Conventional wisdom holds that oil sector nationalizations are rooted in political motives of the petroleum states, which perceive value in the direct control of resource development though a state enterprise.  State motives are inarguably important.  At the same time, we argue in this paper that constraints of risk significantly affect a state's choice of which agent to employ to extract its hydrocarbons.  Implicit in much current debate is the idea that private, international oil companies (IOCs) and the state-controlled, national oil companies (NOCs) are direct competitors, and that the former may face threats to their very existence in an era of increased state control. 

In fact, IOCs and NOCs characteristically supply very different functions to governments when it comes to managing risk.  For reasons we discuss, IOCs excel at managing risk while NOCs typically do not.  IOCs, NOCs, and a third type of player, the oil service company, will all continue to exist because their distinct talents are needed by states seeking to realize the value of their petroleum resources.  However, the relative positions of these different players have changed substantially over time, and will continue to do so, in response to the shifting needs of oil-rich states.

In the first part of this paper, we explore the nature and sources of risk in the petroleum industry, how these risks change over time, the task of managing petroleum risks, and the variable capacity of state and private companies to manage them.  In the second part, we apply qualitative and quantitative approaches to test the idea that risk significantly affects the state's choice of which agent to use for petroleum extraction.  First, we review the events leading to the cluster of nationalizations that occurred in the early 1970s and assess whether they were significantly affected by considerations of risk.  Second, we explore how well variation in risk and state capacity for risk can explain changing ownership over time within a particular oil province - the UK and Norwegian zones of the North Sea.  Third, we use data from energy research and consulting firm Wood Mackenzie to quantitatively test our hypothesis about the key role of risk, looking in particular at the case of oil and gas company exploration behavior.  

In all three cases, our observations are broadly consistent with the hypothesis that risk significantly affects the state's choice of hydrocarbon agent, although, as expected, other factors emerge as important drivers of outcomes as well.

China's coal market is now in the midst of a radical restructuring that has the potential to change how coal is produced, traded and consumed both in China and the rest of the world.  The restructuring aims to integrate the coal and power sectors at giant "coal-power bases" that combined would churn out more coal annually than all the coal produced in the entire United States. 

Coal-power integration is now a focal point of the Chinese government's energy policy, driven by the dramatic "coal-power conflict".  Coal prices are market-based, but power prices are tightly controlled by the government.  This has caused massive losses for Chinese power generators in 2008 and 2010 and triggered government intervention in the coal market with attempts to cap the price of coal.  The pervasive conflict between coal and power is now driving the Chinese government to remake these markets.

Coal-power base policy aims to establish upwards of 14 major coal-power bases, each producing over 100 mt of coal with consuming industries on-site.  The plan envisions that roughly half of China's coal production would be produced at a handful major coal-power base sites that are controlled by key state-owned enterprises (SOEs) and the central government.    

PESD's new research analyzes China's coal-power base reforms and how they will impact Chinese and global coal markets.  Several key findings are:

First, the implementation of coal-power bases would enhance central government's control over the coal sector and over coal prices.  The government could control coal pricing in a large share of the market and mitigate power sector losses by mandating lower coal transaction prices within integrated SOEs.  Using this kind of internal transfer pricing at below market prices for up to half of China's coal would represent a meaningful shift in how coal is priced in China.  If a large share of China's coal were transacted in this manner, it might create an unofficial two-tiered pricing structure in the coal market.

Second, coal-power base policy would bring about modernization and mechanization of a larger share of China's coal production, in theory bringing larger economies of scale to the sector.  While up-front capital investment per ton produced will certainly increase, the marginal cost of coal production should decrease, all other things equal. 

Third, the massive rebalancing of China's coal market implied by coal-power bases is poised to have important impacts on the globally traded coal market.  Since 2009, China's import behavior has become a dominant factor determining the price of globally traded coal.  In simple terms, when Chinese domestic prices are higher than global prices, the country imports.  The development of coal-power bases could radically alter coal price formation in China and directly impact China's appetite for imports, and therefore has the potential to alter coal price formation globally.