New Frontiers in Political Economy of Minerals & Hydrocarbons
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New Frontiers in the Political Economy of Minerals & Hydrocarbons: Section II
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New Frontiers in Political Economy of Minerals & Hydrocarbons
- 1. New Frontiers in the Political Economy of Minerals & Hydrocarbons: Section II World Bank June 24th 2013
- 2. National Oil Companies & SOEs 1. How do NOCs play a role in the political economy of natural resources? 2
- 3. What determines nationalization? 1. Why do political leaders expropriate private oil companies (POCs)? 2. Existing explanations: rent capture & high global oil prices, resource nationalism 3. New explanations: price irrelevance, geology, diffusion effects 3
- 4. Measuring nationalization 1. Acts of expropriation: forced divestiture of privately-held assets 2. Intervention: state control over supply levels and prices 3. NOC establishment: state-owned enterprise operating in the market – Built upon expropriated assets or not – Control over production or not 4
- 5. Measuring nationalization: NOCs Year Country Company Year Country Company 1914 Great Britain BP 1970^ Libya LNOC 1922 Argentina YPF 1971 Indonesia Pertamina 1924 France CFP 1971 Nigeria NNOC* 1926 Italy Agip 1972 Norway Statoil 1938 Mexico Pemex 1974 Qatar QGPC* 1951 Iran NIOC 1975 Malaysia Petronas 1953 Brazil Petrobras 1975^ Venezuela PdVSA 1956 India ONGC 1975 Vietnam PVN 1960 Kuwait KNPC* 1975 Canada Petrocanada 1962 Saudi Arabia Petromin* 1976 Angola Sonangol 1965 Algeria Sonatrach 2002 Eq. Guinea GEPetrol 1967 Iraq INOC 2006 Chad SHT Source: Tordo et al. (2011). National Oil Companies and Value Creation. World Bank Working Paper #218 5
- 6. NOC formation over time 6
- 7. NOC formation over time 7
- 8. Who were the 1960s / early 70s nationalizers? 8
- 9. What explains the 1970s wave of nationalizations? 1. First movers vs. followers 2. OPEC vs. non-OPEC supply 3. Political independence 4. Regional waves vs. global waves 9
- 10. What explains recent nationalizations? 1. Sudan: Sudapet 2. Equatorial Guinea: GEPetrol 3. Argentina: YPF 4. Bolivia’s re-nationalization: YPFB How are these different from nationalizations in the 1970s? 10
- 11. Existing patterns: Oil nationalizations since 1900 1. What factors have historically predicted nationalization? 2. Formalizing determinants of nationalization using statistical models 3. Data: 60 oil-producing countries, measured each year from 1900-2005 12
- 12. Predicting oil nationalization 1. Geology: measuring the oil production cycle and location of oil (offshore v onshore) 2. International market factors: oil prices, IO membership, and the diffusion of nationalization 3. Politics and economics: democratic institutions and income growth 13
- 14. Models are good at predicting some nationalizations… 15
- 16. Model-based clustering Group 1 Group 2 Group 4 Congo Algeria Angola Libya China Colombia Chad Argentina Malaysia Ecuador Chile Australia Nigeria Oman Denmark Austria Norway Poland Egypt Azerbaijan Peru Russian Federation Ghana Bahrain Papua New Guinea Sudan Guatemala Bolivia Qatar Uzbekistan India Brazil Romania Kuwait Canada Saudi Arabia Mexico Cameroon Syria Netherlands France Turkmenistan New Zealand Gabon East Timor UAE United Kingdom Trinidad & Tobago Equatorial Guinea Tunisia Indonesia United States Iran Venezuela Italy Vietnam Japan Yemen Kazakhstan Group 3 17
- 17. ARE ALL NOCS THE SAME? 18
- 18. NOC differences 1. What are the salient differences across NOCs in terms of firm characteristics? 2. Do these differences matter? 3. Can we classify NOCs into different “types”? 19
- 19. Ownership structure 1. Are there significant differences in the ownership structure of NOCs? 1. Full ownership 2. Majority ownership 3. Minority ownership ‒ The “Golden Share” 1. Fully private (POCs) 20
- 20. Trends in ownership structure 21
- 21. Operational capacity 1. Producing NOCs – Involved in upstream operations 1. Regulatory NOCs – Contra the “Norwegian Model” (Thurber et al. 2012) 1. “Shell” NOCs – Middle-men between POC and the state 1. Majority producers vs. minority producers 2. Technical skills – NOCs with or without capacity to produce offshore and/or handle EOR 22
- 22. Trends in operational capacity 23
- 23. Trends in operational capacity: NOCs with majority production status 24
- 24. Access to capital 1. Access to state capital for exploration & production investment (state re-investment) 2. Ability to finance debt: domestically, globally – Can NOC use state assets as collateral for debt? 1. Three potential classes: 1. Limited access to capital: complete reliance on state re-investment decisions 2. Fiscal autonomy: complete reliance on non-state financing 3. Government support: ability to finance capital independently, but can call on state if necessary 25
- 25. Trends in access to state capital 26
- 26. NOC efficiency 1. Tradeoffs between tax rates and revenues 2. Can conceptualize as two variables: – Tax rate under nationalization (Tn) vs. private ownership structure (T-n) – Production revenues under nationalization (Pn) vs. private ownership structure (P-n) 1. Nationalization inefficiency: Pn < P-n 2. State “capture”: Tn > T-n 27
- 27. 28
- 28. 29
- 29. 30
- 30. NOC fiscal auditing practices 1. Transparency of NOC budgets 2. External vs. internal vs. no audits 3. Public dissemination of NOC information 4. Reporting of production, investment, partnerships, contracts 5. Growth of EITI members 1. New EITI reporting standards for SOCs 31
- 31. Regulatory frameworks 1. Differences between NOC and POC regulatory environments 2. Fiscal governance 3. Contractual frameworks 4. Separation of operations and regulation 32
- 32. NOC differences: empirics 1. How can we map out NOC differences 2. What are the existing approaches to measuring NOC vs. POC differences in performance? – NOC “success” in achieving state goals – Traditional metrics of performance – New metrics of performance 33
- 33. NOC differences: empirics 1. NOC “success” in achieving state goals – Performance of NOCs with respect to maximizing political capital: 1. Fostering domestic economic development 2. Developing human capital and technical expertise 3. Depletion strategy 4. For international NOCs: promoting state interests internationally 34
- 34. NOC differences: empirics 2. Traditional metrics of performance – Revenue and earnings generation – Reserves replacement ratio (RRR) – Production growth – Production-to-reserves ratio – Return on investment in E&P 35
- 35. NOC differences: empirics 3. New measures of performance – Value creation index (Tordo, Tracy & Arfaa 2012) 36
- 36. Case study: Nigeria Nigerian production: variance of contracts and ownership structure 1. POC-NNPC Joint Ventures 2. POC-NNPC Production Sharing Contracts 3. POC-NNPC Profit Oil arrangements 4. POC-controlled blocks (royalties) Profit taxes 37
- 37. Source: Nigeria EITI (2011) Final Core EITI Financial Flows Reconciliation Report 2009 – 2011 Oil & Gas Audit 38
- 38. Source: Nigeria EITI (2011) Final Core EITI Financial Flows Reconciliation Report 2009 – 2011 Oil & Gas Audit 39
- 39. Case study: Nigeria 1. Access to capital: relatively low 2. “Cash calls” – Cash advance required to be paid by each joint venture company to meet the net cash requirement of the joint venture – Essentially fronting cash pre-production to cover government’s share 40
- 40. Case study: Nigeria 1. Nigeria as example of non-producing NOC with little access to capital, with variety of contract structures by field 2. Leverage variation in contract types to observe and measure different outcomes of interest: revenue collection, production efficiency (more on this in Section III) 41
- 41. BEYOND UPSTREAM OIL: TRANSPORTATION AND ALTERNATIVE FOSSIL FUELS 42
- 42. Pipelines and ports 1. The importance of hydrocarbon transportation 2. Regional alliances: pipelines 3. Ports and terminals: global partnerships 4. Developing regional independence 5. Spillover effects 6. Potential security threats – Pipelines as spark points for conflict and/or cooperation 43
- 43. Differences between oil & gas 1. Are there salient differences between the political economy of oil and gas? 2. Differentiation with respect to: – Access to ports (for LNG) – If landlocked, pipeline access – Global vs. regional markets – Globally gas becoming more popular – Differential pricing for simultaneous oil & gas production 44
- 44. Differences between oil & gas 1. What are the consequences of these differences? – Differences in price volatility – Differences in demand volatility – Importance of domestic market for gas – Redirecting gas to the oil sector (EOR) – Regional vs. global international relations – Producer-transporter-consumer alliances 45
- 45. Case study: Mozambique 1. Multiple resources and continued exploration – Oil – Gas – Coal 1. Natural gas discoveries and the regional market: future of Mozambique as gas exporter? 2. Links/alliances to South-East African domestic markets: an emerging energy corridor 46
- 46. Source: Wentworth Resources and “Oil and Gas Mergers and Acquisitions Review" 47
- 47. Source: Theodora.com (2008) 48
- 48. CONSEQUENCES OF NATIONALIZATION: NOC ADVANTAGES & DISADVANTAGES 49
- 49. NOC advantages and disadvantages Advantages 1.State control over politically sensitive issues: – Supply price, environmental protection, local labor market 1.Increase bargaining position over POCs 2.Narrow information gap between state and operators 3.Revenue maximization 50
- 50. NOC advantages and disadvantages Disadvantages 1.International retaliation 2.Reduced efficiency of NOC compared to well- designed fiscal regime of taxing POCs 3.NOC can become like another POC, or even “state within a state” 4.Corruption and poor governance 51
- 51. What are the political consequences of nationalization? 1. Does nationalization affect political stability? 2. If so, why do we see this pattern? 52
- 54. What are the consequences of nationalization? 1. Do NOCs increase state revenues from oil and gas? 2. What do we mean by “state revenues” from oil sales? 3. Is NOC inefficiency too high to overcome state control of oil revenue stream? 4. If NOCs increase revenues, could account for prolonged regimes and other politco- economic consequences 55
- 55. NOCs and revenue collection 1. If NOCs do not maximize state revenue from oil, why don’t we see more privatizations? 2. Is state control of the industry worth more than higher revenues? 56
- 56. NOC differences and revenue Are there salient differences across NOCs that explain variance in levels of state revenue? 1.Ownership structure 2.Auditing practices 3.Operational capacity 4.Access to capital 5.Partnerships and regulatory framework 57
- 57. Limitations: data on revenues 1. Limited collection of historical data on state revenues 2. Difficult to test the NOC-revenues hypothesis without time-series data 3. More on this in Section III 58
- 58. Case study: Angola 1. How did Sonangol evolve into a successful manager of state petroleum-sector policies? 2. What characteristics of Sonangol stand out from other African NOCs? 3. Does geology play a role in Sonangol’s success, or is it a barrier to success? 59
- 59. Case study: Angola 1. Angola’s success story: 2. For decades, Angolan government and Sonangol consciously limited the company’s commercial role to selling oil and promoting local content 3. Officials emphasized Sonangol’s quasi-regulatory role as the company honed its skills, then pushed it deeper into commercial ventures—principally through Sonangol’s exploration and production subsidiary—as the company developed sufficient expertise 4. This phased approach to defining the company’s role has driven Sonangol to economic success, though the Angolan NOC remains characterized by serious shortcomings in public accountability 60
- 60. Privatizing NOCs 1. Are revenues higher under privatization? 2. Have states been successful in privatizing? 3. Partial privatization a better option for producing-NOCs – Going from full state ownership to majority state ownership – Publicly listing NOC shares can enforce market discipline and increase efficiency – Viable option for NOC to raise capital in absence of state capital for E&P 61
- 61. Partial privatization: successes Brazil 1. Petrobras: partial privatization (1997) – Immediate increase in cash flow via share sales – Incentivized efficient management – Reduced subsidy costs: privatization gives “a fresh legal argument against entrenched interests around subsidies” – 1997-2007: • Increased production levels (+10.4%/year) • Reserves replacement (7.1 14.2 bn bbls) • Net revenues ($0.3 bn $9.0 bn) 62
- 62. Partial privatization: impediments Cameroon 1. SNH est. as fully-state-owned NOC in 1980 – Non-producing NOC: SNH’s mission is “promotion, development and monitoring of oil activities in the entire country… and management of state interests in the oil sector” – 1980-1991: Notable gaps between reported and collected oil revenues – IMF & World Bank recommendations for partial privatizations – SNH never privatized, despite wave of 1990s privatizations in Cameroon’s other sectors 63
- 63. Partial privatization: impediments Cameroon Period Opaque Secret Accounts Off-budget Partial SNH audit Partial audit/ EITI Cumulative gap Years 1977-79 1980-86 1987-1990 1991-99 2000-06 1977-2006 Period cumulative gap 333.5 5,516.0 414.0 1794.3 2602.7 10,660.4 Yearly average 111.2 788.0 103.5 199.4 371.8 Total CHB amount (1980-86) 4,726.0 Source: Collier and Venable (2011) Plundered Nations? Successes and Failures in Natural Resource Extraction Breakdown of cumulative gap in government oil revenues (in US$ million) 64
- 64. THE TRUE VALUE OF NOCS? PATRONAGE AND CLIENTELISM 65
- 65. NOCs as patronage tools 1. Using NOCs to distribute patronage and clientelistic favors 2. NOC-sponsored social programs a) PDVSA: Misiones Bolivaranos b) NIOC: bonyads 3. NOCs and fuel subsidies 66
- 66. Source: Victor, Hults and Thurber (2012) Oil and Governance. Cambridge University Press. 67
- 67. “NNPC functions well as an instrument of patronage. Each additional transaction generated by its profuse bureaucracy provides an opportunity for well-connected individuals to profit by being the gatekeepers whose approval must be secured, especially in contracting processes… Indeed, the implicit government goal for the oil sector appears to be the maximization of patronage opportunities; government policies have been too inconsistent to allow discernment of any more explicit objectives.” Source: Victor, Hults and Thurber (2012) Oil and Governance. Cambridge University Press. 68
- 68. The NOC Board of Directors (BOD) 1. Key factor in NOC corporate governance: BOD composition 2. Competent BOD: encourages market discipline, transparency, due diligence, ability to raise capital 3. Independent BOD: protects NOC from overly political decisions, promotes efficient use of labor capital 69
- 69. The NOC BOD 1. Differences across NOCs in BOD composition a) Appointment processes: executive vs. joint-body decisions b) Private sector members; technocratic members c) Political members: MPs, local leaders, ministers d) Linkages between NOC and Ministry of Oil 70
- 70. Differences in BOD appointments 71
- 71. The Politics of NOC Boards 1. Are NOC board appointments allocated politically? 2. Are board positions used to distribute patronage to elites? 3. Or are commercial interests in mind? 4. Is it easy to distinguish political appointments from technical appointments? 72
- 72. BOD case study: Ghana 1. GNPC a) Board composition • 7-member board: NOC MD, industry leaders and government officials a) Appointment rules • President nominates BOD members and parliament approves appointments a) Ties to Oil Ministry • None; Minister of Energy is not in BOD a) Allegations of corruption: kickbacks given to board members to secure contracts 73
- 73. BOD case study: Malaysia 2. Petronas a) Board composition • 13-member board: one from government, six from NOC, six from private sector (independent) a) Appointment rules • Executive (PM) appointment, no other approval a) Ties to Oil Ministry • None; but strong ties to Ministry of Finance a) PM uses the board as political tool 74
- 74. BOD case study: Nigeria 3. NNPC a) Board composition • 11-member board: NNPC MD, Minister of Oil, President is the chairman of the board a) Appointment rules • Executive appointment, no other approval a) Ties to Oil Ministry • Direct ties; Minister is on NNPC board a) President uses BOD for patronage appointments 75
- 75. What do and don’t we know about NOCs? 1. What determines nationalization 2. NOC differences 3. Oil vs gas state ownership 4. Beyond the upstream: mid- and downstream roles of NOCs 5. NOC consequences: revenue generation 6. Using NOCs for patronage: the value of board appointments 76
Editor's Notes
- Paasha: Some existing explanations have to do with rent capture and that nationalization coincides with high oil prices. There is also much work on domestic public opinion and resource nationalism (and/or xenophobia) My own data analysis, using a new dataset on nationalizations, shows that price doesn’t help predict most nationalizations, especially the ones we’re interested in, which are the first-movers. More on this in a few slides.
- First we have to look at how to measure nationalization. So, what are the existing measures of nationalization? Acts of expropriation: good measure to track specific instances of forced nationalization. Downside: potential over-measuring. Why put more weight on repeated nationalization relative to consolidated nationalization? E.g. Kuwait started nationalizing in 1960 and completed nationalization in 1974, versus Libya where nationalization was completed in 1968-1970. Intervention: broad measure of nationalization, good for issues related to price-controls set by state. Downside: not as applicable to upstream oil nationalization, but good for downstream where most oil producers (and importers) use state control to provide fuel subsidies. NOCs: good measure to use for comparative study. Easy to interpret cross-nationally. Clear, visible measurement with respect to time: i.e. very easy to identify when a NOC is established, vs. very hard to collect data on individual acts of expropriation. Downside: not all NOCs are the same (will be addressed in next subsection)
- What are some examples of NOC establishments? Table from World Bank report on NOCs (*) Asterisks indicate NOCs that were restructured after initial nationalization (e.g. KNPC became KPC, NNOC became NNPC) (^) Carrots indicate years different from my own coding (will explain if any questions about it, but it will come up later in the next few slides) Working through some cases: 1.) Mexico: first big producer to nationalize 2.) Iran: first MENA country to nationalize, but nationalization later reversed in 1954 3.) Nigeria: part of the wave of 1970s nationaliztions, first big African producer to nationalize 4.) Equatorial Guinea: example of new nationalizations since resurgence of Gulf of Guinea oil production
- Highlighting the big jump in nationalizations that occurred in the 60s and early 70s
- Paasha
- Natasha:
- Paasha: To answer the question about what determines nationalization, we can use statistical modeling to complement existing work based on case studies. I have collected data on 60 oil producing countries during the period from 1900 to 2005, though the first salient nationalization did not occur until 1938 (Mexico)
- Paasha: Strongest predictors are the production cycle and diffusion effect: nationalizations more likely to occur early in the production cycle (measured as years since first production) and more likely to occur when other states nationalize. Oil price matters, but not for first movers. Domestic political institutions and economic growth and wealth are not predictors of nationalization.
- Paasha: This plot shows the average probability of nationalization in any given year in a given country, based on statistical model of the above factors using data for 60 countries between 1900-2005. Mean value is around 0.015, or 1.5% chance of nationalization per year. Quite low, but remember these are rare events with non-trivial repercussions.
- Paasha: These are two plots over time for Canada and the Congo, with the solid line indicating predicted probabilities of nationalization and the dashed vertical line indicating actual nationalization. These two show the model’s strength.
- Paasha: However some cases the model has problems with because we still don’t have good enough evidence for what determines nationalization in first-movers (like Libya) or late bloomers (like Sudan)
- Paasha: Using the model that predicts nationalization, we can group countries into clusters using a more complex method known as Bayesian mixture modeling. The idea is to group countries based on similar patterns in the way X affects Y, which in this case is a list of factors affecting the probability of nationalization. Interesting to see which countries go into which groups, but we can see most countries (37 out of 60) are grouped into one cluster (group 3). What explains these differences? [move on to next section]
- Paasha: Introducing the questions that will be discussed throughout the rest of the presentation.
- Paasha: Full ownership refers to NOCs whose “shares” are fully owned by the state. Majority ownership: where state has partially privatized but retains majority (50% + 1) shareholding. Minority ownership: Golden share refers to minority ownership but state has veto powers over certain decisions made by the NOC and its board. Mainly used by European NOCs like Eni and CFP (in the past) Fully private ownership structure: very few states have a fully private oil sector where there is no NOC. Examples: US, Canada (post-1990s), UK, Australia Interesting pattern is that degree of ownership correlates with petroleum wealth: states with bigger reserves and with export capacity tend towards full ownership, whereas importers or small exporters tend towards partial ownership. In particular, states with declining production tend to switch from full ownership to partially private (majority ownership).
- Paasha: Graph of the percentage of NOCs over time that are fully state-owned. Data collected back to 1905, but not interesting until 1950 because so few NOCs existed. Point out that the y-axis scale starts at 70%, so that for the most part &gt;80% of NOCs have been fully-state-owned over time, with minor fluctuations. Biggest change is after the era of privatization starting in the 1990s, where nearly all OECD NOCs were either privatized or partially privatized (BNOC, PetroCanada, ENI, CFP/Total, JNOC, KNOC)
- Paasha: A producing NOC is one that is involved in upstream production and operations as opposed to a NOC that doesn’t produce but only manages the oil sector, while other companies (POCs) handle operations. Regulatory NOCs can be producers or not: usually the case that there are NOCs which produce and regulate. Examples: Petronas, PDVSA. Regulator means the company is involved in managing the licensing process, ensuring POC compliance with state petroleum laws, monitoring tax and rent collection, and other non-commercial activities. For NOCs that just produce and aren’t regulators, the gold standard is the Norwegian Model of separating production from regulation, which means having a NOC and having an independent regulatory agency. Examples: Statoil (obviously), Petrobras, NNPC. “Shell” NOCs are companies that aren’t really oil companies. They are middlemen in the sense that the sole purpose of the NOC is to serve as the financial intermediary between state and POC. I.e. the NOC collects royalties, petroleum taxes, etc. from companies or in some cases is charged with selling oil that POCs produce. Ghana’s GNPC is one example, but it is now getting more involved in production. Another is Chad’s SHT (est. 2006). For NOCs that produce, some are majority producers in their home country, while others are small producers and give way to POCs. More refined measures are preferred, i.e. percentage of production operated by the NOC, but these data aren’t historically available. Differences in technical skills is one aspect of operational capacity that has yet to be studied in detail across NOCs. We know that NOCs like Petrobras and Sonangol can handle deepwater offshore, while NOCs such as Pemex and NIOC have struggled with offshore E&P. The same is true for enhanced oil recovery. Data hasn’t been collected on this characteristic, but it is a key difference across NOCs.
- Paasha: Same graphical structure as previous graphic: data from 1950-2005, y-axis scale between 70-100%. The measure is the percentage of NOCs that have operational capacity in a given year. Overall, a high percentage (never below 75%) have operational capacity, though the trend has stayed mostly flat with a slight increase over time. But this measure can be misleading … [next slide]
- Paasha: A more interesting measure is the percentage of NOCs that are not only producers, but also produce the majority of a country’s oil. This number is considerably lower than the average for the previous slide. At 2005, roughly half of the NOCs in the sample (47 countries had NOCs in 2005) were the majority producers of oil in their home country. The trend is for the most part a declining one, with the exception of a bump up in the mid 1990s. This is due to the partial privatization of NOCs that weren’t majority producers that then became majority producers after partial privatization (Petrobras, for example). The dip down is due to the creation of minority producer NOCs in the former Soviet states (KMG, for example).
- Paasha: Important to note these are not mutual groups. Some NOCs have access to state capital for E&P, without any other way of financing operations; i.e. these NOCs cannot finance debt independent from the state. Examples include Sonatrach, NIOC, and Petro South Africa. For NOCs that do have access to capital outside of the state (or in the private domestic market), in many cases the state does not allow the NOC access to state capital. Statoil is the canonical example. Petrobras is reaching this stage as well. Ability to finance debt independent of the state is generally associated with partial privatization, though it is considered a step before partial privatization. Example: Pemex allowed to issue debt on the international bond market, but no ability to sell shares. Ownership is still fully state controlled. An interesting difference across NOCs that finance debt publicly is the backing of the state for collateral: Tordo et al (2012) find that S&P ratings correlate with whether the government is prepared to provide financial support to the NOC in times of stress. With these two characteristics in mind, we have three classes of “NOC access to capital”.
- Paasha: This chart shows data I’ve collected for all NOCs since 1950 on the ability to use state capital for investment. This captures two of the categories mentioned above: limited access, and government support. The inverse is the percentage of NOCs in each year that have fiscal autonomy. Clear that access to state capital is declining over time, meaning that more and more NOCs are financially autonomous when it comes to investment. Since 2005, there has been a rebound upwards towards about 60% of NOCs having some access to state capital.
- Paasha: This is a more theoretical construct for how states with NOCs can differ in terms of NOC efficiency. Overly simplified with an eye to state revenues that are a function of a production revenues and tax rate. We are not assuming cost here. The first is the tax rate or more specifically the percentage of revenues the state actually collects from the sale of oil, which we can assume has two values: one under nationalization and one under non-nationalization. The second is the production revenues created under nationalized ownership structure versus under private ownership structure. We can make two assumptions: the first is that production is less efficient under nationalization, the second is that the state’s rate of revenue collection is higher under nationalization.
- Paasha: Using these two formalized concepts as ratios, we can theoretically map NOCs with respect to the tradeoffs between tax rate (“capture”) and production revenues (“inefficiency”) Where hypothetical NOC production revenues are far below the counterfactual POC production revenues, we are at the high end of the y-axis Where the state collects a far higher tax rate (inclusive of all the various kinds of petroleum “taxes”) under nationalization than under a private ownership structure, we are at the high end of the x-axis
- Paasha: If we are to the right or under the 45-degree line, then nationalization is better for the government, despite the inefficiencies high tax rates create
- Paasha: But if we are to the left or above the 45-degree line, then nationalization is not optimal for a state in terms of revenue collection Keep in mind this is theoretical, but this is to give some simplification to the idea that there is an inherent tradeoff between higher revenue collection and production efficiency. We expect that if revenue creation is the primary determinant of oil nationalizations then most NOCs would fit in the blue section; if not, then since these nationalizations have occurred and NOCs remain nationalized, then we suspect that revenue creation may not be the most important factor.
- Natasha
- Natasha Separation of operations and regulation is what is referred to as the Norwegian Model, as discussed a few slides ago. More on this in Section III.
- Paasha: How can we empirically measure differences in NOC performance? Looking at the existing measures plus a new metric
- Paasha: Example of economic development and NOCs: South Africa’s NOC, Petro SA, charged with managing the Black Economic Empowerment (BEE) program. Depletion strategy: state has control over how reserves are produced and the timeline of production. Example: Iran’s “optimal” production level determined by the state at 4 mbd to maximize long-term production growth. A POC on the other hand would produce at the maximum rate to placate shareholders, at 6 mbd.
- Paasha: Typical measures of oil company performance
- Paasha: New value creation index put together by folks at the World Bank for the 2004-2008 period for about 20 NOCs.
- Paasha: Can we exploit variance in ownership structure across different blocks of the same fields? NATASHA WILL EXPAND ON THIS IN SECTION III
- Paasha: Profit taxes from all the different contracts between Nigeria’s government and contractors. -- JVs -- PSC -- “Sole risk”: like a service contract
- Paasha: Royalties from all the different contracts between Nigeria’s government and contractors. -- JVs -- PSC -- “Sole risk”: like a service contract -- Service contract
- Paasha: Discussion of Nigeria’s weak position in terms of NNPC’s access to state capital. They developed the cash call system as a way to deal with the company’s low cash flow. Essentially a loan from a POC until oil is produced and sold. Currently managed by an external independent agency (JPMorgan).
- Paasha: Mention that this will be discussed more in Section III with Natasha’s part on natural experiments
- Natasha:
- Natasha:
- Natasha:
- Natasha:
- Natasha:
- Natasha: Map of existing gas fields and oil finds in Mozambique, and neighboring Tanzania Highlights the diversity of fields, as well as the existence of both oil & gas combined fields as well as non-associated gas fields.
- Natasha: Map of potential pipelines from Mozambique to Southeast African energy corridor
- Paasha: I preface this section with the note that there are many open questions raised in the next few slides. We currently don’t have enough data to rigorously test hypotheses about NOC consequences, so this section of slides is rather exploratory and seeks to open debate and gauge interest in answering these kinds of questions.
- Paasha: Note the political reasons for creating a NOC are mostly for these political advantages. E.g. social development programs, reducing unemployment, forward/backward linkages, etc. Bargaining has helped but this is becoming increasingly irrelevant because of the shift in market practices. Was more important back in the time of the 50-50 arrangements of the 1960s/1970s. Information also more readily available now on cost oil and production.
- Paasha: International retaliation: a bigger problem for earlier nationalizers, highlight examples of Mexico and Iran, but also for recent financial retaliation by Spain over Argentinian nationalization Reduced efficiency: recall prior slides on NOC efficiency. Though this may not be a problem for some, it has potential to diminish the “revenue maximization” benefit State within a state: nationalization may not solve the information asymmetry problem, but may exacerbate it by creating an autonomous NOC that has incentives to misreport costs and revenues to the state Corruption and poor governance: empirically, NOCs may increase corruption and especially funneling of oil revenues outside of the economy. Issue of poor governance will be addressed in the next subsection when discussing NOC boards of directors.
- Paasha: As a political scientist, the questions I’ve raised have been about the political consequences of nationalization and establishing a NOC. For many emerging producers seeking to re-structure the oil and gas industry, a key motivation of whether or not to nationalize is the issue of political stability. NOCs have many advantages as discussed in the previous slide, but what about the end-game? What about what leaders care about most – survival?
- Paasha: Introducing the survival plot: x-axis is time since the start of a political regime, y-axis is the probability of that regime surviving, estimated annually This plot is for authoritarian countries only Shows that regimes with NOCs last longer than regimes without them, in 117 countries over the 1900-2009 period, controlling for time, oil production, and civil war onset (a very basic and preliminary model). Key point here is that there might be a pattern between nationalization and regime survival among authoritarian countries. Goal is to explain why this pattern exists: is it because of the “resource curse”, or is it because nationalization simply enables a political regime to collect greater shares of revenues than it would without nationalization?
- Paasha: Pattern doesn’t hold well for democracies.
- Paasha: Again, just reviewing questions that come up out of the debate on the political consequences of NOCs
- Paasha: Privatization takes away political advantages of having NOCs: losing control over politically sensitive policies, e.g. fuel subsidies, supply controls, public employment Revenue question seems to be answered by the lack of actual privatizations: states must value industry control over potentially higher revenues since very few have privatized their NOCs Additional point: privatization brings with it increased transparency, which may not be a desired outcome if NOC is used as a “piggy bank” by political elites.
- Paasha: We would expect that NOC characteristics would play a key role in the NOC’s ability to provide the state with revenue from the sale of crude. Traditional economic theory would predict that the more competitive is the ownership structure, the more efficient the firm and hence higher returns on investment. For NOCs, this would imply that partially privatized NOCs and those that compete with other NOCs in the market should deliver higher revenues. Auditing and transparency should also in theory increase revenues for the state since these practices reduce inefficiencies. The effect on revenues of operational capacity is difficult to determine. On the one hand, NOCs are “inherently” less efficient than POCs, so its better to have a NOC that leaves the production to POCs and collects revenue post-operations. On the other hand, in the long-term having a NOC that has production capacity (and that production will become more efficient over time) can reduce the information asymmetry between state and POCs, and thus the state can collect its full share of oil rents. Access to capital, as discussed in the slides above, is also a matter of balance. Too much reliance on the state for capital makes the NOC inefficient and prone to moral hazard; too little access to capital and the NOC will have little incentive to explore for new reserves since the company cannot put cash upfront in risky endeavors. The regulatory framework is crucial for the success of the NOC and therefore for the collection of oil revenues by the state. Echo what Natasha discussed above on fiscal regimes.
- Paasha: Problem is that right now we cannot rigorously test the above hypotheses regarding NOC characteristics and state revenue, due to limited data on the latter. Victor will be speaking to this in more detail in the next section.
- Natasha:
- Natasha:
- Paasha: The first two questions we can’t answer yet: very states have fully privatized their oil sectors, with the exception of OECD countries that had NOCs before privatizing in the 1990s (BNOC, PetroCanada, CFP) Partial privatization has been more popular. Idea is to sell some shares but maintain majority state ownership. Statoil, Petrobras, Kazakhstan (KMG) good standards for partial privatization A third option is allowing NOCs to finance debt internationally (discussed above in “Access to capital” slides), example of Pemex
- Paasha: Using this to set up Natasha’s Cameroon case study. Petrobras as canonical example of success in partial privatization of oil in emerging markets.
- Natasha:
- Natasha: This chart shows the level of unaccounted oil revenue from 1977 to 2006. Recall that SNH was created in 1980, also the period of highest secrecy and most unaccounted revenue. Highlights the need for reform in Cameroon, and partial privatization was supposed to be that reform. But has stalled so far.
- Paasha
- Paasha: One clear advantage for state leaders in nationalizing is the ability to use the SOE for patronage. Victor discussed this issue in the morning session and made the point that patronage is inevitable. Here I discuss how the NOC fits in to the political patronage system. The use of NOCs for non-commercial activities such as social programs and economic development varies from state to state, but it is clear from most NOC mandates that the state expects the advancement of social and development goals to be one of the NOC’s missions. Example 1: During the Chavez era, PDVSA has been used as the cash repository to fund a number of domestic and international social programs. Notably the misiones bolivaranos (means-tested welfare programs, e.g. school funding for poor districts, food distribution, etc.) as well as the controversial “PetroCaribe” program which charged PDVSA with delivering nearly-gratis refined petroleum products to poor Caribbean and Central American states. The political goal was to increase popularity both at home and abroad, and often the distribution of goods was neither universal nor means-tested, but rather deliberately targeted for political reasons (large literature on discretionary spending on core vs. swing voters and/or core vs. opposition) Example 2: Iran’s NIOC has been tasked with delivering public goods to the poorest regions since the end of the Iran-Iraq War in 1988. These are managed by para-statal organizations known as “bonyads” which again have been used for political aims rather than purely for improving social welfare. 2. Important to note however that these tasks aren’t unique to having a NOC; the same can be done by taxing POCs and then using those funds to set up these programs. But empirically what we see is that NOCs become the pivotal organization/bureaucracy through which the bulk of state spending goes through. 3. The use of fuel subsidies is tied with the mission of most oil-producing states to provide cheap feedstock to manufacturing and transportation sectors to make them more competitive on the market. NOCs generally manage the distribution of fuel subsidies by bearing the bulk of the cost. The typical model is that the NOC produces crude oil, sells it to domestic refiners for a fraction of the market price, and then the refineries distribute the subsidized fuel to the domestic market. Who bears the cost? Clearly the NOC which could be selling that crude abroad for a much higher price, and then could use those funds to reinvest in producing fields and exploration.
- Paasha: Examples of NOCs used to distribute patronage.
- Paasha: One driver of NOC success is the internal governance, such as composition of it BOD and management. On the other hand, one advantage for the state in having a NOC is the state’s ability to control the company’s management structure and use board appointments as political tools. Hence the pressure by international groups for NOC boards to have independent members to minimize political interference. But independence is often defined as members who are not government officials, company employees or representatives; ideally these members would be POC managers who can offer insight into efficient management. More often what happens is that members are appointed who are “independent” but not politically independent. I discuss this issue in the coming slides.
- Paasha: First thing to look at with respect to NOC boards is their composition and how this varies across cases. Are members unilaterally appointed by the president/PM/leader? Or are other government bodies involved in the process? Do BODs include private sector members? Or members who are appointed because of their technical skills? Are there linkages between the NOC BOD and the Ministry of Oil? Is the minister on the board?
- Paasha: This is from initial analysis of 12 countries that have NOCs on the appointment process. Executive appointment is fairly common, though in some cases the executive only names some of the board members. Legislative approval is only required in about half of the cases. Not surprisingly, there is greater transparency in board appointments when there are checks and balances. Further, this should reduce explicitly political appointments, unless the executive has informal controls over the legislature (e.g. China, Iran)
- Paasha: As discussed above, BOD appointments can be used as political tools. Some states have prohibited government officials from serving on the board: Norway, China, Brazil, Kazakhstan, Russia. But this doesn’t necessarily solve the problem of political appointments. In authoritarian political systems. Board positions can be used to satisfy elites whose support is essential to the regime’s legitimacy and stability (Bueno de Mesquita et al. 2010). Example: Saudi monarch’s appointment of strategic family members to the Aramco BOD (see Herb 1999).
- Paasha: Ghana’s NOC, GNPC, has a relatively small BOD, with 7 members. One member must be the MD of the NOC, the requirement for the six others is that they all be Ghanaian nationals and that they “all be appointed from among persons who by virtue of their careers in the government or public service or of their specialized knowledge are capable of contributing to the work of the Board of Directors.” (Ghana Petroleum Law 1983). Appointments are made by the President and ratified by parliament. Case of corruption in GNPC’s BOD is exemplary for many SOE boards: BOD positions are valuable precisely because they are the gatekeepers for lucrative licenses and contracts. In one strange example, the GNPC board gave one of its own members a $150k contract to represent the company in legal matters. Takeaway from this case: represents the norm in the value of BOD appointments. Typically, the board members know about upcoming contracts and use this info to get their friends/colleagues to bid on these contracts, which not surprisingly they win. Of course, then the board member who gave out this information and helped secure the contract is given “his share”.
- Paasha: Petronas is regarded as one of the “role model NOCs” in its operational abilities in frontier and challenging geological environment (deep offshore, heavy oil, declining fields & EOR). On paper it has a commendable BOD structure and composition, with Malaysian law mandating the presence of independent board members from the domestic private sector. The biggest problem for Petronas is the lack of checks and balances in oversight of the company and the BOD. By law, the company is completely beholden to the Malaysian Prime Minister: the 1974 Petroleum Development Act stipulates that Petronas “shall be subject to the control and direction of the Prime Minister”. As such the company has become the banker of the PM’s pet projects (see Lopez 2012). Because BOD appointments are made solely at the discretion of the PM, board members must execute the PM’s wishes unless they desire a quick exit from the board. One example came in 1999, when then-PM Mahathir forced the board to cease making Petronas’s oil royalty payments to a rebelling province (Terengganu) to cripple the PM’s opposition (see Lopez 2003). Takeaway: even in a context of an efficient and well-regarded NOC like Petronas, the use of the NOC for political aims is unavoidable and the mechanism through which the state controls NOC decisions is the company’s BOD [echo Victor’s point about patronage is politics and politics is patronage]
- Paasha: NNPC’s current board structure is such that it is composed of 11 members, with one of the members being Nigeria’s president (since Obasanjo’s presidency, 1999-2007, the president has served as chairman of the board). The minister of petroleum is a member and so too is the NOC managing director. The others are directors of NNPC’s arms/subsidiaries as well as other political figures and ministers. As such, there is no truly politically independent BOD since the president himself is a member and has strong discretion over who is appointed. Simply put the BOD is a tool for the president to use in order to placate elites by giving them lucrative positions (as discussed in the slides above). Key point: BOD has been dissolved in the past due to allegations of corruption, but presidents who have tried to reduce the usage of NNPC’s BOD for patronage have not historically fared well: Buhari (1983-85) and Shonekan (1998), as well as toward the end of Babaginda’s presidency (1983-1993), failed to satisfy their patronage networks. Case studies have pointed to these failures as factors in these leaders’ replacement (Nwokeji 2007, Lewis 2007, Thurber et al. 2012, Heller 2007, Heller 2009, Gillies 2009) Takeaway: BOD is crucial for leaders to use for patronage appointments. It is expected of any new president to reward his elite supporters by giving them access to lucrative positions, and when this expectation is not met, it becomes challenging for a president to maintain his legitimacy, especially in a fragile democratic context such as Nigeria.