Big oil likely to increase leverage over OPEC

Journal Record, The (Oklahoma City), Dec 4, 1998 by Youssef M. Ibrahim N.Y. Times News Service

With their planned merger, Exxon and Mobil are expected to gain considerably more leverage in their dealings with members of the Organization of Petroleum Exporting Countries, reversing OPEC's quarter-century of primacy in this relationship, oil-industry experts say.

The Exxon-Mobil deal, as well as the planned acquisition of Amoco by British Petroleum, sets the stage for a new partnership with large oil-producing countries that could help stabilize prices, but could also curtail the search for oil in countries outside OPEC, where production is more expensive.

In essence, these mergers and acquisitions may restore to the international oil companies some of the power they had in the 1950s and `60s, when they were firmly in charge of each facet of the industry, from prospecting for oil to refining it into consumer products. Now, according to these experts, the consolidating giants will regain control with the willing cooperation of some big OPEC members, which have been financially squeezed by the collapse of oil prices. Saudi Arabia, Kuwait and several other countries are now actively seeking the help of the big international companies to keep their energy industries going. "At the margin, these mergers are not good news for OPEC, or at least all of OPEC's members," said Lawrence Goldstein, president of the New York-based Petroleum Industry Research Foundation."They force everyone to be a player. They increase the relative power of buyers against those who sell oil, and they create room for even more savings and more cash to play with by the oil companies. Exxon and Mobil together will need less inventories, less gas stations, less pipelines and less people." Of course, the lower prices are a potent force behind the mergers. Oil prices have plunged about 40 percent this year, reaching a 12- year low this week around $11 a barrel for American crude oil because of the Asian economic crisis, ample supplies and a succession of mild winters. So the oil companies are consolidating in part to gain further savings in order to keep operating profitably in the face of such low prices. "Between OPEC and the oil giants, everybody is running around like a chicken with its head cut off, trying to survive in the low-price environment of today," said Amy Myers Jaffe, an energy expert at the James A. Baker Institute for Public Policy in Houston. "This is a radical shift from the `70s, which saw the ascendancy of OPEC and oil prices that at times zoomed up close to $40 a barrel -- at a time when Big Oil was kicked out of many oil-producing countries and saw its operations nationalized in places like Libya, Iraq, Saudi Arabia, Iran and Kuwait." Now, with OPEC unable to stop the fall in prices, big oil- producing countries are asking the giant multinationals to come in and look for oil, inviting joint ventures that only a few years ago they avoided. Over the last few years Iran, Algeria and the United Arab Emirates have initiated joint ventures with international companies. Saudi Arabia and Kuwait say they are now ready, and Iraq continues to seek the lifting of a United Nations embargo to invite the oil companies to come in as partners. Texaco chairman and chief executive Peter Bijur said he would go to Saudi Arabia to explore new business opportunities. "I'm encouraged by the opening of the mind-set of the Saudis," he said. Roger Diwan, director of global oil markets for the Petroleum Finance Co., a consulting group in Washington, said the growing collaboration between multinational companies and OPEC nations was likely to dampen the companies' interest in developing production in remote, landlocked regions like Central Asia, where crude oil is relatively expensive to produce and transport. "It would be absurd," Diwan said, "for American oil companies to spend huge capital trying to get oil or gas from Central Asia, building pipelines to transport it and shipping it at costs ranging from $6 to $12 a barrel when they can move huge volumes of oil from Saudi Arabia, Kuwait and Iran on tankers at costs of $2 to $5 a barrel." For OPEC's 11 members, the picture will be mixed, Diwan noted. The big producing nations, with billions of barrels in reserves, are seeing the advantages of using the distribution and marketing resources of the international companies to move large volumes of oil. And countries like Saudi Arabia and Kuwait are attractive to the companies because the oil there can be cheaply produced in great quantities. As such, the beneficiaries will include Saudi Arabia, which is exporting 8 million barrels a day, as well as Iran, Kuwait, the United Arab Emirates and, in time perhaps, Iraq -- all of which are capable of exporting at least 2 million barrels a day. All but Iraq have invited large companies to come in and discuss joint ventures. The losers are likely to be producers like Venezuela, Indonesia, Nigeria and Mexico, which have relatively less in reserve and more expensive oil or, in the case of Mexico, have resisted the idea of joint ventures in favor of building up their own national oil companies as world operators. Other big losers are likely to be smaller oil companies that emerged in the last two decades to prospect for oil when it was expensive enough to make money. Many of them are likely to retrench or even go out of business, leaving oil in the ground that has become too expensive to be worth the effort of extracting it. This is particularly so in an environment where oil prices have fallen as steeply as in half over the last two years. Diwan estimates that in the last year, the use of drilling rigs in the United States has dropped to less than 55 percent today from 100 percent, suggesting that fewer companies are looking for oil. This decline in exploration and production is good for OPEC as a whole, Diwan declared. For years now, the smaller companies have brought more oil onto the market, competing with OPEC production. Of all the OPEC countries, Saudi Arabia stands by far as the biggest possible beneficiary from the Exxon-Mobil and British Petroleum-Amoco deals. The Saudis have long had close and friendly relationships with large U.S. oil companies -- ties that have repeatedly paid off. "We always like our friends to flourish in the oil business," said Hassan Yassin, a Saudi businessman with oil interests."Exxon, Texaco, Chevron and Mobil have been good friends of Saudi Arabia for decades. It is natural they will be first in line and the bigger they are, the better it is for us." Abdelsamad al-Awadi, European marketing director for the Kuwait Petroleum Corp. in London, agreed. "There is no question consolidation of the oil industry is a good thing for most of us," he said in an interview. "Our area in the gulf region has been neglected. The big companies will have the money, and we have the oil." The emerging relationship between the multinational companies and OPEC is different in important ways from the one the companies had in the `50s, `60s and `70s. Now, commercial needs are the primary motivation, whereas in the past relationships were driven by geopolitics. The change is important to OPEC, an organization that also came to power out of nationalistic concerns. "We are now open to joint ventures," said Nordine Ait-Laoussine, a former oil minister of Algeria who played the major role in 1993 and 1994 in opening the door to foreign oil companies to Algeria.