Contractual Arrangements and Revenue Management: The UK/Scotland and Norwegian Experience

Abstract

Many new oil-producing countries are emerging--most of them developing countries. The lessons from the UK and Norway following the initial discovery of hydrocarbons in the 1960s offer interesting insights, with two very different approaches to resource extraction and two very different outcomes. This experience, briefly outlined in this essay, may inform policymakers in today's new oil-producing countries who are faced with important choices on how best to use their resource wealth and foster development. The framework to analyze contractual arrangements and revenue management revolves around three global cycles: the political cycle, the resource nationalist cycle, and the obsolescing bargain cycle. The political cycle refers to the view--usually driven by ideology--over the role of government in the allocation of economic resources within an economy. If it is believed that markets do not work efficiently because of market failure, governments should intervene. However, if it is believed that government intervention leads to a misallocation of resources, then markets should intervene--the so-called Washington Consensus. The resource nationalist cycle refers to the desire of governments to assert control over their natural resources together with their attitude toward foreign companies. The peak of the cycle would be a strong desire for control with xenophobic dimensions. This, in part, is driven by the magnitude of and need for oil revenues, which to a large extent are determined by oil mineral prices. The obsolescing bargain cycle refers to the idea that the terms of the upstream agreement are determined initially by the relative bargaining power of the parties at the time of negotiation. However, after the operator has made the investments, the bargaining power swings strongly toward the government leading them to seek renegotiation of terms. This cycle is driven in part by the resource nationalist cycle, the size of the eventual oil discovery, and the price of oil. The UK oil experience begins in May 1964 with the UK Continental Shelf Act. This, following the Continental Shelf Convention of 1958, gave the government the power to allocate exploration acreage and approve field developments. Commercial gas was found in West Sole in September 1965. Philips discovered the first commercial oil in the Ekofisk field on the Norwegian side in 1969. In October 1970, BP discovered the Forties field and, in 1971, Shell discovered the Brent field. Production was slow to develop, reflecting the fact that the offshore operations were at the extreme frontier of technical knowledge. By 1976, production had reached only 253,000 barrels per day. Globally, during this period, there were strong pressures for government intervention in the economy. The UK was no exception as the government increasingly struggled to manage an economy sliding into ever-deeper trouble. Balance of payments were seriously undermined by Sterling crises coupled with growing unemployment and a rising budget deficit. In 1964, the government actually introduced a Five Year Plan. Resource nationalism was building to a peak in the Middle East, seriously threatening the major international oil companies. In addition, the obsolescing bargain cycle was strong as host governments sought to exercise their growing postimperial power to squeeze more from fiscal terms. The discovery of North Sea oil was seen as manna from heaven, especially after the first oil price shock of 1973-1974 quadrupled international oil prices. However, there was little or no public debate within the UK on how the windfall might be managed. Rather, the government took the decision to produce the oil as rapidly as possible to reverse the underlying macroeconomic problems of the economy. Concerns over security of imported oil supplies following the Arab oil embargo of 1973 reinforced this desire for haste. The result was that Aberdeen became a clone of Houston as manpower and offshore technology poured in from the United States, which effectively had a monopoly. …