Study projects influence of national oil companies

National oil companies will gain geopolitical influence as their domination of worldwide production grows, says a study by Rice University's Baker Institute for Public Policy.

Paula Dittrick
Senior Staff Writer

HOUSTON, Mar. 2 -- National oil companies, controlling 77% of global oil reserves, will gain geopolitical influence as their domination of worldwide production grows, says a study by Rice University's Baker Institute for Public Policy.

The study said the top 10 reserve holders internationally are NOCs that allow no equity participation in production by foreign oil companies. Partially or fully privatized Russian oil companies control a further 6% of global reserves, for which the study uses a 2005 estimate of 1.148 trillion bbl.

Baker Institute scholars analyzed historical case studies of NOCs and developed an economic model to examine the interplay between economic, political, and geopolitical factors in oil production and investment.

Empirical analysis shows NOCs that are fully government-owned and sell oil products at subsidized prices—a group that includes NOCs of the Organization of Petroleum Exporting Countries—have lower operating efficiency than privately held companies with no such obligations.

"Specifically to the extent that NOCS must meet the noncommercial objectives of politicians and other political interests, they may not produce at a technically efficient level," said a summary report released Mar. 1 during a 2-day NOC conference at Rice.

"In other words, by allocating rents to various special interests, a NOC will be less likely to be able to produce as much as it would have if it had been a private company that could operate without government interference in its decision-making," the summary said.

The Baker Institute, together with the Japan Petroleum Energy Center, released a lengthy study analyzing the strategies, objectives, and performance of NOCs.

The study includes individual examinations of Saudi Aramco, Nigerian National Petroleum Corp., India's Oil & Natural Gas Corp., Russian's OAO Rosneft, Russia's privately held OAO Lukoil, Malaysia's Petronas, Indonesia's PT Pertamina, National Iranian Oil Co., Petroleos de Venezuela SA, China National Petroleum Corp., China Petroleum & Chemical Corp. (Sinopec), China National Offshore Oil Co., Norway's Statoil ASA, and Kazakhstan's KazMunaiGaz. Iraq's Oil Ministry also was a research subject.

Privatization and efficiency
The study reports empirical evidence that at least partial privatization brings commercial benefits. The conjectures of the theoretical modeling exercise were verified through empirical analysis using a sample of 80 firms during 2002-04.

The empirical exercise also demonstrated the importance of vertical integration to a firm's ability to capture maximum value from its production.

"On average, for the sample of NOCs analyzed, those that both are fully government-owned and sell petroleum products at subsidized prices will be only 35% as technically efficient as a comparable firm which is privately held and has no obligation to sell refined products at discounted prices," the study said.

While individual NOCs vary in efficiency, on average the modeling shows that fully government-owned firms exhibit 60-65% the operating efficiency of a privately held international oil company (IOC), the study said.

This means NOCs might have more difficulty replacing reserves and expanding oil production than the industrialized West, which was responsible for 40% of increased worldwide oil production capacity in the past 30 years—with most of that investment coming from IOCs, the report said.

Supply and demand
The NOCs' influence over global oil supply and demand will affect future oil prices and security trends. Consuming nations, like the US, might need to adjust national energy strategies to reduce vulnerability to NOC oil supply.

The study's summary calls Saudi Aramco "the powerhouse of geopolitical NOCs" because it's the only state oil company that is truly a global oil swing producer.

"The critical question for the future is whether Saudi Aramco, along with other major NOCs, will be able to continue to invest adequate amounts to meet the projected rise in oil demand in the United States, Europe, China, and emerging economies in Asia and elsewhere," the summary report said.

The International Energy Agency projects investments totaling $2.2 trillion will be needed during the next 30 years to meet rising world oil demand.

An NOC's ability to meet its business strategies will be challenged by its obligations to support national interests. NOC noncommercial objectives can include:

--Oil wealth redistribution to society at large.

--Foreign and strategic policy and alliance-building.

--Energy security, including assurance of domestic fuel supply and security of demand for producing countries.

--Wealth creation for the host nation.

--Participation in national-level politics.

--Industrialization and economic development.

Contact Paula Dittrick at paulad@ogjonline.com.

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