In a new working paper, PESD affiliate Peter Nolan and associate director Mark Thurber find that considerations of risk help explain why oil-rich states may choose international oil companies rather than state-controlled enterprises to find and extract oil in "frontier" territories.

Abstract

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.

The TomKat Center for Sustainable Energy has awarded four research grants totaling $1.2 million to Stanford University researchers for smart power grid related studies.  One of the four grants went to a PESD-led project that will help regulators overcome barriers to the development of electricity transmission lines needed to facilitate renewable energy deployment.  At present, the lack of adequate transmission infrastructure makes it difficult to connect generators in regions with rich wind or solar potential to major population centers.

One of the biggest challenges in the current transmission planning process is accurately characterizing the benefits of transmission lines to build a case for their development.  "Our research will develop key analytical tools to help regulators and policymakers assess the economic and environmental benefits of transmission expansions to support renewable generation," Wolak said. Such tools can ultimately be built in to grid planning, expansion, and pricing methodologies.

 

PESD Director Frank Wolak will be participating in the Singapore Electricity Roundtable 2010 hosted by Energy Market Company (EMC) as the keynote speaker, covering the challenges in developing regional electricity markets, as well as sit as an industry panelist.

 

EMC is gathering leading practitioners and thinkers in the electricity industry for this event, which is dedicated to connecting influencers, decision makers, potential investors and experts in the electricity and related industries. Senior executives and decision makers from the energy, electricity and related industries in Singapore and across the region look forward to this valuable opportunity to meet one another and discuss the challenges and issues of importance to the electricity industry in Asia Pacific and globally.

Topics this year will range from challenges of developing regional electricity markets and insight into the impact of pricing CO2 into electricity trading to smart metering and electricity derivatives markets plus updates on Thailand, China and the NEMS. Our much-anticipated panel discussion will cover Singapore's Economic Strategies Committee's (ESC) recommendations and implications for the power industry.