IOCs, NOCs Facing New Realities

Cancun Management Session

Statoil Venezuela President Tor Espedal sees the international oil companies facing a dilemma and asks, "Will the national oil companies help the IOCs?"

Basically, he answers his question "maybe." But if both parties are smart, both sides can benefit.

Espedal's presentation at October's AAPG International Conference and Exhibition in Cancun was part of a full day of presentations by executives of major companies who discussed technology and strategies for maximizing efficiency. Companies represented in addition to Statoil included Pemex, Aramco, BP Exploration, ChevronTexaco, ExxonMobil, Kuwait Petroleum, Schlumberger, Shell International and Total.

Espedal sees a much stronger commercial and non-commercial partnership between the NOCs and IOCs.

"Globalization of the political agenda within the oil producing countries will create increasing demands for international cooperation on trans-national issues," he said, "such as training, models for social development, models for industry development and commercial models."

But first, the dilemma.

Espedal said at the heart of the dilemma is the great pressure the IOCs face by the market to replace reserves — and their efficiency at realizing sustainable maximum benefits for the resource owners in their alliances with the NOCs and their governments — because the NOCs are where the projected world reserves await.

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Statoil Venezuela President Tor Espedal sees the international oil companies facing a dilemma and asks, "Will the national oil companies help the IOCs?"

Basically, he answers his question "maybe." But if both parties are smart, both sides can benefit.

Espedal's presentation at October's AAPG International Conference and Exhibition in Cancun was part of a full day of presentations by executives of major companies who discussed technology and strategies for maximizing efficiency. Companies represented in addition to Statoil included Pemex, Aramco, BP Exploration, ChevronTexaco, ExxonMobil, Kuwait Petroleum, Schlumberger, Shell International and Total.

Espedal sees a much stronger commercial and non-commercial partnership between the NOCs and IOCs.

"Globalization of the political agenda within the oil producing countries will create increasing demands for international cooperation on trans-national issues," he said, "such as training, models for social development, models for industry development and commercial models."

But first, the dilemma.

Espedal said at the heart of the dilemma is the great pressure the IOCs face by the market to replace reserves — and their efficiency at realizing sustainable maximum benefits for the resource owners in their alliances with the NOCs and their governments — because the NOCs are where the projected world reserves await.

"If they (IOCs) don't replace the reserves, their value declines. With time, they will cease to exist," Espedal said, adding statistics that showed that production and reserve growth of the super majors has occurred through merger and acquisition activities. "For two decades, exploration additions have not replaced production."

Meanwhile, the IOCs have changed their structure of E&P spending dramatically.

"With perhaps one exception (ChevronTexaco), Statoil's larger peers have adjusted their exploration spending from 25-30 percent to 10-15 percent of their E&P spending," he said. "This year, worldwide exploration and production spending will grow only 9 percent, up from the 4 percent first planned.

"That's a weak response to oil prices that are up 30 percent," he added.

Aversion to Risk?

Bolstering Espedal's point, four days after his presentation the Wall Street Journal reported that the seven largest Western oil companies are expected to generate $71.3 billion in free cash this year — and that is after funding $78.1 billion on new projects. The Journal reported that dividends, share repurchases and building cash reserves appear to be the priority.

"Why are the IOCs not exploring more?" Espedal asked during his presentation. "Could there be one main factor — an extreme aversion to risk? The same risk aversion that drove oil companies into mega-mergers aimed at cutting costs?"

Espedal said very high production growth rates in the range of 2-6 percent and high near-term "normalized" return on average capital employed "was not sustainable, because in the long term you cannot maximize these two metrics and at the same time keep the reserve/production ratio healthy."

But the NOCs, where the IOCs look to access their future reserves, are facing pressures of their own, both in supply/demand and political/societal pressures.

Espedal sees world oil demand increasing from about 75 million BOD to 100 million BOD in 2015 — almost as large as OPEC's current production. That includes "dramatic demand increases" in China and India, with 10 percent of Persian Gulf oil directed to the Western markets and close to 70 percent to Asia.

"The Atlantic Basin energy system will emerge, and Latin America, especially Venezuela, Mexico and Brazil, will become an increasingly important oil producer by 2015," he said. Also he sees Russia increasing its role in global energy markets.

Meanwhile, he said, other factors loom:

  • World population is growing, he said, noting that 40 percent of the world's population is concentrated in oil rich countries.
  • Three percent of the world's population will control 75 percent of the remaining reserves.
  • The explosive growth of cities will test the capacity of their governments to provide jobs and social support to sustain livable and stable environments.
  • The emerging urban middle class is creating rising expectations and aspirations, and "demands on improved living stands equal to the living standards in the major oil importing countries and the best of the exporting countries."

Collision Course

A key driver for the "oil rich" countries over the next 15 years, Espedal said, will be increased pressure in generating jobs for the young masses.

"More than half of their population is now under 20 years of age and will continue to have large, young populations with the labor force growing at an average of 3.2 percent per year," he said. "The problem of employment, personal development is compounded by weak educational systems that (are) producing a generation lacking the technical and problem-solving skills required for economic growth."

Thus, the collision of the dilemmas: The IOCs are driven by the demands of the capital markets and the investment community, and the NOCs are primarily driven by socio-economic and political demands.

Espedal said it is imperative for NOCs to re-evaluate their positions and their relations with the IOCs.

Given the prices and the mega trends, the oil producing countries will turn to a rent-driven policy at the cost of a new development-driven policy, according to Espedal. The NOCs can expect to control the rent and a larger share of the pie for their people IF they do it in a gradual and managed fashion. The NOCs that are able to implement this with the IOCs will win in the long run.

Meanwhile, IOCs can expect less financially attractive and potentially lower profitability below today's acceptable thresholds, he added. Dynamics around the oil and gas business have created the space and need for coherent "Corporate Social Responsibility Policies" as part of their core business, which will promote economic and human development, and environmental protection.

Due to the lack of public policies, this is fertile ground for the IOCs, he said.

Espedal also sees a financial market drive that forces the IOCs to seek new "monster mergers," because it is "easier," "quicker," "familiar" and "under control" much more than the other routes open to the IOCs — especially if the oil prices dip below $18 for more than 4-6 months.

"These trends will be stronger and more visible sometime in the 2005-2007 timeframe," he said.

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