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By John Kemp
LONDON, Jan 15 (Reuters) - For a decade, the oil industry has worried about rising resource nationalism in producing countries. Host governments have imposed tougher terms, demanded bigger exploration bonuses and extracted a higher share of revenues, in some cases expropriating foreign oil companies when they failed to develop new fields fast enough.
Now the wheel may be turning as the prospect of big new oil and gas finds from shale and in deepwater trigger a competition among potential host countries to attract investment.
Between 2002 and 2008, the oil and gas sector was characterised by a scarcity of deposits, giving host countries the whip hand. Now deposits are plentiful but there is a scarcity of capital and technology needed to exploit them fully, which has shifted the balance of power in favour of the major international oil companies and leading independents as well as oilfield services companies.
Britain and Argentina are just two examples of countries hoping domestic shale resources could transform their economies following the example of Texas and North Dakota, and willing to reduce their share of the revenues in order to develop new oil and gas resources.
"We've decided to give incentives for gas production," Argentina's President Cristina Fernandez said in November. The country became notorious after expropriating Repsol's stake in YPF earlier last year, but exploration and production terms are being softened to attract investment.
Domestic prices remain controlled, but firms will be allowed to sell new production at $7.50 per million British thermal units (mmBtu), up from the previous ceiling of $5.00, and almost twice the prevailing price in the United States, to spur development of the country's giant Vaca Muerta shale deposits .
Britain's government has promised to develop a "targeted tax regime" to stimulate the development of shale deposits. "With the shale gas industry at an early stage of development, the government believes that a targeted tax regime will help unlock investment," according to Britain's finance minister.
"The use of field allowances to encourage investment in the North Sea has demonstrated the effectiveness of a targeted tax regime in stimulating investment and production that would not otherwise have gone ahead" ("Government action to stimulate shale gas investment" Oct 8).
In October, Britain announced the successful completion of an offshore licensing round, an investment by Talisman to extend the life of ageing fields in the North Sea, and the development of big new fields by Shell -- all after a series of changes to tax laws that would introduce more generous field allowances and tax rates for fields that are old, small or particularly deep, and would otherwise be marginal or uneconomic to develop.
Other countries, including Brazil, Mozambique, Tanzania, Kenya and Uganda, are also competing for investment by offering more generous terms than before.
Even Russia, which has been cited for the past decade as the ultimate example of resource nationalism, has expanded its cooperation with Exxon and BP, reversing a decade-long trend in which it was taking projects back from the international oil companies.
It is too soon to say whether these are isolated examples or part of an industry-wide trend. Fiscal terms in the main producing countries of the Middle East, with the largest and cheapest resources, remain very tough.
But as the industry shifts from developing existing fields to finding and developing new resources in new areas (Latin America, Africa, Arctic) and using new technologies (shale, offshore) fiscal terms will have to become more generous.
Exploration and development of new resources entails a much higher level of risk than continued production from mature fields, as Peter Nolan and Mark Thurber from Stanford University explain in a recent article "On the state's choice of oil company: risk management and the frontier of the petroleum industry" (2012).
"Frontier petroleum activities by definition are those characterised by the highest risk," they write.
"Over many decades, the industry has seen the frontier progress from exploration and development of onshore sedimentary basins through shallow offshore basins and into deep and ultra-deep water basins today ... Emerging frontiers include the challenge of commercialising vast resources of unconventional oils and gas."
In mature fields, with low risk, the temptation for the government to toughen existing fiscal terms or even expropriate private operators (especially if they are foreign) is high. The objective is to extract as much rent as possible. The government may feel a national oil company can produce from these fields as well as one of the major international oil companies or a foreign independent.
But with prospective new resources, the geological, technical and economic risks are much higher. The host government may need access to specialist technology and expertise, and may not have the capital required or the appetite for risk to try to develop the resources itself.
Foreign companies become the only option for development. The choice is between offering generous terms acceptable to foreign investors or not developing the resource at all.
Attitudes towards resource nationalism and openness to foreign investment therefore tend to match and amplify the industry's underlying investment and pricing cycle. Waves of expropriation alternate with periods in which foreign investment is welcomed, as the industry switches between developing existing resources and opening up new frontiers.
For the moment, with the industry and host governments focused on opening up new supplies, terms are becoming more generous. High prices, intense exploration and the revolution in oilfield technology have caused the cycle to turn.
On current trends, prospective oil and gas resources are more than sufficient to meet projected demand over the next decade, while development technology and expertise remain scarce, so host countries will have to compete to ensure their resources are developed.