National Oil Companies (NOCs)

NOCs: a tool to prevent information asymmetry and exercise national control

On the face of it, NOCs would seem an ideal instrument to tackle the problem of asymmetry of information between governments and foreign investors. Under most PSCs, bridging information asymmetry is achieved by making provisions for joint management through a management committee comprising of the NOCs officials and those of the IOC, as is the case under the Indonesia PSC, where Pertamina has management responsibilities, and under the Malaysian PSC, where Petronas and the contractor are required to form a joint management committee.

NOCs seem to be an obvious vehicle for ensuring and promoting national control over the development of the oil, gas and mining sectors. Yet they feature far more prominently in the development of oil and gas than in the mining sector. State participation rates of 20 per cent or more are common in oil-producing countries. Rates in Brunei, the United Arab Emirates, Venezuela and other oil producers exceed 50 percent NOCs are now a typical feature in most if not all petroleum regimes around the world, particularly outside of the OECD countries.

2. “Permanent Sovereignty” over natural resources

The principle of permanent sovereignty over natural resources is perhaps the primary principle that has led to the creation of NOCs across the post-colonial world, and will continue to assure NOC existence in the future.

A nation and its people’s permanent sovereignty over its natural resources has been recognised in several United Nations (UN) declarations, the most important of them being the UN General Assembly’s Resolution on Permanent Sovereignty over Natural Resources. Resolution 1803 (XXVII) if 14th December 1962. Other relevant UN resolutions include: GA Resolution 626 (VII) of 21 December 1952; and GA Resolution 2158 (XXI) of 25 November 1966. In relation to offshore oil & gas resources. The UN Convention on the Law of the Sea (UNCLOS), confers sovereign rights on coastal States for the purpose of exploring and exploiting, conserving and managing the natural resources (Article 57) and authorizing and regulating drilling on the continental shelf (Article 81). The Energy Charter Treaty, a multilateral treaty by mostly EU states, also recognise state sovereignty and sovereign rights over energy resources at Article 18.

The most common vehicle for state participation in the oil & gas industry has been the NOC, but participation can still be effected in other ways, for instance, through an energy ministry, as is the case under the Kenyan PSC.

Return of resource nationalism in 2000s

Before the 1970s, the global oil and gas industry was dominated by international oil companies (IOCs), who had long term concession agreements dating back to the colonial era, and inherited in the immediate post-colonial years after independence. Aside from colonial legacy, another reason for the continued long term concessions was because the host countries did not have the technical competence to explore and develop for oil and gas, and so relied on the IOCs for expertise and funding. Concession agreements were normally heavily skewed to the advantage of IOCs. After 1970, IOC dominance was gradually replaced by developing NOCs which were established by the resource-rich developing countries to take control of their oil & gas reserves. This was further buoyed by the expansion of international service companies, to whom IOCs were outsourcing technical competence as a way of re-structuring operations and cutting costs. These international service companies provided technical services to NOCs, further reducing the need for IOCs.

An example is Saudi Arabia’s Arabian-American Oil Co. (Aramco), which was initially owned by Standard Oil of California and Texaco, who funded exploration and the development of Saudi oil basins from the 1930s. Due to colonial legacy and the government’s reliance on their technological expertise and access to project finance, Standard Oil and Texaco enjoyed favourable terms. However, by 1950, bargaining power had shifted and the Saudi government negotiated a 50:50 profit split. In the 1970s, Saudi Arabia nationalised Aramco, first retaining the original owners as operators, and eventually having full control. Another example is PDVSA in Venezuela, which was nationalised in 1976.

There was renewed resource nationalism in the 2000s and by the end of 2014, 57.3 per cent of global proved oil reserves were in five countries: Saudi Arabia, Iraq, Iran, Kuwait and Venezuela, all of which operated through NOCs.