The Oil Curtain and the Evolution of National Oil Companies

Abstract

Management Sketch out the global landscape of reserves and production and its most salient features would be the growing appetite for oil and gas and the drive for reserves replacement from frontiers and mature fields. In the background lie the cycles of "feast or famine" and the long lead times that govern investment and returns. Tantalizingly hidden away is the essence of the industry—petroleum reserves. The Oil Curtain neatly symbolizes resource sovereignty and separates the hydrocarbon "haves" from the "have nots." It has led to the major part of proved global oil reserves being booked by national or state oil companies (NOCs). To illustrate the change of ownership, in 1971 NOCs held 30% of total global reserves while international oil companies (IOCs) held 70%. Today NOCs have increased their share to 93% while IOCs hold 7%. What caused such a dramatic reversal in fortune? Since the early 1900s the importance of oil in financial, political, and strategic matters has been bubbling up to the surface. Eventually, this led to a pressing need for producing states to control oil. Mexico was first to "shut" the oil curtain by nationalizing its oil assets and forming the wholly state-owned Pemex (Petróleos Mexicanos) in 1938. By 1960, resource sovereignty had fully matured into a global force and the Central Bank of Oil—the Organization of the Petroleum Exporting Countries (OPEC)—was created. OPEC's central message was clear: oil was too important to leave in the hands of foreigners. It would seek to regulate "oil rents" and end arbitrary payments from foreign oil companies. OPEC's thinking was shaped threefold. First, deals favored foreign oil companies and foreign governments, not producing states. Foreign oil companies also controlled an outward flow of profits, which were often the greater part of producing countries’ gross domestic product. Generally, beneficiaries were foreign governments either directly through shareholder dividends or indirectly through taxes. Secondly, foreigners took vital political decisions affecting the sovereignty of producing countries. Oil production, foreign exchange earnings through oil sales, and ultimately, national debt were being dictated by foreign oil companies. Lastly, the military and naval campaigns of the Second World War combined with the utility of oil in general transportation left no doubt that oil was a primary strategic asset.