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ANALYSIS-Oil majors forced to accept tough terms

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04.20.08, 4:17

ROME, April 20 (Reuters) - From Iraq to Ecuador, international oil companies have swallowed their pride and agreed to contract terms they would have walked away from a few years ago.

Oil prices have risen more than five-fold since 2002, emboldening OPEC and non-OPEC energy producers alike to demand a greater share of record revenues and tighten national oil company (NOC) control over the world's biggest reserves.

U.S. crude has hit a new record at $117 a barrel.

"Producers are becoming more assertive in dictating terms, forcing companies to contemplate contracts that in the past they would have preferred not to take on," said Julian Lee, senior energy analyst at London's Centre for Global Energy (otcbb: GEYI.OB - news - people ) Studies. "It's a standard reaction from oil producers to high oil prices."

OPEC-members Kuwait and Iraq are negotiating oil service contracts with oil majors such as Exxon Mobil (nyse: XOM - news - people ) and Royal Dutch Shell (nyse: RDSA - news - people ). In Ecuador, leftist President Rafael Correa has forced international firms to swap deals that gave them a share of oil output for service contracts.

The same kind of deals are on the table for the private sector in energy reform plans in non-OPEC Mexico, desperate to find new reserves in its deepwater to compensate for falling domestic output.

International oil companies (IOCs), facing shareholder scrutiny on the rate they book new reserves to replace what they pump, prefer production sharing contracts (PSCs) that offer them a slice of oil output and encourage them to take on exploration risks.

But as PSCs become scarcer, majors are being forced into competition with service giants such as Halliburton (nyse: HAL - news - people ) and Schlumberger (nyse: SLB - news - people ). National oil companies (NOCs), especially those from energy-hungry Asia, are also in the hunt.

"Kuwait and Iraq are interesting arenas for how the relationship between IOCs and NOCs is changing," said an oil major executive involved in the contract negotiations.

"We are facing competition from service companies and from Asian NOCs. This is taking international companies outside their traditional comfort zone."

Majors complain that service contracts with a flat fee give them no incentive to showcase what they do best.

Kuwait, Iraq and Mexico are all looking at adding performance incentives to service contracts to whet the majors' appetite, without signing away rights to oil reserves.

NOC TRANSFORMATION

National oil companies competing on the international stage, such as Brazil's Petrobras and China's PetroChina (nyse: PTR - news - people ), have also changed their business model and are becoming more like IOCs.

"They mostly play by the same rules when it comes to international opportunities," said Bob Fryklund, vice president of industry relations at consultancy IHS (nyse: IHS - news - people ). "It makes sense for NOCs to morph towards IOCs. The line between the two has become blurred."

NOCs can leverage government-to-government diplomacy to gain the edge over IOCs in international competition, Fryklund said. Governments have forgiven debt and pledged to take part in big infrastructure projects as they look to get their NOCs access to foreign reserves.

As NOC and IOC competition grows, both types of companies are being forced to become niche operators in areas in which they have experience and expertise, Fryklund said.

Majors are still ahead of the game in deepwater plays, unconventional oil and gas and heavy oil, he said.

But in technology, where majors have long held the lead, NOCs have mostly caught up, Fryklund said.

There are still opportunities in oil producing countries, such as in the refining sector in Saudi Arabia and Kuwait. But the openings are potentially less lucrative than upstream opportunities in the past, Fryklund said.

"You can get access," said Fryklund. "But is it going to turn you a profit?"

http://www.forbes.com/reuters/feeds/...-ANALYSIS.html