Energy security at risk as oil nations act tough

Iran isn’t the only oil producing country making use of its newfound bargaining power. Oil exporting countries are using their new-found muscle to negotiate more favourable deals with foreign oil companies operating their reserves.

Earlier this week, Russia cancelled the permits to an ongoing LNG project — some see this as a move to pressure the consortium executing the project. Bolivia, which has large gas reserves, nationalised them in May this year while Venezuela renegotiated the production sharing contracts negotiated with foreign oil majors in the 1990s.

This trend towards resource nationalism could threaten India’s quest for oil security. Indian companies like ONGC Videsh and Reliance are increasingly moving overseas in quest for oil. India had her own share of troubles in concluding the natural gas deal with Iran.

On Monday, Russia’s ministry of natural resources withdrew the environmental clearance for an LNG project — Sakhalin II. This means that the Shell-led consortium will be unable to execute plans to build the LNG plant and puts supply contracts with the US, Korea and Japan in a jeopardy.

Some analysts have read this as a form of pressure on the consortium to conclude a deal with state-owned Gazprom, which wants a 26% stake in the project, according to reports on RIA Novosti, the state news agency.

“Russians feel that many of the oil deals concluded in the mid-1990s served Western interests more than theirs, and they feel that earlier losses need to be reversed,” says Sundeep Waslekar, president, Strategic Foresight Group, a think-tank specialising in security related issues. ONGC Videsh is involved with Sakhalin I, a nearby oil production project that accounted for almost a third of the company’s oil production in ’05-06.

In May ’06, the president of Bolivia ordered troops to seize the country’s gas fields. Bolivia had privatised its natural gas sector in the mid-1990s, after which the country’s gas reserves shot up from 3.8 trillion cubic feet to 26 tcf.

Venezuela, which has amongst the largest oil reserves globally, had also invited a number of foreign companies in the petroleum sector in the 1990s. International oil majors such as Chevron, BP, Total and Repsol-YPF entered into operating service agreements (OSA).

In ’01, the country passed a new set of laws governing the hydrocarbon sector, which superseded the old laws and raised the royalty and tax rates for the foreign operators. The foreign operators also had to convert OSAs into joint ventures with the state-owned oil companies. “Unlike Russia, where the issue is mostly commercial, Venezuela is also using oil as a political tool.

It is supplying cheap oil to Cuba and is offering concessions for political support,” says Mr Waslekar. “In the current market conditions, sellers are in a position to dictate terms,” he adds. The African state of Chad is also embroiled in a similar tussle to get better terms from a Chevron-Petronas consortium producing oil in that country.

One reason for the bickering is that because of higher oil prices, there is more to fight over. Secondly, many of these contracts had been negotiated in the 1990s, when oil prices were lower and these countries were in need of cash. Their bargaining position has strengthened considerably since.

The spike in oil prices also means there are many more billion to fight over. This bickering could hurt India’s quest for energy security. India’s two oil majors, ONGC and Reliance, are increasingly venturing overseas in search for exploration acreage. OVL is currently India’s second largest oil producer, after ONGC.