Risks of rising oil nationalism

Governments may focus much of their oil wealth on other priorities, causing oil-field efficiency and investment to suffer.

It's hard to shed a tear for Big Oil. The top five publicly traded companies racked up a record $119.5 billion profit last year – roughly the size of Ireland's economy.

Yet these corporations are steadily losing ground to a surging group of nationally run companies – a trend that could come back to hurt oil-consuming nations such as the United States, some experts say.

The risk is that governments that run oil companies will lavish so much of their oil wealth on social programs and other priorities that efficiency and investment in new oil fields will suffer.

"We could have a problem down the road because not enough investment will be made," says Amy Myers Jaffe, an energy expert at Rice University's Baker Institute for Public Policy in Houston. In Venezuela, Iran, and Russia "we might see declines in production in coming years." These countries have huge reserves and state-run energy sectors with questionable efficiency.

Many forecasters expect that world oil output will continue to rise, along with demand, in the years ahead. But in this era of newly resurgent national oil companies – the NOCs, in industry jargon – any forecasts have a large margin for error.

Consider:

• Iran, now among the world's leading crude-oil exporters, could become a net importer of oil within the next decade. The reasons include both rising demand, driven in part by huge government subsidies for gasoline, and slow-growing production.

• Venezuela is moving toward tighter national control of its industry, with President Hugo Chavez saying he wants to share oil wealth with the country's often- impoverished citizens. But the more that is spent on social programs, the less remains for investment. Last year, when Exxon-Mobil was reporting record profits, Venezuela's PDVSA posted a 26 percent decline in profits, the company reported.

• In Russia, the government of Vladimir Putin has stirred up controversy with its own brand of "resource nationalism." Analysts say the government pressured Royal Dutch Shell to hand over control of one major project, on Sakhalin Island, to Russia's Gazprom in December. As in Venezuela, such moves could strain the confidence of international oil companies in forming partnerships with Russia.

In a new analysis of the role of national oil companies, Ms. Jaffe cites stark numbers from the International Energy Agency: Developing nations, typically with oil fields under state control, will account for some 90 percent of new hydrocarbon supplies over the next two decades. That's a sizable shift from the decades since 1970, when industrialized Western nations were able to pump about 40 percent of the world's new supplies, with most of that done by publicly traded companies.

"A major shift in control of reserves and production is under way in international oil markets from international oil companies to national oil companies," John Deutch, former Director of Central Intelligence, said at a March congressional hearing. "The NOCs have both commercial and political objectives. Countries such as Iran, Russia, and Venezuela make clear their intent to use their petroleum resources to advance their political interests."

It's a pattern that ebbs and flows with the price of crude oil, some energy analysts say. When oil prices are strong, resource-rich developing nations try to harvest maximum gains from their petroleum reserves. Governments assert a bigger role for national oil companies and grant a smaller role to firms like Exxon-Mobil.

Of course, the threat posed by the rising NOCs depends on the eye of the beholder. While some US experts fret that world oil supplies won't keep up with growing demand, oil-producing countries may well be worried about domestic unrest. So increased social spending, even from the perspective of Western consumers, may be laudable if it helps stabilize oil markets.

"If we ended up in a civil war, we may not see that output, period," says A.F. Alhajji, an oil expert at Ohio Northern University in Ada. In that way, he says, the NOCs are generally making world oil markets more reliable, not less.

A lot depends on how NOCs are run, and how well they are able to partner with other oil firms or energy-service companies. State-run oil companies can be run efficiently, say Jaffe and other experts, pointing to Brazilian and Norwegian companies as models of success.

On the other hand, Iran is now pumping less than 4 million barrels of oil per day, Dr. Alhajji notes. He estimates that if the previous government had retained power, Iran would be producing 4.5 million barrels per day by now, and 5.5 million by 2010.