Oil, gas adviser to the world

Competition squeezes government take of oil and gas revenues

Larry Persily

Petroleum News Juneau Correspondent

Pedro van Meurs has advised Alaska on oil and gas tax policy since 1996, bringing more than 30 years of international knowledge to the state. This second in a three-part series tells what he thinks of worldwide oil and gas issues.

Pedro van Meurs has seen a lot of changes in world oil and gas markets, but none so obvious — or long lasting — as one that started to take hold in 1986.

Before that turning point, he said, the government share of petro-dollars was increasing. Then world oil prices collapsed and governments started finding themselves accepting a smaller share of production revenues. Lower prices forced governments to get more competitive for big oil’s investments.

“One of the most interesting aspects is that government takes are still declining,” van Meurs said, even as the markets are in a period of higher-than-average prices.

He likens the post-1986 change to a shift in a real estate market. When too many developers bring too much property into the market, the price drops for everyone trying to sell a house. For oil and gas nations, they have more exploration property to offer than companies need at any one time.

“An enormous amount of lots have come in the market,” he said, as the former Soviet Union, China, Vietnam, Africa and other areas have opened their doors — and their land — to foreign exploration and development for oil and gas. “It has the effect as if everybody in town decided to sell their home.”

Before the change started in the late 1980s and heated up in the early 1990s, companies had few options for their investment dollars: North America, the North Sea, a little of Latin America and Indonesia were the major ones. Today’s growing list of investment options means governments have little choice but to live with a smaller take from oil and gas production, he said.

Long-term oil at $20 to $25

Political turmoil in Venezuela, Nigeria and Venezuela, coupled with the war in Iraq, caused the market to worry about future supplies, driving up prices this past year. But van Meurs does not expect $30 oil to remain a fixture in world markets.

Nor does he expect natural gas prices to remain as high as they are today. There, too, it is a matter of demand opening up new supplies, with more investment opportunities coming into the market.

“There are absolutely colossal amounts of stranded gas in the world,” van Meurs said, putting the total at 5,000 trillion cubic feet worldwide, particularly in Russia, the Middle East, Indonesia and Latin America. Actually, that’s a bit short of British Petroleum’s June 2003 estimate of 5,500 tcf, with almost three-quarters of it in the Middle East, Russia and former Soviet Union countries.

Alaska’s North Slope has proven reserves of 35 tcf, with geologists estimating total reserves at 100 tcf.

As if thousands of trillions of cubic feet of gas chasing a market weren’t enough, there is coalbed methane gas, too. “We are getting closer to seeing coalbed methane within economic reach,” van Meurs said. “The resources of coalbed methane are for all practical purposes limitless.”

Governments need to adapt

Governments need to adapt to the change in market fundamentals, he said. “Each year about 20 jurisdictions make important changes in their petroleum terms and conditions, and most countries make yearly adjustments to their tax systems through the budget procedure,” he said in a brochure for his class on world oil and gas fiscal policies.

The need to change governments’ long-term attitude is especially true for natural gas.

Van Meurs continued with the housing market analogy: “For gas there are thousands of abandoned homes that have never been brought to the market and are now coming on the market.” The competition is cutting into governments’ take on their projects to commercialize gas reserves.

Gas in same situation as oil

That trend means this is a good time for governments to cut their best deal and lock in a project, van Meurs said. “This is the time to monetize your gas.”

It’s just good, old-fashioned competition. “Governments are undercutting each other on gas, even in the Middle East,” he said. “Saudi Arabia realizes that if they don’t come on the market now, their gas will be valueless for centuries. Asia is swamped with Mideast gas.”

The challenge is to encourage investment while maximizing the public’s share of the resource value, without driving investment to a competing region of the world, van Meurs said. “There is a balance between those two.”

And how a nation, a state or a province measures the government, or public, take from oil or gas fields is important, too. Economic spin-offs, such as jobs, construction benefits and other development, can be just as important as tax and royalty dollars, he said.

“The more items you can get in the plus column, the less you are interested in the government take.”

Next week: Alaska’s dependency on oil and gas.

Van Meurs advises, then leaves decisions to public officials

“If you are an adviser to governments, you have to have the modesty to understand you are only an adviser.”

Consultants also have to understand that they don’t always get to stick around to see what the government does with their advice. “Sometimes I give advice and then I leave. I don’t really know what happens,” van Meurs said. “Sometimes I go on a mission where people just keep my knowledge.”

But usually he gets to see what happens. “That is very satisfying. You can say, ‘I did that.’”

Of course, it’s easier when he is juggling just four to five clients at a time. That’s the most he usually allows himself to carry.

And when a consulting project produces results — good results — there often are “thank yous” and mementos given out as remembrance gifts. “Once an important deal is done, a lot of gimmicks are handed out,” van Meurs said. The tokens range from cups to glass balls. “It’s interesting to see what people came up with.

“I treasure them not for their artistic value, but for what they mean.”

When not traveling around the globe, advising governments on how to structure their fiscal regime to attract and retain oil and gas investment dollars, van Meurs is in the classroom, teaching the same thing to up to 40 students at a time. He teaches his class, World Fiscal Systems for Oil & Gas, twice a year — once in London and once in the Bahamas. The five-day class isn’t inexpensive, at about $3,900 per person, but it often has more applicants than the professor can accommodate.

“There is nothing as nice as teaching people from all over the world who bring issues to class,” van Meurs said. He also sometimes takes his class to the work place, such as when he has been hired to teach oil company executives how the world works. The state of Alaska three years ago contracted with van Meurs to provide the class for employees at the departments of Revenue, Law and Natural Resources.

The software sounds rich

The name itself can be deceiving. Though it’s merely an information database, Petrocash “sounds like you get rich with that software.”