Hard-Up Oil Regions Opening the Pipelines

I noticed this weekend that Helmerich & Payne, a big U.S. oil drilling company, announced that it was slamming the breaks on oil drilling operations in Venezuela.

Why? Because of delayed payments from Venezuela's state oil company.

No need to get into the nitty-gritty – it’s not the first time an oil driller got stiffed by a state-sponsored oil company.

It’s the larger picture that intrigues me. With so many hard-luck oil-producing countries on the skids, opportunities for U.S. oil drillers to strike more favorable deals are abundant. I’m talking about countries like Venezuela, Russia, and some of the sub-Saharan bourses like Libya and Sudan.

Many of these countries are controlled by governments with a strict, socialist hand. There are many problems associated with pseudo-dictators having control over a given country’s oil reserves, but one of the most significant is that such countries, when times are flush, do not plow oil profits back into their oil industries.

Instead, they spend the money on things unrelated to oil management – things like social programs, political war chests, and the odd government palace or two. Eventually, that kind of “eyes-off-the-ball” capital management will catch up to you, and that’s exactly what’s happened to countries like Venezuela (where Hugo Chavez is struggling to retain the controls of power as his economically-ravaged country suffers).

Hey, when oil is selling at $140 a barrel, anyone can act like a banana republic kingpin and spread the money around wide enough so the people get fed and oil fields are run efficiently. But at $40 a barrel, there’s only so much oil lucre to go around.

That’s where Western oil producers can strike a good deal. Now, the Associated Press is reporting that such companies that have kept a lot of cash on hand to weather the tough economic times, have gained significant leverage when negotiating oil-drilling deals with cash-strapped state-controlled oil producers. Don’t get me wrong, negotiating more favorable deals is only sustainable if oil produced remain low – if we climb back into the $90-and-above range for a barrel of oil, all bets are off.

That’s clearly not the case right now, with oil trading at under $50-per-barrel as anxiety about the global economy keeps consumers and businesses on the sidelines. No bar graph or government bailout program I’ve seen is likely to change that perception anytime soon.

That leaves the Libya’s and Venezuela’s of the world in a bind. They have the oil but they need the cash. So, hat in hand, once powerful government leaders are directing their state oil agencies to take the best deal they can get.  “(They used to say) what the hell do we need the majors for? We've got gobs of cash,'' said Amy Jaffe, an energy expert at Rice University's James A. Baker III Institute for Public Policy, in an interview with the Associated Press. “As the economy and prices collapsed, it's a different picture,' Jaffe said. She adds that state-run oil companies, facing drilling rigs in disrepair and unable to cope with the management side of the business, also have little recourse than to bring a big, Western oil producer in to spread some cash around and handle the job.

That’s why Chevron Corp., Royal Dutch Shell PLC have come out in recent weeks and said they expect increased access to oil fields in state-run oil countries. Sure, there are some calculated risks – when you climb into bed with a Hugo Chavez or a Moammar Gadhafi (who, like the swallows returning to Capistrano, annually threatens to nationalize Libya’s oil fields, even as Western oil companies have billions invested there). But faced with big cuts in oil production, cash is the real king in nationalized oil countries.

Consequently, good contracts – where they are long term, offer better tax and production-share rates, and where the terms don’t change on a dictator’s whim – are available for Western oil companies. The International Energy Agency says that state-run oil companies are pegged to account for 80% of oil exploration growth by 2030. But without the cash to harness that opportunity, such countries are turning to cash-rich Western oil firms to fill the space.

That’s one potentially big silver lining in an otherwise stagnant U.S. energy landscape.

Posted 03-30-2009 7:45 PM by Bret Boteler
Related Articles and Posts