Iraq is not the only oil war at this time. New political battles for oil and gas are emerging as tensions rise between Western oil and gas conglomerates and the governments of non-Western countries, which are major future suppliers of these vital resources.
The latest shock to the Western oil majors came from new measures begun this week in Kazakhstan to unilaterally violate international energy contracts, if its government decides that foreign companies are not obeying the rules. In Russia, a new law later this year will disallow companies owned 50% or more by foreigners from bidding in auctions for strategic deposits.
Russia has already forcefully renegotiated almost all foreign oil and gas contracts since 2003. Gazprom, its gas conglomerate, causes fear in Europe because of its bold plans to buy oil and gas distribution and other companies.
The European Union’s executive Commission views this as aggression and is opening investigation of Gazprom for misuse of market power to control segments of Europe’s oil and gas markets. But these are early days and the charges are a long shot.
The trend to contract revisions is spreading among the former Soviet republics, which are likely to be the world’s leading new sources of supply. However, no emerging supplier is likely to nationalize resources or make dramatic demands like Russia has dared with foreign energy investors.
Restrictions on the participation of Western majors in extraction are increasing with news laws in Bolivia and Venezuela, which are also trying to better redistribute oil revenues. Other key producers like Kuwait, Mexico, and Saudi Arabia do not allow foreign participation in oil and gas extraction. Some that do permit foreign investment are under embargo e.g. American companies are not allowed to invest in Iran or Sudan.
The Kazakh move was prompted in part by cost overruns and a five-year delay to late 2010 of a huge contract at Kashagan, run by the Italian major Eni, Exxon Mobil and Royal Dutch Shell. The government is threatening to impose $10 billion in fines if negotiations due to close on October 22 end in failure.
Some Europeans and American Congressmen are citing security reasons for objecting to Gazprom’s inroads since it is State-owned. In turn, Kazakhstan is citing security reasons to prevent European companies from obtaining lucrative contracts which are then not fully honoured, placing financial strains on the government. Since suppliers like Kazakhstan depend heavily on oil revenues to finance economic development and their hold over power, they do not appreciate delays in obtaining those revenues.
Chevron chief executive David O’Reilly rushed to the Kazakh capital last week to ensure that his company’s huge investments in another Kazakh project at Tengiz would not be touched for “ecological reasonsâ€. This was the argument used by Russia in a dispute with BP in December 2006 to force a cut in its stake in the $20bn Sakhalin-2 scheme in favour of Gazprom.
Russia supplies over one-third of Europe’s natural gas and is expected to become more prominent in coming years. It is already a major supplier to Germany, Central and East Europe, and Britain. Gazprom caused special heartburn earlier this year when it showed interest in buying Centrica, which owns British Gas, a family jewel.
The Russian company has been accused of playing politics by using its market power to intimidate the Ukraine and Belarusse governments and remind European politicians of their electors’ economic dependence on Moscow’s goodwill. Security of energy supply is now a key political issue between the European Union and Moscow.
Despite their political power, Western governments are unable to stall or stop their energy vulnerability. Britain could only stand by as Moscow squeezed BP. Energy economy stresses are reviving plans in Europe and the US to expand nuclear power regardless of anti-nuclear lobbies. That presages some domestic political turmoil.
Whatever happens, none can prevent a loss of bargaining power in oil and gas compared with the new producers over the next 15 years because data comparisons suggest that oil and gas resources in industrialized countries are being depleted ten times faster than in other countries. This growing dependence on imports is bad news with oil prices already well above $70 a barrel.
Industrialized countries consume more than half of global oil and gas output but possess only a quarter of production. They have less than 8% of the world’s remaining proved reserves of oil and gas. In contrast, developing or transition economies were 21 of the top 25 countries ranked in 2005 by total remaining proved reserves.
With a mess in Iraq, quarrel with Iran and the declining political clout of their governments, Western companies are finding it more difficult to access those remaining reserves in countries that have been Russia’s sphere of influence for decades if not centuries.