OIL AND
GOVERNANCE
Depletion Policy
Some authors (Stevens 2008) say that measuring the
performance of NOCs is difficult and controversial.
These are a great number of metrics conventionally
used.
One common features is that many depend upon
reserves or production levels
This use of reserves and production data is
reinforces for NOCs because they often exhibit
extremely poor transparency of financial data
commonly available for IOCs.
1
Two Fundamental Problems
• Accuracy of the reserve figures
– Triggered by OPEC first in 1987- how to allocate
production quotas. Continues to be a challenge in
the absence of any independent evaluation of
reserves there remains doubt over their accuracy.
Thus using them as a metric of the performance for
a NOC is dubious.
2
Two Fundamental Problems
• The second problem using reserve and
production levels as a performance metric
concerns depletion policies. The figures for
reserve and production emerge as the result of
depletion policy
1-4
“Low” figures or reserves of production growth
could be a symptom of poor performance by the
NOC or could be a deliberate depletion policy by
the reserve owner (NOC)
3
• Depletion Policy- decisions in deciding how quickly or
slowly to develop the depletion amount.
– Explore commercial find
• Do not develop/ or develop
• Do not produce/ or produce
• Spend/save domestically or invest abroad
• Key choice is because oil is an exhaustible resource
Barrel produced today cannot be produced tomorrow
• Barrel not produced today will earn a rate of return.
See schedule/table 3
1-6
Existence of NOCs
Depletion became an issue because IOCs were
operating under “oil style concession
agreements” giving them virtually total
management freedom. Effectively IOCs set
depletion rate of most exporters.
Ended with the end of the nationalization of the
operating J-Vs in the early 1970’s
4
• Depletion lies in the hands of the government. After 1st
oil shock of 1978/79, growing tendency to “leave the
oil in the ground”
• Driven by number of factors
– Wide spread belief that the oil process would rise in the
future
– Some countries had real fears assets were exposed to
political risk
– Practical problem overseas assets might be exposed to
political risk between their gov’t and US gov’t
– Gov’ts simply lacked competence and capacity to manage
hrydocarbon reserves following forced withdrawal of IOCs.
– Capacity expansion was simply not a realistic answer.
5
• Second oil shock 1978-81 –oil ___ would
carry on rising forever –thus why increase
production capacity
• The inexorable rise in excess capacity caused
OPEC to cut back production and were forced
to defend prices.
• In 12 years following 1978, non-OPEC
production grew by 12.6 million bpd
6
• 1990’s, attitudes began to change
– Lower prices created serious macroeconomic problem
– OPEC quotas were open upstream to IOCs
– By 1998 only Sadia Arabia and Mexico were off limits to
IOC investment
• Following oil collapse in 1998, changed again
– Related to depletion policies dependency on were oil sector
dominated by private sector or a NOC
– “Peak Oil” ever rising prices thus reserves were
increasingly valuable (oil in the ground)
– Plus cost of service companies made production and
exploration became increasingly expensive
7
• The principal- agent view of the oil sector
make young post-graduate students returning
home that NOCs by their very nature are high
cost, inefficient, and prone to indulging in rent
seeking. In many cases, NOCs were starved of
funds to pursue any depletion policy that
requires any increased capacity and production
levels
8
• Therefor we must be cautious about
performance from reserves and production
data. Growth is not always a sign of improved
performance nor are declining numbers more
than a reflection of inefficiency, may simply
reflect government performance in a dynamic
oil market. (Saudi 200- 207)
• Page 209 quotes a book by Simmons that
Saudi reserves were grossly over stable
9
• Statoil (ps99)- 640
10
Moving Forward
• Question- how rapidly the company can evolve
into a global player while keeping domestic
production high. This means growing reserves
through improved domestic exploration as well as
through both strategic M&A and organic
exploration abroad.
• Statoil must find the right ways to meld
technological leadership with hard-headed
strategic decision making and efficient execution.
11
• Recent years purchase does not depend on any
privileged position in closed markets such as
– Deepwater US
– Oil sand in Canada
– Shale gas in US
• An explanation might be Algeria and the
Shtokman project and Total and Gazprom.
12
Reserves Replacement and Cost Structure for
Selected NOCs (2004-2007)
Petrobras StatoilHydro CNOOC
Petronas
IOCs
Domestic
109%
66%
131%
150%
73%
International
-61%
107%
684%
110%
73%
Domestic
$8.87
$15.40
$10.93
NA
$15.62
International
$23.60
$56.32
$18.32
NA
$19.51
RRR %
89%
73%
191%
119%
68%
RRC $/BOE
$11.51
$25.06
$14.78
$2.50
$17.23
Reserve Replacement
Rate %(BOE)
Reserve Replacement
Cost (RRC) $/BOE
Combined
Domestic/International
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