x Abu Dhabi, UAEFriday 19 January 2018

Time to declare independence in energy business

We all know about the buccaneering Texan oil man JR from Dallas, but the independent exploration and production company is almost fiction in our part of the world.

On a recent visit to Calgary, the oil capital of Canada, I happened to glance at a wall plaque in the lobby of an office tower. It said 41 oil companies had their headquarters in that single building. In the whole of the Middle East, by contrast, there are not that many, and those that do exist are nearly all state-owned. We all know about the buccaneering Texan oil man JR from Dallas, but the independent exploration and production (E&P) company is almost fiction in our part of the world. Yet independent E&P plays a crucial role elsewhere. The independents led the recent US boom in the so-called tight natural gas that is extracted from shales, which requires special technology. Many of these companies are minnows, such as my Canadian examples. But some have grown from nothing into billion-dollar enterprises. In 1989, Aubrey McClendon, the chief executive of Chesapeake Energy, began with US$50,000 (Dh183,600) and 10 staff. Just 21 years later, the company is worth more than $15 billion, employs 8,000 people and has transformed the US gas business. The giants of the oil world missed this revolution: ExxonMobil recently had to fork out $41bn for the independent XTO Energy, showing the high costs of being late to the party. In 1985, the Irish oilman Aidan Heavey started out in the west African nation of Senegal, a West African nation then not known for its oil. Tullow Oil is now one of Europe's largest oil companies and has won fame for striking big fields in countries that the supermajors had ignored, such as Uganda and Ghana. Today, building a Middle Eastern Chesapeake or Tullow is impossible. Fiscal terms are tough and low domestic gas prices offer little reward to explorers. But the biggest obstacle is that the region's hydrocarbon resources are tightly guarded by governments, which allow access only to their own national oil companies (NOC) and a magic circle of international supermajors such as Shell, Total and ExxonMobil. The NOCs, often carrying great political clout, defend their territory fiercely and many can point with justification to a long history of success. In the past, the Middle East's oil and gas was abundant, easy and cheap. But with the region's struggles in keeping up with gas demand and its need to tackle mature or more difficult oilfields, independents could play an increasingly important role. Smaller, nimbler companies search out new exploration ideas and new technologies for hard-to-extract reserves. They operate mature fields coming to the end of their life, cutting down costs and squeezing out more drops of oil through attention to detail. They would sidestep the sometimes suffocating bureaucracy and caution of the big NOCs. Many of the Middle Eastern hydrocarbon reservoirs are essentially identical over large areas. Yet there is little chance of Qatar Petroleum, Saudi Aramco, Kuwait Oil Company (KOC) or Abu Dhabi National Oil Company operating in their neighbours' territory. Successful independents could serve to share best practices between countries. And successful indigenous oil companies, listed on regional stock exchanges, would provide bellwether stocks and a productive outlet for abundant domestic capital. Natural employers of local citizens, they could offer a way for the people of the Middle East to invest directly in the hydrocarbon wealth beneath their feet. At times of low oil prices, the mobilisation of private money would ease the drain on the state's coffers. Once these companies had grown enough, they could expand into other countries and bring profits back into the region. A few Middle Eastern independents have emerged. The Sharjah-based Crescent Petroleum and its affiliate Dana Gas have done well in Iraqi Kurdistan, though their deal to import Iranian gas into the UAE has been long-delayed. Kuwait Energy (not to be confused with KOC), has built up positions in Egypt, Oman, Yemen and elsewhere. Oman's Petrogas is one of the few examples that operates in its home country. Iraq's recent bid rounds were a great missed opportunity. The supermajors and Asian state companies dominated. But preference could have been given to consortia including an indigenous Iraqi independent as a non-operating partner, perhaps with 5 per cent or 10 per cent. That would have helped build national capabilities. It would also have deflected those who say the Iraqi oil industry is being sold off to foreigners. Of course, such policies have to be pursued carefully. Saudi Aramco is not likely to allow an interloper into its crown jewel Ghawar Field, the world's largest. The NOCs argue that they are the steward of national resources with the mandate to preserve them for future generations. An inexperienced newcomer might do irreparable damage to a major field. In Nigeria, the policy of indigenisation has yielded a number of successes in developing previously marginal fields. It ran into trouble, though, with some blocks being won by politically connected players without technical capability, or who were unable to cough up the lavish bids they had promised. With these caveats, though, a bold policy of encouraging domestic E&P independents would add new faces to the Middle East economy. They would help in increasingly mature producing countries such as Syria, Oman and Yemen, in need of revitalisation. But they could also bring new concepts, particularly in helping to meet the GCC's growing thirst for gas. Most of all, they would build economic links between nations, and foster that culture of entrepreneurship which is so vital to the next phase of the region's growth. Robin Mills is a Dubai-based energy economist and the author of The Myth of the Oil Crisis