Rise of Nat'l Oil Cos Crimping Long-Term Crude Supply

HOUSTON Mar. 01, 2007 (Dow Jones Newswires)

The rising dominance of national oil companies has relegated the Western oil majors to "second-tier status" and could have a "substantial long-term impact on resource development," according to a report to be released Thursday by researchers at Rice University.

The report, which notes national oil companies, or NOCs, now control more than 75% of global proved oil reserves, offers broad policy guidance to U.S. officials on navigating a global oil patch increasingly controlled by companies that view their socio-economic mission as equal to, or more important, than their commercial success. It will be released Thursday at a conference hosted by the James A. Baker Institute for Public Policy at Rice.

Although the report doesn't explicitly discuss prices, the rise of NOCs has been a "huge factor" in the price run-up of recent years, said Amy Myers Jaffe, a Rice fellow in energy studies who helped prepare the study. If leading NOCs don't adopt more commercially oriented measures, then "the path for prices is up," Jaffe added.

Crude currently trades in the $60-per-barrel range amid a multi-year bull run in energy commodities that began in 2004 and is expected to persist for at least a few more years. Analysts have generally attributed higher prices to several factors, including surging Asian energy demand, political instability in the Middle East and tepid production from a war-torn Iraq.

The Baker report suggests the rise of NOCs constitutes an important, if less obvious, factor in this trend. Companies like Venezuela's Petroleos de Venezuela, or PdVSA, have steered significant investment dollars away from oilfield development and toward social programs, while Iran's National Iranian Oil Co. could cease to be an oil exporter by 2011 because of costly fuel subsidies that encourage consumption, according to the report.

While these programs "admirably" benefit wider socio-economic objectives, they impact output, the report said. "These noncore, noncommercial obligations have imposed costs on NOCs, and in some cases, dilute the incentive to maximize profits," according to a summary of the report. "The result has been stagnation in capacity growth, and an inability to maintain or grow the countries oil production capacity."

The report broadly praises national oil companies such as Norway's Statoil ASA (STO) and Malaysia's Petronas that have moved to at least partially privatize and/or sell shares publicly, an approach with "empirically" demonstrable efficiency benefits. The report also praises global oil heavyweight Saudi Arabian Oil Co., or Saudi Aramco, for its dexterity to date in fulfilling non-commercial goals with its core oil functions, but notes that "questions remain" on whether the company can continue to "balance these conflicting goals as the call on its oil rises to new highs."

The road ahead is more complex for the U.S. and other importing nations, the report suggests. While the U.S. would probably prefer to see NOCs privatized, "it will have to accept NOCs as a fact of life but should encourage steps to make their activities more businesslike, transparent and - to the extent possible - free of onerous government interference," the report said.

Copyright (c) 2007 Dow Jones & Company, Inc.

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