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A New World Order?

Peter McKenzie-Brown
August 23, 2008

“Alberta became the Bolivarian province of Alberta when you decided to take more royalties from the oil companies,” Luis Vierma told a scowling crowd from Calgary’s petroleum community last June. “This made Venezuelans very happy.” The reference, of course, was to Simon Bolivar – the 19th century revolutionary whose leadership helped to liberate much of South America from the Spanish monarchy. The speaker was the E&P vice president of a national oil company – specifically, that of the Bolivarian Republic of Venezuela.

Vierma’s cheeky comment garnered a few chuckles from his audience, but not many. This articulate man – he was educated and for some years worked in the United States – described a world order which at first blush doesn’t seem to suggest a happy future for western-style international oil companies. However, this commentary suggests that it may not be all that bad for private-sector oil companies, and that the changing world has huge implications for the oilsands.

The United States is clearly worried about Venezuela. The CIA’s 2008 World Factbook, for example, offers a litany of indignant complaints about the South American nation. “Hugo Chavez, president since 1999, seeks to implement his ‘21st Century Socialism,’ which purports to alleviate social ills while at the same time attacking globalization and undermining regional stability. Current concerns include: a weakening of democratic institutions, political polarization, a politicized military, drug-related violence along the Colombian border, increasing internal drug consumption, overdependence on the petroleum industry with its price fluctuations, and irresponsible mining operations that are endangering the rain forest and indigenous peoples.”

Vierma’s audience was also concerned, but their concerns were much narrower. They were well aware that Petróleos de Venezuela S.A. (PdVSA) was the beneficiary of Chavez’s large-scale nationalization of assets held by international oil companies. They were also aware that the company holds the keys to Venezuela’s Orinoco heavy oil belt. Named after the nearby Orinoco River, these deposits are roughly comparable in terms of in situ volumes to those in Alberta’s oilsands. On the global stage, they are the province’s only serious competitor.

New World Order: This commentary explores Vierma’s suggestion that recent decades have seen the creation of a new world order that is now entrenched and becoming more pronounced. It is an idea that is getting ever-wider acceptance. “In the new international energy order, countries can be divided into energy surplus and energy-deficit nations,” writes Michael Klare, an American academic who specializes in the geopolitics of energy. “Deficit states like China, Japan and the United States are compelled to pay ever higher prices for imported fuels as they compete with one another for those materials the surplus states are prepared to supply. The surplus states, on the other hand, are sure to become richer as they parcel out their increasingly valuable commodities at whatever prices the markets will bear.”

As Klare observes, national oil companies (NOCs) are increasingly dominating global oil supply. Of the 15 oil producers with the greatest reserves, only two are privately owned – Russia’s Lukoil (#9) and Chevron (#15.) Between them, they control 2% of the world’s proved conventional reserves – compared to 77% for the other 13 companies, combined.

PdVSA’s Vierma – his company is the beneficiary of a highly contentious nationalization of the petroleum industry by the Venezuelan government – is a strong believer in the new world order. “The whole industry of the last century is completely different from the industry of today. In the 1970s, 85% of the (world’s) oil reserves were managed by international oil companies, the Seven Sisters. Today the situation is completely different. Most reserves are now managed by national oil companies, and everything now gravitates around (them). At the beginning of the 21st century, national oil companies turned into the principal actors in the petroleum sector.”

Petroleum “is the backbone of the economy in Venezuela,” he added. And according to the vision of Venezuela’s socialist government, the country’s NOC has a responsibility “to ensure our shareholders get enough of our revenue, and we have 27 million shareholders, the Venezuelan people. We have a responsibility to develop our reserves to allow them to have a better life. This is the main difference between how the industry was managed in the past and how it will be managed in the future.”

Being a national oil company brings a lot of responsibilities. Perhaps the most important of these are social responsibility and how we take care of the environment. Last year PdVSA invested $14 billion in social programs, and after paying taxes and royalties still made US$6.27 billion in profit. “This proves that we can be a profitable oil company with a lot of social responsibility.” This is the vision of the future, he said: “Oil companies around the world will do the same.”

Competition and Cooperation: “We believe the work here will involve cooperation instead of competition,” he said. “Even though some competition will be there, but cooperation is an important issue to be considered.” By his analysis, national oil companies fall into three groupings. The first are those that can meet their own needs plus export – for example, Saudi Aramco, PdVSA and the National Iranian Oil Company. Another category includes national oil companies in consuming countries, like China’s CNPC and India’s ONGC. These companies can’t meet internal demand, and are looking for opportunities overseas. Finally, there are NOCs in countries that can satisfy internal demand and could, with development, become important exporters; these include Mexico’s Pemex and Brazil’s Petrobras. This latter group of countries, Vierma suggested, “are going to become important sources of primary energy” to the rest of the world.

PdVSA has formed alliances with NOCs throughout the world, and owns a substantial American subsidiary – CITGO, an integrated oil company in its own right, and the vehicle through which PdVSA exports oil to the US. “All these companies are participating in projects with us either upstream or downstream,” said Vierma. “The magic word is how we can establish cooperation with their regimes so these companies can be successful and sustainable over time. We believe cooperation (not competition) is the key word to establish business relationships with these companies.”

Oh, Canada: According to academic Michael Klare, PdVSA is number six among national oil companies, with control of 6.6% of the world’s proved reserves. However, that number does not take into account the vast potential of the Orinoco oil sands.

When you factor in the oilsands, the numbers become staggering. Start adding the resource potential of bitumen and heavy oil from Canada and extra-heavy and heavy crudes from Venezuela and, Vierma said, “(between us,) Canada and Venezuela will have more than half of the oil reserves around the world.”

How can Canada benefit by working in Venezuela? The country is looking for foreign partners to develop offshore properties that are prospective in terms of both oil and natural gas. In the oilsands, the two countries need to share oilsands technology. According to Vierma, “Venezuela now has 1.3 trillion barrels in situ. With 20% recovery we believe 235 billion barrels of heavy and extra-heavy crudes are now (technically) producible from (our oilsands area), and 17 NOCs are working with PdVSA in that area. By October 2009 we plan to certify those 235 billion barrels that are going to be recovered.”

In a proposal that is unlikely to draw much interest from Canadian firms, PdVSA suggests using cooperation rather than competition to create global market efficiency. “In terms of heavy oil production and heavy oil markets we need to share our learning lessons, experiences and challenges with Canadian companies. Canada and Venezuela will share the same markets as well as the same challenges. Why not cooperate to make the markets more efficient?” He suggested, for example, that Canadians focus on developing markets in Asia, while Venezuela develops markets in the Atlantic basin.

How else could Canada and Venezuela cooperate to develop those resources? PdVSA obviously wants access to Canada’s oilsands technologies. But the country’s conventional resources are also considerable – don’t forget that PdVSA controls 6.6% of the world’s oil reserves – and these resources also need to be developed in a hot global economy – hot, at least, in terms of petroleum exploration and development. Like other producers around the world, Venezuela needs infrastructure, including rigs for conventional oil and gas drilling, and that “provides tremendous business opportunities for Canadian companies.”

The Human Factor: As he closed his presentation, Vierma made a plea for help in education and training. “We need human resources, skilled people, and we are here to tell you this is another area where there are opportunities for the people of Alberta,” he said. “We are aware that the level of education in this province is very good, and we want to retake the bridges that we have burned in the past.”

The irony of this comment, of course, is that Venezuela’s 21st century socialism has helped reduce the talent available to Venezuela while increasing that in Canada. Last year both Exxon Mobil (the parent of Imperial Oil) and Petro-Canada fled Venezuela because of the shenanigans of Hugo Chavez. Both companies were investigating extra-heavy projects in Venezuela, and both transferred technical expertise and field workers to Alberta as a result.

According to CEO Ron Brenneman of Petro-Canada, “We are finding that some pretty good technical people are coming available (directly) out of PDVSA as a consequence of what’s going on down there.” He adds, though, that “I don’t think this will affect (Alberta’s) labour pool to a large extent.”

But what about the new world order? The argument that the world has fundamentally changed is very strong. NOCs are unquestionably dominant in the politically risky parts of the world, and that trend is unlikely to change. In addition, geopolitical considerations (including human rights issues, corruption and worries about Venezuelan-style nationalization of assets) are keeping international oil companies away from many of the regions that are left.

Does this mean the future belongs to PdVSA and other NOCs, as Hugo Chavez and others have suggested? The answer is almost certainly no. Rather, international companies will increasingly focus on development in areas where risk is minimal and potential is large. Clearly, much of that activity will take place in Alberta’s oilsands.

To use Shell as an example, its Canadian oilsands potential is in the 40-billion-barrel range – volumes that dwarf the rest of its oil assets world-wide. Remember that list of oil reserves of the world’s top 15 companies? Such a resource would place Shell in seventh place – ahead of the National Oil Company of Libya, behind PdVSA.

This reality suggests another vision of the new world order. Increasingly, perhaps, international oil companies will need to retreat to low-risk, high-potential areas like Alberta in North America, Europe, Australia, India, parts of Southeast Asia and South America and other “safe” parts of the globe. In a future of declining conventional production, they will prosper by applying their considerable intellectual, technical and capital resources to oil sands and shale oil development, and to the production of gas from tight sands, shale and hydrates.

The service sector could also do well in such a world order. Unconventional development requires a lot of support from service providers. Supplying expertise to inefficient national oil companies could offer (just as Vierma suggested) “tremendous business opportunities.” Indeed.

Peter McKenzie-Brown
August 23, 2008

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