Middle East Economic Survey
VOL. LI
No 16
National And International Oil Companies: Putting Relationships In Perspective
By Ibrahim Al-Muhanna
The following is the text of a paper delivered by Dr Muhanna, Advisor, Saudi Arabia’s Ministry of Petroleum and Mineral Resources, at the International Oil Summit in Paris on 10 April.
I would like to share with you my views on the relationships between national and international oil companies, and in particular to view those relationships within the framework of their wider context.
The roles of national and international oil companies, and the relationships that exist among them, have received a great deal of attention over the past few years, especially with the recent rise of oil prices. This increased scrutiny touches upon many different aspects, including the capability of national oil companies (NOCs) to meet growing demand, the issue of resource nationalism and its impact on the industry, the changing roles of international oil companies (IOCs), and the question of IOC access to reserves.
Over the years there have been a number of changes in the relationships between NOCs and IOCs. Yet, these changes are not a cause for alarm, and I would argue that the roles of both are expanding in exciting new ways. If anything, NOCs and IOCs are complementing one another to an unprecedented degree by pooling their respective strengths and areas of expertise. To clarify this point, I would like to take a brief look at the evolution of these relationships and I will be examining the current status of this relationship. Finally I will close with a discussion of the Saudi position on this issue.
If we consider the evolution of our industry, and particularly the changing roles and responsibilities of IOCs and NOCs, we can begin to understand how dynamic our business really is, and just how misleading gross generalizations can be.
Political Economy
During the first half of the 20th century, oil companies were often seen as an arm of the great powers and an integral part of their pursuit of overseas power, wealth and influence. During the 1960s and 1970s, a wave of nationalization of oil companies swept the world, with some countries electing to establish their own NOCs, either to operate in parallel with the multinationals, or to replace them. This development was part of a broader philosophy of political economy which swept over the world and in one way or another touched all major industries, not only oil. Of course, oil companies fully or largely owned by governments were not limited to developing countries. Many OECD countries exercised some degree of state ownership over their leading national petroleum enterprises.
However, in the 1980s a new direction started to take shape as free market policies began to spread. As a result, many European countries began to liberalize and ultimately privatize their energy companies in a process which continues until today. Moreover, during the 1980s and 1990s, a new class of companies from countries such as Russia, China, Malaysia, Saudi Arabia, Norway, India and Brazil began to assume international importance. These companies are either fully or largely government-owned, yet they operate independently of direct government control and are run according to common, private-sector business practices. Furthermore, some national oil companies began to acquire interests in downstream oil assets in consuming countries, either acting unilaterally or in partnership with IOCs. At the same time, more and more countries from Latin America, Africa, the Middle East, Asia, and the Caspian are opening up their territory to international petroleum investors.
The low oil prices we experienced during the 1990s were a major factor in the decreased pace of investment and production expansion. At the same time, political circumstances blocked or hindered IOC investments in several major oil-rich countries, including Iran, Iraq and Libya.
Toward the end of that decade, a wave of mergers among leading IOCs took place, bringing together major firms such as Exxon and Mobil, Chevron and Texaco, and BP, Arco and Amoco. These mergers and acquisitions not only strengthened the consolidated companies which resulted from these transactions, but also led to the expansion of their activities, including forming alliances and stronger relationships with NOCs. Another major development for the oil industry during the 1990s was the rise of specialized oil service companies. With their technological prowess and focus on niche activities within the wider world of petroleum, these firms can satisfy whatever needs either national or international oil companies may have, particularly with regard to exploration, drilling and production activities. The growth in the role of these service companies enhances the capability of both national and multinational companies to develop their resources, especially where the international financial markets are ready to provide project finance. In this environment, what petroleum enterprises need most is sound management, a clear strategic direction and the right price for the commodity which they produce.
IOCs’ Access To Resources
Let me now turn to an issue which has been the subject of a great deal of debate: the access of IOCs to petroleum resources. In this regard, it is clear that different countries have pursued different policies and enacted different types of regulation, all of which are related to their individual level of economic and infrastructure development, their petroleum resource potential, and their national political system. Generally speaking, we can speak about five overlapping types of policies:
First, policies which
provide incentives for oil company investment with little or no
restrictions. This policy regime is normally found in countries which have
low expectations for significant oil discoveries.
Second, policies which
provide free and equal investment opportunities, but which also include a
high level of restrictions, sometimes nationally and sometimes locally.
These restrictions include licensing fees, high taxation, environmental
restrictions, and regulations designed to protect national or local
interests. When we consider this type of policy, we think of industrialized
countries with some potential for oil discoveries.
Third, there are those
countries with strong potential for oil discoveries and future production on
an economic scale. They open up their oil and gas sectors to foreign
investors and operators, but with some requirements such as that a good
percentage of the resource ownership or production goes to the national oil
company.
Fourth, there are some
countries with good potential for oil resources which are opening up to
foreign enterprises, but international political circumstances have
restricted international petroleum investments. This was the case for Iraq
and Libya in the past, and currently applies to both Iran and Sudan.
Fifth and finally, very few countries limit international investment to some parts of the industry and restrict participation in other segments as a result of either political or economic considerations.
What we can conclude from these cases is that the international oil industry, and the policies and regulations which govern it, are much more complex than some people might have us believe. Instead, we should recognize and appreciate the fact that these factors are dynamic, that they affect both national oil enterprises and the multinational firms, they are not simply the product of sudden increased resource nationalism, nor do they represent an effort to squeeze IOCs out of the upstream segment of the business.
Saudi Arabia
At this point I would like to talk about the case of Saudi Arabia. First and foremost, we recognize both the complexity and the dynamism of the contemporary petroleum industry, and embrace both of those aspects of the business. Saudi Arabia has close and mutually beneficial relationships with all types of oil companies: including national petroleum enterprises, multinational firms, independent companies and general and specialized petroleum service companies.
When it comes to international petroleum investments in the Kingdom, we have to distinguish between four distinct segments of the business: oil exploration and production, natural gas, oil services, and downstream activities. With regard to the upstream oil sector, it is a question of economic interest; no more, no less. As you all know, for the past quarter century Saudi Arabia has maintained significant spare production capacity, which reached a height of 5mn b/d at some points in the 1980s and stands at more than 2mn b/d today. Only one time during the past 25 years did market conditions warrant producing our full capacity: following the Iraqi invasion of Kuwait in the fall of 1990. Given this existing supplemental production capacity, the huge oil reserves which we have and an NOC which is highly capable in terms of management, financial resources and E&P technology and infrastructure, any additional international investment in the upstream would have no economic logic or additional benefits for the Kingdom.
Of course, the upstream natural gas sector was opened to international companies in 2003, in one of the most open, competitive, and transparent processes the global energy industry has ever seen. Today, five foreign oil companies are working in partnership with Saudi Aramco to explore for non-associated natural gas in Saudi Arabia’s Empty Quarter. Furthermore, the petroleum service industry in Saudi Arabia ‒ which is worth more than $20bn annually ‒ is completely open to both national and international investments. In the downstream sector, we have nine major joint ventures inside Saudi Arabia and overseas – in partnership with both national and international oil companies.
In conclusion, the respective roles of national and international oil companies and the relationships between and among them are dynamic and fluid, they are highly complex and multifaceted, and they are shaped and affected by geological, political and economic factors. Looking to the future, it is clear that our industry will confront a wide range of both challenges and opportunities, increasing policy constraints at all levels and steadily growing demand.
All of this requires a great deal of work and commitment by all stakeholders – producers, and consumers, NOCs and IOCs, financial institutions and petroleum service industries, as well as educational training institutions. Furthermore, these efforts have to be undertaken both independently and in partnership with one another, and will require billions of dollars of investment. The challenges of the future will require ever more advanced technology, sustained training and investment in human capital, and a wise and meaningful approach to environmental issues. If we are to tackle these challenges successfully, we cannot afford to point fingers or blame one another, but instead must commit ourselves to achieving greater mutual understanding and working together for the common good.
There is no doubt that growing interdependence, increased diversification and fair competition are strengths to be built upon and not weaknesses which hold our industry back.