HOUSTON --Energy companies are facing tougher negotiations over fiscal terms, as oil-producing countries capitalize on the tight market to push for a better returns.
Venezuela recently pushed through new royalty changes that are expected to result in lower profits for ongoing projects operated by Exxon Mobil Corp. (XOM) and ConocoPhillips (COP). Western companies also face stiffening requirements to new deals or contract renewals in Indonesia, Chad and Kazakhstan.
The trend, which some see as parallel to the renegotiations that took place in the 1970s, is expected to take some more of the earnings luster off of $50-oil in the coming quarters. Despite reporting huge earnings for the third quarter of 2004, oil companies last week signaled that tighter competition for drilling rigs and other equipment is pushing up the cost of oil field services.
"Around the world, you will see more and more, whether it is increasing royalties or windfall taxes," "The bulk is on stream within a week," Raoul Restucci, chief executive for the Americas for Royal Dutch/Shell Group (RD,SC) unit Shell Exploration & Production, said at an industry conference in Austin. "These prices are starting to bite, and they'll have consequences."
Richard Gordon, executive vice president at John S. Herold Inc., said Venezuela's move to raise royalties on a series of capital-intensive, heavy oil projects wasn't surprising. A recent Herold paper cited other negotiating standoffs, including ExxonMobil's deliberations in Indonesia and the recent effort by the Kazakh government to claim a stake in the giant Kashagan oil field in the country.
In addition to bidding for production agreements, companies may be asked to bid on signing bonuses or on extensive requirements for local content on projects, Herold said. The report likened the situation to the 1970s.
"As national oil companies rose to dominance, marginal tax rates ballooned and retroactive increases in government take became the norm rather than the exception," the report said of that period.
The U.S. could conceivably join the revenue grab from the cash-rich oil giants, most likely through a revived windfall profits tax. The previous version of the tax, repealed in 1988, raised taxes when oil prices rose significantly. Some lawmakers discussed reviving the tax when oil soared with the first Iraq war, but there has been little such talk this time around.
"It's hard to see in today's environment, in terms of talking about any new taxes," said Ian Bremmer, president of the Eurasia Group, a New York consulting firm. "It's very difficult to get through Congress."
Gordon disagreed, and calls some form of the tax "very likely" if oil companies continue to ride high prices to multibillion dollar record earnings.
"It would not take any great genius to dust off the windfall tax to cover a series of deficits," he said.