Oil firms need a new game plan

Claudia Cattaneo
Financial Post
November 06, 2007

PetroChina's remarkable ascendancy yesterday to the world's first trillion-dollar company is an important event for energy consumers and private sector energy companies.

It highlights that state-controlled companies (also known as National Oil Companies or NOC), such as PetroChina, are eating their private counterparts' lunch; it points to greater NOC control of the world's energy resources, which can only mean higher energy prices and lower energy security for the West; and it shows to private sector companies (also known as International Oil Companies or IOC) that if they want to stay in business, they need to rethink their views of energy security and their recent strategies of re-patriating their cash to North America, in plays such as Alberta's oilsands, that are supposedly more stable.

Justified or not, PetroChina's huge stock market value makes it a stronger company and gives it greater access to capital to make acquisitions. It builds on PetroChina's advantage relative to IOCs in places such as Africa, where it is ready to spend on infrastructure to complement its energy investments. With a strong stock price, it can afford to pay up, if it chooses, for Husky Energy Inc.

China's largest oil company isn't alone as a state-controlled company becoming a force in the stock market. Russia's Gazprom, already worth nearly US$300-billion, said it wants to be the world's largest company by market value. Saudi Aramco, the national oil company of Saudi Arabia and the world's largest oil company by output, yesterday announced plans to sell shares to the public for the first time by offering to investors 25% of the shares of a joint venture refinery with Sumitomo Chemical Co.

"[NOCs] are becoming much more sophisticated in every way -- financially, technically," said Peter Tertzakian, chief energy economist at ARC Financial Corp. and author of A Thousand Barrels a Second. "They have a boldness and a confidence that they didn't have before."

NOCs are already sitting on huge resources. Robert Skinner, a former director of the Oxford Institute for Energy Studies, said more than 75% of the world's oil and gas resources are vested in, owned or controlled by NOCs.

Further concentration of the world's energy riches in the hands of national oil companies is bad news for consumers. Many NOCs are owned by governments that rely on oil revenues to fund their budgets, hardly an incentive to keep prices low. Meanwhile, consuming nations are increasingly dependent "on a group of nations that are manifestly undemocratic, in many cases led by despotic leaders, some ravaged by civil wars fought over petroleum rents, and by regimes whose hold onto power, given demographics, largely depends on ever-increasing the production and export of their resources," Mr. Skinner said.

This changing environment calls for a new way of thinking by the IOCs about energy security. In the past few years, IOCs have sold off their international assets to concentrate in politically secure regions, sparking the torrent of funds into the oilsands. The Alberta government's new royalty strategy has demonstrated Alberta is as politically risky as other oil producing jurisdictions.

Future energy security will depend on private oil companies' return to the international arena through co-operation, said Lou Gagliardi, oil analyst at investment advisor John S. Herold Inc. in Norwalk, Conn.

"Industry and companies have to evolve with the times," he said. "You can dig in your heels or say, OK fine, I'll try to adapt. If you want to be a player, you got to be there."

ccattaneo@nationalpost.com