In recent contract auctions, US oil companies and other international majors were all but shut out. This continues a shocking shift in global oil power -- and investors should pay attention.
All that blood and no oil?
Even if you don't believe the Iraq war was all about oil, the country's recent auctions for the right to explore and develop its huge oil reserves was shocking: U.S. companies were just about shut out.
Exxon Mobil (XOM, news, msgs), which in November won the right to develop Iraq's West Qurna 1 field, is the only U.S. company to lead a winning bid. And Occidental Petroleum (OXY, news, msgs) is the only U.S. oil company that wound up as a junior partner in a winning bid.
Yes, Iraq's oil fields, which could produce more oil -- 11 million barrels a day -- by the end of the next decade than Saudi Arabia produces now, will be developed with almost no participation by U.S. oil companies.
As shocking as which companies didn't win bids is which companies did:
See a pattern here?
The list of winners is dominated by national oil companies. The international majors that once dominated the global oil industry are, by and large, absent.
That's quite a different story than in the 1920s, when Iraq was ruled by the United Kingdom under a League of Nations mandate. Then, after the discovery of huge reserves in 1927, oil production was monopolized by Iraq Petroleum, which was owned jointly by the predecessors to BP, Total, Royal Dutch Shell, Exxon Mobil and a consortium of other U.S. oil companies. The Iraqi government, which had been promised a 20% share of the company in the San Remo Conference after World War I, was frozen out.
Given that history, it shouldn't be surprising that in the early 1960s, Public Law 80 appropriated more than 90% of the assets of Iraq Petroleum for the country. The nationalization of Iraq's oil industry was completed in 1966 with the formation of Iraq National Oil. More from MSN Money and MoneyShow.com3 stocks for the coming oil shortage2009: The year of living dangerouslyThe key to oil stocks worth buyingJubak on video: What really caused dollar's rally?Another lost decade for investors?Jubak on video: Debt crisis is brewing overseasBigger than Big Oil There are two reasons, one obvious and one not so obvious, that national oil companies dominate the list and international majors are absent.
First, the Iraqi auction continues the shift of power in the global oil industry to national oil companies.
The world's largest oil companies
Access to the world's oil reserves is even more concentrated in the hands of national oil companies. International oil companies had full access to just 6% of the world's oil reserves in 2008, according to PF Energy. An additional 10% were controlled by national oil companies that provided limited equity ownership to the international majors. Russian oil companies, which sometimes had international partners, controlled 6%. The remaining 78% of reserves were controlled by national oil companies that did not allow or severely limited equity stakes by the international majors.
Second, the terms of the Iraqi auctions made them, by and large, unattractive to international majors but not to national oil companies. The auction results show how different the motives are that are driving these two parts of the global oil industry.
If you are an international investor-owned oil company, the terms of the Iraqi auction were close to punitive.
The Iraqis set production targets that the winning companies had to meet or exceed. (Now, remember, we're talking about a nation whose oil industry faced horrendous difficulties in reaching relatively low prewar production levels because of violence against oil workers and attacks on oil industry infrastructure.)
If a company promised to exceed the government's target for production, that gave its bid an edge. A big edge if it promised to exceed the target by a lot. So, for example, Royal Dutch Shell's winning bid for the giant Majnoon field promised to deliver not only the government's production target of 700,000 barrels a day but a massive 1.8 million barrels a day. That's 1.1 million above the government's target.
And then the Iraqis set terms on these deals that weren't going to shower the winners with dollars.
Oil development and production contracts come in many flavors. Among the most common is called production sharing. In these contracts, the oil company that puts up the capital and does the work required to develop the field gets a share of the oil produced by the field.
From the company's point of view, this has the advantage of letting the oil company share in any increase in oil prices. A company's share of production when oil is $40 a barrel is more valuable when oil rises to $60 a barrel. A production-sharing deal gives the oil company a way to participate in the rising price of oil.
Of course, production-sharing deals give the oil company a share of the price appreciation of oil that many oil-owning nations think rightfully belongs to them. And production-sharing agreements are declining as a percentage of all oil-development deals.
So it's not surprising that the Iraqi auction didn't include any production-sharing language. The terms call for a straight fee to go to the oil company per barrel produced. If oil prices double, all that gain goes to Iraq.
Continued: Securing reserves if not profits
1 | 2 | next >
Check out Jim's top stocks for the next 12 months.
Read how to invest with Jubak's showcase portfolio.
Follow the long-term portfolio from Jim's book "The Jubak Picks."
See Jim's new portfolio to help navigate the treacherous interest-rate environment.
Search for a Jubak's Journal article by topic or stock symbol.
(19 messages)
(22 messages)
(1 messages)
(8123 messages)
(841 messages)
We tried to tell all of you it was bogus, but nobody wanted to hear it. The money's all gone now, so it's time to cry in your beer.
@Flap185
We also have a name for folks that think that all the fighting we are involved in the Middle East is unprovoked American aggression. They are called “Amnesiacs”.
This is because they seem to forget that 9/11 was delivered to our doorstep for the uncomplicated reason that some folks over there hate us and will continue doing the same to us repeatedly as long as they are able.
so how about they pay back the US for all the money we poured into their country not to mention the lives we lost there say a trillion dollars!!!!!!
Read Full Article »