By
Ibrahim Al-Muhanna
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.
Editor's
note: This article
was first delivery as a paper by Dr Muhanna, at the International
Oil Summit in Paris on 10 April, and was first publish by Middle
East Economic Survey, VOL.
LI, No
16, 21-April-2008,
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