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Welcome Back, Big Oil Mexico, Iran and other producing nations are trying to entice multinationals back to their countries. The ramifications—for the countries, the companies and geopolitics—could be huge. by Benoît Faucon Updated May 18, 2014 7:25 p.m. ET Some of the biggest oil producers in the world are about to make it a lot easier for Western oil companies to do business with them. For years, Mexico, Iran, Iraq, Algeria and Libya—most of them among the top 10 producers world-wide—were fiercely nationalistic when it came to oil. They either offered Western companies punitive terms to develop their reserves or didn't do business with them at all, controlling their supplies tightly with state-owned companies. Now, facing a range of problems, these nations are looking to tap more of their reserves—and they're offering Western companies generous deals to win their help. What could it all mean? Plenty. Windfall for Countries In many cases, liberalizing represents a potential economic boon for countries. Asset manager BlackRock says liberalization could add a full percentage point to Mexico's annual gross-domestic-product growth—equivalent to about $12 billion. There are local and global political considerations in play, too. In Iran, Libya and Algeria, the population is addicted to low energy prices and high oil-funded social spending. All of that is in jeopardy as countries struggle to boost production. Iran, meanwhile, is trying to turn down the political heat it faces from the West. Signing big deals with oil companies could help the process. For Western consumers, liberalization could mean more stability. Motorists would be less likely to suffer the sort of spike they saw in July 2008—when oil surged to $147 a barrel—if there were new sources of supply to ease the effect of disruptions elsewhere. But oil may not be much cheaper than today: Because much of this production would be in challenging terrain, prices would remain elevated and no lower than $70 a barrel, analysts say. The biggest question marks in all this are the oil companies themselves. Executives are reluctant to comment on the potential deals. But it isn't clear that they will want to return to all those countries, analysts say: The economics of the oil business may be changing to favor different kinds of exploration projects elsewhere in the world. And those regions don't come with the kind of political risk that the Middle East and North Africa do. At the very least, though, the fact that these countries are extending an olive branch shows that the major oil companies have regained a lot of leverage in parts of the world they used to dominate. "The pendulum is perhaps swinging away from a state-dominated energy-production world," says Jonathan Wood, an associate director on transnational issues at U.K. consulting firm Control Risks. When the oil majors were locked out of these countries in the first place, it represented a huge shift of power. Until the early 1970s, the majors controlled 85% of the world's oil reserves—but resentment was building. Oil-producing countries began to see Western involvement as a form of neocolonialism, and they wanted to take back control of their own resources. So, they started nationalizing supplies or otherwise lowering foreign investment. When the smoke cleared, the oil majors' share of world reserves had plunged to 6%. At the same time, reserves were declining on the majors' home turf in the U.S. and Europe. So, the companies had little negotiating room when presented with tough terms in the Middle East and North Africa. For instance, in 2004, Libya asked for 90% of the oil produced by the companies. The next year, Algeria forced foreign companies to give up control of their fields and decreed a tax on profits over $30 a barrel. In Iraqi contracts set up in 2009, companies were typically paid less than $2 per additional barrel produced in fields they helped develop. In many cases, the majors took these unfavorable deals. But they also started investing in new technologies back home. In recent years, those bets have started to pay off. Advances such as deep-water drilling and fracking to extract oil from rocky shale formations have opened up previously inaccessible reserves and reversed nearly three decades of decline in U.S. crude production. The result: U.S. companies—and some European ones—are reducing their presence abroad. U.S. shale oil costs 14 times as much to produce as conventional oil in the Middle East. But operators get full ownership of production and projects—in contrast to Middle Eastern countries, where the lion's share goes to the governments. As U.S. oil production surges, the protectionist nations have been slipping. Crude production fell more than 20% in Iran over the past two years. Mexico's output dropped 25% last year from 2005 levels, and Algeria's fell 12% in the same period. One exception is Iraq, where production is increasing but the government has an ambitious goal of tripling its production to nine million barrels a day by 2020. Help, Please All of which is driving countries to seek Western help to uncover new sources of oil that weren't accessible before. "The U.S. has the technology and experience that other countries don't have related to hydraulic fracturing," says Bo Ollison, an independent energy consultant. The biggest shake-up is coming in Mexico, the world's No. 10 producer as of 2012, according to BP PLC's annual statistical report. Mexico's production has been falling for years. But new legislation is ending the monopoly of state-owned Petróleos Mexicanos in oil and gas and will soon allow foreign participation in the sector for the first time since 1938. Mexico's oil production could double by adding about 2.5 million barrels a day under liberalization, according to Citigroup Inc. Along with boosting GDP growth, that could ease the strains on the country's energy supply and fuel costs. FP.FR in Your Value Your Change Short position FP.FR in Your Value Your Change Short position aCheasapeake Energy, Total SA and Chevron Corp. have expressed interest in entering Mexico; Total signed a technical-cooperation agreement with Pemex in April. "It's a giant step," Total CEO Christophe de Margerie says of the country's opening. "But we don't know exactly what the contracts will look like." The changes in Iran, the world's No. 6 producer as of 2012, aren't quite as sweeping—but they come with a lot of political expectations. A Western ban on investing in Iranian oil fields is widely expected to be lifted in coming years following an interim accord with world powers on Tehran's nuclear program. Iran is considering changes to its current stringent oil terms in hopes of boosting its production capacity by 43%. Not only will companies get unprecedented control over projects, but also the deals will last 15 to 20 years—versus the usual five years under the old deals. Erfan Ghassempour, a petroleum analyst in Tehran, says that liberalization "amounts to deeper relations between Western oil giants and the Iranian government, which in turn will boost the economic and political relations of the Western companies' countries and Iran." Some observers think the picture is more complex. "It will be a slow process to get Western oil companies back to Iran,," says Amy Myers Jaffe, executive director on energy and sustainability at the University of California. "There is a lot of competition for capital globally, and Iran's reservoirs are prolific, but they are also complex and in poor shape," which would make them less attractive to Western companies. As for political effects, "there are historical, cultural, social and geographically driven strategic reasons why the Islamic Republic is not tied currently closely to the West," Ms. Jaffe says. "Those will persist long after trade ties improve." What Comes Next? In Iraq, the No. 9 oil producer in BP's report, officials are offering sweetened terms for its next big project, the redevelopment of the Nasiriya oil field. Oil companies will be able to negotiate a share of revenue the project generates, instead of being stuck with a flat per-barrel fee. "In 2009, Iraq was able to get oil companies to sign tight contracts," says one top executive at a European company operating in the country. Facing the competition of shale oil, Iraq "couldn't do it again." In North Africa, Algeria is offering lower taxes and royalty payments to the state depending on the expected production, spending and profitability of a field—in effect, making it more attractive to invest in riskier, more expensive projects. The North African country expects the new law to help achieve its plans to nearly double its oil production to two million barrels a day and unlock an estimated 27 trillion of cubic meters of unconventional natural-gas reserves. Libya is preparing a similar change to its legislation, after a new constitution is put in place. It holds the largest oil reserves in Africa but has just the third-largest oil-production capacity on the continent. The goal of liberalization: to help boost current oil capacity by 66%. The hope, of course, is that oil money will help ease political tensions in those countries. But that's open to debate, says Ms. Jaffe. "Algerians are tired from years of civil war, and one would like to hope that a larger national budget from [shale oil and gas] would give the country more leeway to [achieve] the kind of economic growth that will smooth internal political instability. But in the end, like in Libya and Iraq, oil can be very divisive when there are grievances about the distribution of the wealth that comes from resource development." Muted Reaction So far, the new oil policies aren't sparking the sort of turmoil seen in the past century. Consider Mexico, where a mass strike led to the nationalization of oil, and the Institutional Revolutionary Party that carried it out used it as a defining moment in modern Mexican history for the rest of its long run in power, which finally ended in 2000. Returned to power in 2012, the party decided to reverse the nationalization it had carried out. And in Iran—where nationalization triggered a Western-sponsored coup in 1953—opposition to prospective new contracts has been muted. Still, any liberalization policies could face opposition from bureaucrats who fear trouble from factions opposed to the measures, says Denis Florin, an associate director at Paris-based energy consultancy Lavoisier Conseil. And, of course, everything depends on how oil companies respond. Investing further in the Middle East and North Africa represents a return to their traditional types of projects, Ms. Jaffe says. But it isn't a "slam dunk" that they would rather be in the region, even if rates of return improve. "There is a growing preference for exploring for shale in North America, Australia and China." Money is also a huge factor. "Investments made in U.S. shale oil and gas have been just like printing money for the companies who have been really successful at it," Ms. Jaffe says. Middle Eastern and North African oil countries "are not likely to be able to shake the capital out of the U.S. oil and gas boom." Mr. Faucon is a Wall Street Journal reporter in London. Email him at benoit.faucon@wsj.com.