National Oil Companies 101
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THE new administration in Guyana is considering options for the role of government in managing the growing oil and gas sector. During a recent conference, a speaker pointed to Suriname’s experience and raised the possibility of establishing a national oil company. Such organisations are sometimes popular because they promise to facilitate technology transfers or provide more control over oil projects, but they also come with challenges that can be difficult to manage.

National oil companies, sometimes referred to as NOCs or state oil companies, are fully or majority-owned by the government. They can provide governments with more control over the decision-making process during development since they are direct investors in oil development.

Because they are direct investors, national oil companies also participate directly in the planning and budgeting process, including timelines for production and depletion. This often helps locals gain management experience in the sector.

Some countries, like Norway and Malaysia, have successfully used national oil companies to accumulate both wealth and experience in the industry. These countries have done so by creating strong institutions and regulations and enforcing separation of regulatory agencies and national companies. In successful cases like these, governments are often removed from the national oil company’s decision-making process. This provides insulation from day-to-day political pressures that may take away from a successful national oil company’s focus on long-term growth.

In other countries with successful oil and gas sectors, such as the United States and Canada, governments decided to forego national oil companies. Like Guyana, they take part in the oil and gas sector by granting permits to private companies to develop oil regions in exchange for taxes, royalties or a share of the profits. This helps reduce the risks that come with national oil companies, which can be considerable.

National oil companies, like all state-owned businesses, are vulnerable if government agencies seek to maximize short-term revenues over investing in the long-term health and growth of the sector. Some oil experts criticized Petróleos de Venezuela (PDVSA), the national oil company in Venezuela, for short-sighted, politically-driven decision making that ultimately led to reduced production and left the country overly dependent on volatile oil revenues to cover social programs. It can be hard for governments to make smart long-term decisions about diversifying the economy when the lure of short-term oil profits is strong.

Similarly, direct government involvement in a lucrative industry can also lead to corruption risks if officials use the contracting process to enrich themselves, as was widely alleged to take place in Brazil. Conflicts of interest can quickly multiply and be hard to manage when a state agency is overseeing a state company.

Finally, the potential benefits from national oil companies’ direct investment—technology transfers, increased decision-making and local management experience—come with the responsibility to make substantial upfront investments in projects. A $9 billion (USD) project for example, would require a 10 per cent partner to make a $900 million investment prior to production revenues.

Under Guyana’s current arrangement, private companies make 100 per cent of the up-front investments for exploration and development. Those investments are only re-paid when revenues begin, often five to 10 years after the first investment. Sometimes they aren’t repaid at all, if exploration is unsuccessful, projects stall or oil prices are too low. If the governments of state oil companies are required to borrow heavily to cover their company’s share of the costs, it can lead to higher sovereign debt and greater risk.

Right now, Guyana is avoiding many of the risks that national oil companies present, but there are concerns that the current institutional arrangement does not capture some of the benefits it could, one reason that the government is considering additional regulations. A national company is an important idea for Guyana to consider, especially as it becomes a more sophisticated and experienced producer.

Guyana is not alone in this situation. Oil and gas producing countries across the world continue to tinker with the “best” way to develop natural resources. There is no one-size-fits-all approach to oil development because producing countries themselves are so varied. National oil companies come with potential benefits and risks that the new administration, and all of Guyana, must consider.

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