Resource nationalism on the retreat in a world of shale

Myths of nationhood come in many forms: epic poets, climactic battles, age-old enemies. Possession of a slippery black liquid is also a popular foundation myth, the bedrock of political beliefs from Venezuela and Mexico to Scotland and Iran. But in a world where oil is not so scarce and valuable, is resource nationalism ebbing?

Resource nationalism has been the dominant phenomenon in the past decade of international oil investment. Amid the 1990s’ low oil prices, private companies had been lured back into Latin America, North Africa and Central Asia. But when prices started rising from 2000, governments increased taxes, expropriated or nationalised assets, or engineered the entry of state firms. This happened not only in ideologically hostile jurisdictions such as Argentina, Venezuela and Russia, but in theoretically investor-friendly areas such as Alaska, Alberta, the UK’s North Sea and Australia.

International companies were perceived to have taken advantage of countries such as Russia and Kazakhstan at times of national weakness, and foreign “control” of mineral resources had become intolerable to the public.

Usually this nationalist rhetoric was a cloak for two other motivations. The first was the simple pursuit of money, as rising oil and gas prices and poorly designed contracts had made fields vastly more lucrative than ever anticipated. Countries that discovered large volumes of hydrocarbons for the first time, such as Uganda and Mozambique, have sought more recently to increase their tax take.

The other motive was political power. With oil often the key source of government revenues, and the state firms’ repositories of technical and managerial skills, aspiring authoritarian or revolutionary governments believed that they had to control it. Rafael Ramírez, removed last week as the Venezuelan oil minister, said in 2006 that the state oil company, Petróleos de Venezuela, was “red, very red”, the colour of the ruling party.

But with the US shale revolution, this cycle of resource nationalism may be passing. Growing North American shale output has outweighed geopolitical upsets, keeping oil prices stable since 2011, and causing gas prices to fall. Contracts have reached a rough equilibrium where governments have captured the bulk of the “rent” — the profits in excess of a normal return to the investor. Further tax increases would deter new investment, especially at a time of very high development and operating costs.

Some countries realise they need to attract more international investment and technology as industry problems mount. Mexico’s 1938 nationalisation under the slogan “the oil is ours” remains a potent symbol, but it has cut production from 3.4 million barrels per day in 2004 to about 2.4 million bpd today. Needing expertise in deep offshore and shale fields, it has just approved a historic reopening to private companies.

Iran is seeking to revive its sanctions-hit industry by bringing in major companies such as Total and Eni. Argentina, which nationalised the local YPF unit of Spain’s Repsol in 2012, has now paid compensation and is trying to bring in the US’s Chevron to develop the Vaca Muerte formation, possibly one of the world’s best shale oil resources.

Shale gives the international oil industry new options. Capital is flooding into North America, even while the oil majors are cutting expenditure elsewhere. The larger independent firms such as Apache, Occidental, Anadarko and Hess, all of which had strong positions in the Middle East and Africa, are under shareholder pressure to focus on the US. Even the most fervid resource nationalists will find themselves squeezed by shortages of capital and flat or falling oil and gas prices.

It is still in the early days, but the balance of power may be shifting back towards international companies. That is good news for them, and for consumers who can hope for more diverse and secure energy supply. It is uncomfortable for governments used to having things their own way, and for populist politicians seeking appealing rhetoric.

Robin Mills is the head of consulting at Manaar Energy and the author of The Myth of the Oil Crisis

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