Bigger than Big Oil

The world's largest oil companies
In 2007, according to Petroleum Intelligence Weekly, 70% of world oil production was controlled by national oil companies. Exxon Mobil, the biggest of the international majors, produced 3% of the world's oil. Three national oil companies exceeded Exxon Mobil's production: Saudi Aramco (12% of global production), National Iranian Oil (5%) and Pemex, the Mexican national oil company (4%).

Access to the world's oil reserves is even more concentrated in the hands of national oil companies. International oil companies had full access to just 6% of the world's oil reserves in 2008, according to PF Energy. An additional 10% were controlled by national oil companies that provided limited equity ownership to the international majors. Russian oil companies, which sometimes had international partners, controlled 6%. The remaining 78% of reserves were controlled by national oil companies that did not allow or severely limited equity stakes by the international majors.

Second, the terms of the Iraqi auctions made them, by and large, unattractive to international majors but not to national oil companies. The auction results show how different the motives are that are driving these two parts of the global oil industry.

If you are an international investor-owned oil company, the terms of the Iraqi auction were close to punitive.

The Iraqis set production targets that the winning companies had to meet or exceed. (Now, remember, we're talking about a nation whose oil industry faced horrendous difficulties in reaching relatively low prewar production levels because of violence against oil workers and attacks on oil industry infrastructure.)

If a company promised to exceed the government's target for production, that gave its bid an edge. A big edge if it promised to exceed the target by a lot. So, for example, Royal Dutch Shell's winning bid for the giant Majnoon field promised to deliver not only the government's production target of 700,000 barrels a day but a massive 1.8 million barrels a day. That's 1.1 million above the government's target.

And then the Iraqis set terms on these deals that weren't going to shower the winners with dollars.

Oil development and production contracts come in many flavors. Among the most common is called production sharing. In these contracts, the oil company that puts up the capital and does the work required to develop the field gets a share of the oil produced by the field.

From the company's point of view, this has the advantage of letting the oil company share in any increase in oil prices. A company's share of production when oil is $40 a barrel is more valuable when oil rises to $60 a barrel. A production-sharing deal gives the oil company a way to participate in the rising price of oil.

Of course, production-sharing deals give the oil company a share of the price appreciation of oil that many oil-owning nations think rightfully belongs to them. And production-sharing agreements are declining as a percentage of all oil-development deals.

So it's not surprising that the Iraqi auction didn't include any production-sharing language. The terms call for a straight fee to go to the oil company per barrel produced. If oil prices double, all that gain goes to Iraq