• Pursuing Foreign Petroleum Investment Opportunities
  • May 1, 2003 | Author: Jay G. Martin
  • Law Firm: Winstead Sechrest & Minick P.C. - Houston Office
  • There is no question that Houston has become the undisputed center of the world's petroleum industry. Ever since the global petroleum markets have undergone immense change over the past 25 years, the petroleum markets in the United States and elsewhere has experienced significant advances in technology on both the demand and supply sides. Additionally, it has seen a tremendous consolidation of companies in the petroleum industry that has led to the formation of such giant companies as ExxonMobil, Chevron Texaco, BP (Amoco) and Conoco Phillips, just to name a few.

    On the international scene, the industry has gone from being characterized by nationalization, renegotiations and the emergence of strong state-owned petroleum companies supported by foreign loans in the 1970s, to a market that encourages foreign investment due to the collapse of oil prices and state socialism in the 1980s. As a result of this shift in philosophy, many countries, which formerly had centrally planned economies (e.g. Former Soviet Union, China, certain Latin American countries), are rushing to attract foreign petroleum investors as a panacea to their disappointingly slow economic growth. In some cases, state-owned petroleum companies are being restructured and have moved or are moving towards privatization in hopes of securing much needed investment dollars.

    However, in most oil and gas producing countries, the only route for a foreign investor to participate in an attractive acreage or exploration opportunity is through working in a joint venture, production sharing or service contract relationship with the state-owned oil company serving as a mandatory partner. But, these types of business relationships are prone to experiencing critical issues, including access to land, payment to host country for extraction of oil and gas, management of geological and technological risk, and excessive supervision of oil and gas drilling activities, which must be managed effectively to be successfully completed.

    So how does a CEO of a multinational petroleum company, whether Houston-based or not, decide which foreign exploration opportunity is right for the company to invest its limited corporate funds. For starters, from a high level, they should generally consider the risk versus the potential rate of return with regard to the investment opportunity. Next, they should always keep in mind the following factors before committing any capital to a foreign investment opportunity:

    · Geological and technological risks

    · Competitiveness and flexibility of fiscal terms

    · Ability to obtain an equity interest in oil and gas produced

    · Operational freedom

    · Equity and fairness of government decision making processes

    · Property rights/guarantees that recognize the sanctity of private property

    · Fair/efficient legal system that protects contract rights in a speedy, low cost, and unbiased manner

    · Proximity of markets for products produced

    · Free-markets that call for no price controls or regulated prices imposed by government

    · Free trade that does not restrict the movement of goods/services, both internally/externally

    · Low levels of taxation on labor/capital, and a stable/predictable tax system that ensures businesses are not subject to retroactive tax increases

    · Levels of government spending that are sufficient in providing for public safety (protection of person and property), public health and education, but are not so high as to be wasted or interfere with the proper allocation of resources, which could diminish economic opportunity and growth

    · Reasonable/rational government regulations of oil and gas drilling activities

    · Stable money that is not subject to high levels of inflation or inflationary swings

    · Local labor content requirements

    · Effective methods of dispute resolution such as international arbitration

    Conversely, there are challenges faced by the host countries as well. For example, they must strike a delicate balance between their mandates as stewards of a sovereign, natural resource, while attracting and sustaining private sector investments that yield economic development, advancement of technology, revenues to the public coffers and a vibrant long term energy industry.

    Furthermore, regulation of oil and gas activities by host countries is constantly evolving and changing in response to advances in technology, new economic concepts, new financing methods and new political attitudes. As such, there are several trends that have emerged which are likely to have a major impact on the global petroleum industry in the future, including:

    · Impact of global warming on the petroleum business

    · How rapidly energy demand grows

    · Continued unrest in the Middle East (particularly in Saudi Arabia)

    · The effectiveness of OPEC's efforts to raise and lower oil and gas production levels

    · The large potential of the ex-USSR

    · Continued restructuring, privatization and internationalization of other key state-owned oil companies

    · The impact of governmental regulation of the environment on future oil and gas developments

    · The impact of terrorism on future energy projects

    · Availability of affordable insurance for future oil and gas projects

    Regardless of the potential challenges faced by petroleum companies, or foreign countries, the upshot is there continues to be an opening of numerous and promising oil and gas exploration opportunities that have historically been closed to western investment dollars. And while no corporation or government would ever enter into an investment opportunity to fail, negotiations can break down over fairly predictable concerns by both parties. Hence, prior to undertaking any foreign investment opportunity, the first step of all parties involved should be to carefully assess the elements of the opportunity.