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22 May 2024

Crisis may force Opec members to cut barriers

Algeria's inability to meet its gas export may force it to lower guards, says PFC Energy. (GETTY IMAGES)

By Shashank Shekhar

Even as the financial crisis may force some Opec members to lay down barriers for entry of international oil companies (IOCs), the Middle East-based national oil companies (NOCs) with stronger balance sheets will not do the same, an energy analysis firm said in a recent update.

Washington based energy analysis firm PFC Energy said countries such as Venezuela, Ecuador and Algeria that are under "financial stress" could ease oil sector entry terms this year. It attributed its conclusions to a study made by its Petroleum Risk Manager service. Countries with weak government finances, declining production or immediate technical needs could make concessions to attract investments. International oil companies (IOCs) may, therefore, find greater negotiating leverage in these countries.

According to Organisation of Petroleum Opec data, 100 capacity projects worth $120 bn (Dh441bn) are planned by Opec members in 2009.

"Over the past few years, rising oil prices and dwindling investment opportunities for oil companies gave greater leverage to resource holders, and many countries responded by tightening their contract terms. Those conditions have changed, and many oil producing countries will find their relative power has diminished," PFC Energy said.

"Sustained low oil prices will add to the financial strain on state budgets, forcing a policy response. Countries that introduced windfall profits taxes will see declining participation in new bid rounds, and IOCs will push for more favourable terms in bilateral negotiations," it added.

On the other hand, the Middle East NOCs who continue to enjoy strong balance sheets may not be forced to do the same, PFC Energy said. "Most of the large oil producers in the Middle East and North Africa are well-positioned to ride out the downturn in oil prices."

GCC countries in the Middle East are in a particularly better position, a PFC Energy analyst said.

"Commercial terms in the Gulf's upstream sector never fluctuated with prices. National oil companies enjoy the lowest production costs in the world and long-standing relationships with those foreign firms already operating in the region. In any case, openings in the upstream oil sector are very limited, and those openings that exist are small plays, like in Oman or Qatar," Raja Kiwan a Dubai-ased analyst with PFC Energy said.

Some Middle East countries that have specific technical needs that require foreign investment – and could be forced to make some concessions on contract terms, PFC Energy cautioned.

Among the more vulnerable states are Venezuela and Ecuador. "Venezuela's national oil company PDVSA is facing severe cash flow problems, and unrestrained state spending has left Venezuela highly exposed to the downturn in oil prices. Even before the financial crisis, Caracas had been signalling its interest in greater foreign investment, particularly for heavy oil in the Orinoco belt. A May 2009 licensing round will test the government's willingness to introduce lower taxes and royalties for IOCs that can offset PDVSA's financial and technical limitations," PFC Energy said.

Ecuador, like Venezuela, dramatically increased taxes on oil companies last year will be under pressure to make amends, PFC Energy said. Algeria's inability to meet its gas export may force it to lower guards, the firm said. "After an unsuccessful bid round in December 2008, Algeria could adopt a softer negotiating stance with companies interested in tight or more deep gas developments."