Of Clownfish and Cordyceps

By Duncan Sutherland- Exclusive to Dig Media

The intertwined life cycles of clownfish and sea anemones amply demonstrate a mutually beneficial relationship. Immune to the anemone’s sting, clownfish have a safe haven and a rich source of food. In return, the clownfish cleans the anemone and provides nutrients with its droppings.

Not all inter-species relationships are reciprocally advantageous. Cordyceps fungal spores grow on an insect’s exoskeleton before infecting the brain. The fungus then forces its host to “climb a plant and, upon reaching the top, to clamp its mandibles around a leaf … thus securing it firmly to what will be its final resting place.” The body of the fungus then grows through the head and releases its spores into the air.

Biologists are intimately familiar with the dynamics of symbiosis and parasitism in the natural world. Less appreciated is the guidance such interactions offer for the hydrocarbon business. With a supermajority of known oil and natural gas supplies being held by state-controlled firms, publically traded energy companies are compelled to cooperate.

The exact terms of operation vary depending on the host country. The two basic formulations are service contracts and production sharing contracts. Service contracts hire multinational firms to provide expertise, advice and/or equipment at a negotiated rate. Production sharing contracts give all parties a percentage allotment of the recovered resources, so revenue will vary significantly depending on market prices for oil or natural gas.

Once the exclusive preserve of top- tier multinationals, these partnerships are seeing an increase in smaller exploring, engineering and oilfield services contracts. Russia’s government and energy concerns appear more comfortable with smaller companies. Volga Gas (LSE:VGAS) and other small operators have carved a niche working less significant properties.

Cordyceps:

Joint ventures have been cropping up regularly in the news as energy prices have risen. The poster child for the cordyceps model has undoubtedly been Venezuela’s Petróleos de Venezuela, S.A. PDVSA’s operations are focused in the South American country, which is the world’s number six net oil exporter.

Through 2006 and 2007, the government of President Hugo Chávez passed new laws that fundamentally altered operating conditions for energy companies. New joint ventures were to have at least 60% PDVSA ownership, while pre-existing projects were unilaterally adjusted to meet the new standard. The oil majors involved [Chevron (NYSE:CVX), BP (NYSE:BP), Statoil (NYSE:STO), ExxonMobil (NYSE:XOM) and ConocoPhillips (NYSE:COP)] were understandably agitated. Exxon and Conoco both ceased operations in the country over the row, abandoning significant portions of their global production. The companies are now seeking international arbitration to resolve the dispute and hopefully recoup costs.

Just like cordyceps, coercion of multinational firms can be contagious. Bolivia’s President Evo Morales added a belligerent twist to the Venezuelan model when he directed the military to commandeer the nation’s gas fields. A presidential decree mandated majority control of all energy developments by Yacimientos Petroliferos Fiscales Bolivianos (YPFB), the state-owned enterprise. Unlike Chavez’s plan, Morales decree created a six month renegotiation period between multinationals and YPFB. Particularly hard hit by the nationalization were Repsol YPF (NYSE:REP) and the partially state-owned Petrobras of Brazil (NYSE:PBR).

Clownfish:

Energy resources offer an attractive source of income for developing countries, but memories of colonial exploitation often militate against foreign control. Conversely, national energy companies often lack the capital, experience, technology or specialized labour to fully exploit their patrimony.

Though they receive far-less media attention, some cooperative energy schemes are synergistic. The emirate of Qatar has a long record of this. Playing host to American, European and Asian companies, Qatargas and Qatar Petroleum have provided consistency and profitability to all parties. A Google news search for Qatargas provides a litany of new projects, ventures and partners. One for PDVSA catalogues stories about ineffective arbitration, intemperate rhetoric and underperformance.

Other clownfish countries include Bahrain, the United Arab Emirates, Saudi Arabia and Malaysia. A quick scan of this list suggests that small countries, unstable neighbourhoods, and security cooperation with the United States are correlates of amenability to multinational energy firms.

Conclusion:

Symbiosis and parasitism are not the only models for energy cooperation, but they provide a useful starting point of the extremes. Most countries, including Russia, Nigeria and Iran have a much more conflicted approach towards multinationals.

Each of the above countries exhibits a different set of pathologies. Russia oscillates between soliciting and curtailing foreign investment. Nigeria’s armed insurrections, fractious politics and rampant corruption create a highly unstable set of operating conditions. The history of Shell Oil’s half century of operations in the Niger Delta attest to this. Iran is desperate to expand foreign investment, but international sanctions and regional tension depress interest in the otherwise attractive resources and regulatory regime, as Total (NYSE:TOT) will attest.

Although the potential disadvantages seem to favour a parochial investing strategy, this is becoming more difficult to sustain. As mentioned before, a supermajority of world oil and gas reserves are held by state enterprises. This includes almost all of the “easy” oil and gas. To discount all companies that transact with state-owned firms will reduce your exposure to risk, but will simultaneously reduce your potential gains. With declines looming or expected in many of the fields held by publically traded firms, divestment or diminished returns may well prove to be the only methods of avoiding contact with nationalized energy.

Country-by-country variation in approaches is highly consistent with overall foreign policy. Chavez’s ideology is a strain of anti-market socialist revanchism. Considering he alleged American involvement in a 2002 coup attempt against his government, it is not especially surprising that he became even more hostile to American companies. Qatar, by contrast, has an extremely extroverted and cooperative foreign policy. Being able to compromise and work for mutual benefit has allowed it to thrive while sandwiched between Saudi Arabia and Iran and hosting US military bases.

National energy companies are inseparable from national governments, and should thus be understood as instruments of power. The guiding principle should be a clear understanding that there are no friendly oil and gas companies, just the oil and gas companies of friendly countries.