Issue, Main Menu, World — April 2, 2008 at 3:44 am

Very Big Oil

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National entries into international commerce have always made for risky business. For over a century, foreign oil companies and nations have fostered the growth of joint-ventures in which foreign investors and the government of an oil rich nation would go in league together in order to maximize profits for both parties. The nature of this relationship was simple—traditional multinationals would provide the technology and capital necessary to start oil production while governments would furnish the manpower and provide exclusive extraction rights to a specific multinational oil company. This practice has funneled untold wealth into regions of the world that would have otherwise remained in the hinterland of the global economy. Yet, a recent phenomenon has developed in which National Oil Companies (NOC) have started engaging in cross-border transactions. While traditional multinationals like British Petroleum, Chevron-Texaco, and Shell are subject to Western business practices—periodically releasing financial statements and subject to the scrutiny of domestic governments—their nationally owned counterparts are not. The transition of these NOCs into international conglomerates raises an issue of accountability. Some National Oil Multinationals (NOM), subject to minimal regulation, are exploiting the oil market at the expense of traditional firms, who are consistently losing their means for expansion given the inherent competitive disadvantages they now face.

Russia provides a clear example, as Putin has successfully managed to leverage the country’s oil wealth to encourage foreign investment in joint-ventures with the state-owned companies Rosneft and Gazprom. Under these arrangements, Russia would limit the amount of stock a foreign firm could possess beneath the amount needed to have a controlling stake. In June 2007, Putin and Russian investors invited BP to enter into the joint extraction effort “TNK-BP” to build more off-shore rigs near the Sakhalin Islands off of Russia’s Pacific coast and to develop an oil field in eastern Siberia. Three years after TNK-BP went into business, the Russian government threatened to impose fines and penalties against the company for so-called “environmental” shortcomings—this coming from a government that has repeatedly mocked the United States for confuting environmental concerns with business.

Shortly after being submerged in a barrage of fines and taxes, BP relinquished its right to this venture as TNK-BP shareholders decided to sell the controlling stake of the company to Gazprom and with it, the capital its investors furnished for the projects. While these types of measures may seem like reciprocal justice for the high prices Western consumers pay for companies like BP’s oil, they can become assaults on foreign multinationals that continue to drive up prices of production and promote uncertainty. Unable to enforce their claim under international law, firms like BP must simply must go drill elsewhere driving up their production costs and ultimately, the price of oil.

Although outright government takeovers as in the case of TNK-BP are rare, they are occurring more frequently and behind a number of more clandestine façades. The Chinese government has taken a more subtle—if not more “effective”—approach with even greater social and political costs. The Chinese government has flooded the governments of developing oil-rich African nations with a profusion of low-interest loans in order to secure exclusive drilling and extraction rights for its oil companies. In addition, Chinese banks like China EximBank entice politicians with campaign funding to promote loose extraction laws once they become elected. In Nigeria, this situation has deteriorated to the point where oil companies are essentially paying the salaries of officials assigned to assess quality standards from the Nigerian government’s extraction regulatory agency.
In Gabon, one of China’s big three oil companies, Sinopec, won rights to extract oil in this manner. Disregarding Gabonese law for the protection of the Invindo National Park, home to the largest population of lowland gorillas in the world, the state-sponsored firm employed a means of extraction known as “horizontal drilling.” This practice essentially entails strip mining with explosives, resulting in the denuding of the surrounding park and the dispersal of large numbers of the endangered gorillas. Despite protests and legal recourse from the Gabonese people, Sinopec would not desist. The Gabonese political establishment was finally able to prevent further use of this practice. In a nation in which 15 of the top 20 wealthiest citizens have been directly involved in the oil trade, Sinopec was then able to gain the government’s approval to drill in Petit Loango National Park.

Although Sinopec’s practices in Gabon may violate ethical and environmental sensibilities, it is clear that NOMs will use political leverage to decrease the ability of the Western firms to compete effectively. Although Chinese firms are providing much needed capital to otherwise barren economies of these developing nations, humanitarian ambitions are not fueling China’s interest in the developing world. Judging by the effect of this inundation of funds into African economies, allegations of governmental corruption are appearing in formerly stable nations like Kenya. In these cases, China’s barring of Western entry into the African oil trade has had unintended political and social consequences as well. In fact, just about every African nation that has accepted low-interest or no-interest Chinese loans has experienced political instability due to scandals related to oil contracts. It is difficult, if not impossible, for international regulatory agencies to impose sanctions on Chinese firms while barring a commodity vital to the improvement of African economies.

However, not all NOCs are pillars of government inefficiency or represent a total lack of accountability. In fact, some of these companies compete fairly against foreign companies for exploration and extraction rights. PetroBras of Brazil and Statoil of Norway have consistently enriched their own nations while at the same time maintaining transparency standards. PetroBras has managed to become Morgan Stanley’s top emerging market company in terms of market weight against other NOCs like Gazprom or Sinopec. PetroBras rivals traditional multinationals in its off-shore drilling capacities and alternative energy research by developing its own technology and introducing innovations to the international energy market. Although it operates in a complete monopoly, Norway’s Statoil continues to adapt to world markets, allowing Western investors to trade a portion of its stock in the NYSE.

NOMs need not be a mere means of exerting state control over the international trade of a vital commodity. However, oil-producing states are manipulating foreign capital and erecting bars to fair competition against Western firms in the form of hostile takeovers and irresponsible lending practices. While resulting high prices create severe strains on consumers, the global consequences of crude states will continue to unfold in this contentious brand of international petro-politics.

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