Do you ever wonder if bureaucrats from all over the world get together in a windowless room somewhere to plot ways to frustrate the industry? If unseemly decisions involve India, Argentina or Brazil, then they probably have been hatching plans to hamstring oil and gas companies.
Reliance Industries has just been penalized by the Indian government for declining gas production from its offshore fields in the Krishna-Godavari Basin. The government is administering a $1.25 billion fine because the decline curve in the field is steeper than expected.
Imagine that. You start production in a field in a frontier area and discover that it doesn’t perform the way the company predicted. And, that has never happened before, right?
The Indian Oil Ministry came down hard on the company, saying it “failed to fulfill its obligations and willfully caused breaches, which led to immense loss and prejudice to the government and people of India.”
The ministry will not allow Reliance to recover the cost of its investments in 2010-12 — a total of $1.235 billion. It does make you wonder if the bureaucrats recognize what those types of punitive actions will do to investment in oil and gas throughout the country.
Argentina, on the other hand, is all about shooting itself in the foot — multiple times. On May 3, Argentina’s congress passed a bill empowering the government to seize 51% of YPF. Repsol valued its assets at $10.5 billion and wasn’t sure if the company could get the government to pay for its short-sightedness.
The administration and the congress were joyous, though, because YPF was now back in Argentina’s control. The bureaucrats “know” that they will be able to run the company much more profitably while providing crude oil and gas to consumers at rates below the cost of finding and producing the hydrocarbons.
Perhaps a course in economics for President Cristina Fernandez de Kirchner and the members of congress would help — probably not.
As one analyst noted, YPF’s performance is a direct result of price controls and regulation of the oil and gas industry by the government. How the same people who caused the problem think their takeover of YPF will solve the problem remains to be seen.
Other companies shouldn’t get too comfortable. The measure passed by congress includes language that would allow the government to intervene with any energy company operating in Argentina.
And, then there is Brazil. This follows the fairy tale about the goose that laid the golden eggs. A Brazilian federal prosecutor has taken it upon himself to rein in the oil industry in Brazil. He filed suit for $11 billion against Chevron for a spill in the Frade field offshore.
The prosecutor claimed that the Chevron spill – about 3,000 barrels – has brought Brazil to the brink of environmental disaster, “possibly pushing some species to extinction” and causing “impacts on economic activity in the region.”
He asked a judge to order the company out of the country and arrested several Chevron employees.
The oil industry has been a boon to Brazil’s economy, taking it from a net importer of oil to a net exporter. That is what the government would be risking to pursue this line of punitive action.
Petrobras is opposed to such actions, since that company had a spill in another field. The Brazilian firm is well aware of what would happen to foreign investment if such a massive claim is successful against a foreign energy company.
For some reason, the bureaucrats seem to think that it is easier to blame a company or an industry for legislative failings than it is to correct the legislation.
Contact the author, Scott Weeden, at firstname.lastname@example.org.
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