Analysis: Arab Spring Likely to Leave Oil Firms Unscathed

June 23, 2011 by · Leave a Comment 

By Tom Bergin

2011-06-15T172504Z_01_BTRE75E1CDW00_RTROPTP_3_INTERNATIONAL-US-TUNISIA-TOURISM

A Tunisian artisan makes tributes to the “Arab Spring” revolution by etching flags on bronze plates in the medina, the old city of Tunis, June 14, 2011.

REUTERS/Zoubeir Souissi

LONDON (Reuters) – Western oil firms are unlikely to face widespread asset seizures or contract revisions as a result of Arab uprisings, thanks to deft diplomacy, legal protections and efforts to depict themselves as partners of the local citizenry.

In the past, big political shifts in the Middle East have often been followed by the eviction of foreign oil producers — Muammar Gaddafi in Libya, Saddam Hussein in Iraq and Ayatollah Khomeini in Iran to cite a few examples.

This time around, upheaval has hit Libya, Egypt, Yemen, Tunisia and Syria — not the biggest oil producers in the Arab world but among the most open to foreign investment. Companies including BP Plc, Exxon Mobil and Royal Dutch Shell have spent billions there.

“I wouldn’t describe us as worried. We’re being vigilant,” said Bob Dudley, chief executive of BP, echoing comments from other companies.

The new governments that have emerged, or may emerge, are expected by and large to remain supportive of foreign investment, because they will wish to maintain output and government revenues.
“I don’t see there being a large nationalistic wave,” said Richard Quin, Middle East analyst at Wood Mackenzie.

In the past popular anger toward a regime has spilled over to the companies that supported it, but oil companies say that over the past two decades, they have positioned themselves on the side of communities, rather than as agents of government.

“Companies now are not so closely aligned with governments,” said Mahdi Sajjad, president of Syria-focused Gulfsands Petroleum, whose shares have been hit by investor fears about the unrest.
In part this has been achieved by investing in community engagement projects. Oil contracts that are more transparent and more favorable toward host nations also play a big role.

Contract Changes

Up to the 1970s, oil contracts were opaque and seen as beneficial to companies and the region’s frequently corrupt governments — at the expense of citizens. Now contracts usually follow internationally accepted models.

This will help oil executives argue they are giving host nations the best deal that a new leadership could hope to get and, therefore, that existing contracts should be respected.
“We look at it (investment) from a perspective of the fundamental stakeholders, the population of the country .. rather than through the lens of the current incumbent government,” said Frank Chapman, chief executive of British Gas producer BG Group.

“What we are doing in Tunisia and Egypt is sustainable,” he added.

Oil companies have beaten a path to new leaders in Egypt and Tunisia, and, an Italian ministerial source told Reuters last month, even to Libyan rebel leaders. Companies say the signals received so far do not point to widespread asset seizures.

If new governments do seek to expropriate oil fields or to rewrite contracts, companies will find they have greater legal protection than they did when the last wave of nationalization swept through the Arab world in the 1970s.

Modern contracts bar governments from taking unilateral action to seize assets and can limit their ability to hike taxes. And if there is a dispute over whether the government has overstepped its authority, companies don’t have to worry about arguing their cases in front of potentially biased local courts.

“Contracts usually provide for arbitration in a neutral venue,” Anthony Sinclair, a partner with law firm Allen & Overy said.

Potential for Loss Still

In addition, many countries have signed bilateral investment treaties, known as BITs, which commit them to protect foreign investments in their territories.
“There are close to 3,000 of these treaties in existence,” Sinclair said.

These will help deter unilateral moves against companies, but they will not protect companies against all losses. International litigation can drag on for decades, during which opportunities are lost, said Harry Clark, partner at Dewey & LeBoeuf. This suggests companies might agree to unfavorable contract changes that would not be upheld in court.

Also oil companies can face a big financial hit if instability delays production.

“The oil industry values everything in net present value terms … (and) because you are pushing things out, on a discounted cash flow basis, that will erode value,” said Quin.
BP and other companies have suspended operations in Libya, while French oil major Total said it lost production at one field in Yemen due to the conflict there.
Sajjad said Gulfsands’ operations in Syria were unaffected, but the conflict could create difficulties in importing equipment there and in other countries — especially if new sanctions are imposed against governments fighting revolts.

There is little companies can do to limit such losses.

Yet some executives say the problems thrown up by the Arab Spring simply reflect the intrinsic nature of the oil business.

“It is always like that in exploration, you can always face different kinds of issues .. This is part of life for an oil and gas company,” said Total head of strategy Jean-Jacques Mosconi.

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Iraq Cabinet Ratifies Four Major Oilfield Deals

January 9, 2010 by · Leave a Comment 

By Missy Ryan

2010-01-06T133509Z_2082907_GM1E6161NUB01_RTRMADP_3_IRAQ

Iraq’s President Jalal Talabani (Center L) and Defence Minister Abdel Qader Jassim (Center R) salute as they review troops during the Iraqi Army Day’s 89th anniversary celebration, in Baghdad January 6, 2010.

REUTERS/Stringer

BAGHDAD, Jan 5 (Reuters) – Iraq’s cabinet has ratified contracts with foreign firms to develop four oilfields, pushing Iraq a step closer toward finalising deals that may make it a leading world oil producer, the government said on Tuesday.

“The cabinet has ratified four oilfields: Majnoon, Gharaf, and in Nineveh province Qayara and al-Najmah,” government spokesman Ali al-Dabbagh said.

Last month, the Iraqi Oil Ministry initialled service contracts with seven foreign consortia to develop fields including supergiant Majnoon, which was awarded to Royal Dutch Shell and Malaysia’s Petronas in a December energy auction.

The firms, part of a long-awaited wave of foreign investment in Iraq’s promising oil sector, must now sign final deals before they can begin work.

The deals represent a mainstay of Iraq’s ambitions to transform its underperforming oil sector and bring output capacity to 12 million barrels per day (bpd), a huge increase from output now of around 2.5 million bpd.

The deals ratified on Tuesday were offered to foreign firms at a Dec. 11-12 energy auction, Iraq’s second this year.

Royal Dutch Shell, Europe’s largest oil company, and Petronas won the rights to Majnoon, a major field near the southern oil hub of Basra.

Majnoon, whose reserves of 12.6 billion barrels make it one of the world’s largest untapped fields, was one of the prizes on the block in that auction.

Major Success

After a more tepid showing in an initial auction in June, Iraqi oil officials hailed the December auction as a major success. Gharaf, a smaller oilfield with 900 million in reserves, went to Petronas and the Japan Petroleum Exploration Co (Japex).

Qayara and Najmah, located in Iraq’s restive north, were both won by Angolan state oil firm Sonangol.

The 800-million-barrel Qayara field is south of Nineveh province’s capital Mosul, while nearby Najmah has around 900 million barrels.

There are three deals from Iraq’s second bidding round that must still be ratified, including Halfaya, which was won by China National Petroleum Company (CNPC), Total and Petronas. Halfaya, in southern Iraq, has estimated reserves of 4.1 billion barrels.

Badrah, a 100 million barrel reservoir, is another. Badrah went to Russia’s Gazprom, Turkey’s TPAO, Kogas and Petronas.

Last but not least is West Qurna Phase Two, which was won by Russia’s Lukoil and Norway’s Statoil. The supergiant field has reserves of 12.9 billion barrel.

After the deals were initialled, the government said it was seeking a number of technical or operational amendments to the contracts.

“Sonangol was the first company to accept the proposed amendments followed by the other companies whose contracts were approved today by the cabinet,” said Sabah Abdul Kadhim, head of the legal and commercial section of the Petroleum Contracts and Licensing Directorate.

He said responses from the other companies were expected by Thursday. (Additional reporting by Ahmed Rasheed; editing by James Jukwey)

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