percent royalty, a level intended to overcome concerns about drilling for heavy, poor-quality oil.
That all changed last October, when Mr. Chávez's government increased the royalties in the Orinoco region to 16.6 percent, ending a virtual tax holiday. Venezuela is now hoping to raise the income tax rate on the projects in the Orinoco to 50 percent from 34 percent, the country's energy minister, Rafael Ramírez, told reporters recently.
In other parts of the country, the government has also toughened terms, seeking as much as $3 billion in back taxes, raising taxes and requiring majority state ownership. Companies are still welcome, officials say, while making clear that the state is in charge.
"The higher prices permit countries to have the higher revenues for development," said Nicolás Maduro, president of the National Assembly in Venezuela. "Even with the higher royalties and taxes, the oil company earnings are still enormous."
What do you think? Leave a comment below. See our commenting guidelines.
Sign up for regular Resilience bulletins direct to your email.