The Strategic Control of Oil and State-Owned Enterprises: Some Lessons from International Experience

Which is the largest oil company in the world? Exxon? Shell? Chevron? BP?

None of them.

The world's largest oil and gas companies are state-owned. They are known as national oil companies (NOCs). Among them are Saudi Aramco (Saudi Arabia), NIOC (Iran), KPC (Kuwait), ADNOC (Abu Dhabi), Gazprom (Russia), CNPC (China), PDVSA (Venezuela), Statoil (Norway), Petronas (Malaysia), NNPC (Nigeria), Sonangol (Angola), Pemex (Mexico), and Petrobras.

In a conservative estimate made in 2008, before the pre-salt reserves were well known, NOCs already dominated 73% of the world's proven oil reserves and accounted for 61% of oil production. According to the International Energy Agency, the trend is for NOCs to be responsible for 80% of additional oil and gas production by 2030, as they dominate the reserves.

It wasn't always like this.

Until 1970, the so-called international oil companies (IOCs), the large multinationals, the Seven Sisters, completely dominated 85% of the world's oil reserves. Another 14% of the deposits were dominated by smaller private companies, and NOCs had access to only 1% of the reserves. The state-owned companies that existed at the time, such as YPF (Argentina), Pemex (Mexico), Petrobras, and PDVSA, had no real influence in this market.

The IOCs did as they pleased. They dictated the production and price of oil and its derivatives worldwide, always with the short-term perspective of maximizing profits and rewarding shareholders. Highly vertically integrated, the Seven Sisters were responsible for research, exploration, production, refining, and distribution. Domestic content? Only the sweat of low-skilled local workers.

All of this began to change at the end of the 1960s. Arab nationalism, inspired by Nasserist ideology, incited a wave of oil nationalization, which began in Algeria in 1967 and in Gaddafi's Libya (the West's hatred of Gaddafi was not unfounded) in 1969 and 1970. This nationalizing wave spread rapidly throughout the Middle East in the early 1970s.

Governments nationalized oil fields and expropriated assets from multinational corporations to create their own oil companies. By 1972, Saudi Arabia, Qatar, Kuwait, and Iraq, home to the world's largest reserves, had already begun these processes.

This completely changed the oil market. Governments began to appropriate a much larger share of the oil supply chain, even...
Because they discovered that the IOCs were hiding the real production costs from them, artificially reducing the remuneration owed to the countries. And the States, not the Seven Sisters, began to dictate the pace of oil production and marketing, no longer with the perspective of obtaining the
Maximize dividends in the short term, but with the strategic objective of maximizing the use of a finite and non-renewable natural resource.

Internationally, this new state dominance allowed producing countries, united in OPEC, to effectively influence the price of oil, which became a global commodity. In 1973, after the Yom Kippur War between Arabs and Israelis, the Arab countries imposed an embargo on the US, Europe, and Japan, which supported Israel, causing oil prices to skyrocket worldwide. This was the first oil shock, which would have been impossible to achieve in a market governed solely by the interests of large multinational corporations.

Throughout the 70s, the strategic dominance of states over oil grew with the expansion and consolidation of processes.
Nationalization of reserves, the creation of large state-owned companies, and the strengthening of existing ones.

Significantly, the wave of privatization that swept the world in the 80s and 90s, under the paradigm of neoliberalism, did not affect, in a certain way...
substantial state control over the oil supply chain.

There have been some instances of total or partial privatizations, especially in Latin America and Eastern Europe. In Argentina, for example, YPF, the second state-owned oil company to be created, was privatized in 1928. In Brazil, Petrobras went public on the New York Stock Exchange. In Russia, some sectors of the hydrocarbon industry were also privatized.

However, the rise in oil prices that began at the start of this century triggered a new wave of nationalizations and the creation of state-owned companies. In Russia, Putin reversed the privatizations, creating a very powerful Gazprom. The same occurred in Central Asian countries.
like Azerbaijan and Uzbekistan. In Bolivia, the Morales government nationalized the hydrocarbon fields. In Argentina, the Kirchner government expropriated Repsol, which had seized the assets of YPF.

This virtually worldwide trend toward state control of oil is no accident. In the study of over a thousand pages entitled Oil and
In the book "Governance: State-owned Enterprises and the World Energy Supply," published in 2012 by Cambridge Press, which analyzes the experience of 15 large NOCs (including Petrobras), the organizers mention some strong reasons for the emergence and persistence of this trend.

There are, of course, political reasons, such as the appeal of nationalism and the convenience of obtaining geopolitical gains through effective and direct control.
of sensitive and strategic assets such as hydrocarbons, as Russia does, for example.

But there are also reasons strictly linked to long-term economic rationality.

Direct control of oil fields and production would allow, more easily:

1) To influence the price of hydrocarbons in the domestic market, providing energy subsidies to the productive sector if necessary.

2) Establish national content policies that take advantage of the opportunities and synergies created by hydrocarbon production to create a long national oil supply chain, stimulating industries and the service sector.

3) To dictate the pace of exploration of reserves and commercialization of oil, according to national interest and within a strategic vision of making the most of the existence of a finite and non-renewable natural resource.

4) Generate and obtain detailed information about oil and gas deposits, their potential, and their exploration costs.

5) Develop proprietary technology related to the hydrocarbon chain.

Some might argue that at least some of these objectives could be achieved without the necessary participation of a NOC. In theory, a good regulatory model would make it possible to achieve these strategic and long-term objectives without the direct participation of a state-owned company as the major operator of the oil fields.

International experience shows, however, that this is very difficult.

In the aforementioned study, among the 15 large NOCs analyzed, only 2 are not major operators: NNPC, from Nigeria, and Sonangol, from Angola. These large African companies perform basic regulatory functions and do not have the technical capacity to operate in the exploration and production of hydrocarbons.

In the case of Nigeria, the analysis shows that the country is unable to adequately control its oil sector, the basis of the Nigerian economy. The large multinational companies operating there completely dominate production and exploration and remunerate the state based on their profits.
NNPC has its own information on costs and production volume. Because it is not an operator, NNPC does not have the technical capacity to evaluate them. Also
There is no effective policy for creating an oil supply chain in Nigeria.

Added to this is the terrible management of the state-owned company and its subservience to a highly patronage-based political system.

NNPC is neither a competent operator nor an effective regulator of the sector, exhibiting very poor performance. As a result, Nigeria lacks strategic management of its most valuable natural resource.

Regarding Sonangol, although the chapter dedicated to it highlights it as an efficient and stable regulator that does not hinder the operations of the multinational companies established there, the information coming directly from Angola paints a very bad picture.

According to Francisco de Lemos Maria, who assumed the presidency of the company in 2012, the current operational model is characterized by Sonangol's growing dependence on both third-party contributions for generating results and the outsourcing of basic services.
According to the new president, the hydrocarbon system in Angola is "unsustainable."

In fact, the promised "Angolanization" of inputs and services in the oil supply chain did not work, and now the new presidency is making efforts to transform Sonangol into an efficient and robust operator as well.

There therefore appears to be a positive correlation between having strategic hydrocarbon management capabilities and having a NOC (Non-Operating Company) with the effective capacity to operate the fields.

It is evident that NOCs are not a panacea in themselves and can even be an instrument of distortions and inefficiencies, especially in countries.
with weak democratic controls over state management. But its existence undoubtedly makes the strategic management of oil resources by nation-states much easier.

Even the much-praised Norwegian model for hydrocarbon management, which contains liberalizing elements, is fundamentally based on...
Statoil, which operates, very efficiently, about 80% of Norway's oil reserves.

It should be borne in mind that the large-scale nationalizations of oil in the 1970s were essentially driven by the need that...
States have found it necessary to have access to reliable information about oil fields and the production and operational costs of activities in the oil supply chain. Generally, the large multinational corporations of the time concealed this information from governments, which, lacking their own operators, had no way to verify or challenge the data presented by the companies. 

Therefore, the vast majority of governments not only changed the regulatory model, but also focused on creating NOCs, such as large operators, to provide practical and technical support for the new parameters of strategic hydrocarbon management.

After all, information is power.

In the case of Petrobras, its usefulness to Brazil and its unique competitiveness in the world lies precisely in the information and technology that...
She holds it.

Petrobras is the only one, among all the major NOCs, that was created before the existence of proven oil reserves in its area of ​​operation was confirmed. All the others were created in an environment of certainty of proven reserves and/or easy nationalization of pre-existing assets.

Therefore, Petrobras had to invest heavily from the outset in prospecting and developing its own technology, especially deep and ultra-deep water exploration technology, which has already earned it well-deserved major international awards.

Therefore, Petrobras's great advantage in the competitive hydrocarbon market lies in its cutting-edge technology and mastery of strategic information about oil fields, particularly those in the pre-salt layer.

This advantage allowed Petrobras to remain the major oil operator in Brazil, even after the infamous risk contracts of
The 1970s and the adoption of the concession model in the 1990s.

Well, removing Petrobras's status as the sole operator of the pre-salt fields could deprive the company of this unique advantage, and Brazil of its ability to strategically manage the fantastic, but finite, resources of the pre-salt reserves.

In fact, depending on the pace of the pre-salt auctions, Petrobras might not be able to participate in most of them, which could result in its exclusion from the majority of the pre-salt reserves. It must be borne in mind that, in an environment of crisis and squeezed revenues, the temptation to accelerate pre-salt auctions in the short term may overshadow long-term strategic considerations.

For the company, such exclusion would result in rapid weakening and, probably, difficulty in honoring its debt, which was incurred precisely to enable it to explore the pre-salt reserves. All of its technological and informational capital could be sold or lost, and in a more pessimistic scenario and in the long term, it would end up becoming a large NNPC or Sonangol, dedicated to acting secondarily as a regulator.

For the country, the scenario of Petrobras being excluded from most or even a significant portion of the pre-salt reserves would likely result in a
great difficulty in strategically managing its hydrocarbon-derived resources. In this scenario, we would encounter obstacles.
considerable resources are needed to control the pace of production, collect the royalties actually owed, and implement the national content policy.

In this sense, removing Petrobras' status as the sole operator of the pre-salt fields could be the beginning of its end and the surreptitious start of a Petrobax. 

It could also be, in a broader sense, the beginning of the end for a developed, sovereign, and just Brazil.