Oil companies and producing countries have seen their relationship evolve significantly over the years. There has been a continuing trend by national governments toward tighter access to their countries’ oil and gas reserves.
The Early Decades
The first oil companies were founded in the 19th century. Since then, the industry has been reshaped a number of times due to economic and geopolitical upheavals.
The very first oil majorsWord sometimes used to describe the leading international oil companies. were:
- Standard Oil, founded by the American industrialist John D. Rockefeller.
- Shell, founded by the British businessman Marcus Samuel.
By 1911, Standard Oil had become so powerful that the U.S. Supreme Court ruled that it had violated the Sherman Antitrust Act prohibiting the creation of large corporations whose monopoly position could potentially distort competition. Standard Oil was subsequently broken up into 30-odd companies; the three biggest were Standard Oil of New Jersey (later Exxon), Standard Oil of New York (later Mobil) and Standard Oil of California (SoCal, later Chevron). From their inception, these three new companies were among the seven largest oil companies in the world — a group known as the Seven Sisters (Standard Oil of New Jersey, Standard Oil of New York, SoCal, Texaco, Gulf, Anglo-Persian Oil — later BP — and Royal Dutch Shell). Compagnie Française des Pétroles (CFP), which eventually became Total, is often considered the eighth sister.
7: The Seven Sisters dominated the oil stage for more than 50 years during the 20th century
In July 1928, several oil companies signed the Red Line AgreementOil contract under which the oil that is produced is shared between the state and the oil company... , in which they divided among themselves the oil resources in within territories that formerly comprised the Ottoman Empire, an area extending from Palestine to northern Iraq and the Arabian Peninsula. This led to the creation of several large consortiumsA consortium is an association of individuals, companies, organizations, governments ... , allowing the companies to pool their resources:
- Turkish Petroleum Company, alter Iraq Petroleum Company (IPC).
- Abu Dhabi Petroleum Company (ADPC), United Arab Emirates.
- Qatar Petroleum Company (QPC).
- Kuwait Oil Company (KOC).
- Arabian American Oil Company (Aramco), Saudi Arabia.
In the 1950s, the consortiums agreed to transfer a significantly higher percentage of their oil revenue to the producing countries, although this did not put a dent in the Seven Sisters’ profits.
After the 1973 Oil Crisis
Following the steep climb in prices triggered by the 1973 oil crisis, in 1974 Big Oil posted profit of $17.5 billion, up from $8 billion in 1973.
These events prompted producing countries to create national companies, to exert greater control over their oil resources. The private companies were eventually forced to relinquish their production rights, and the large consortiums were gradually nationalized.
The very first oil majors were: Standard Oil (founded by John D. Rockefeller) and Shell (founded by Marcus Samuel).
Around this time, the number of regions with high oil and gas potential started to become rarer, while exploration and production costs began to climb. As a result, many small and medium-size oil companies were taken over by larger companies. This wave of takeovers coincided with the merger of several big oil companies between 1984 and 1990, resulting in the formation of the top five corporations that exist today (see Close-Up: "Different Types of Oil and Gas Company").
Two Main Types of Contract
In countries where one exists, the national oil company controls access to reserves and sets up partnerships with private companies that are interested in conducting development operations within their territory. There are two main types of contract:
- Under a concession contract, a foreign oil and gas company obtains ownership of the resources within a specified geographic area for a pre-determined period of time and shares the revenue from the sale of the products with the national company. The oil company, referred to as the concession holder, has the exclusive right to explore the area and owns the infrastructure in which it has invested to carry out its operations. It pays royalties and income and other taxes to the national company according to the amount of oil it produces.
- Under a production-sharing contract (or agreement), the national oil company retains control of the reserves, as well as the infrastructure in which the private companies invests. The national company grants a pre-determined percentage of production to the foreign oil company, which shares a stipulated amount of the oil or gas with the national company. It must also pay income and other taxes to the national government.
Today, for historical and political reasons, production-sharing contracts are more common than concession contracts. This practice reflects the strong determination among oil-producing countries to maintain sovereignty over their reserves.