Nationalised oil can deliver output growth

Venezuela’s oil minister stood up in public this week and denounced the man beside him as “predatory” and a peddler of “the colonialist high-handedness which has done so much harm to the world”.

His unfortunate neighbour on the conference podium was the boss of U.S. oil firm ConocoPhillips, which is claiming billions of dollars in compensation for the 2007 nationalisation of its business there.

Minister Rafael Ramirez’ own boss, President Hugo Chavez, is one of the world’s most outspoken critics of capitalism.

The 21st Century nationalisers may have good reason to believe they can do a better job than the foreign and private sector oil firms they see as careless short-termists

Veteran oil men point to a decades-old example of a well-run state company overseeing steady, efficient, modern production – Saudi Aramco. The one-time joint venture between U.S. companies and the kingdom of Saudi Arabia is now strictly a state entity.

It was on another podium back in 1967 that the American senior vice president of Aramco, then called the Arabian American Oil Company, told 200 young Saudis they would always be employed by a U.S. firm.

Read tersely from note cards, his words angered many in the audience. In their eyes, much was wrong. Operations were being run from New York, Dallas and San Francisco, while Saudi oilfield workers lived in shanties.

As the world grew thirstier for Saudi oil in the 1970s, the U.S. companies exploited the kingdom’s reserves at “ridiculously high rates”, cutting corners and making a mess of the oilfields and reservoirs, said Sadad Husseini, a former senior Saudi Aramco official.

“The general culture was: discover the resource, squeeze it as cheaply as possible and then move on.”

Fed up with Big Oil’s mentality, a Saudi ruling class with a strong sense of ownership oversaw a nationalisation of Aramco that was completed in 1982.

“We were not going to squander or mishandle our assets,” said Husseini, who was in charge of exploration and development. “We started building schools, creating jobs and developing our resources over 30 to 40 years … We spent many years in the 80s correcting the problems they had left behind.”

“The key to the Saudi model’s success has been consistency – and that will continue,” said a senior Western oil executive familiar with the inner workings of the state oil giant. “King Abdullah clearly sees Aramco as a national champion and is willing to develop young Saudis.”

The kingdom’s output rose above 10 million barrels per day this year, its highest for 30 years.

Other similarly blessed countries have patchier records and less reason to blame the international oil companies for their woes – although Ramirez did exactly that in his speech this week at an OPEC industry conference – naming ConocoPhillips and ExxonMobil.

VENEZUELA’S DOUBLE U-TURN

Caracas boasts the biggest oil reserves in the world, and seeking state-of-the-art technology, management skills and capital, it lured foreign companies back into its patch in the 1990s.

But after socialist President Hugo Chavez came to power highly regarded technocrats fled from PDVSA after he vowed to shake up the “gold-card culture” at national oil company PDVSA’s “state within a state.”

Now after 13 years in power and the nationalisation of almost all the OPEC nation’s oil assets, critics say PDVSA is languishing under tight control by officials, with production slowly declining.

“There have been no new discoveries, capacity is lagging, investment is down, activities are opaque instead of being transparent,” said a former senior Venezuelan oil official who declined to be identified.

“A whole lot of things have gone wrong.”

Lawsuits are among them. Caracas is embroiled in about 20 cases before the World Bank’s arbitration tribunal as a result of the state takeovers – including multi-billion dollar proceedings brought by Exxon Mobil and ConocoPhillips.

But behind the rhetoric and writs, the Chavez government has negotiated with companies and agreed to pay compensation for taking over a percentage of their ventures.

As a result, several big foreign companies remain partnered with PDVSA to develop the Orinoco extra heavy crude belt.

Caracas says the ventures will eventually add hundreds of thousands of barrels a day of new production. In its annual results for 2011, PDVSA said production rose to 2.99 million barrels per day last year, from 2.97 million bpd in 2010.

To the government’s fury though, international energy organizations including OPEC routinely give lower estimates for Venezuela’s crude production.

If the jury is out on a PDVSA output success story, there can be no doubt that Russia’s renewal of state control has done the job.

In the mid-2000s Russia nationalised its biggest private oil firm YUKOS and put its main owner Mikhail Khodorkovsky behind bars.

The move sparked predictions that the world’s top oil producer would lose its dominance and Western investors flee. Rosneft, the Kremlin’s main oil firm, took over most of YUKOS’s assets and grew production by double digits – allowing Russia to hold its ranking and pump more than 10 million bpd.

In a world of finite hydrocarbons and high prices, host governments would be irresponsible to do anything other than drive a hard bargain.

In the 1970s, international oil companies held about 85 percent of the world’s known hydrocarbon reserves. That has fallen now to less than 10 percent.

To gain a foothold in big producers, the companies must be able to offer something unique – the ability to manage complex large scale projects and/or cutting-edge technology.

YPF’S CHALLENGE

Argentina will be hoping to emulate Saudi Aramco’s record with its plan to invest $7 billion a year to revive output at YPF after wresting control from Spanish group Repsol this year.

It may be a big ask for YPF to perform better than the previous Repsol-run entity and revive Argentina’s oil and gas production.

The company is rich in resources, but at this stage they are either very mature or lie in the recently discovered shale assets in the Vaca Muerta formation.

“It will be very hard for YPF to deliver, and production is likely to continue to decline,” said Rebecca Fitz of PFC Energy.

“This could create opportunities for companies with the right technical capabilities and appetite for above ground risks. YPF … will ultimately face pressure to bring other companies in.”

YPF was privatized in the 1990s after 70 years under full state control. Repsol got involved in 1999.

“It’s easy to criticize the nationalization process. But don’t rush to judgment on Argentina,” said Husseini.

“When Aramco was nationalized – the values and priorities changed for the better and I suspect YPF will go that way.”

Reuters