New Frontiers in the Political Economy of Minerals & Hydrocarbons: Section II

World BankJune 24th 2013

National Oil Companies & SOEs

1. How do NOCs play a role in the political economy of natural resources?

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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

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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

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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

NOC formation over time

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NOC formation over time

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Who were the 1960s / early 70s nationalizers?

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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

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What explains recent nationalizations?

1. Sudan: Sudapet2. Equatorial Guinea: GEPetrol3. Argentina: YPF4. Bolivia’s re-nationalization: YPFB

How are these different from nationalizations in the 1970s?

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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

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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

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Predicting oil nationalization

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Models are good at predicting some nationalizations…

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But not other nationalizations…

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Model-based clusteringGroup 1 Group 2 Group 4Congo Algeria Angola Libya China

Colombia Chad Argentina Malaysia EcuadorChile Australia Nigeria Oman

Denmark Austria Norway PolandEgypt Azerbaijan Peru Russian FederationGhana Bahrain Papua New Guinea Sudan

Guatemala Bolivia Qatar UzbekistanIndia Brazil Romania

Kuwait Canada Saudi ArabiaMexico Cameroon Syria

Netherlands France TurkmenistanNew Zealand Gabon East Timor

UAE United Kingdom Trinidad & TobagoEquatorial Guinea Tunisia

Indonesia United StatesIran VenezuelaItaly Vietnam

Japan YemenKazakhstan

Group 3

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ARE ALL NOCS THE SAME?

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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”?

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Ownership structure

1. Are there significant differences in the ownership structure of NOCs?

1. Full ownership2. Majority ownership3. Minority ownership

‒ The “Golden Share”

4. Fully private (POCs)

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Trends in ownership structure

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Operational capacity

1. Producing NOCs– Involved in upstream operations

2. Regulatory NOCs– Contra the “Norwegian Model” (Thurber et al. 2012)

3. “Shell” NOCs– Middle-men between POC and the state

4. Majority producers vs. minority producers5. Technical skills– NOCs with or without capacity to produce offshore

and/or handle EOR

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Trends in operational capacity

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Trends in operational capacity: NOCs with majority production status

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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?

3. Three potential classes:1. Limited access to capital: complete reliance on state

re-investment decisions2. Fiscal autonomy: complete reliance on non-state

financing3. Government support: ability to finance capital

independently, but can call on state if necessary25

Trends in access to state capital

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NOC efficiency

1. Tradeoffs between tax rates and revenues2. 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)

3. Nationalization inefficiency: Pn < P-n

4. State “capture”: Tn > T-n

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NOC fiscal auditing practices

1. Transparency of NOC budgets2. External vs. internal vs. no audits3. Public dissemination of NOC information4. Reporting of production, investment,

partnerships, contracts5. Growth of EITI members

1. New EITI reporting standards for SOCs

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Regulatory frameworks

1. Differences between NOC and POC regulatory environments

2. Fiscal governance3. Contractual frameworks4. Separation of operations and regulation

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NOC differences: empirics

1. How can we map out NOC differences2. 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

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NOC differences: empirics

1. NOC “success” in achieving state goals– Performance of NOCs with respect to maximizing

political capital:1. Fostering domestic economic development2. Developing human capital and technical expertise3. Depletion strategy4. For international NOCs: promoting state interests

internationally

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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

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NOC differences: empirics3. New measures of performance– Value creation index (Tordo, Tracy & Arfaa 2012)

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Case study: Nigeria

Nigerian production: variance of contracts and ownership structure

1. POC-NNPC Joint Ventures2. POC-NNPC Production Sharing Contracts3. POC-NNPC Profit Oil arrangements4. POC-controlled blocks (royalties)

Profit taxes

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Source: Nigeria EITI (2011) Final Core EITI Financial Flows Reconciliation Report 2009 – 2011 Oil & Gas Audit 38

Source: Nigeria EITI (2011) Final Core EITI Financial Flows Reconciliation Report 2009 – 2011 Oil & Gas Audit 39

Case study: Nigeria1. Access to capital: relatively low2. “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

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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)

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BEYOND UPSTREAM OIL:TRANSPORTATION

AND ALTERNATIVE FOSSIL FUELS

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Pipelines and ports

1. The importance of hydrocarbon transportation

2. Regional alliances: pipelines3. Ports and terminals: global partnerships4. Developing regional independence5. Spillover effects6. Potential security threats– Pipelines as spark points for conflict and/or cooperation

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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

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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

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Case study: Mozambique

1. Multiple resources and continued exploration– Oil– Gas– Coal

2. Natural gas discoveries and the regional market: future of Mozambique as gas exporter?

3. Links/alliances to South-East African domestic markets: an emerging energy corridor

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Source: Wentworth Resources and “Oil and Gas Mergers and Acquisitions Review" 47

Source: Theodora.com (2008) 48

CONSEQUENCES OF NATIONALIZATION:

NOC ADVANTAGES & DISADVANTAGES

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NOC advantages and disadvantages

Advantages1.State control over politically sensitive issues: – Supply price, environmental protection, local

labor market

2.Increase bargaining position over POCs3.Narrow information gap between state and operators4.Revenue maximization

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NOC advantages and disadvantages

Disadvantages1.International retaliation2.Reduced efficiency of NOC compared to well-designed fiscal regime of taxing POCs3.NOC can become like another POC, or even “state within a state”4.Corruption and poor governance

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What are the political consequences of nationalization?

1. Does nationalization affect political stability?

2. If so, why do we see this pattern?

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Consequence: Political Stability

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Consequence: Political Stability

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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

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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?

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NOC differences and revenue

Are there salient differences across NOCs that explain variance in levels of state revenue?1.Ownership structure2.Auditing practices3.Operational capacity4.Access to capital5.Partnerships and regulatory framework

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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

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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?

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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

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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

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Partial privatization: successesBrazil

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)

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Partial privatization: impedimentsCameroon

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… andmanagement 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

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Partial privatization: impedimentsCameroon

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)

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THE TRUE VALUE OF NOCS? PATRONAGE AND CLIENTELISM

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NOCs as patronage tools

1. Using NOCs to distribute patronage and clientelistic favors

2. NOC-sponsored social programsa) PDVSA: Misiones Bolivaranosb) NIOC: bonyads

3. NOCs and fuel subsidies

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Source: Victor, Hults and Thurber (2012) Oil and Governance. Cambridge University Press. 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

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

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The NOC BOD

1. Differences across NOCs in BOD compositiona) Appointment processes:

executive vs. joint-body decisionsb) Private sector members; technocratic membersc) Political members: MPs, local leaders, ministersd) Linkages between NOC and Ministry of Oil

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Differences in BOD appointments

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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?

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BOD case study: Ghana

1. GNPC a) Board composition• 7-member board: NOC MD, industry leaders and

government officialsb) Appointment rules• President nominates BOD members and parliament

approves appointmentsc) Ties to Oil Ministry• None; Minister of Energy is not in BOD

d) Allegations of corruption: kickbacks given to board members to secure contracts

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BOD case study: Malaysia

2. Petronasa) Board composition• 13-member board: one from government, six from

NOC, six from private sector (independent)

b) Appointment rules• Executive (PM) appointment, no other approval

c) Ties to Oil Ministry• None; but strong ties to Ministry of Finance

d) PM uses the board as political tool

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BOD case study: Nigeria

3. NNPCa) Board composition• 11-member board: NNPC MD, Minister of Oil,

President is the chairman of the board

b) Appointment rules• Executive appointment, no other approval

c) Ties to Oil Ministry• Direct ties; Minister is on NNPC board

d) President uses BOD for patronage appointments

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What do and don’t we know about NOCs?

1. What determines nationalization2. NOC differences3. Oil vs gas state ownership4. Beyond the upstream: mid- and downstream

roles of NOCs5. NOC consequences: revenue generation6. Using NOCs for patronage: the value of board

appointments

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