This article was first published in Platform’s Carbon Web newsletter, issue 11.

The falling oil price will significantly reduce the bargaining position of oil producing countries.

The dramatic crash from an all-time high of $147 a barrel in summer 2008 to $34 in January 2009 has already reversed the trend of resource sovereignty seen in previous years. There has been an abrupt halt to attempts by producer countries to regain national control over oil and gas resources, typefied by Hugo Chavez and Vladimir Putin standing up to American and British oil corporations in wresting back control over projects awarded during periods of political weakness.

The shrunken oil price has slashed revenues, both for producer governments and national oil companies (NOCs), including Gazprom in Russia, PDVSA in Venezuela and NIOC in Iran. This is producing major budgetary problems in countries heavily reliant on oil exports for income, which is particularly challenging for governments in countries where political legitimacy relies on welfare handouts and oil-backed employment. Falling revenues for NOCs creates capital contraints, especially in those countries with large populations where the state has not built up piles of cash for the future. This makes new exploration or development by national oil companies financially difficult, which in turn increases the political acceptability of investment by foreign corporations.

The falling oil price also poses financial challenges for the Oil Majors – notably BP which admitted in February that it needed to borrow capital in order to maintain dividend payments to shareholders without having to cut back its exploration and extraction plans. Alternative energy budgets in BP were slashed). However, Oil Majors have learnt to take advantage of oil prices at any value – high or low. When oil prices are high, producing margins are large, and there are soaring profits. When they fall, private oil companies with significant resources of capital are in a far stronger bargaining position vis-a-vis producer countries.

Exxon has the largest resources – $31.4 billion in cash and $200 billion in its own shares. Although speculation first focused on whether Exxon would launch a takeover bid of a rival Oil Major such as BP, it is more likely that the company will buy up stakes in Iraqi, Brazilian or African fields. Nansen Saleri, previously head of reservoir management at Saudi Aramco, believes that companies like Exxon and Shell will aim to buy stakes in massive projects planned at the top of the curve by state oil companies that are currently strapped for cash. That the majors have such plans is confirmed by statements such as Shell Chief Executive Jeroen van der Veer’s, “Oil prices are lower, and may continue to stay low for a period, and that will ease access to reserves.”

However, the changing dynamic is not as harmonious as van der Veer implies with his reference to “eased access to reserves.” The international oil companies have already begun to exert heavy pressure, particularly to get increased access and control in those regions they have been previously excluded from – especially where there are super giant fields with low operating costs. Such efforts are likely to be combined with backing from the UK Foreign Office or US State Department. Producer countries – struggling to maintain budgets set at a higher oil price, are susceptible to such pressure.

Iraq has already adjusted the contract terms for its current licensing bid round, after the private oil companies complained in February. BP, Shell, Chevron and other companies shortlisted will now be able to take controlling 75% stakes rather than the initially proposed 49%. The Iraqi NOCs role has thus been shrunk from majority partner to a minority 25%. This is particularly relevant given that the fields concerned include Iraq’s largest – the “elephant” fields Rumaila, East Baghdad and West Qurna. That the IOCs were taking advantage of the low oil price to push for better terms was recognised by at least one private oil executive quoted by Reuters, “With the price of oil where it is at the moment, I do not believe they can push [for such terms] that hard.”

A similar readjustment appears possible in Venezuela. Bids for participation in heavy oil projects in the Orinoco Belt were postponed by a few weeks from early March. State oil company PDVSA is struggling to find the capital it needs, with various analysts commenting that it will be forced to include more “attractive components” to contracts than in recent years.

From Zambia to Russia, resource-rich countries are under pressure. How much control over local resources is handed over to the IOCs in any particular country will depend on a variety of factors, including the ability to manage with reduced oil revenues and to withstand corporate and diplomatic pressure.

The oil price weakness in the 1990s (which saw it drop to $10 a barrel) created a context for deals like Sakhalin II. Whether we see a repeat of such rip-off contracts will depend on social movements as much as the oil price.