States and Markets in Hydrocarbon Sectors

Andrei V. Belyi, Kim Talus

• Publisher: Palgrave Macmillan
• Year: 2015
• ISBN:
  9781137434074
• Topic: Economics
• Subtopic: Economic Policy
• Index: Economics

Research on the role of states and markets in the hydrocarbon sector is highly topical in contemporary International Political Economy. This edited collection will approach this subject from a broader perspective, investigating the very essence of the interaction between the state and the market and how this varies on a regional basis.

Part I

The International Political Economy of State–Market Interaction in Energy

Part I of this volume will analyse the cross-border and transnational issues related to state–market interaction within the hydrocarbon sectors. Oil markets have long been international, and gas markets are now becoming international. States are exposed to market volatilities and progressively take into account new economic realities. Hence, this part mostly addresses horizontal transnational challenges for both states and markets in international energy relations. In some cases, energy is an important factor in the states’ policy motivations, and in some others, energy is merely used as a tool to achieve other objectives. Hence, an interrelation between states and markets can have multiple dimensions. In order to highlight them, Chapter 1 addresses the topic of oil and gas development in the context of international political economy (IPE). Chapter 2 defines the institutions of states and markets in energy. Chapter 3 addresses the link between energy interdependencies and regional political integration.

1

States and Markets in the Oil Industry

John V. Mitchell and Beth Mitchell

Introduction

The oil industry is touched by many aspects of international political economy (IPE) studies: the role of the state as owner or custodian of natural resources, the relation between state and government, between governments internationally; the economic forces rewarding international trade in oil and oil-related assets and transfer of technology; the independence, formal or real, of companies with oil resources and markets, governance of companies within the corporate sector of private sector economies, and within the state sector where that dominates the economy; and the role of ideas, sometimes mobilized by non-governmental organizations (NGOs).

These topics can conveniently be grouped into Susan Strange’s four structures: production, finance, security, and knowledge (Strange, 1988). Decisions and power flow from one to the other, in different directions at different times, as through a membrane. Changes outside the industry permeate the industry, where their effects depend on the balance between its structural legacy and its ability to recreate itself. The outcome affects the likely success of a state’s (or a company’s) efforts to increase or defend the wealth of its citizens/shareholders. The analysis of change has affinities with the ‘challenge and response’ model of Toynbee (Toynbee, 1947), but without its determinist trends, and with the creative destruction model (Schumpeter, 1942).

Production

‘Production’ in the oil industry is bounded by consumption: oil and gas are not consumed directly but deliver services (heat, power, etc.) through technologies of demand whose evolution involves other industries, in countries where oil is consumed and which are not necessarily under the influence of the governments of producing countries (between 60 and 70 per cent of world oil is consumed outside the countries in which it is produced). As resources do not coincide with markets, finance, or knowledge, there is inevitably international trade, investment, and technology transfer, deviations from which are likely to be costly. Changes in technology are global. Some are symbiotic with the technology of production: oil products are developed to match the requirements of oil-using machinery and vice versa. For the automobile and aviation industries, as for oil production, general technologies from outside their industries transform technology within them. Government regulations, driven by better knowledge of health and safety risks, shape the industries’ interface with each other and with the broader consuming public.

The policy options of producing countries’ governments are thus limited by demand in global markets: there is a clear imposition of power by markets on these states.

There is a reverse imposition of state power on the importing countries. The production structure of the oil and gas industry differs from that of manufacturing and service industries. The resources are where they are and, unlike factories, cannot be created elsewhere. However, in many countries, at various times, the development of local resources has required foreign finance and knowledge: this in turn brings a measure of external market power into those resource states, with a supporting state power from investor governments aiming to protect their companies’ investments abroad.

Property rights

‘Security’ underpinning international trade in oil has a special connotation in the sense of security of property rights over mineral resources. The most basic legitimate functions of the state are to exercise control by force over its citizens and its territory (a ‘failed state’ is one which does not succeed in this). This entails sovereignty over natural resources within the territory. There are several important nuances. In the United States, Canada, and some parts of Australia, subsoil property rights accrue to the owner of the surface. In most European jurisdictions, and those of former European colonies, subsoil rights belong to the state, identified as the sovereign. In Muslim jurisdictions, depending on the school of jurisprudence, subsoil rights belong to the community of the faithful, under God: the ruler has a duty as trustee to apply them in the interests of the people.

Sovereignty and state ownership are not the same. There is no question that the US state is sovereign over its resources. The coexistence of private ownership and state sovereignty may historically have been specific to the United States: the size and diversity of the private sectors of its economy, its large financial sector, and the pervasive influence of competition in a democratic country meant that expropriation of privately owned resources would be unlikely to be politically acceptable or economically beneficial. Private ownership in the United States is difficult to constrain except by laws and regulations designed to prevent monopolies and protect public health, safety, the environment, security, and so on. These are not trivial exceptions. The breakup of the Standard Oil Trust (1906–1911) through a judicial process based on general anti-trust legislation changed the shape of the US oil industry and the nature of the US companies, some of which subsequently became major transnational oil corporations.

In countries without a large competitive, diversified private sector, private ownership implies foreign ownership with connotations of loss of sovereignty and control. In such countries a different role for the state in ownership of all resources seems inevitable. The only question is how this is exercised: through state corporations, possibly with some private sector shareholding, through licensing and contracts by state corporations to the private sector foreign companies, or through licences and contracts to foreign companies, granted directly by the government, as they were in the concession era in the early 20th century.

In China and former communist countries, ownership of resources has remained with the state after being expropriated during their respective socialist revolutions. The right to exploit resources is allocated by the state to state-owned private companies (as in the Central Asian states, Azerbaijan, or in China in a few selected areas).

Russia is a special case. There, the total collapse of the Soviet Ministry of Oil in the last days of the Soviet Union and the subsequent history of privatization (Gustavson, 2012) led to the existence of a large private sector (operating but not owning resources), while the ‘strategic network’ companies, Gazprom and Transneft, remained under direct (majority) state ownership and control. The ‘national champion’ (Rosneft) is organized as a private sector company with majority state control, but without a monopoly over old or new oil development (except in the Arctic). Gazprom is also organized as a private sector company, though with government control. Its monopoly of gas pipelines has been reduced to allow more competition from entirely private sector companies such as Novatek. There is no policy or commercial imperative for Russian companies to expand upstream overseas, though the national champions will be bound into the international oil and gas trade and financial systems through their foreign trade and foreign shareholders and foreign bonds.

Security is not simple for resource states (Dannreuther, 2010). Their governments’ sovereign authority to grant property rights for oil and other mineral resources – as described above – is subject to three types of constraint on ownership.

In many countries there are customary or communal rights (often enshrined in the constitution or in legal practice). The argument is that in territories still occupied or demarcated by these premodern communities, surface and subsurface rights were and are the common property of the surviving communities rather than of the central modern state. According to this argument, the premodern ruler or wielders of government power did not have the right to grant concessions to private sector foreign companies or to pass that authority to successor colonial or modern states (USAID Issue Brief. 2014). There are contentious cases, such as Indonesia (Gerretson, 1953–1957), where mineral concessions purported to be granted by the pre-modern rulers prior to consolidation of the modern or colonial state. After decades of litigation and negotiation between state and federal government, such claims were resolved for Alaska in 1971 (Jones, 1981). In Canada (Van Loon, 2014) and New Zealand, native rights derive from treaties between the secular or colonial government and the tribes, and their interpretation is still subject to dispute. In Colombia and Ecuador, indigenous rights are protected by the constitution, but the precise extent is subject to dispute and in the case of Ecuador can be overridden by the national government for development reasons. In Indonesia, native rights have had fluctuating protection under different regimes with disputes mostly focused on defending surface rights in the face of deforestation by companies. Even where surface rights have become well-defined over time, subsurface rights are often contentious, in the right to ‘artisanal’ mining, the power to allocate rights to mining companies, and the share of revenues to the community (First Peoples Worldwide, 2013).

A second constraint from security to markets is where legal conflict over surface and subsurface rights coincides with conflict between local and central government and involves companies that are the executors of development under licence from central government. The result is, in extreme cases, a state of civil war as in Aceh between 1953–1962 (Dar al Islam) and 1986–2005 (GAM), in Sudan in recent decades, and currently in Libya. Foreign companies are involved in these disputes through their activities on the ground: in some cases their attempts to protect their investments have involved paying for and collaborating with local security forces who turn out to be responsible for human rights abuses, thereby bringing opposition from international security constituencies, so that foreign companies are exposed to shareholder pressure in their home countries, possibly to international sanctions, and to a risk premium on their finance. This puts market pressure on the opposing parties to reach agreement, rather than forgo the development opportunities and revenues that foreign companies can bring.

Thirdly, state security impacts oil and gas companies in territorial disputes between states: recent and ongoing examples inhibit or raise the risks of exploration in the South China Sea, the eastern Mediterranean, offshore Angola and the Democratic Republic of Congo, the Caspian Sea, Western Sahara, South Atlantic (Falkland Islands), East Timor, and parts of the Arctic Ocean.

Finally, states’ concern for their security affects the resolution of commercial disputes: submission to national or foreign courts of arbitration panels has been a critical issue for state–market relations affecting oil and gas, bound up with questions of sovereignty, obligations under the 1958 UN convention on the Recognition and Enforcement of Arbitration Awards, and more general norms for settlement of international property and commercial disputes. The Energy Charter Treaty (1994) gives companies (from states which are party to the treaty) the right to invoke binding arbitration against governments, and thus goes further than many investment protection agreements negotiated in recent years. This treaty has not been ratified by most of the major producers of oil and gas, but has had some success in attracting cases. The lack of widespread support by producing governments, particularly Russia, has raised questions about its review and renewal (Nappert et al., 2011).

Finance

Outside the United States, early known oil and gas resources were found in countries – many of them colonies or dependencies of major powers – without indigenous financial structures; their development depended on foreign sources of finance, implicitly protected by the metropolitan power. Early 20th- and late 19th-century international oil companies were largely created by private finance raised in the markets of North America and Europe: Anglo-Persian Oil Company (later BP) started with private finance, which was boosted by an injection of government capital in 1914. Later, governments, rather than private markets, were the founding investors in ELF, CFP, and ERP (France) and ENI/SNAM (Italy).

The balance between state and market finance changed further in the 1970s with the rise of the national oil companies of the exporting countries. These are not necessarily fully funded by their governments’ oil revenues. State companies like Pemex have used international financial markets to raise money and state companies such as Statoil, Gazprom, and Rosneft have been organized as corporations with private shareholders and quotations on stock exchanges and in bond markets. Foreign states can interfere: European Union (EU) sanctions on financial and other transactions with Iran since 2010 have effectively reduced investment in Iran’s oil industry and restricted its ability to raise capital, finance trade, and insure oil and other operations.

Many newly emerging oil-producing countries of the 21st century are in developing countries with no financial markets or other resources. For them, the old model seems again to be relevant – at least until production revenues begin to flow.

Knowledge

Production

Knowledge specific to the oil industry is only part of a global knowledge structure of ideas and science, which infuses human societies more generally – in particular the global development of computing capacity, digitalization, and communications. The oil industry applies these, particularly in exploration, reservoir development, refining, and logistics. These have changed the production structure of the industry, adding reserves and confounding the predictions of ‘peak oil’ and the perceptions of impending shortage upon which many government policies have been based. This knowledge is transferred internationally by people and organizations and goes beyond proprietary intellectual property. It is not carried only by major international oil companies, but in a variety of service and supporting industries whose activities have grown as the oil companies outsourced many technical services to companies like Schlumberger (which operates global research centres in the United States, the United Kingdom, Brazil, Russia, Norway, and the Middle East), employing a multinational professional workforce. Saudi Aramco supports two technical universities in Saudi Arabia and research centres in the United States, the United Kingdom, the Netherlands, China, and France; there are national research institutes in Iran (Research Institute of Petroleum Industry), and in Abu Dhabi, Malaysia, Egypt, Russia, Norway, Nigeria, and Brazil. Knowledge is also carried in the training which executives of the exporting country or companies receive in universities in the United States and Europe (three of Saudi Aramco’s Executive Board have US technical degrees).

The development of knowledge outside North America and Europe changes the balance within the global oil industry. The old international companies, with their experience of large deepwater and Arctic projects, are not the only or best source of technology for other situations.

The current vector of change in oil production is the combination of horizontal drilling with fracturing to produce oil and gas from petroliferous shale (‘fracking’). This creates new opportunities for owners of those resources and governments of countries in which shales (and necessary water supplies) occur, upsetting policies previously shaped by the perception of impending shortage or lack of ‘conventional’ oil resources.

While supply technologies shape what the oil industry does, it is demand technologies that define the oil industry’s place in the wider world. Because they are so varied, their impact has been less compreh...

Table of contents

• Cover
• Title Page
• Copyright
• Contents
• Foreword
• Preface
• Notes on Contributors
• Introduction
• Part I: The International Political Economy of State–Market Interaction in Energy
• Part II: States and Markets in Hydrocarbon Export-Dependent States
• Part III: The ‘Consumer’ State Perspective
• Conclusion
• Index