ABSTRACT
The three main options that an oil producing country can select from are: ‘go-italone strategy,’ entire private ownership or IOC-NOC cooperation. Under the ‘go-it-alone’ strategy, the fiscal regime is almost irrelevant, since there are no private companies involved. Under entire private ownership, the norm is to apply concessionary regimes, as is the case in OECD countries, while under the hybrid strategy a wider selection of regimes is available, varying between concessionary, production sharing agreements and service contracts. If the country chooses to develop its resources on its own, the government formulates and finances an adequate investment program itself and executes it through an NOC. Saudi Arabia is one of the very few countries to have adopted this ‘go-it-alone strategy’ – after many years of reliance on outside oil companies (the original Aramco).3 Such a strategy requires the establishment of an NOC that is fully capable of taking the operations role in upstream asset development. Saudi Aramco has access to abundant resources domestically and is mainly focused on the self-sufficient development of those national resources. Similar NOCs exploit their resource base both as a means of supporting the national economy and as a tool to sustain their country’s oil supplies. However, other NOCs have not been as successful.4 Normally, NOCs have to meet costly non-commercial national obligations that can hinder their ability to raise external capital and to compete at international levels. NOCs, for instance, can be coerced by governments to favour excessive employment and/or be forced to sell their petroleum products to domestic consumers at subsidized prices. These constraints hinder the national firms’ ability to produce at a technically efficient level that maximizes the overall value that could be obtained from their oil resources. Consequently, there is under-investment in reserves, stagnation in capacity growth and an inability to maintain or grow the country’s oil production capacity. Mexico’s State oil company, Pemex (nationalized in 1938), has long been regarded as a critical source of income to the government; virtually all Pemex income is transferred to the state. In the light of the rapid decline in production, the company is facing serious financial pressure with a mounting debt, reaching $42.5 billion (as of 2008) and hindering its investment capabilities. To save Pemex from a deep financial and operational crisis, the Mexican Government has considered – despite strong public opposition – narrowly opening its oil and gas sectors to international players under the restrictive terms of risk service contracts (see Section 2B). The second option is the other extreme, where the host nation encourages the IOCs to take the lead. In this model, the government creates the appropriate regulatory and fiscal frameworks for IOCs to make the necessary investments in their upstream sectors. This enables the state to avoid allocating much capital itself. The skills required at political and policy level in making this approach
attractive and balanced should not be underestimated, but the core investment and operations are undertaken by international firms, both major IOCs and associated service providers, with an appropriate return-sharing framework. Concessionary regimes are normally found under this kind of arrangement. Entire private ownership is pretty much exclusively confined to the OECD. Indeed most OECD countries follow this model, made easier by the fact that the IOCs are domiciled within OECD nations, hence appearing as ‘national champions,’ creating the benefits of substantial employment and repatriation of significant dividend flows. The UK Continental Shelf (UKCS) has had a successful oil and gas industry for more than 40 years. The industry is fully privatized – the British National Oil Company (BNOC) existed up until 1982 when it was successfully privatized as part of the government’s aim of reducing the role of the state across the entire spectrum of the British economy. The UK Government came to the view that the industry would be more efficient without any state interference and that it could share in the rewards through the tax regime. The US Gulf of Mexico (GoM) is also entirely owned and operated by IOCs (as is the entire petroleum industry in North America). Leading edge technology is continually being developed and deployed to extend commercial operations into ever deeper water and further into the waters of the Northern Arctic exposed to the seasonal pack ice. The Federal Government continues to earn substantial sums from lease sales (exceeding $178 billion from the Outer Continental Shelf ). Sustained growth in production and development activity continues. Between 1992 and 2008, oil companies have drilled more than 2,100 wells at depths greater than 1,000 feet in the US gulf. In stark contrast, and over a similar period, Pemex has only drilled a handful of wells in the deepwater GoM. The third alternative is to adopt a hybrid solution using NOC-IOC partnerships. This, in effect, is a combination of the other two options, where an active NOC joins forces with material and significant foreign capital and technical expertise to meet the investment needs of the country. Most oil and gas producing countries, outside the OECD, have adopted this approach (as in Egypt and Indonesia, for example) and some inside the OECD (such as Norway). This approach permits a variety of interfaces between the national and the international partners and allows for experiment and innovation. A wide range of petroleum fiscal arrangements is found under this model. The IOC-host government/NOC interaction does not have to be reduced to a zero-sum game, where what one side wins the other loses. These two entities have different objectives, functions, capabilities, assets and tolerances for risk. In principle, each side possesses what the other side seeks: governments hold the below ground resources sought by IOCs, and IOCs control most of the technical, managerial, and project execution resources that governments need. Under this third option, the government exercises control over the critical strategic investment decisions such as the exploration for and development of new oil and gas deposits. However, it does not need to interfere in the day-today running of the oil and gas fields or in the procurement strategy. This is because the state’s tasks and skills differ from those required in day-to-day busi-
ness operations. IOC investment creates space for state resources to be diverted to other priorities as well as providing access to early revenues. This hybrid solution can strike the right balance between national political objectives and the need to secure capital and expertise from the private sector. The state seeks to improve performance and delivery by concentrating on genuinely public services whilst leaving oil and gas operations as far as possible to the IOCs or private sector, within an appropriate and enabling regulatory framework. State monopoly may weaken incentives to put in place an effective or efficient fiscal regime, which is less important for a state-owned organization as the money goes from one government pocket to another. An exclusively private industry requires a well thought out regime balancing state and industry interests, but risks falling short on meeting non-fiscal aspirations. Some states believe that their equity participation provides a return in excess of what can be extracted by the tax system alone. The hybrid route may prove the most popular option as it provides opportunities to meet political imperatives of state control while benefiting from private sector technology and expertise. Although oil producing countries can choose between those three options, they can reposition themselves over time as conditions, both external and internal to the oil and gas industry, evolve. Over time, NOCs may be partially or fully privatized. The same NOCs once confined to a purely domestic agenda may be given the freedom to invest overseas and trade assets in pursuit of business development and portfolio management ambitions. The list of private sector players may well increase over time as a deliberate policy ambition to increase activity levels. The type, structure and terms of the fiscal regimes can evolve and change accordingly.
