GLOBAL REPORT Power shifts in global oil business The 'new seven sisters,' from Saudi Aramco to Malaysia's Petronas, have replaced the Western majors as rule makers in energy.
By Carola Hoyos Financial Times March 19, 2007
When an angry Enrico Mattei coined the phrase the "Seven Sisters" to describe the Anglo-Saxon companies that controlled the Middle East's oil after World War II, the founder of Italy's modern energy industry could not have imagined the profound shift in power that would occur barely half a century later.
As oil prices tripled over the last four years, a new group of oil and gas companies rose to prominence. They have consolidated their power as resource holders and pushed the world's biggest publicly traded energy companies, which emerged out of the original Seven Sisters - ExxonMobil Corp. and Chevron Corp. of the U.S. and Europe's BP and Royal Dutch Shell - onto the sidelines and into an existential crisis.
The "new seven sisters," or the most influential energy companies from countries outside the Organization for Economic Cooperation and Development, have been identified by the Financial Times in consultation with numerous industry executives. They are Saudi Aramco, Russia's Gazprom, CNPC of China, NIOC of Iran, Venezuela's PDVSA, Brazil's Petrobras and Petronas of Malaysia.
Overwhelmingly state-owned, they control almost one-third of the world's oil and gas production and more than one-third of its oil and gas reserves. In contrast, the old Seven Sisters - which shrank to four in the consolidation of the 1990s - produce about 10% of the world's oil and gas and hold just 3% of reserves. Even so, their integrated status - which means they sell not only oil and gas but gasoline, diesel and petrochemicals - pushes their revenue notably higher than that of the newcomers.
Robin West, chairman of PFC Energy, an industry consulting firm, says: "The reason the original Seven Sisters were so important was that they were the rule makers. They controlled the industry and the markets. Now, these new Seven Sisters are the rule makers and the international oil companies are the rule takers."
The International Energy Agency calculates that 90% of new supplies will come from developing countries in the next 40 years. That marks a big shift from the last 30 years, when 40% of new production came from industrialized nations, most of it controlled by publicly traded Western energy groups, said a report published this month by Rice University's James A. Baker III Institute of Public Policy.
The biggest contributor will be Saudi Aramco, the world's largest and most sophisticated national oil company and thus No. 1 on the Financial Times list. Amid the surge in crude prices since 2002, Saudi Aramco launched its most ambitious expansion program in a generation. It aims to boost production capacity from 11 million barrels a day - or 13% of today's global consumption - to 12.5 million barrels a day and then 15 million.
In doing so, Saudi Aramco will consolidate its position as the world's most powerful oil company, allowing the government in Riyadh to remain the world's central banker of oil - turning the taps on when there is a shortage of global supply and off when prices fall below its comfort level.
International oil companies and the leaders of the main consuming nations have come to accept Saudi Aramco's dominance. But the recent shift in the international influence of smaller national oil companies has been harder to swallow. By the end of last year, companies such as BP and Shell had lost their leading positions on the world's stock exchanges. Russia's Gazprom and PetroChina Co. (88% owned by CNPC) had pushed their way into second and third place, after ExxonMobil, among publicly traded energy groups.
The main reason for this shift in power has been a resurfacing of the resource nationalism that began in Mexico in the 1930s, spread to the Middle East in the 1970s and abated - in some cases went into reverse - when oil prices cooled in the late 1980s and 1990s. Corporations including Mattei's Eni are having to accept new contract terms in countries such as Russia and Venezuela, where national energy companies are systematically clawing back control of fields.
Venezuela enacted a law this month that will give PDVSA majority control of the Orinoco Belt's heavy oil fields, the largest resource of its kind in the world.
In Russia, the Kremlin wrested control of Shell's $20-billion natural gas project on Sakhalin Island at the end of last year and announced that Gazprom would lead development of the vast Arctic Shtokman gas field, relegating international oil companies to service providers.
The effect of today's nationalism is different from that of the 1970s. In 1975, Gulf, one of the original Seven Sisters and now part of Chevron and BP, shifted all its movable investment dollars out of the developing world and back to North America and the North Sea. This time international oil companies are finding no new fields to escape to. In fact, they have not discovered a site capable of pumping more than 1 million barrels a day since 2000, when Kazakhstan's Kashagan field became the biggest find in 30 years.
Meanwhile, national oil companies are banding together to help develop one another's reserves, leaving growth in the oil and gas industry - and the resources for world economic development - in the hands of the new seven sisters and the governments that control them.
The consequences could hardly be more profound. Fatih Birol, chief economist at the IEA, estimates that the world is falling 20% short of making the $20-trillion investment needed to ensure adequate energy supplies for the next 25 years.
Governments' unwillingness to allow their national oil companies to reinvest their recent windfall profits back into the industry is at the root of some of the supply worries. Instead, those governments use the money for social ventures or it is wasted.
President Hugo Chavez of Venezuela spends two-thirds of PDVSA's budget on his populist social programs. Almost $7 billion had been funneled in that direction by 2005, compared with $77 million spent in 1997 by the previous government, the Rice University report found.
Meanwhile, in Russia little of Gazprom's earnings goes toward upgrading Russia's antiquated, leaking pipeline system. In Iran, NIOC is still a gas importer despite controlling South Pars, the world's biggest gas field. It is hindered from boosting its oil production or fixing its refineries because of the burden of subsidies that keep gas prices at less than 50 cents a gallon.
But Mexico is a prime example of what happens when a government restricts foreign investment while using its oil company as a bottomless piggybank. Pemex's decline has excluded it from the Financial Times' list of the developing world's most influential energy companies.
The most pessimistic forecasters say the rapid aging of Mexico's giant Cantarell field will turn America's third-largest oil supplier into a net importer within a decade.
"The X-factor is [Mexico's] Congress. With Pemex constantly locked in a battle to secure sufficient funding and a reasonable fiscal regime, the company cannot plan on a long-term horizon with great certainty, handicapping its ability to manage declines," says Ryan Todd, an analyst at Sanford C. Bernstein. This could contribute to a "severe problem" in world oil supplies in three to five years. For Mexico, it would mean the gradual loss of 40% of its tax revenue.
International oil companies are, however, competing not only with resource holders but with national oil companies that have become resource seekers.
The biggest of those competitors is CNPC. It has a solid foothold in China's large reserves. But it is its rapid push to secure international reserves that makes it so powerful.
Backed by Beijing's feverish quest to secure the energy it needs for China to develop, CNPC has fanned out across the globe into about 20 countries from Azerbaijan to Ecuador. It has pumped more than $8 billion into the oil industry of war-torn Sudan, where human rights concerns deter others.
"CNPC are the rule makers on access to new reserves in new markets, and they are changing the competition for resources, services, capital and markets," West says.
Nor is CNPC the only company changing the rules in the race to secure assets. Smaller national oil companies such as Petrobras and Petronas are also keeping international energy executives awake at night.
Petrobras, for example, has been at the forefront of the technology needed to pull oil out of ultra-deep waters, such as those that abut Brazil's shores. The company is now using those skills to compete head-on with BP and ExxonMobil in Angola as well as the Gulf of Mexico.
Malaysia's Petronas has also spread out internationally, notably into Sudan and Burma. It receives about 30% of its corporate revenue from abroad and operates in more than 25 countries, producing oil from about 50 projects, most of which it runs, Rice University's report says.
Companies such as Petrobras and Petronas have the advantage that they can more easily woo fellow resource-rich national oil companies. International majors continue to suffer from their reputations, earned in the 1980s and '90s, as haughty and patronizing business partners.
But their attitudes have improved. Examples include the tone they now use in negotiations and their employment and training of local engineers. They also have been known to build infrastructure, such as desalination plants, that might not be needed in the energy project at hand.
International oil executives are making these concessions because they see today's power balance as a long-term condition. Christophe de Margerie, chief executive of France's Total, made his mark brokering deals with national oil firms in the Middle East and Africa. "I think this new world will stay even if the price of oil drops a little bit," he says.
But he believes that eventually national oil companies, many of which are battling declining fields and other technical and managerial challenges, "might be forced to consider, 'Well, whatever we said, those people are worth working with because we need them to develop our reserves.' "
The view expressed by De Margerie could not be further from the self-confident stance his predecessor at CFP, Total's predecessor, took 60 years ago.
Yet it is a worry not only for De Margerie and his peers. If the new seven sisters do not live up to their potential, the world's continued economic growth, China's development and the West's comfort and wealth will be far from assured.
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(INFOBOX BELOW)
New world of energy
Saudi Aramco
With 25% of the world's oil reserves and the capacity to produce nearly triple the amount of any other group, Saudi Aramco is the world's most successful national oil company. The House of Saud dictates energy policy but leaves day-to-day strategy to the technocrats who run it. Saudi Aramco is investing $50 billion over 15 to 20 years, but its biggest fields are aging.
Gazprom
No other company keeps Europe, and increasingly Asia, on tenterhooks more than Gazprom. As a tool of the Kremlin, it has been involved in a gas dispute with Ukraine and a debate with Japan and China over competing pipelines from Siberia, and has grabbed Royal Dutch Shell's majority stake in the Sakhalin II liquefied natural gas project. Gazprom has increased its influence with deals in Central Asia, including Iran. Its push into the European market has provoked moves to limit its access.
CNPC/PetroChina
All three of China's top oil companies have been making ambitious moves abroad. But China National Petroleum Corp., with its 88% ownership of PetroChina, is the biggest and has the widest international reach. PetroChina holds most of its overseas assets in a joint venture with its parent and is active in about 20 countries from Azerbaijan to Ecuador. CNPC retains sole control of its controversial assets in Sudan.
NIOC
Iran is one of the few Middle East countries with massive hydrocarbon wealth that is open to investment by foreign energy companies. National Iranian Oil Co. has partnerships with Italian, French, Dutch and Norwegian companies and collaborates with Chinese and Russian groups. Yet despite controlling South Pars, the world's biggest gas field, Iran is a net importer of gas.
PDVSA
Venezuelan President Hugo Chavez recently signed a law that allowed PDVSA to seize control of the rich Orinoco Belt's heavy crude oil projects. PDVSA's production is shrinking but it is still important to the fortunes of international energy groups, whose contracts in many cases are being rewritten.
Petrobras
The strength of Petrobras is deepwater exploration and production. Expertise gained in Brazil's waters is being applied off the coast of West Africa and the Gulf of Mexico, where its Cottonwood field is in production.
Petronas
Malaysia's national oil company has been described as the role model others would like to follow. Though a top-three exporter of liquefied natural gas, Petronas risks falling behind the gas companies of Qatar, Nigeria and Indonesia.
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Source: Financial Times
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