More on the ef­fi­cacy of a lo­cal oil re­fin­ery

Stabroek News Sunday - - NEWS -

In­tro­duc­tion – Re-cap

As posited last week, it is my view that the true essence of an oil re­fin­ery that is deemed lo­cal, lies in its type (form) of own­er­ship, man­age­ment, and op­er­a­tional­ized con­trol. In this re­gard, I had iden­ti­fied three broad ex­ist­ing types, namely 1) a re­fin­ery, wholly owned/man­aged/op­er­ated by for­eign in­vestors (for ex­am­ple, an in­ter­na­tional oil ma­jor; a for­eign Na­tional Oil Com­pany (NOC); or, some type of joint ar­range­ment among the two; 2) a re­fin­ery that is sim­i­larly, wholly owned/man­aged/op­er­ated by do­mes­tic pri­vate in­vestors, with or with­out a joint ar­range­ment in­volv­ing for­eign pri­vate in­vestors or a NOC. In these two in­stances, Guyanese tax­pay­ers and con­sumers carry no fi­nan­cial re­spon­si­bil­ity what­so­ever for the suc­cess or oth­er­wise of the project. Crude oil sold to the re­fin­ery by the gov­ern­ment out of its profit share would there­fore, take place at arm’s length.

To en­sure the lat­ter ef­fec­tively ap­plies, gov­ern­ment sup­port for the project should not ex­ceed that which is cur­rently al­lowed for such in­vest­ments. In other words, no spe­cial sub­si­dies, tax ex­pen­di­tures, or price pro­tec­tion, out­side pre­vail­ing lev­els would be af­forded to the lo­cal re­fin­ery. In the two in­stances in­di­cated here, I would have no reser­va­tion over the es­tab­lish­ment of a lo­cal oil re­fin­ery. In­deed I would go fur­ther and claim, it would be pre­sump­tu­ous of me (or any out­sider), to ob­ject to it in a cap­i­tal­ist free mar­ket-based econ­omy like Guyana.

It is only in in­stances of the third type; that is, where ei­ther 1) Guyana oil re­sources, 2) tax­pay­ers’ funds or 3) con­sumers are forced to carry fi­nan­cial re­spon­si­bil­ity for the suc­cess of the project that out­siders would have a le­git­i­mate case for pass­ing judge­ment on its ef­fi­cacy. And, it is that cir­cum­stance, which will be the ex­clu­sive fo­cus of my com­ments on the wis­dom or oth­er­wise for Guyana estab­lish­ing its own oil re­fin­ery.

This judge­ment, how­ever, needs to be framed in the con­text of the five strate­gic con­sid­er­a­tions, which were enu­mer­ated in last week’s col­umn, namely: 1) the state/gov­ern­ment role in the econ­omy; 2) the state/gov­ern­ment’s role in the en­ergy sec­tor; 3) the state/gov­ern­ment’s role in pro­mot­ing lo­cal con­tent re­quire­ments to gen­er­ate greater do­mes­tic value added; 4) whether or­ga­ni­za­tion­ally, Guyana should es­tab­lish an as­so­ci­ated NOC; and 5) the pe­tro­leum sec­tor out­look in the com­ing decade. The re­main­der of to­day’s col­umn of­fers some re­flec­tions on these strate­gic con­cerns.

Oil re­fin­ery and NOC

His­tory has re­vealed that, ini­tially, the global oil in­dus­try (es­pe­cially in the United States), has been led by pri­vate oil com­pa­nies (POCs). It was not un­til just af­ter the turn of the 20th cen­tury that the first NOC was es­tab­lished in Europe (1908). Sev­eral waves of NOC for­ma­tion fol­lowed there­after: Europe in the 1910s and 1920s, Latin Amer­ica in the late 1920s and 1930s, the Mid­dle East in the 1930s and af­ter World War II. The lit­er­a­ture re­veals that, out­side North Amer­ica and the cen­trally planned economies, in the decade mid-1960s to mid-1970s, pub­lic con­trol in the oil in­dus­try rose from about ten per cent to about two-thirds. In the re­fin­ing and mar­ket­ing sec­tors the re­spec­tive in­creases were from one-seventh to one-quar­ter, and just over one-tenth to just over one-fifth.

Oil re­finer­ies in de­vel­op­ing coun­tries are of­ten linked to the es­tab­lish­ment of NOCs. As the pe­tro­leum Min­is­ter of Trinidad and Tobago had ad­vo­cated re­cently, such NOCs are pro­moted to se­cure 1) a coun­try’s con­trol over its re­sources; 2) the pro­mo­tion of mid­stream and up­stream value added along the pe­tro­leum in­dus­try’s value chain; 3) sup­port­ing the oil sec­tor’s role in na­tional eco­nomic achieve­ment, and there­fore, the cre­ation of jobs, skills, so­cial pro­tec­tion, en­hance­ment of tech­ni­cal ca­pac­ity, in­fra­struc­ture de­vel­op­ment, and, ex­port-led value added growth.

His­tory has re­vealed that, ini­tially, the global oil in­dus­try (es­pe­cially in the United States), has been led by pri­vate oil com­pa­nies (POCs). It was not un­til just af­ter the turn of the 20th cen­tury that the first NOC was es­tab­lished in Europe (1908). Sev­eral waves of NOC for­ma­tion fol­lowed there­after: Europe in the 1910s and 1920s, Latin Amer­ica in the late 1920s and 1930s, the Mid­dle East in the 1930s and af­ter World War II. The lit­er­a­ture re­veals that, out­side North Amer­ica and the cen­trally planned economies, in the decade mid-1960s to mid1970s, pub­lic con­trol in the oil in­dus­try rose from about ten per cent to about two-thirds. In the re­fin­ing and mar­ket­ing sec­tors the re­spec­tive in­creases were from one­sev­enth to one-quar­ter, and just over one-tenth to just over one-fifth.

Un­mis­tak­ably, the in­flu­ence of NOCs peaked with the for­ma­tion of OPEC and the two ma­jor oil price shocks in 1973-74 and 1978-80. Read­ers should note that the former price shock cost Or­gan­i­sa­tion for Eco­nomic Co­op­er­a­tion and De­vel­op­ment mem­bers about 2.6 per cent of their GDP and for the lat­ter, 3.7 per cent.

NFor and against

Ar­gu­ments ad­vanced in favour of NOCs have been many, but these can be syn­the­sized into three broad groups. First, the his­tor­i­cal con­text. This em­pha­sizes protest against colo­nial and big power ex­ploita­tion of the nat­u­ral re­sources of Guyanatype economies. Sec­ond, the size and im­por­tance which oil and gas at­tain in economies with large dis­cov­er­ies. Third, the po­lit­i­cal ben­e­fits de­rived from ex­panded state re­sources af­ford con­trol of jobs, so­cial ben­e­fits, ed­u­ca­tion, train­ing, in­fra­struc­ture and in­vestable funds.

De­spite these ad­van­tages, the record of NOCs has been dis­ap­point­ing in prac­tice. Re­search and anal­y­sis sug­gest that in most in­stances their per­for­mances have been poor; in­ef­fi­cien­cies have be­come en­demic; and cor­rupt prac­tices by state of­fi­cials and the po­lit­i­cal rul­ing class have been marked. Ad­di­tion­ally, most NOCs face mar­ket fail­ures, weak ex­ter­nal­i­ties, dis-in­cen­tiviz­ing and rent-seek­ing be­hav­iours, all of which con­flict with com­pet­i­tive in­cen­tiviz­ing.

Trends

Such neg­a­tives have been am­pli­fied by two broad trends. First, the global col­lapse (re­treat) of the USSR and the so­cial­ist bloc of coun­tries. Sec­ond, this col­lapse has fa­cil­i­tated the rapid rise of glob­al­ism and neo-lib­eral philoso­phies, which de­vel­op­ments un­der­mine pub­lic con­fi­dence in the state as a de­vel­op­ment pro­mot­ing agency.

This ex­pe­ri­ence is well demon­strated in the dra­matic turn­around of the World Bank from a NOC-pro­mot­ing agency, to the op­po­site. Thus, in its June 1996 is­sue of ‘Fi­nance and De­vel­op­ment’, the World Bank had stated un­apolo­get­i­cally that in 1995 it had re-ex­am­ined its pe­tro­leum in­dus­try strat­egy in light of de­vel­op­ments over the pre­vi­ous decade and had shifted in favour of 1) help­ing de­vel­op­ing coun­tries mit­i­gate project risks; 2) pro­mot­ing gov­ern­ment as a reg­u­la­tor and not pro­ducer of pe­tro­leum prod­ucts and ser­vices; 3) cre­at­ing open and com­pet­i­tive mar­kets; 4) serv­ing as a mag­net for pri­vate cap­i­tal; 5) pro­mot­ing pri­va­ti­za­tion; 6) pro­mot­ing pri­vate trade (pipe­lines); 7) de­vel­op­ing pri­vate sec­tor ca­pac­ity; 7) help­ing to re­struc­ture NOCs; 8) sup­ple­ment­ing the pri­vate sec­tor ca­pac­ity of de­vel­op­ing coun­tries; 9) pro­mot­ing more be­nign fu­els (like gas for coal and oil); and 10) pro­vid­ing risk guar­an­tees for the do­mes­tic pri­vate sec­tor.

Con­clu­sion

ext week I shall pro­nounce on my at­ti­tude to the es­tab­lish­ment of a sta­te­owned/sub­si­dized na­tional oil re­fin­ery for Guyana, whether cre­ated di­rectly as a pub­lic cor­po­ra­tion or in any other ar­range­ment, in which the state shares sub­stan­tially in the pro­vi­sion of 1) less than full cost crude oil, 2) in­vest­ment funds, or 3) fa­cil­i­tates the ven­ture be­yond the pre­vail­ing level of state sup­port, whether through fis­cal, price or crude oil guar­an­tees, or any other pub­lic ben­e­fits.

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