Until the 1970s, a few major transnational corporations (TNCs) from the United States and Europe dominated the international oil industry. Today, the picture is strikingly different. Global production is now controlled by stateowned companies in developing and transition economies. Some of them have also emerged as major overseas investors. This article is based on UNCTAD’s World Investment Report 2007: Transnational Corporations, Extractive Industries and Development.
Great imbalances
There are widening imbalances in world consumption, production and reserves of oil and gas (figure 1). Developed countries consume more than half of global oil and gas output, but they account for only a quarter of global production. More-over, less than 8% of the world’s remaining proved reserves of oil and gas are found in the developed countries. As many as 21 of the top 25 countries ranked in 2005 by total remaining proved reserves were developing or transition economies. In addition, resources in developed countries are being depleted at a rate more than ten times faster than that of developing and transition economies. That means developed countries will have to rely increasingly on oil and gas imported from developing and transition economies.
Declining role of the « Seven Sisters »
In 1972, eight of the top-10 oil producers in the world were privately owned TNCs, including the so-called « Seven Sisters ». These were vertically integrated oil companies, active in the extraction and transportation of oil as well as in the production and marketing of petroleum products. In the early 1970s, with the emergence of the Organization of the Petroleum Exporting Countries (OPEC) and a wave of nationalizations in developing countries, the ownership picture changed drastically, increasing the role of state-owned national oil companies. For example, the share of TNCs in crude oil production plummeted from 94% in 1970 to 45% in 1979.
In 2005, three state-owned enterprises topped the list of the largest oil and gas producers: Saudi Aramco (Saudi Arabia), Gazprom (Russia) and the National Iranian Oil Company (Islamic Republic of Iran). Saudi Aramco’s annual production was in that year more than twice as large as that of the top private producer, Exxon Mobile (United States). Of the top 50 producers, more than half were majority state-owned, 23 were based in developing countries, 12 in transition economies and just 15 were from developed countries.
For developed-country TNCs, accessing remaining reserves is also increasingly complex. Some developing countries with large reserves – such as Kuwait, Mexico and Saudi Arabia – do not allow foreign company participation in oil and gas extraction. Others permit foreign investment but are facing embargoes applied by TNCs’ home countries. For example, companies from the United States are not allowed to invest in the Islamic Republic of Iran or in Sudan. Several oil and gas producing countries have furthermore recently adopted measures to restrict the participation of TNCs in extraction or to redistribute the revenues derived from such activities. In Bolivia, a 2006 Hydrocarbon Law transferred control over resources to the State and laid the basis for negotiating higher tax and royalty rates with investors. Since 2003, the Russian Government has renegotiated the terms of almost all TNCrelated oil and gas contracts, resulting in an increase in the Government’s share of revenues and in higher taxes and royalties. In Venezuela, the Government has changed the rules on equity participation and taxation to reduce foreign oil and gas company interests and to raise government revenue from the sector.
The emergence of oil TNCs from the South
Competition for oil and gas resources is been accentuated by the increased overseas investment activity of companies headquartered in developing and transition economies. In just a decade, some oil and gas firms from developing and transition economies have emerged as significant players, operating Oil and gas production increasingly in the hands of developing countries Until the 1970s, a few major transnational corporations (TNCs) from the United States and Europe dominated the international oil industry. Today, the picture is strikingly different. Global production is now controlled by stateowned companies in developing and transition economies. Some of them have also emerged as major overseas investors. This article is based on UNCTAD’s World Investment Report 2007: Transnational Corporations, Extractive Industries and Development. Great imbalances There are widening imbalances in world consumption, production and reserves of oil and gas (figure 1). Developed countries consume more than half of global oil and gas output, but they account for only a quarter of global production. More-over, less than 8% of the world’s remaining proved reserves of oil and gas are found in the developed countries. As many as 21 of the top 25 countries ranked in 2005 by total remaining proved reserves were developing or transition economies. In addition, resources in developed countries are being depleted at a rate more than ten times faster than that of developing and transition economies. That means developed countries will have to rely increasingly on oil and gas imported from developing and transition economies. Declining role of the « Seven Sisters » In 1972, eight of the top-10 oil producers in the world were privately owned TNCs, alongside traditional TNCs from developed countries. The combined overseas production of CNOOC, CNPC, Sinopec (all China), Lukoil (Russia), ONGC (India), Petrobras (Brazil) and Petronas (Malaysia) exceeded 528 million barrels of oil equivalent in 2005, up from only 22 million barrels 10 years earlier.
Both CNPC and Petronas are involved in oil and gas production in more than 10 foreign countries, and Petrobras and Sinopec in more than 5 foreign countries. Between 1995 and 2005, the number of foreign economies in which Petronas had oil and gas extraction increased by 10, CNPC by 8, Sinopec by 6 and ONGC by 5. The rapidly expanding overseas upstream production presence of selected developing- and transition-country TNCs is illustrated in figure 2. A few of these TNCs have invested in some host countries which large private oil companies may have difficulty entering. Such difficulties may be due to sanctions imposed on them by individual countries or to other forms of pressure on companies to divest. For example, CNPC, ONGC and Petronas have extraction operations in Sudan.
Development opportunities and policy implications
For a number of low-income but oil-rich countries, the current commodity price boom presents a unique chance to generate revenues needed to invest in education, health and infrastructure with a view to alleviating poverty. In Angola, for example, the taxes paid by one single foreign (Norwegian) oil company, Statoil, amount to almost as much as Norway’s total bilateral official development assistance to the entire sub-Saharan Africa. Transnational oil companies account for a particularly high share of oil production in poor countries. For example, in Equatorial Guinea their share was 92% in 2005 and in Angola and Sudan it exceeded 60%. The rise of new overseas investors may imply new competition for the existing players but put the oil-producing countries in a stronger bargaining position. Unsurprisingly, many governments have in the past couple of years taken action to increase their share of the revenue generated from the extraction of natural resources.
However, seizing the development opportunities from natural resources is not straightforward. Too often in the past, windfall gains from oil have been used in a less than optimal way from a development perspective. It is therefore important to ensure that the current window of opportunity is not wasted. In this process, the oil-producing countries themselves have the prime obligation to protect the development interests of their people. But home countries, the oil companies as well as civil society can also contribute. The quality of governance and the use specific government policies and institutions of the host country are a determining factor for ensuring sustainable development gains from oil and gas extraction. Governments of the oil-producing countries need a clear vision and strategy to ensure that their resources are used in a productive, transparent and equitable manner. They also need to strengthen their abilities and capacities for discharging well-designed policies.
Home-country governments should promote responsible behaviour by TNCs investing in extractive industries abroad and assist the host countries in developing sound policies and institutions. This is equally important when the home State is also the owner of the investing company. Norway represents best practice. First, Statoil its state-owned oil company has been a pioneer in terms of revenue transparency. Second, through its Oil for Development programme, the Norwegian Government is cooperating with more than 20 countries in areas such as legal frameworks, administration, licensing, industrial development, environmental challenges and revenue management. Thirdly, in September 2007, Norway became the first major home country to announce that it will implement the Extractive Industry Transparency Initiative at home. More countries should follow Norway’s example.
The role of the oil companies themselves is to contribute to efficient production while, at a minimum, respecting the laws of the host country. When reserves are located in weakly governed or authoritarian States, they need to consider carefully the implications of investing. However, relatively few of the largest oil and gas companies are explicitly committed to relevant international initiatives. This is particularly true for companies from developing and transition economies. Until more companies participate in them and abide by their commitments, the impact of these laudable initiatives will be limited. Most important multistakeholder initiatives in this area have been established only in the past decade. These include the Extractive Industries Transparency Initiative and the Voluntary Principles on Security and Human Rights. Civil society has played an active role in promoting these initiatives and should continue to contribute expertise on economic and environmental as well as human rights issues, as well as monitor the actions both of governments and companies.
International organizations, including UNCTAD, must also play their part. We can help facilitate learning opportunities from studying and comparing the positive and negative experiences of different countries. The international community can also be instrumental in the development of standards and guidelines and in promoting the use and adoption of existing tools to help ensure a more development-friendly outcome of extractive activities.
By Torbj?rn Fredriksson, UNCTAD
Note. World Investment Report 2007 can be downloaded free of charge at www.unctad.org/wir
