Strategic guidance on OPEC, swing-producer, and NOC choices
Introduction
My long-standing recommendation to establish a National Oil Company, NOC, intentionally rejects the notion of linking this policy recommendation with the establishment of a state-owned (or joint venture, stateprivate) downstream “oil refinery”. This rejection also applies to the much touted “mini-oil refinery” that was once very popular in local circles. I have developed my arguments in support of this recommendation in a score of previous columns (May 28, 2017 to October 29, 2017); and will not repeat here.
I also reject the IMF proposal that Guyana establish a State-owned Holding Company. This is because, as conceived by the IMF, such a company is restricted to financial interests, with limited involvement in operational decision making. I am somewhat sympathetic with recommendations to establish a National Energy Company, as distinct from a NOC. On this matter, readers would recall that the establishment of an Energy Ministry or Agency, along with the Buxton Proposal for cash transfers, have been my two leading recommendations, for spending Guyana’s expected windfall earnings from its oil discoveries.
As indicated last week, my option for an NOC follows along the lines of the Natural Resource Governance Institute’s Natural Resource Charter, NRC. This is listed as Precept 6 in the decision chain for the 12 Precepts of the NRC.
Today’s discussion wraps-up my presentation on the NOC, as well as the broader topic of the three strategic choices Guyana will have to make in regard to its petroleum profile in the coming decade.
Size and importance
Recently, I have been made painfully cognizant of how unaware the average reader is of the great importance of NOCs in the global oil economy. Records show that in 2019, well over half of the global supply of oil and gas was produced by NOCs! Their production totalled about 85 million barrels of oil equivalent, per day. Further, about 90% of global oil and gas reserves is held by NOCs.
Because of their size and importance, NOCs possess two formidable economic features. One is that, worldwide, these companies provide hundreds of thousands of jobs. And secondly, their total sales generate humungous multi-billion US$ financial assets, worldwide. Indeed, so vast are their financial resources and impact on jobs and government revenue that, they are commonly referred to as “behemoths” in the economic literature — a term the NRC itself recognizes!
Under-analyzed behemoths
Based on the information cited above, it didn’t take long for analysts to recognize that data on these companies should be systematized and published. As Ed Crooks observed in the Financial Times: “Considering their importance, NOCs are relatively under examined” (2019). Thankfully, such views led to the creation of an NOC database, which is reputed to be “the world‘s most comprehensive”. The database is available online, in an interactive format. It is prepared on the basis of a common methodology, which enhances its usefulness.
As the database itself professes, its existence facilitates several key development functions. It does so through: 1) “filling gaps” in the knowledge of the global oil sector and the global economy; 2) “serving as gatekeeper for international oil companies, IOCs, access to hydrocarbons;” and 3) handling large portfolios of what are in fact public assets, and being involved in executing complex projects. These projects are not only in oil, but other oilrelated areas, such as infrastructure, technology transfer and domestic linkages.
The database’s website observes: “Effective NOCs deliver significant value to their stakeholders via fiscal revenue … successful exploration efforts and the development of new skills and technologies,” NOC Database. The Report further admits that “NOCs have traditionally been poorly understood.” This, it indicates, has been due to previous poor reporting on these companies, sparse research, and the consequent absence of reliable comparative data which the database presently fills.
The database covers all the key areas one would expect to find (production, revenue, fiscal transfers to the state, operational and financial performance). These are based on a standard methodology; see www.nationaloilcompanydata.org.
Other related
Readers should recall I had recommended an NOC as envisioned in the NRC’s Charter. This Charter offers policy options and practical advice, on how best to manage Guyana’s) natural resource wealth so as to “ensure the NOC can draw on accumulated experiences … learn from history and avoid mistakes of the past”, NRC 2nd Edition.
Experience shows that establishing an NOC is a longterm endeavour. To establish one by the next decade, preparations have to start soon. The reason for such early action is that concerns over accountability and governance have arisen in regard to several NOCs. The authority and governance framework, under which they operate, have often proven to generate serious conflicts of interests, as well as outright corrupt practices and bad governance. This is because the rules of operation of NOCs have to be reconciled very carefully with their commercial roles, with international best practices for both public and private governance, fully embraced.
To wrap up, I believe the greatest dangers NOCs face are often generated by economic pressures. Two of these I briefly refer to here. One is that, when oil prices are on the decline and thus their revenues, management faces great pressure to maintain traditional contributions, at the pre-price decline level. Similarly, domestic consumers of their products expect to continue to be offered such products at prices below those prevailing in the world market thereby placing heightened pressure on the NOCs’ finances!
Experience reveals that, in responding to these twin pressures, NOCs have created several disasters. Therefore, the framework and rules of Guyana’s NOC must guard against these frailties.
Conclusion
Next week I offer concluding comments on the revealed adverse impacts of the 2020 general crisis on Guyana’s nascent petroleum sector.