The balance of power between host countries and petroleum companies has shifted decisively as a result of the shale revolution and the push into deepwater oil and gas fields off the coast of Latin America and Africa.
The first decade of the 21st century was dominated by talk about increasing “resource nationalism” as governments demanded a greater share of the revenues from natural resources located on their territory. In the past three years resource nationalism has disappeared from the agenda. Rather than trying to impose tougher terms on oil and gas companies, most countries are now competing to attract investment by offering reductions in royalties and lower tax rates.
Countries as diverse as the UK, Argentina, Ukraine and Poland want to attract explorers and developers to exploit shale deposits, and countries along the east and west coasts of Africa, as well as Latin America, are all vying to attract spending on offshore oil and gas discoveries.
Faced with so many competing opportunities, oil and gas companies are pushing for a better deal.
“We are not an opportunity-
constrained company, we are a capital-
constrained company,” Shell chief executive Peter Voser said in an interview, a position he has stressed to investors several times this year.
The underlying message from Shell and other oil companies to resource owners is clear — if you want us to invest time, money and technology developing your resources rather than those elsewhere, you must offer us competitive and attractive terms.
Under the traditional model in the oil and gas industry, producers paid semi-fixed fees in the form of royalty payments and bonuses to the resource owner, normally the government. In return they got to keep any residual revenue from selling the oil and paid taxes on the profits in the normal way.
However, by the late 1990s that model had been replaced in most emerging markets by production-sharing arrangements and service contracts, under which the oil and gas company received a largely fixed fee for investment in exploration and development, while the host government kept the residual revenue.
Service companies such as Halliburton and Schlumberger were happy to work as contractors on fixed fees, but most international oil and gas majors, such as Shell, BP, Total and Exxon Mobil, resisted and continued to press for access to oil and gas as equity owners.
In the 1990s and through the 2000s as China boomed and the commodity super-cycle pushed prices for oil and other commodities to record highs, resource owners pushed for even tougher deals and for the most part they were successful.
Resource owners such as Iraq insisted on service contracts with exceptionally tough terms and the international oil companies eventually agreed, mostly to get a foot in the door and hope the terms could be renegotiated to something more favorable later.
Even countries such as the UK, which continued to offer traditional royalty-and-tax terms and increased tax rates, in many cases retrospectively, to capture the windfall profits from higher oil and gas prices.
By 2008 as commodity prices were peaking, governments appeared to have won. Whether oil was produced under a royalty-and-tax system or some form of production-sharing or service contract, host governments had succeeded in capturing most of the upside from oil and gas prices.