National oil companies (NOCs) produce most of the world’s oil and natural gas and bankroll governments across the globe. Although NOCs superficially resemble private-sector companies, they often behave in very different ways. To understand these pivotal state-owned enterprises and the long shadow they cast on world energy markets, the Program on Energy and Sustainable Development (PESD) at Stanford University commissioned Oil and Governance: State-owned Enterprises and the World Energy Supply. The 1000-page volume, edited by David Victor, David Hults, and Mark Thurber, explains the variation in the performance and strategy of NOCs, and provides fresh insights into the future of the oil industry as well as the politics of the oil-rich countries where NOCs dominate. It comprises fifteen case studies, each following a common research design, of NOCs based in the Middle East, Africa, Asia, Latin America, and Europe. The book also includes cross-cutting pieces on the industrial structure of the oil industry and the politics and administration of NOCs.

NOCs are distinguished from private companies by their need to respond to state goals beyond profit maximization. Governments seeking to retain their hold on power use NOCs to deliver benefits to influential elites (“private goods”) or to the broader population (“social goods”). Oil and Governance finds a strong correlation between such non-hydrocarbon burdens on the NOC—which include providing employment, subsidizing fuel, or handing out plum jobs to the politically connected—and deficiencies in oil and gas performance. The highest-performing NOCs, like Norway’s Statoil and Brazil’s Petrobras, face relatively circumscribed non-oil demands from their governments.

How governments administer their oil sectors also proves to be a crucial determinant of NOC performance. Democracies (e.g., Norway, Brazil) and autocracies (e.g., Saudi Arabia, Angola) alike are capable of grooming successful NOCs. What matters most for outcomes is not regime type per se but rather that governance systems provide unified signals to the NOC. (By contrast, regime type is observed to be an important driver of whether governments nationalize their oil sectors in the first place, or privatize existing NOCs.) Fragmented governance, in which multiple government actors assert their interests but no one assumes strategic responsibility, appears uniformly fatal to NOC performance. Nascent democracies like Mexico’s can be particularly vulnerable to oil sector dysfunction stemming from fragmentation. Governance systems must also be matched to a country’s institutional and political realities. Nigeria has arguably set back its progress in oil through attempts to slavishly imitate Norway’s forms of oil organization in the absence of Norway’s mature political and civil service institutions.

The close ties between the NOC and its government can have a detrimental effect on the ability of the NOC to manage the risks that are so characteristic of the oil and gas industry. Whereas private companies are forced to hone their geological knowledge and skills through global competition for capital and hydrocarbon licenses, NOCs for the most part are comfortably sheltered from competitive threats at home. They therefore fail to develop the global reach that helps private players (the international oil companies, or IOCs) manage risk by means of a diversified global portfolio and the ability to link resources to customers around the world. (Some NOCs have begun to internationalize in recent years, but it is striking that none of the NOCs studied in Oil and Governance went down this path until forced to by domestic resource scarcity, or at least of the perception of future scarcity.) The soft budget constraint faced by the NOC also discourages the cost efficiencies that help mitigate risk.

This gulf in risk management capabilities between IOCs and most NOCs suggests that the resource dominance of NOCs does not pose an existential threat to private oil companies. Private players will continue to play a key role in the frontiers of oil and gas development—frontiers like shale gas, oil sands, and the remote Arctic. NOCs will continue to control low-cost oil around the world, while a select few of the most focused and unencumbered among them start to build up their own risk management skills through partnerships with IOCs.

NOC control over resources has important implications for the world oil price. The NOCs studied in the book produce their reserves at half the rate of the major IOCs—whether due to lower performance or a deliberate attempt to preserve resources for the future. Moreover, governments tend to rely most heavily on the risk management skills of IOCs when prices are low and then swing back towards NOCs in high price periods when they can afford to focus on delivering benefits to favored constituencies. The result of this dynamic, which is observed in the case studies of Oil and Governance, can be “backward bending supply curves” that exaggerate price volatility in the world oil market.

This effect of NOCs on global oil supply and price appears to be much more important than any geopolitical fallout from NOC primacy around the world. Oil and Governance finds very little evidence that NOCs act as effective foreign policy weapons on behalf of their host states. Even where politicians may desire to employ NOCs in this way, the incentives of the NOC itself are usually strongly opposed to such an exercise of power. As one example, Europe’s Gazprom depends overwhelmingly on revenues from gas exports to Europe because gas is so heavily subsidized in Russia. When NOCs do venture abroad, as in the case of China’s CNPC, they are often motivated to do so precisely by the desire to achieve more autonomy from their political masters at home.

Abstract

Norway has administered its petroleum resources using three distinct government bodies: a national oil company engaged in commercial hydrocarbon operations; a government ministry to direct policy; and a regulatory body to provide oversight and technical expertise. Norway's relative success in managing its hydrocarbons has prompted development institutions to consider whether this “Norwegian Model” of separated government functions should be recommended to other oil-producing countries.

By studying ten countries that have used widely different approaches in administering their hydrocarbon sectors, we conclude that separation of functions is not a prerequisite to successful oil sector development. Countries where separation of functions has worked are characterized by the combination of high institutional capacity and robust political competition. Unchallenged leaders often appear able to adequately discharge commercial and policy/regulatory functions using the same entity, although this approach may not be robust against political changes. Where institutional capacity is lacking, better outcomes may result from consolidating commercial, policy, and regulatory functions until such capacity has further developed. Countries with vibrant political competition but limited institutional capacity pose the most significant challenge for oil sector reform: Unitary control over the sector is impossible but separation of functions is often difficult to implement.

Nigeria depends heavily on oil and gas, with hydrocarbon activities providing around 65 percent of total government revenue and 95 percent of export revenues.  While Nigeria supplies some LNG to world markets and is starting to export a small amount of gas to Ghana via pipeline, the great majority of the country's hydrocarbon earnings come from oil.  In 2008, Nigeria was the 5^th largest oil exporter and 10^th largest holder of proved oil reserves in the world according to the U.S. Energy Information Administration.  The country's national oil company NNPC (Nigerian National Petroleum Corporation) sits at the nexus between the many interests in Nigeria that seek a stake in the country's oil riches, the government, and the private companies that actually operate the vast majority of oil and gas projects.

Through its many divisions and subsidiaries, NNPC serves as an oil sector regulator, a buyer and seller of oil and petroleum products, a technical operator of hydrocarbon activities on a limited basis, and a service provider to the Nigerian oil sector.  With isolated exceptions, NNPC is not very effective at performing its various oil sector jobs.  It is neither a competent oil company nor an efficient regulator for the sector.   Managers of NNPC's constituent units, lacking the ability to reliably fund themselves, are robbed of business autonomy and the chance to develop capability.  There are few incentives for NNPC employees to be entrepreneurial for the company's benefit and many incentives for private action and corruption.  It is no accident that NNPC operations are disproportionately concentrated on oil marketing and downstream functions, which offer the best opportunities for private benefit.  The few parts of NNPC that actually add value, like engineering design subsidiary NETCO, tend to be removed from large financial flows and the patronage opportunities they bring. 

Although NNPC performs poorly as an instrument for maximizing long-term oil revenue for the state, it actually functions well as an instrument of patronage, which helps to explain its durability.  Each additional transaction generated by its profuse bureaucracy provides an opportunity for well-connected individuals to profit by being the gatekeepers whose approval must be secured, especially in contracting processes.  NNPC's role as distributor of licenses for export of crude oil and import of refined products also helps make it a locus for patronage activities.  Corruption, bureaucracy, and non-market pricing regimes for oil sales all reinforce each other in a dysfunctional equilibrium that has proved difficult to dislodge despite repeated efforts at oil sector reform.