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Oapec Novembre 77

The future Role of the National Oil Companies
in the World Petroleum Industry


by
A.H. Taher Govenor, Petromin.
Abriged text of paper presented to the 1977 OPEC seminar on " The Present and Futur Role of the National Oil Compagnies ", Vienna, October 10-12, 1977.


Introduction


It can be safely stated that the history of the world petroleum industry took an imprtant turn after the second world war and then another, a far more reaching one, as a result of OPEC decisions during tehe middle East War of October 1973. Although it is true that the earlier phases of this indutry had their own significance and importance in the 19th century and the first half of this century, it is clear that the developments which took place in the last thirty years or so have had a more immediate influence on the future of the world than the earlier developments, in spite of the fact thet these relatively recent developments resulted in part from the earlier ones. Newertheless, they have been influenced heavely by the political and economic developments that took place in the oil producing and consuming countries as well as in international economic and political relations.


The creation of the national oil compagnies, and hence their role in the international petroleum industry, is a direct product of these complex developments. But as much as their role is affected by these developments, it also affects further developments in the world petroleum industry as well as in international relations. In order to identify and understand such a role, one needs to put it in the right historical perspective, and to view the political aspects as well as those of business and industry.


A you may well imagine, this iis notan assignment that can be completed within the framework of this paper. So, instead of digging deeply into these historical developments and analyzing them, all I can do here is


to brieffly refer to such developments as they relate to the identification and definition of the role of the national oil companies.


Why Create a National Oil Company ?


One the most pertinent questions that relate to our paper today is whether or not there is a real need for the creation of a national oil company. Our discussion to the national oil companies of the oil exporting countries.


Economic development in the oim-producing countries led to increasing demand for more revenues to finace development needs. Since the determination of both prices and production levels was left to the multinationals, governments were left with no alternative means to increase the cash flow to balance their budgets except, perhaps, through borrowing. Nevertheless, some of them tried their luck in selling royalty oil. In spite of increasing production from new discoveries, however, the complex royalty-expensing formula led to peanuts than a bonanza.


Sovereign governments had no control over the prices at which their oil was sold, or the level at which their depletable wealth was produced or, for that matter, to whom it was sold. At certain times these governments had no access to oil to bunker their ships, or to deliver it to a friendly government, except through companies with which they did not have a legal relationship.


Governments were thus caught in between the need for more money and the sad position of having no control over their economic testiny. Moderates called for effective participation as a substitute for full nationalization, and so came participation. What could not be gotten through price and output determination was to be earned as income from participation. Clearly, the balance of power was shifting gradually from the multinationals to the OPEC governments. What was misunderstood and underestimated by the multinationals, and perhaps even by certain governments, was that such a shift in the balance of power would occur so soon. maybe it could have been hedged againts by the multinationals, maybe not ; nevertheless, the 1972 participation negotiations were tiring, difficult and indicative of the multinationals’ shortsightedness....


Participaton, however, made it possible for many governments to enter the international market. They found out that in marketing some of their oil they could do what the multinationals had done. This led to increasing the self-confidence of the governmants and their companies in handling international oil activities.


To cut a long story short, most governments felt that while yhe multinationals had many things to offer, the governments should take over 100 % of the ownership of their oil and the facilities that produce it, in order to use them whenever they are really useful, and no more.


So, what to do with all these major economic and political gains ? Entrust them, in part at least a nattional oil company.


Market Factors Necessitate the Existence of a National Oil Company


Util the early 1970s many oilmen felt that the supply of oil would continue to meet demand with surpluses showing up from time to time. However, as of today, it is fairly established that shortages will be witnessed in the 1980. What matters for our discussion is that at times of shortages the national oil company can best assit a government in implementing its international oil policies, as it did in 1973 and 1974.


For several decades, the multinationals were always there to fill in the gap and meet demand. Their supply and availability position was astrong enough to enable them to do so. This is not really true anymore, because in the future, they themselves may be short on supply to meet their own integrated needs. It all depends on so many complex political and marketing factors. What is clear, however, is that the governments require a tool through which they can exercise some influence on the market. This is needed in case of shortages, when a national oil company can be the governments arm in allocating <hatever oil is to be made available in excess of its long-term obligations. Furthemore, it is the only tool available for the increasing number of govenment-to-government deals. Since more and more oil is being made available to the government, it goes without saying that such availability needs handling through the government’s business arm - the national oil company.


What Should be Expected from National Oil Companies


As a startind point, it is clear that in all probability the supply and availability position of a company is by fax more abundant and stable than its counterpart’s, the multinational.


Under normal conditions of a reasonable balance between supply and demand, the role of a international oil company should not differ from that of the multinational - in other words, to make available to the world market a certain quantity of crude oil and its derivatives : at times, directly to refiners and distributors, and at other times, through integrated facilities. That is, of course, in addition to its role in implementing its government’s national and international oil policies whenever appropriate. The big question mark is whether one can safely assume such balance in th e world oil markets for the planning purposes of a national oil company. Unfortunately, one cannot.


As a result of the work of the Energy Commision of the Conference on International Economic Cooperation (CIEC), it has become abundantely clear that such balance in the 1980s and beyond is a mirage. It may never occurunless major energy projects are undertaken in almost all parts of the world. Many of these projects require international cooperation. Should such cooperation take place, a new role may emerge for the national oil company, namely, an international role in the overall energy field, and not merely in oil supply.


So in essence, an emerging national oil company may have to simulate the role of the multinational, perhaps as modified by an unbalanced international oil market. Furthermore, it may assume another role by participating in the planning and implementation of an international energy development program. Instead of enumerating the typical function of an integrated multinational oil company. I would like to examine the modifications resulting from a changing international oil market.


In the "good old days", a multinational used to establish oil facilities, move oil from one location to another, set prices, invest money and transfer income, all in almost total freedom. The whole world was more or less one huge enterprise wherein the management of a multinational took decisions left and right without an ayebrow being raised anywhere. Unde today’ s conditions of a great deal of government intervention and increasing regulation everywhere, this picture might appear exaggerated.


Increased government intervention and regulation limits the fridom of the multinational as well as the national oil companies in their international activities. This means a great deal more selectivity is required in these activities. Coupled with an unbalanced oil market, such limits narow the investment and downstream choices a great deal. More and more activity will be directed towards areas where some economic freedom still exists. Even in such cases, a newcomer like a national oil company may still have to consider other factors before taking its final decision.


In the past, the typical downstream investment of the multinational was guided by integration to establish a secure market position, counting on integrated profits to justify it. Such integrated profits have been greatly reduced, and in the case of the national oil company, may no longer exist. Moreover, the security of markets for crude oil in a short market assumes a different perspective. In other words, for the national oil company neither of the two major considerations in a downstream investment is relevant anymore.


Under present and future market conditions, the marketing of crude oil does not really present as big a problem for a national oil company as it used to when the market was in surplus position. In particular, downstream investment in refining and distribution does not seem necessary.


as a means of crude oil disposition. It may, however, still be desirable in order to improve returns on the heavier and high sulfur crudes. Investment in crude carriers under foreseeable tanker market conditions does not seem to be commercially feasible either. With the sirplus in the market, the national company is better off chrtering. In fact, should the surplus continue, the national company’s competitive position would seem to be better than that of the typical multinational which owns a large tanker fleet. Nevertheless, downstream investment in both refining and crude and product carriers may prove to be necessary to lend a degree of flexibility to marketing a national compagny’s crude products.


If one examines a national company’s hydrocarbons availability in terms of crude oil, petroleum products, natural gas and LPG, another form of selectivity emerges. That is to say, a national company may have to be selective in its investment decisions both in terms of geography as well as in terms of type of hydrocarbons facility.


The geographical constraints are defined in terms of economic freedom in the first place, once the maketing consideration exist. For example a few downstream investment opportunities may still crop up for refining heavy high-sulfur crude, making it possible for the national company to plan its future crude marketing activities. Alternatively, more can be said for transportation, marketing and distribution of natural gas liquids and liquefied petroleum gas, because supply may exceed demand by a high margin for many years to come. In this case an orderly marketing approach, for both the national and multinational, requires selective downstream investment. Such investment may be directed towards transportation, terminal construction, storage and distribution. Geography seems to be directing us towards the two major markets for these products, namely, Japan and United-States, but similar facilities may be required in certain large developing countries.


So, in essence, the emerging national oil companies are similar in many respects to their counterparts, the multinationals. This is particularly true in marketing and downstream activities.


Conclusion

A national oil company under our definition in this paper is really a multinational owned by the state of an oil producing and exporting country. Such ownership qualifies the national company to play a particular role in the international oil market, refecting the political objectives of its government in both marketing and downstream investment. This is one major characteristic that differentiates it from the multinational. Furthermore, it would appear that, under a 100 % take-over of oil-producing facilities by producing governments, the supply and availability position facilities by producing governments, the supply and availability position.


is more stable, though not necessarily more abundant. The multinationals still command a strong position in the market, which can give a degree of stability and security in the flow of oil to its historical markets.


This may make it acceptable for the national company to leave sizable quantities of its crude available for marketing by the multinationals. Under such conditions, the multinationals may continue to have more crude available than to the nationals, though certainly without the same degree of security of supply.


So far we have said nothing about the role of the national company in exploration, a field in which the multinationals still have a strong card to play. In spite of the fact yhat many national oil companies have undertaken exploration for hydrocarbons is still largely a game for tha multinationals. Hence, it would seem advisable for the nationals to cooperate with the multinationals in this field for the mutual benefit of both.


That, of course, does not mean the national company may not play an imprtant role in seismic and geophysical and other surveys, as well as in drilling. In essence it means risk-taking and identification of exploration opportunities and drilling sites. It means interpreting geological information in the way in which the multinationals proved their worth over and over again and in which they can continue to contribute to substantially further discoveries for the benefit of all concerned. Furthermore, many of the multinational oil companies have extented their activities to other energy fields where nationals, or some of them at least, may find themselves soon. Those which have an abundant supply of oil today will need a different anergy mix in their domestic markets in the not-too-distant future. As such, the national oil companies can be an excellent tool for the transfer of alternative energy technologies through cooperation with the multinationals as well as with other international energy institutions. This new role requires a definition of its own.

STATISTICS
LIBYA
Production of Crude Oil by Company
During First-Half 1976, 1977


Compagny


First-half
1976


%


First-half
1977


%


Percentage
change


Oasis / NOC


687,411


37,3


708,340


33,3


3,0


Occidental / NOC


279,056


15,1


362,068


17,0


29,7


Esso Standard / NOC


190,419


10,3


183,893


8,6


(3,4)


Umm Gawabi


113,109


6,1


120,252


5,7


6,3


A. Gulf


253,936


13,8


390,250


18,3


53,7


Agip / NOC


147,439


8,0


176,118


8,3


19,5


Mobil Oil / NOC


80,851


4,4


95,062


4,5


17,6


Essosirte / NOC


67,422


3,6


68,247


3,2


1,2


Aquitaine / NOC


19,603


1,1


14,603


0,7


(25,5)


NOC


3,849


0,2


5,686


0,3


47,8


Wintershall


1,712


0,1


2,091


0,1


22,1



Total


1,844,807


100


2,126,610


100


15,3

</ligne


Source : Officiel Information

LIBYA


Exports of Crude Oil
During First Half 1976, 1977

(b/d)


First Half 1976
Quantity %


First Half 1977
Quantity %


Percentage
Change


U.S.A


444,768


25,2


793,438


40,0


78,4


Latin America


64,271


3,6


45,594


2,3


(29,1)


Western Europe


1,131,983


64,1


1,028,309


51,8


(9,2)


Eastern Europe


45,645


2,6


29,754


1,5


(34,8)


Japan


43,044


2,4


15,250


0,8


(64,4)


Africa


3,440


0,2


---------


--------


---------


Caribbean


29,277


1,7


46,903


2,4


60,2


Others


3,370


0,2


24,171


1,2


617,2


Total


1,765,798


100


1,983,419


100


12,3


Source : Officiel Information

CONFÉRENCE REPORT


OPEC Seminar on National Oil Companies


OPEC’ s highly successful seminar on " The Present and Future Role of the National Oil Companies " was held at OPEC headquarters, in Vienne, on Oct.10-12, 1977, under the chairmanship of the Indonesian Minister of Mines, H.E. Dr. Mohammed Sadli. From the outset, the scope of the seminar was broadened to include discussion of topics other than that of the National Oil Companies (NOCS) . H.E. Dr Valentin Hernandez-Acosta, the Minister of Energy and Mines in Venezuela, also attended.


Mr. Ali Jaidah, Secretary General of OPEC, defined in his keynote adress the new objectives that confront the NOCs : First, the efficient management at all levels of the oil industry by national of OPEC member countries ; second, the development of an indigenous technological base which is capable of contributing to the needs of the oil sector member countries ; and finality, the speedy transformation of the role of OPEC member countries from that of raw material exporters to manufacturers by the entry into certain downstream operations, especially in the refining and petrochemical sectors. In this way the national oil industry should become the pivotal point of the process of industrialization.


The meagerness of downstream anvestments in OPEC countries was illustrated by Dr. Ali Attiga, Secretary General of OAPEC, who pointed out that, despite the recent changes enhancing the relative economic positions of the oil-exporting countries, downstream gross investmenrs in tha OAPEC area and in terms of fixed assets represented about 3.11 % of world investment in 1946 and increased to only 3.79 % in 1975. " The decisive factor ", according to Dr. Attiga, "is the extent of political will and institutional stability on the part of the member govenment.... Will the oil exporting countries take full advantage of their golden opportunities to use the oil sector for developing their individual and combined economic potential, bigining with the integration of their indutries both horizontally and vertically ? "


Expending on the theme of the future role of NOCs, Dr. Abdul-Hadi Ther, Governor petromin ( Saudia Arabia ), listed several possible areas open to investment decisions, both in terms of geography as well as in terms of hydrocarbons facility.


Representatives of the major oil and chemical companies were less sanguine in their appraisal of the future role of NOCs in downstream activities.

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