Policy choices for the 2030s: More on why a National Oil Company is a must!

Guyana’s Infant Oil and Gas Sector:

Introduction

In recommending the establishment of a National Oil Company (NOC) in Guyana by the next decade, I am also explicitly rejecting any notion of twinning this policy recommendation with the establishment of a state-owned (or joint venture, state-private) downstream “oil” refinery. This rejection also refers to the much touted “mini-oil refinery” that was once very popular in local circles. I have developed my arguments on this in a score of previous columns (May 28, 2017 to October 29, 2017).

Relatedly, I also reject the IMF proposal for a State Holding Company. This is because, as conceived it is restricted and confined to financial interests, with very limited involvement in operational decision making. I am however, quite sympathetic to the recommendation for the establishment of 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, my policy option for a NOC, is one constructed along the lines of the Natural Resource Governance Institute’s (NRGI) 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 this topic which was introduced last week.

Size and importance

Over the past few years, I have been made painfully recognizant of how little the average reader is aware of the importance of NOCs in the global oil economy. The records reveal that, as of last year (February 2019), well over half of the global supply of oil and gas was produced by NOCs. That consumption totaled 85 million barrels of oil equivalent, per day (Mboe/d). In addition, 90% of the total global oil and gas reserves is held by NOCs.

Because of their size and importance, NOCs possess two economic features, which are worthy of mention. One is that, worldwide, these companies are providing jobs for hundreds of thousands of workers. And, the other economic feature is that, the sales of their products, at home and exported, generate the equivalent of multi-billion US$ financial assets, worldwide. Indeed, so vast are their financial resources and impact on jobs and government revenue that, they came to be commonly called “behemoths” in the economic literature — a term the NRC itself recognizes.

Under-analyzed behemoths 

Based on the brief data cited above, it didn’t take long for analysts to recognize that the data on these companies needed to be systematized, gathered and published. As Ed Crooks, 2019, Energy Source Energy Sector had observed: “Considering their importance, NOCs are relatively under examined”. Such views soon led to the creation of a NOC database. The present database is now 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 stresses, 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, TOCs, access to hydrocarbons” 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 oil-related 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 earlier poor reporting on these companies, sparse research and 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). As indicated it is based on a standard methodology. The Website is www.nationaloilcompanydata.org.

  Other related

It is crucial for readers to bear in mind that my recommendation for the establishment of a NOC, is one as envisioned in the NRC’s Charter, which declares it: “offers policy options and practical advice … on how best to manage (Guyana’s) natural resource wealth”. The aim therefore, is to “ensure the NOC can draw on accumulated experiences … learn from history and avoid mistakes of the past”, NRC 2nd Edition.

From all accounts, the establishment of a NOC is a long-term endeavour. Consequently, if one is to be established in Guyana by the next decade, preparations have to be started next year, 2021. The reason for this early action is that serious 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, they face heightened pressures on their management to be able to maintain traditional contributions, at the pre-price decline level. The other is that domestic consumers of the NOCs products generally believe, and indeed expect to be offered these products at prices below the ruling world market ones. Such subsidization also puts heightened pressure on a NOC’s 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 begin to address the key concern of this stage of my assessment; that is, what are the expected near-term setbacks and losses, which can be attributed to the 2020 general crisis, as I have defined it?