Thursday, November 18, 2004

Oil Ecology - Continued
Yesterday’s blog covered one aspect of the changing global “ecology” of oil, the relationship between the majors and independents. Another important change concerns the evolving role of national oil companies, particularly those in large consuming countries, as they seek to diversify their supplies and bolster energy security. The majors have dealt with these companies for decades, often as partners but increasingly as competitors for projects. However, in the last few years new issues have given the national oil companies a potential edge in gaining access to undeveloped resources.

Human rights, sustainable development, and global environmental issues have all emerged as risks to manage, but also as factors that may determine with which countries the global oil companies can do business. All of these issues are squarely in the radar screens of socially conscious investors, who represent a sizable force in the markets, and exercise growing influence on company policies. As this article from the Financial Times points out, China and India, both of which have significant concerns about energy security, have a very different approach to of the issues cited above. This gives them access to resources that are untouchable by the majors.

Consider the impact of shareholder initiatives and lawsuits in constraining the US majors from investing in countries such as Burma. The Chinese National Oil Company and ONGC of India face no such scrutiny. So while US companies have ultimately sold their stakes in pariah states, or come in for withering criticism and pressure, CNPC and ONGC have crafted major investment strategies focused on them.

I am not suggesting that the international oil companies should be free to pursue opportunities without regard to political, social and environmental issues. These concerns are becoming much more important to global capital, and scorning them will have long-term, detrimental effects on shareholder value. Rather, the majors and their investors need to take cognizance of how the emergence of a class of players without the same constraints changes the competitive landscape and limits some opportunities.

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