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Geopolitics Slipping on Oil

From Bolivia to Venezuela to Kazakhstan to Russia, a trend of energy nationalization is emerging. Many observers say it is here to stay. Others caution there could be a backlash, jeopardizing foreign investments, technological development and access to lucrative markets.

Energy-rich nations are acting tough and many observers note it has become the norm. The most recent case of nationalizing a country's energy sector is Bolivia, where this month the army seized the country's gas fields and ordered foreign oil and gas companies to leave Bolivia by October if they don't agree to less favorable contracts.

Soaring energy prices have moved many other resource-wealthy countries to change their way of doing business with foreign investors. Recent auctions of potential oil fields in Algeria, Libya and Egypt have produced contracts that many oil executives say won't generate returns to compensate for ever-increasing risks.

These moves, contends Dennis de Tray, Vice President of the Washington-based Center for Global Development, are often driven by problems of underdevelopment. He says, "The world is awash by high-priced oil and countries are saying, 'These multinationals are getting rich and we are still very poor, why aren't we getting our fair share?' Clearly, it is popular in countries that have not achieved the kind of poverty reduction that they might have wanted."

Leveraging Resources

Saad Rahim is a risk analyst of PFC Energy, a global energy consultancy headquartered in Washington. He argues most countries don’t have military capabilities, nor are they economic powerhouses so they try to pull weight with their resources. "They are saying, 'What do we have that we can use as leverage in geopolitics?' It really comes down to their resources. That's their only bargaining chip, so they might as well take advantage of it. But, really, what country doesn't use resources as a tool? You rely on your economic wealth to generate power. Whether it will backfire or not is a separate question and it likely will," says Rahim.

Since 2000, geopolitical crises and the nationalizing of resources have reduced global oil production by 7.8 million barrels a day. According to most observers, when a government takes over a privately owned energy company it often lacks access to the technology needed to maximize production. Foreign investors also start withholding funds out of fear their assets will be nationalized.

William Ramsey, Deputy Director of the International Energy Agency, a Paris-based monitoring group devoted to energy security, adds that "resource nationalism," or government takeovers of energy sectors, is often counterproductive.

He says governments need to strike a balance between their economic concerns and those of foreign corporations. "Anytime you engage in resource nationalism and open up contracts that have been signed and delivered and are in practice, and people have invested money and made plans, you jeopardize your relationship with the companies. It makes it more hazardous for a company to renegotiate and re-establish terms because the company says to itself, 'This was torn up once, it can presumably be torn up twice.' If you create that kind of a dynamic between you and the investors that are necessary in your economy, it's a bit dangerous," says Ramsey.

The Rise of State Oil

William Ramsey adds that profitable, state-run oil sectors are the exception rather than the rule. "Saudi Arabia has done that successfully for some years. They have a very strong company, which hires Western technologies, so they stay state of the art. For other places, it doesn't work so well. In Iran, the relationship is stressed. Companies are not satisfied with the deals. They are not satisfied with the return on their investments. So it is hard for them. In Mexico: oil, gas, electricity, petrochemicals, refining, everything is done by PEMEX [i.e., Mexico's state-run oil giant, Petróleos Mexicanos]. There are no foreign companies whatsoever, except on a service basis. And, I think, that Mexico itself would argue that that's not working," says Ramsey.

Some observers note that global energy reserves are increasingly off limits to international investors. In the 1960s, 85 percent of known reserves worldwide were open to international oil corporations. That number is now down to 16 percent. In 1979, U.S. and British companies accounted for about 28 percent of world oil and gas production. By 2004, their share had fallen to 14 percent. The rest was in the hands of national companies.

Meanwhile, energy-wealthy countries have become richer and less dependent on foreign investors, explains Annette Hester at the University of Calgary's Latin American Research Centre. She cautions that international oil companies can no longer count on asserting their right to develop oil reserves on the grounds that they are the best at what they do.

"What we are seeing is a revival of national companies and a revival of investments in each others countries by national oil companies. If you go around the world and you start watching who is doing the major new fields that drilling awards are being awarded to, they are national oil companies. So the government dominance of the industry is starting to become a lot more blatant and a lot more powerful than the free market," says Hester.

In addition, says risk analyst Saad Rahim, world oil reserves may soon peak, compelling international companies to cooperate with state-controlled energy players. "We have done a comprehensive study looking at all oil fields around the world. Outside the major OPEC producers, you start to see a real decline in a lot of these fields. This will start drying up opportunities for a lot of companies between 2010 and 2012. So you come back to the question, 'Where do you go then?' I think, they will say, 'We don't like this re-nationalization, but we will have to swallow the bitter medicine and come back in,'" says Rahim.

According to most observers, the crosscurrents at work today are reshaping global energy and energy supplies will remain a source of contention and cooperation for some time to come.

This story was first broadcast on the English news program,VOA News Now. For other Focus reports click here.