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Oil Industry Structure Its Impact on State/NOC Behaviour And NOCs and the Global Oil Market: Should We Worry? Mark Thurber Associate Director, Program on Energy and Sustainable Development Stanford University Energy Seminar 6 February 2012 http://pesd.stanford.edu • Stanford University Largest Reserves Holders are NOCs NOC (PESD sample) NOC (Other) IOC (Major) IOC (Other) *Wood Mackenzie commercial + technical reserves as of Oct 2009 (Reserves figures on working interest basis) Data Source: Wood Mackenzie 2 Largest Producers are NOCs NOC (PESD sample) NOC (Other) IOC (Major) IOC (Other) (Production figures on working interest basis) Data Source: Wood Mackenzie 3 Role of NOCs in Oil Oil Reserves* as of Oct 2009 2008 Oil Production (top 1460 petroleum companies) (top 1460 petroleum companies) Total = 1.5 trillion barrels Total = 77 million barrels/day *Wood Mackenzie commercial + technical reserves (94% of world total) (All reserves and production figures on working interest basis) NOCs control 73% of world oil reserves and 61% of world oil production Data Source: Wood Mackenzie Corporate Analysis Tool4 Role of NOCs in Natural Gas Gas Reserves* as of Oct 2009 2008 Gas Production (top 1460 petroleum companies) (top 1460 petroleum companies) Total = 1.2 trillion barrels oil equivalent Total = 48 million barrels oil eq/day *Wood Mackenzie commercial + technical reserves (93% of world total) (All reserves and production figures on working interest basis) NOCs control 68% of world gas reserves and 52% of world gas production Data Source: Wood Mackenzie Corporate Analysis Tool5 Should We Worry? …about the future of private oil companies? …about NOCs as geopolitical weapons? …about the effect of NOCs on price? …about the environmental impacts of NOCs? 6 How NOCs are Different and Why It Matters 7 Our Sample of 15 NOCs Gazprom KPC CNPC Sonatrach ONGC PDVSA ADNOC Petronas NNPC Petrobras Sonangol 8 Some are active National abroad Natural gas too (and Oil sometimes a lot else) A stretch in describing Company many NOCs SCEIWH = State-Controlled Entity Involved With Hydrocarbons 9 NOCs Produce Their Reserves More Slowly Data Source: Wood Mackenzie Corporate Analysis Tool (2009) (Working interest production and commercial + technical reserves) Why? • Poor performance? • Inflation of reserves estimates? • Deliberate strategy? 10 Oil Company Goals International Oil Company (IOC) objectives • Maximize and grow profits 11 Principal-Agent Theory Government Principal Incentive/monitoring scheme •Different objectives from principal Oil Company (e.g. most pay for least work) – Private Agent •Knows more about its performance – State-Owned (“information asymmetry”) Oil Company Goals International Oil Company (IOC) objectives • Maximize and grow profits National Oil Company (NOC) objectives (many are possible) • Maximize and grow profits • Provide major portion of government budget (many, including Mexico, Venezuela, India, Nigeria, Algeria) • Subsidize domestic fuel (e.g. Venezuela, Iran) • Provide social programs / employment (e.g. Venezuela) – Programs can also be used to build political base • Serve as government implementing agent (e.g. Venezuela) • Provide for “energy security” of country (e.g. Brazil) • Pursue foreign policies aims of government (e.g. Russia?) • Extend lifetime of resources (e.g. Qatar, Saudi Arabia?) 13 Level of Burden Social Goods Private Goods High Gazprom (subsidized domestic gas) NIOC (rents to security and police groups that back NIOC (fuel subsidies; social programs) ruling elites) NNPC (fuel subsidies) NNPC (political patronage; contracts and “lifting PDVSA (post-strikes) (fuel subsidies; social licenses” to associates; senior posts as political programs) plums) Pemex (high taxes, spent by government for broad PDVSA (post-strikes) (political patronage) public purposes) Upper middle CNPC (employment) Gazprom (investments benefiting elites) KPC (employment of Kuwaitis in general) KPC (elite employment) Sonatrach (high taxes, which government uses to ONGC (nepotism; contract corruption) pursue macroeconomic stability goals) Pemex (patronage through unions) Sonatrach (political patronage) Lower middle ADNOC (training/employment) CNPC (senior posts as political plums) ONGC (employment; some CSR) Petronas (private banker and political tool for PDVSA (pre-strikes) (fuel subsidies) prime minister) Petrobras (tool for energy self-sufficiency and to Sonangol (education and employment for elites) supply domestic markets) Petronas (fuel subsidies; high taxes in Malaysia, spent by government for public purposes) Saudi Aramco (support diversification of economy and Saudi employment) Sonangol (fuel subsidies) Low Statoil ADNOC PDVSA (pre-strikes) Petrobras Saudi Aramco Statoil 14 The Impact of State Goals on Performance Performance in Non-hydrocarbon burden hydrocarbon functions High Upper middle Lower middle Low High PDVSA (pre-strikes) Statoil Petrobras Upper middle CNPC ADNOC Petronas Saudi Aramco Sonangol Lower middle Gazprom Sonatrach ONGC PDVSA (post-strikes) Pemex Low NIOC KPC NNPC Large Non-Hydrocarbon Burden → Low Hydrocarbon Performance 17 Should We Worry? …about the future of private oil companies? …about NOCs as geopolitical weapons? …about the effect of NOCs on price? …about the environmental impacts of NOCs? 18 Risk and the Hydrocarbon Industry Investment: $100M $100M $100M $100M Payoff: $0 $0 $500M $0 Risk → Uncertainty + Capital at Risk New province exploration Frontier (High risk) Proven province exploration Proven (Moderate risk) New province development Tertiary Recovery Mature (Low risk) Proven province development Secondary Increasing Increasing uncertainty ofoutcome Recovery Extraction Increasing capital at risk Source: Nolan and Thurber 2010 “Obsolescing Bargain” Frontier Reserves creation Proven/Mature Major exploration and Reserves extraction field development Field surveillance, maintenance & Secondary Recovery Frontier Reserves creation Tertiary Recovery Investment risk Investment Field maturity Managing Risk: IOCs vs. NOCs Risk Management Strategy Context for IOCs Context for NOCs 1) Use geological expertise Must compete on Protected position at home to make better predictions predictive skill 2) Diversify risk through a Must compete globally for Political and competitive global portfolio best opportunities obstacles to going abroad 3) Use connections to get Global reach Domestic focus resources to customers 4) Reduce capital costs Cost reduction drives profit “Soft budget constraint”; through skillful engineering and survival govt. appropriates profits 5) Share risk with other Partnerships with IOCs and Partnerships with IOCs and companies NOCs NOCs Going Abroad NOC moves abroad spurred by perceived resource insufficiency at home 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Production from Home Country from Production Portion of 2008 Working Interest Interest of 2008 Working Portion 0% Data Source: Wood Mackenzie Corporate Analysis Tool 24 Managing Risk: IOCs vs. NOCs Risk Management Strategy Context for IOCs Context for NOCs 1) Use geological expertise Must compete on Protected position at home to make better predictions predictive skill 2) Diversify risk through a Must compete globally for Political and competitive global portfolio best opportunities obstacles to going abroad 3) Use connections to get Global reach Domestic focus resources to customers 4) Reduce capital costs Cost reduction drives profit “Soft budget constraint”; through skillful engineering and survival govt. appropriates profits 5) Share risk with other Partnerships with IOCs and Partnerships with IOCs and companies NOCs NOCs => IOCs tend to be more effective risk managers Managing Risk: NOCs, IOCs, and the Deepwater Frontier 0.40 2500 1970-1989 0.35 2000 0.30 0.25 1500 Fraction of NOC-Operated Wells 0.20 1000 0.15 0.10 500 0.05 Number of Zones Category Depth in Zones of Number Fraction of Wells Operated by Home NOC Home by Operated Wells of Fraction 0.00 0 Data Source: Wood Mackenzie PathFinder database 28 There Will Always Be Hydrocarbon Frontiers => IOCs Will Always Have a Role Classification of Partnerships Between NOCs and IOCs, 1990-2011 Source: PESD Database of NOC-IOC Partnerships (2012) 29 The Unconventional Gas Frontier Source: PESD Database of NOC-IOC Partnerships (2012) 30 Should We Worry? …about the future of private oil companies? NO. …about NOCs as geopolitical weapons? …about the effect of NOCs on price? …about the environmental impacts of NOCs? 31 Should We Worry? …about the future of private oil companies? …about NOCs as geopolitical weapons? …about the effect of NOCs on price? …about the environmental impacts of NOCs? 32 Using the NOC as a Geopolitical Tool Obstacles 1) Issues of Risk and Investment Climate 2) Principal-Agent Relationship 33 Principal-Agent Theory Government Principal Incentive/monitoring scheme •Different objectives from principal Oil Company (e.g. most pay for least work) – Private Agent •Knows more about its performance – State-Owned (“information asymmetry”) Moves abroad often driven by the NOC, to assert autonomy Ways NOCs Could Be Geopolitical Tools 1) Cut off energy exports to serve political goals of government (Gazprom?) 2) Use domestic resource access to forge political alliances (PDVSA?) 3) Project political influence through oil and gas activities abroad, while “locking up” scarce resources (CNPC and other Chinese NOCs?) 35 Ways NOCs Could Be Geopolitical Tools 1) Cut off energy exports to serve political goals of government (Gazprom?) 2) Use domestic resource access to forge political alliances (PDVSA?) 3) Project political influence through oil
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