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Thursday, June 16, 2011
In the past, big political shifts in the Middle East have often been followed by the eviction of foreign oil producers -- Muammar Gaddafi in Libya, Saddam Hussein in Iraq and Ayatollah Khomeini in Iran to cite a few examples.
This time around, upheaval has hit Libya, Egypt, Yemen, Tunisia and Syria -- not the biggest oil producers in the Arab world but among the most open to foreign investment. Companies including BP Plc, Exxon Mobil and Royal Dutch Shell have spent billions there.
"I wouldn't describe us as worried. We're being vigilant," said Bob Dudley, chief executive of BP, echoing comments from other companies.
The new governments that have emerged, or may emerge, are expected by and large to remain supportive of foreign investment, because they will wish to maintain output and government revenues.
"I don't see there being a large nationalistic wave," said Richard Quin, Middle East analyst at Wood Mackenzie.
In the past popular anger toward a regime has spilled over to the companies that supported it, but oil companies say that over the past two decades, they have positioned themselves on the side of communities, rather than as agents of government.
"Companies now are not so closely aligned with governments," said Mahdi Sajjad, president of Syria-focused Gulfsands Petroleum, whose shares have been hit by investor fears about the unrest.
In part this has been achieved by investing in community engagement projects. Oil contracts that are more transparent and more favorable toward host nations also play a big role.
Up to the 1970s, oil contracts were opaque and seen as beneficial to companies and the region's frequently corrupt governments -- at the expense of citizens. Now contracts usually follow internationally accepted models.
This will help oil executives argue they are giving host nations the best deal that a new leadership could hope to get and, therefore, that existing contracts should be respected.
"We look at it (investment) from a perspective of the fundamental stakeholders, the population of the country .. rather than through the lens of the current incumbent government," said Frank Chapman, chief executive of British Gas producer BG Group.
"What we are doing in Tunisia and Egypt is sustainable," he added.
Oil companies have beaten a path to new leaders in Egypt and Tunisia, and, an Italian ministerial source told Reuters last month, even to Libyan rebel leaders. Companies say the signals received so far do not point to widespread asset seizures.
If new governments do seek to expropriate oil fields or to rewrite contracts, companies will find they have greater legal protection than they did when the last wave of nationalization swept through the Arab world in the 1970s.
Modern contracts bar governments from taking unilateral action to seize assets and can limit their ability to hike taxes. And if there is a dispute over whether the government has overstepped its authority, companies don't have to worry about arguing their cases in front of potentially biased local courts.
"Contracts usually provide for arbitration in a neutral venue," Anthony Sinclair, a partner with law firm Allen & Overy said.