Mommer Charts Power Shift Towards IOCs In Upstream Sector

VOL. XLV

No 27

8-July-2002

GENERAL

Mommer Charts Power Shift Towards IOCs In Upstream Sector

The accelerated opening up of upstream oil to foreign investment by international oil companies (IOCs) in countries where sovereign rights have previously been protected by a combination of government and national oil company hegemony, is set to undermine OPEC’s embedded concept of resource sovereignty and subsequently market share, according to OPEC advisor Bernard Mommer. In his book Global Oil and the Nation State*, Mr Mommer, who is a senior research fellow at the Oxford Institute for Energy Studies (OIES), charts the decline of the proprietorial model of oil development (which seeks to enhance the economic benefits accruing to the sovereign owner of hydrocarbon resources) in favor of the non-proprietorial model, where consumer interests dominate through the full access of IOCs.

Proprietorial Vs Non-Proprietorial Governance

Mr Mommer starts by surveying the history of mineral ownership, specifically the differences in approach represented by public and private governance over resources. He notes that as far back as late 18^th century France, legislators became aware that in all but surface mineral extraction, the laws of ownership that applied to land were inadequate regarding mineral extraction from depths of over 100ft. The principle of public ownership and administration of non-surface mineral resources was thus established, and while this principle did not restrict private operators from exploiting resources, it limited private rights over deep resources to prevent them becoming obstructive. Mr Mommer goes on to describe the characteristics of private ownership, including lease contracts, signature bonuses and royalties, and to make case studies of British coal, American oil from 1860-1970 and Mexican oil over the same period. However, Mr Mommer is anything but equivocal about which system he prefers. “The economic and technical advantage of public mineral ownership in hydrocarbons and in mining at great depth is proven beyond any shadow of doubt,” he says, arguing that wherever private mineral governance has disappeared in the 20th century, re-privatization of the mineral deposits has never been considered as an option.

Describing private mineral ownership in the US as a “quirk of history,” Mr Mommer asserts that governments, companies and consumers are agreed on the principle of public mineral ownership and that as such, the global issue is no longer private vs public mineral governance but non-proprietorial vs proprietorial governance. Mr Mommer describes non-proprietorial governance as involving the concept that minerals are a free gift of nature, and thus this type of governance is about facilitating a free and frictionless flow of investment into reservoirs. Meanwhile proprietorial governance demands ground rent, thus obstructing investment to some extent. According to Mr Mommer, one of the clearest characteristics distinguishing one system from the other is the production to reserves ratio. In 1998, he pointed out that OPEC produced 42.5% of global oil output while holding 76% of proven reserves. Meanwhile, the most liberal oil-producing country in the world, the UK, produced 3.8% of global output from its 0.5% of global proven reserves.

The Concession System, Oil Prices, Production Control And The Establishment Of OPEC

Mr Mommer moves on to survey the development of the international concession system, which he identifies as the first governance structure of international oil. He then discusses the central issue of oil prices, production control and the establishment of OPEC in 1960, following a period of weakening oil prices. Mr Mommer notes that the decline in global oil prices started with the massive increase in post-war supply competition. US companies involved in Middle East oil grew from 28 in 1945 to 190 in 1958, while a surge of US independents entered Venezuela – then still the world’s largest exporter – in the 1956-57 bidding round. “Hence, while the percentage of effectively controlled output was shrinking, the international price structure was exposed to increasing tensions due to the enormous differences in production costs and profitability,” Mr Mommer writes, conceding that the market solution would have been lower prices. However, the impact of lower prices on US marginal stripper wells, which accounted then for two thirds of the country’s 600,000 oil wells, would have been devastating. The US tried to counter the price falls in the mid-1950s by introducing a program of voluntary import restrictions, although this failed and merely resulted in lower domestic production and increased imports. President Eisenhower’s subsequent introduction of compulsory import quotas essentially shielded US and Canadian producers from global price falls, but left Venezuela and Middle Eastern producers exposed.

The creation of OPEC was primarily intended to restore prices to levels prevailing before the falls of the late 1950s, although there was no great enthusiasm for regulating production, which was only mentioned among other means as a way of stabilizing prices. OPEC initially chose to focus on encouraging operating companies to reverse falls in posted prices regardless of market prices in order to protect royalty revenues. However, OPEC then began to make incremental changes to the fiscal framework and ultimately to production levels in order to achieve its price and revenue objectives. But OPEC almost overreached itself after its strategy resulted in nationalization. “OPEC was confronted, unexpectedly, with the challenge to consolidate and institutionalize its ‘revolutionary’ achievements,” Mr Mommer writes. “In its advance, it had crossed the old clear-cut front line between the member countries and the foreign oil companies.” Thus OPEC countries now had to deal directly with consuming countries on issues of price and volume. Mr Mommer argues that OPEC cohesion in the face of consumer interests has never wavered and that although it has promoted the idea of consumer-producer dialogue, this was “never more than a sideshow.” Moreover, “OPEC continues to be in control of three quarters of the world’s oil reserves, but this is the only account with a favorable balance to OPEC. On any other account the balance is firmly in favor of the consuming countries.”

The New Role Of Consuming Countries

Mr Mommer states that the decline in economic growth prompted by the two global oil shocks in 1974-75 and 1980-83 and the parallel issue of security of supply prompted consuming countries to take new steps to regain the upper hand. The establishment of the International Energy Agency (IEA) in 1974 was the first salvo in this effort and it established a requirement for stocks, an emergency sharing system and a long-term program to lower demand growth, boost indigenous production and develop alternative sources of energy. Yet the ability of OECD countries to limit their dependency on OPEC oil was constrained. Mr Mommer notes that by 2010, 70% of OECD oil demand will be imported, with demand in the rest of the world expected to grow even faster. This demand is likely to be met primarily by the Middle East producers and Venezuela, despite the widespread use of coal and more recently gas.

The crucial moment for the advance of the consumer-led vision of oil development came with the collapse of the Soviet Union. The end of the cold war opened up huge new areas for oil development and provided a unique opportunity for the consuming countries to advance their agenda on a truly global scale, Mr Mommer argues. “The nascent liberal, ie non-proprietorial governance of international oil, still limited in its scope to the consuming countries, was suddenly upgraded to an integral part and even to a model, for a new world of global capitalism,” he writes. Consumer interests were advanced by means of bilateral and multilateral investment treaties. Mr Mommer says that non-proprietorial governance of international oil, which the developing countries have been building in response to the OPEC revolution of the early 1970s, has evolved into a “grandiose framework of international trade and investment treaties, in an attempt to create one global economy united by free trade and free investment.” He suggests that in this new paradigm, mineral resources become subject to the global sovereign: consumers.

Yet these bilateral investment treaties clearly represent the negation of permanent sovereignty over natural resources, a concept embedded in OPEC’s basic principles, Mr Mommer says. He cites the case of the central Asian republics which have wholeheartedly endorsed the consumer model, perhaps as part of a strategy to keep Russian influence in check. “Worse, even some of its [OPEC’s] member countries, for example Venezuela, a very experienced and relatively developed oil country – subscribed to the liberal policies.” Mr Mommer explains this process by pointing to the poor performance of national oil companies in major exporting countries since nationalization and the existence of reformist groups within these countries eager to impose market economy models on the internal policy debate. He adds that where this process of liberalization has taken place, national oil companies have been the preferred agency of change, appearing to retain their “national costume” while expanding their role into a liberal licensing and contracting agency.

*Global Oil and the Nation State is published by the Oxford University Press for the Oxford Institute for Energy Studies, 57 Woodstock Road, Oxford OX2 6FA, UK.