NOCs Hold, IOCs Fold

Oil firms’ united front cracks
Developing nations gain traction in bid for greater profits

By Steve LeVine in Dallas, Bhushan Bahree in New York and Gregory L. White in Moscow

A freshround of demands for contract concessions, and outright expropriation by oil-producing countries have brought down one of the most powerful negotiating tools used by major oil companies — their united front. The companies are divided into two camps: those still insisting a contract is a contract and others saying they are willing to renegotiate terms to reflect higher oil prices.

Until now, the oil companies have pushed back as developing countries have asked for a bigger share of what they regard as windfall profits from contracts negotiated during the days of $10-to-$20-a-barrel oil in the late 1990s. But senior executives of Chevron Corp. and France’s Total SA publicly said that they are ready to consider giving more of the profits to the countries.

Royal Dutch Shell PLC and Exxon Mobil Corp. are among the companies still adhering to the tough public posture toward changes in contract terms. They are rejecting suggestions by Moscow they alter early-1990s contracts under which they obtained rights to natural-gas fields in Russia’s Far East. This week, Russia raised the pressure by revoking an environmental permit for Shell, threatening to halt the project.

It isn’t clear whether the tough-guy or nice-guy approach will prevail. But the stakes are considerable. Ripping up agreements to give a bigger cut to oil-producing nations will hurt companies’ bottom lines. And if oil companies get booted out of oil fields, that could have a bigger effect.

The apparent crumbling of the unified front is notable. Three years ago, for instance, Chevron temporarily shut down its Tengiz oil field in Kazakhstan rather than accede to what it called an attempt to violate the “sanctity” of the contract by the government levying hundreds of millions of dollars in new taxes. Chevron eventually agreed to pay $810 million in new taxes, but it never acknowledged it had effectively agreed to altered contract terms.

Chevron Chief Executive Officer David O’Reilly, addressing the issue of greater demands for renegotiation, told Organization of Petroleum Exporting Countries representatives in Vienna that “it is natural that governments seek a greater share of the economic pie in good times.” He added: “However, it is very important that changes be carefully considered in the light of increasing costs, more sophisticated technology and the inevitability of a cyclical downturn in prices at some time in the future.”

In another speech at the OPEC meeting, Christophe de Margerie, president of exploration and production at Total, said: “At $70 oil, there is room for renegotiation. But we have to be careful that it’s a real negotiation and not new fiscal terms imposed on us.”

Developing countries haven’t been the only ones making demands. Last December, Britain raised taxes on North Sea oil and gas to 50% from 40%. And the U.S. Congress has had hearings on boosting royalties from oil companies drilling in federally owned waters in the Gulf of Mexico.
But the greatest pressure is coming from the developing countries. In a report issued by Standard & Poor’s cited six countries that have unilaterally increased royalties and taxes on oil revenue and profit this year. “In the end, what can the companies really do?” John Thieroff, the author of the report, said in an interview. “At the end of the day, you pay the taxes.”

In April, Ecuador passed a law requiring oil companies to give back half their oil revenue above a benchmark price contained in their original contracts. Algeria is imposing a windfall tax on companies. Chad wants a60% stake in oil deals. Venezuela, which has led the charge for concessions, has been raising taxes and royalties, and also requiring oil companies to give over majority control of their fields to the stateowned oil company. Italy’s Eni SpA and Total, which balked at the demand, have seen their fields in that country confiscated.

In Russia, the hardest-hit so far has been Shell’s $20 billion project, known as Sakhalin-II. Shell has said environmental issues raised inthedispute don’t constitute legal grounds for nullification of the project’s permits. Russian officials had said they wouldn’t take unilateral moves in the Shell and Exxon cases but suggested the companies voluntarily subject themselves to Russia’s regular tax regime, which analysts say would take a much bigger chunk of the profits.

And Russia’s Ministry of Natural Resources said it is considering canceling the license for Total’s Kharyaga production-sharing agreement, claiming the field hasn’t been adequately developed.

Chip Cummins, Greg Walters and Anne-Sylvaine Chassany contributed to this article.