Tuesday, January 29, 2013

Challenges Facing International Energy Companies

In light of the terrorist attack against the In Amenas gas field in Algeria two weeks ago, which ended in deaths of nearly 80 people, there is a renewed sense of vulnerability among international oil companies (IOCs) to security challenges in politically unstable countries. Wall Street Journal blogged this week that “energy firms are re-evaluating their presence in the [Middle East and North African] region” after the attack in In Amenas. While the attack was unprecedented, it is unlikely to that IOCs will pull out altogether from one of the most the prolific and profitable regions in the world. In fact, the security situation is just one of many pressing challenges that IOCs confront at this point. While the challenges are many, it is worth looking into five of the most prominent ones.

Number one challenge for IOCs is something that was mentioned in the last post on this blog – resource nationalism and the rise of national oil companies (NOCs). High oil prices and the rise of NOCs since the 1990s have significantly reduced the bargaining power of IOCs and weakened any leverage they formerly had on energy-rich countries. As a result, IOCs have learnt adapt to less favorable contract and investment terms and take greater risks to operate in more unstable geopolitical environments. 

A related, second, challenge is political instability (e.g. Arab spring), weakening of energy-rich nation-states and terrorism (e.g. Nigeria, Algeria). Many energy-rich countries in the Middle East, North Africa and Sub-Saharan Africa, for example, Nigeria, Sudan, Iraq, and Libya, face grave security problems, which are not only due to the lack of the rule of law and security, but a more fundamental issue of weak nation states with weak governments that wield little influence and legitimacy in their respective countries. Some energy analysts point out that there have been a growing number of attacks against Western interests since 2000. Because of that, companies are likely to continue to invest in extensive security needs in physical workplace, including Algeria.

The next challenge facing IOCs is tight supplies of economically extractable oil and gas and competition to produce energy sources in geologically difficult, remote, harsh and economically costly areas (e.g. unconventional sources such as shale and tight gas and oil, oil sands, exploration of the Arctic) ultra-deep waters, or tar sands. Developing unconventional energy sources in such challenging environments require significant investments in technology.  But even heavy investment in technology cannot guarantee successful finding of oil or gas, as was the case with the deep-water drilling in Gulf of Mexico’s Alaminos Canyon or the recent outcome of shale gas drilling in Poland that turned up dry wells.   

Fourth challenge is cyber security threats and cyber espionage (hacking on energy companies to obtain vital information on energy activities). Energy companies are increasingly targeted by hackers aiming to obtain valuable information on new oil findings or other valuable corporate data. For example, coordinated hacking in 2010 via malicious e-mails sent to employees of ExxonMobil, ConocoPhillips and Marathon Oil evidenced that hackers aggressively seek proprietary information. There is also politically or ideologically driven hacking to disrupt petroleum operations not only against IOCs, but also NOCs.  For instance, perpetrators of a massive cyber attack on Saudi Aramco in August 2012, which damaged 30,000 computers and aimed to stop production of oil and gas, reportedly blamed Saudi Arabia for “crimes and atrocities” in Syria and Bahrain. Highlighting ideological motivations of cyber attacks, it was reported in August 2012 that an Anonymous hacker group planned an attack on computers of energy companies developing Canada’s Alberta oil sands. This group invoked environmental harm from oil sands operations as its motivation to attack. Hacking is more sophisticated now than a few years ago and protection of data of energy companies and critical infrastructure from cyber attacks appears is becoming a serious concern for corporate and government interests. 

Fifth challenge is addressing climate change and pressures from environmental groups to regulate the energy industry. While political debate over global warming goes on, executives of major IOCs appear to have come to accept the scientific consensus on climate change and to expect that regulations to cut greenhouse emissions would be inevitable. The current challenge for energy majors is to have a strong voice in the climate-change policymaking and work out the levels of regulations through a coordinated national approach to cut greenhouse gases as opposed to a multitude of regulations devised by various local governments, at least in the U.S. Another layer of challenge here is an increase in shareholder resolution filings in the U.S. to pressure energy companies on sustainability and climate change issues, sometimes even tying executive compensation directly to a company’s sustainability metrics. With many other challenges facing IOCs, as well as NOCs, this list is hardly exhaustive. But could this be a first-tier list?

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