Earlier this week, ConocoPhillips struck a deal with Qatar Petroleum International (Qatar Petroleum’s global arm) by which the two will collaborate on expanding the Qatari firm’s global presence. Conoco will reportedly help QPI on energy projects beyond the Qatari market – which is phenomenally well endowed from an “upstream” perspective though small from the perspective of local consumption.
In reporting the deal, the Financial Times sees the arrangement as reflective of the “weakened position” of global oil companies when dealing with natural producers. Another perspective is that it reflects increased parity between producers and oil “majors”. In either case, the trends driving the shift in posture are here to stay.
One trend driving the shift in posture is the increased savvy of oil producers in the Gulf and worldwide. As local strength and expertise have developed over the past decades, national oil companies have become less and less dependent on the “majors.” The story of Saudi Aramco is a striking example.
Profit-sharing terms between the Saudi government and US oil companies evolved drastically over the decades. The agreement morphed from a mere 5,000 British pound rental fee plus a modest royalty (before oil was discovered) to a 50-50 profit split in the 1950s to majority Saudi ownership in 1974. By 1988, Saudi Aramco’s ownership was fully Saudi. The producing country’s bargaining power grew as its economic clout increased.
(For more on the evolution of Saudi Aramco, see Chapter 4 – “Silicon from Sand: Essential Background on the GCC – of Dubai & Co.)
A second key tend is the growing global aspirations of Gulf firms. The Qatar-Conoco deal illustrates this: QPI and other Gulf firms increasingly seek to grow their overseas operations. Gulf leaders recognize the importance of such expansion in fostering the long-term competitiveness of the region and its firms.
A third crucial trend changing the posture of major oil companies is the rise of competition. Producers are keenly aware that they have options and can choose between technical partners from the US, EU, Russia, and Asia. There are a growing number of world-class oil and gas services companies, while the number of producer countries is fixed. Hence, a shift in negotiating power is inevitable.
(Nameer Siddiqui of Goldman Sachs commented eloquently on the impact of competition on producers’ negotiation power at the Harvard MENA Business Conference earlier this month. He is an old friend and fellow HBS alumnus.)
Whether one sees the shift in posture as “weakening” or as “increasing parity”, realities on the ground suggest that the shift will remain. Savvy multinationals must recognize the new landscape, in which one-sided deals are increasingly a thing of the past.
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