London, 7 July 2010

The Gulf of Mexico spill is likely to tip the balance of power in the oil industry in favour of national oil companies, raising costs and eroding the influence of majors and independent producers. After the Deepwater Horizon disaster a six-month moratorium on offshore U.S. oil operations and much tighter rules on global offshore production will force up costs for producers worldwide and allow countries with oil to extract much better terms from international oil companies. International oil companies (IOCs) may be forced to share expertise and technology with state-owned producers in order to secure access to offshore oilfields that are responsible for an increasing share of global oil production. "One of the IOCs' only remaining advantages is their technological edge over national oil companies," said Holly Pattenden, head of oil and gas at London based research group Business Monitor International.

"The governments are now going to be able to put their foot down and say they want to go in as a joint venture and they want technology sharing" before they agree new licence allocations. About 30 percent of the 85 million barrels per day (bpd) of oil consumed globally now comes from offshore oil wells and its share is rising steadily. With most of the big onshore wells in the hands of state companies, offshore is one of the few areas of potential expansion for IOCs.

"More and more of global oil production is offshore and an increasing amount of that is deep offshore," said Mike Wittner, global head of oil research at French bank Societe Generale.

"The new areas are Caspian, Gulf of Mexico, Brazil and West Africa and of those four areas, three of them are deep water." Offshore drilling, especially deepwater production, is becoming increasing vital to IOCs because most of the onshore reserves are either declining or have already been allocated.

"The key problem for IOCs is that, unlike national oil companies, offshore is all they've got left," said Adam Ma'anit, energy analyst at London-based researcher Platform. The IOCs have decades of expertise and technology developed

in the mature areas of the North Sea and U.S. Gulf. A widespread assumption until recently had been that the IOCs would be able to use these skills to push further and further offshore and into deeper and more remote wells to replenish their reserves. But the Deepwater disaster puts that into question.

Relief Wells

Governments are talking about a range of new rules on offshore operations, including perhaps mandatory drilling of secondary relief wells in case of an explosion, which would increase costs dramatically for operators. Desperate for reserves, IOCs may well be obliged to trade their expertise and technology for licences or concede much less attractive terms for new contracts, including joint ventures.

"When governments are making decisions about regulating their waters, they are now going to certainly want to be in a position where they have control over operations," said Ma'anit. "So they are going to either demand majority stakes, which many do anyway, or will ask for joint ventures or partnerships."

Pattenden said one of the IOCs few remaining advantages upstream was their technological edge, but downstream they still had an enviable array of assets, to which state oil companies wanted access. This balance suggested future cooperation.

"The main advantage for IOCs is their large, diversified, established customer bases, retail networks and refineries," she said. "This is one of the main things IOCs (will) market when they're trying to win contracts ... Some technologies will remain the preserve of the IOCs in the near term."

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