Redrawing the boundaries
  from: Offshore Engineer
  by: Darius Snieckus
  Tuesday, June 17, 2008

US EIA forecasts see oil and gas production meeting well over half of world energy demand through to at least 2025. With NOCs’ share of remaining global reserves at near 90%, is this reality precipitating ‘a deeper relationship’ between the western E&P fraternity and their hydrocarbon-rich host countries? Darius Snieckus reports.

Resource nationalism – as Shell in Russia and Eni in Kazakhstan among other international oil companies would, if only in private, attest – is fast changing the E&P;landscape across the globe. Worldwide energy demand for hydrocarbons, which the US Energy Information Administration calculates will break the 120 million boe/d threshold in less than 20 years, is transferring power to the hands of the 60-plus national oil companies that have sovereign control over 90% of the world’s remaining resource. Indeed, 17 of the 20 largest oil and gas companies are now NOCs, with supermajors accounting for only 3% of oil and 2% of gas reserves globally, though they collectively operate 20% of production through contracts with host governments.With crude trading at over $130 a barrel, the International Energy Agency’s chief economist, Fatih Birol, calls it ‘a new world oil order’.

The situation is no less absolute to the mind of Total chief executive Christophe de Margerie, who sees the current challenge for the oil and gas industry as overarching both the ability to meet the world population’s growing appetite for energy and to help in the protection of the planet, primarily when it comes to CO₂ emissions. ‘We have a problem with the environment and we have a problem with access to energy: how do we reconcile the two?’ he stated in his keynote address to the recent International Oil Summit in Paris.

To meet oil and gas demand that grew by more than 2%/yr between 2004-2007, equal to a rise of 1.6 million b/d on average over each of the last three years, now depends on ‘dialogue and cooperation’ with host governments given western oil companies’ constrained access to new reserves, de Margerie underlined, noting 45% of remaining proved oil is located in ‘closed’ countries. ‘More than ever we need to be working as one to achieve our goals, then it will not be a problem of resources, not a problem of reserves, so long as we can develop the necessary dialogue and cooperation between IOCs and NOCs.’

‘A deeper relationship with host countries is under way,’ he said, ‘where oil and gas projects contribute more to local development and people’s expectations regarding jobs in the host countries, training, community development and best governance.

‘Ultimately this is not about NOCs and IOCs or Opec and non-Opec,’ de Margerie added. ‘It is only about supply and demand. And, speaking for one IOC, we are spending as much money as we can on new development – while dealing with costs that, let’s face it, are really reaching the sky, as we progress projects that present extraordinary technological and environmental challenges. As examples, he pointed to ‘frontier’ projects in which Total is involved, citing the Shtokman field in the Russian Barents Sea, heavy oil developments in western Canada, and the Dolphin gas complex off Qatar.

‘We need to be able to all sit down and say “How much more can you each produce?” because right now we all recognise that what we are left with in terms of reserves are the most difficult reserves to produce,’ stressed de Margerie, ‘and we have to produce them under the technical constraints presented by a scarcity of certain categories of experts and equipment in a booming project market.We all do.’

At the same time, he continued, ‘the fight for [the hydrocarbons] we have’ is taking place at a time when fossil fuels, coal included, account for nearly 60% of anthropogenic greenhouse gas emissions. ‘This is definitely a matter of urgency and we must as an industry be actors and not just observers, for we need to know soon how CO₂ emissions will be dealt with after 2012 [when the Kyoto Protocol's emissions targets expire].’

Hard truths

Expanding energy demand, hard to access resources, and rising carbon emissions, are, not surprisingly, fundamental to the E&P worldview of Shell executive director of exploration and production Malcolm Brinded, who, like de Margerie, sees the best response from the global oil industry coming from the ‘ability to work together, particularly national and international oil companies’.

‘Energy industries will be transformed over coming decades as we respond to the challenges embodied in three hard truths: first, we need to meet the expanding energy needs of an increasingly populated and rapidly developing world; second, we need to get more from resources that are increasingly difficult to find, produce and deliver; and third, we must cut carbon emissions to stabilise atmospheric CO₂ and limit global warming,’ stated Brinded. ‘Finding solutions to tackle these hard truths will require us to develop new technologies, and deploy them on a massive scale.’

The engine Brinded argues can best drive this juggernaut of a project is ‘partnership’ between NOCs and IOCs. ‘NOCs today are knowledgeable, capable and confident,’ he stated. ‘They don’t depend on IOCs. However, I believe that IOCs – with their integrated global capabilities – contribute valuable additional strengths in developing and deploying technology, helping to build local skills and capabilities, and helping to secure added-value customers.’

Brinded also suggested a hidden benefit could be gleaned from the ‘innovation and improvement’ bred by the competition among IOCs to become partner of choice for a given NOC. ‘I know that being chosen depends on the competitiveness of our technologies and capabilities, as well as our commitment to meeting partners needs,’ he said. ‘As IOCs we seek to employ our strengths and capital for long-term mutual advantage, building a relationship not selling a package, and we will need to to face the challenges of the coming decades.’

Different strengths

Though Saudi Arabia’s minister of petroleum, Ali Al-Naimi, openly shares de Margerie and Brinded’s view of the environmentalist role the global oil industry should evolve to take on – delineating the ‘direct relationship between energy, the natural environment, and economic growth and human prosperity’ – it is less clear how the kingdom perceives the usefulness of IOCs in achieving a balance between responsibility to a natural environment that is ‘a common trust and God-given patrimony’ and the desire to ‘improve the living standards of our fellow men’.

‘Different countries have different strengths and resources to contribute to economic growth and of course our major source of contribution to the global economy is through our petroleum reserves,’ stated Al-Naimi. ‘Saudi Arabia has 264 billion barrels of crude oil reserves, with the potential to increase those resources by at least 200 billion barrels. As for natural gas, we have reserves of 258tcf, with the likelihood of doubling that figure.’

To better play to its strengths, he said, Saudi Arabia planned to ramp up production capacity – backed by an infusion of some $90 billion over the next five years – to 12.5 million b/d, ‘enough to meet the expected call on Saudi oil for the foreseeable future even as [it] maintains a spare production capacity of 1.5-2 million b/d’ to cover any disruption of supply from another Opec member.

‘The challenges before us are great – economic growth, human prosperity, and welfare of the environment – but Saudi Arabia is eager to join with others in these efforts and looks forward to making a meaningful contribution to the solutions that we must find, together,’ he added.

Underpinning the protean relationship between IOCs and NOCs is a crude price that has shot up 60% over the last four quarters and lays bare the extent to which each needs the other. For while IOCs, faced with a depleting portfolio of ‘easy reserves’, are helped by high oil prices in paying for the development of more complex and/or remote fields, many resource-rich countries and their NOCs are currently enjoying a ‘windfall surge’ in revenues and have less need to bolster production, either because of depletion policies or due to concerns over how well their respective economies might absorb the profits.

Ultimately, whatever new forms of collaboration are hashed out between the IOCs and NOCs in the near-term – and for a most recent example look at the ‘new model of cooperation’ formulated by Eni and the Congolese government that ‘combines the traditional activities of hydrocarbon E&P;with sustainability and important initiatives with unconventional and renewable sources’ – there is an outstanding chance that a sharp correction in the crude markets might just change the lie of the land again. ‘The current oil price may increasingly play a “clearing” role indirectly through its impact on the pace of global economic growth’, the IEA’s Birol reckons, with the record crude prices being experienced today – contrasted with the price spikes of 1973-75 and 1979-81 the first instance of oil price and demand ‘both being up’ – triggering a slowdown that in turn alters the balance of power between the IOCs and NOCs as demand and then oil price loses altitude. OE

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