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Royal Dutch Shell Plc .com: Race to the world’s energy hotspots

Race to the world’s energy hotspots: Scramble for oil: Money no object as the big players grab what is left of a diminishing resource
By: TERRY MACALISTER, The Guardian – United Kingdom
Published: Jul 07, 2006

The decision by Sinopec of China to pay $1bn for the right to explore for oil in deep water off Angola has shocked the west, which fears it could be left behind in a global scramble for resources.

Similar oil prospects off the coast of the impoverished African country were selling for $35m (pounds 19m) less than a decade ago, when western oil giants such as BP and Shell had the field almost to themselves.

The rising power of oil companies from fast-developing and energy- hungry nations such as China and India have contributed to soaring oil prices. This week, they hit record highs of $75 a barrel, dipping only slightly yesterday.

“It’s just like the British housing market. You have a lot of people chasing a few opportunities. The difference with oil is the companies have huge amounts of cash,” said Derek Butter, an analyst at energy consultants Wood Mackenzie, based in Edinburgh.

And it is not just Angola that is benefiting. The Nigerian government has just sold 16 exploration licences in deep water areas for $500m and secured promises that the buyers will spend a further $20bn on new infrastructure projects such as gas-processing units. Licences have been offered almost everywhere recently: from the Gulf of Mexico to Brazil to Libya. It is only in fast-declining areas such as the North Sea that few of the large companies are really interested, although drilling activity has risen here, too.

The oil grab is also triggering a merger and acquisition bonanza. China National Petroleum Corporation recently bought PetroKazakhstan for $4.2bn, while China National Offshore Oil Corporation (Cnooc) caused panic in Washington last year when it tried to buy the US oil group, Unocal.

In the past, the forthcoming stock market float of controversial Russian giant Rosneft – expected to be valued at $80bn – might have been avoided by respectable western companies fearing damage to their reputation. But BP and others say they might not be able to turn down such an opportunity if the price is right, partly because it would offer vital access to an increasingly protected Russian market.

The Russian president, Vladimir Putin, opened the door for BP to buy Moscow-based TNK, but has since made it almost impossible for anyone to do a follow-up deal. Most governments in the oil-rich Middle East are even more wary of foreign oil firms.

The growing power of leftwing but nationalistic governments in South America is forcing western firms to pay more or leave. Bolivia has just requisitioned assets from Repsol YPF of Spain and has increased gas export prices to neighbouring Argentina by 45%.

With oil prices continuing to bubble along at just under $75 a barrel yesterday, oil industry experts are increasingly convinced there will be a $40-plus price environment for the foreseeable future. This compares with a $20 expectation barely two years ago.

BP made a pounds 3bn profit in the first three months of this year and looks set to easily beat this in the second quarter, having built up a mountain of cash from record earnings in recent years.Billions of pounds have been given back to shareholders at BP, Shell and ExxonMobil, but large oil companies worldwide are also desperately pouring money into trying to replenish their reserves.

The bidding war that has driven up the price of exploration rights in Angola was not just the work of Sinopec. Total of France spent $670m on a 40% stake in the assets next door on block 17.

And national oil groups such as Sinopec will be more flexible on how they structure deals. The Korea National Oil Corporation has recently won an area in Nigeria through a barter deal under which fellow Korean conglomerate, Daewoo, will build a shipyard and railway link. Similarly, the Oil and National Gas Corporation of India has teamed up with local steel group Mittal to offer a range of services to Kazakhstan in return for oil rights.

Saudi Arabia tried a similar move some years ago when it said it would allow western oil majors to explore on condition they helped build gas plants and desalination plants. BP and others turned this down on the basis that it was outside their expertise, although Shell has started a more limited drilling programme in the Empty Quarter.

The race for assets has even included territories formerly shunned by the west, such as Libya. The Libyan government attracted better tax terms from western firms than anyone expected, and Mr Butter believes the Iraqi government should be able to do the same once peace prevails.

But he says it is wrong to blame national companies from China and India for the inflation that has also hit the price of rigs and staff as shortages develop. He says US-based Anadarko Petroleum has just made a $21bn bid for local rivals Kerr-McGee and Western Gas Resources, while ConocoPhillips bought another American oil firm, Burlington Resources, for $35.6bn in December.

“Whilst it is true the international expansion of the Asian national oil companies has increased competition for opportunities in some areas, we question the conventional wisdom that they are unfairly dominating the upstream sector and indulging in a ‘win at all costs’ strategy,” says Mr Butter. But even he struggles to see how Sinopec can explain the cost-competitiveness of spending $1.1bn in Angola.

Bruce Evers, oil analyst with Investec Securities in London, says asset prices are likely to continue to increase. “It’s absolutely staggering what companies are forking out.”

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