As oil prices surge through $140/barrel at the time of writing, surely one
can at least count on the invisible hand of the market to drive further exploration
and production and ultimately bring more supplies on line, right? Or perhaps, more
ominously, high oil prices presage a darker future of shortage and conflict as global
oil fields pass their geological “peak”? In fact, both positions miss a crucial point
about the dynamics of the world oil market — that it is increasingly animated by the
counterintuitive behavior of the state-owned oil and gas giants that now control the
vast majority of the world’s hydrocarbon resources.
“On average national oil companies (NOCs) extract resources
at a far lower rate than international oil companies (IOCs),
leaving about 700 billion barrels of oil effectively ‘dead’ to
the world market.”So-called “national oil companies,” or NOCs, own about 80 percent of the world’s
proven reserves of oil, a percentage that has been on the rise as the persistent high
price environment encourages countries to assert even tighter control over the rent
streams flowing from their resources. NOCs are curious and variegated beasts, and,
contrary to the popular imagination, some are highly capable both technically and
organizationally. Brazil’s Petrobras is an acknowledged world leader in deepwater
drilling, while Norway’s StatoilHydro is highly regarded for its competence and
transparent business practices. Saudi Arabia’s national champion, SaudiAramco, is
secretive to the outside world but generally considered to be a well-run, technically
capable organization. At the other end of the continuum, government infighting and
micromanagement hobble Mexico’s Pemex and Kuwait’s KPC. Once-independent
PDVSA in Venezuela has been remade by President Hugo Chávez into a government
puppet that spends liberally on social programs but consistently undershoots its
production targets. And indeed some national oil companies are hardly oil companies
at all — Nigeria’s NNPC, for example, is mostly a rent-seeking bureaucracy.
What NOCs do share in common as distinct from the familiar international oil
companies (IOCs) is being answerable to a host government, which inevitably
brings with it some focus on objectives other than simple profit maximization.
Typically, an NOC arises originally from the desire of resource-rich governments
(“principals”) to gain more effective control over resource extractors (“agents”) by
creating an oil champion owned by the state. Prior to NOC formation, governments
are frequently (and often justifiably) wary of exploitation by the foreign oil operators
providing hydrocarbon extraction services. Lacking a deep understanding of the
costs of production, states are simply unable to be sure they are taxing their agents
appropriately. In addition to enhancing control over the hydrocarbon sector and the
revenue it brings, states may hope for other benefits from the NOC: cheap energy
to fuel a growing economy, employment and development of local industry to
support the hydrocarbon sector, or even foreign policy leverage derived from control
of key resources.
Unfortunately for the states, relationships with their NOCs are rarely straightforward,
with implications for performance. Some national oil companies evolve into barely
controllable “states within a state”— PDVSA pre-Chávez was an example of this —
while others see their initiative smothered by excessive government intervention as
in the case of Pemex and KPC. Fraught state-NOC interactions can take their toll on
company effectiveness; in other cases, NOCs may simply appear less efficient than
their IOC brethren because they are serving state purposes beyond simple monetization
of hydrocarbon resources. Irrespective of cause, the result is that on average NOCs
extract resources at a far lower rate than IOCs, leaving about 700 billion barrels of oil
effectively “dead” to the world market. A far more immediate concern than whether
oil fields are passing their geological “peak” is who is sitting on top of those fields!
A detailed study of NOC performance and strategy at the Program on Energy and
Sustainable Development at FSI suggests a useful way of thinking about the effects
of NOC resource domination on world oil and gas markets. Price versus quantity
supply curves from classical economics assume that increased price will spur efforts
to expand supply. Unfortunately, the counterintuitive reality for NOCs is that, when
it comes to expanding supply in the current high-price environment, most either
1) can but don’t want to or 2) want to but can’t. The
end result is what one could call a “backward-bending”
supply curve — additional price increases do little or
nothing to boost supply.
“The world has plentiful hydrocarbons in the
ground, but that’s where many of them are
going to stay due to the unique organizational
and political dynamics of the NOCs.”In the “can but don’t want to” category are resourcerich
governments that have decided they cannot
assimilate any more money. Already, their investments
are running into political resistance around the globe —
witness Dubai’s failed attempt to purchase U.S. port
management contracts, CNOOC’s failed bid for Unocal,
or the increasing calls for curbs on the activities of
sovereign wealth funds. Nations may decide they
have enough cash and are better off leaving resources
in the ground where they safely await monetization at
a later date.
In the “want to but can’t” camp are countries and
their NOCs that are simply unable to provide the
stable political and regulatory climate to support additional build-out of expensive
production and transport infrastructure. This situation is particularly common for
natural gas, where long investor time horizons are needed to bankroll the multibilliondollar
capital costs of pipelines or liquefied natural gas (LNG) terminals.
Meanwhile, international oil companies are left on the sidelines salivating
helplessly over the vast reserves in NOC hands. Venezuela’s Orinoco region could
yield hundreds of billions of barrels of heavy crude, but the government and a nowpliant
PDVSA invite favored countries and their NOCs to explore rather than selecting
the operators most capable of extracting the challenging but plentiful resource.
Technical expertise and massive investment are required to fully develop vast Russian
gas fields including Kovykta, Shtokman, and Yamal, but IOCs already burned by
nationalizations and shifting rules in these and other Russian ventures are unlikely
to be in a position to supply enough of either. In the face of dwindling resources they can tap, IOCs will need to diversify their business models, perhaps tackling
technologically challenging options like oil sands or liquids from coal in conjunction
with the carbon storage techniques that could make these palatable from a climate
change perspective. Ironically, the only “easy” oil for IOCs has become oil that is
geologically and technologically difficult.
While oil price is dependent on many factors (including global economic health)
and is impossible to forecast with certainty, one can confidently predict continued
tight supply of oil and gas, especially given global demand that will be propped
up indefinitely by rising consumption in China and India. The world has plentiful
hydrocarbons in the ground, but that’s where many of them are going to stay due
to the unique organizational and political dynamics of the NOCs. Leverage over
the market is weak; measures to reduce demand for oil and gas (though politically
unpopular) or to spur development of alternative fuels and associated infrastructure
(though slow to develop at scale) may be all that we have.
