Robin Mills: The five steps to ruining a national oil company

There are five easy steps to ruining a national oil company. Should you be president of a petroleum-rich country, within a few years you can convert even the most capable guardian of the country’s hydrocarbon wealth into a bloated, inefficient and dangerous monopoly.

The first stage is to make sure you subjugate the company firmly to political goals, not commercial ones. It may be effective to put an ally in charge, preferably one without an oil industry background, who can sack experienced technocrats from opposition parties.

Of course, countries such as Norway may preach separation of powers – a ministry to set strategy and policy, a regulator to ensure the rules are followed, and a national oil company to operate fields. But things are different in Scandinavia.

The second stage is to require the company to supply the domestic market with below-price fuel. Instead of spending money on health or education, why not encourage Muscovites to heat their homes in winter with the windows open? In Venezuela, you pay more to top up your tyres than the 6 bolivars (about Dh3.5) it costs to fill your tank. Maybe Venezuela should introduce subsidised air.

You may end up having to import fuel at world market prices and sell it domestically at a loss. But if this helps to keep inflation down and a political party in power, the price seems worth paying. Brazil’s Petrobras has lost US$14 billion since the start of 2012 from government price controls, at the same time as it is trying to raise $237bn of investments in its new oilfields by 2017.

Thirdly, if you are lucky enough to have large but geologically challenging oil and gas reserves, you should require the national oil company to control their development, regardless of its technical or financial capacity.

Petrobras is one of the world leaders in deepwater oil production. So when you find some 50 billion barrels of oil in the deep offshore “pre-salt”, why not require it to lead every field development? Never mind that that burden would overstretch any oil company in the world.

If you find the national oil company still needs partners, better to avoid technically capable corporations from your adversaries. So, like Venezuela, you can secure applause from “anti-imperialist” circles around the world by inviting Belarus, Vietnam and Iran to help you develop your extra-heavy crude resources in the Orinoco belt. Probably no one will notice that your hundreds of signed memoranda of understanding have led to very little in the way of tangible projects.

You can also try to scare off potential investors by nationalising them, as Argentina did with Repsol’s YPF unit, then find another company willing to work with you on the country’s giant shale oil prospects.

Fourthly, you can require that the national oil company enter a range of social investments and “economic diversification” projects quite outside its core competence: supplying food and running schools. Like Mexico’s Pemex, you can allow the company to become a state-within-a-state, beholden to labour unions and grossly overstaffed.

Murky governance will allow your political allies to skim off billions in corruption, as alleged at China National Petroleum Corporation. But hope that oil prices will remain high so that falling production does not undermine the government budget.

Fifthly, you can forget basic safety and environmental protection. If 41 people die in an explosion at your largest refinery, such as at Venezuela’s Amuay in 2012, you can blame it on sabotage rather than incompetence and ignoring warning signs.

Of course, you could do none of these things. You might end up with a successful, internationally competitive national oil company such as Norway’s Statoil, Malaysia’s Petronas or Saudi Arabia’s Aramco. But that might require you to give up short-term political advantage for long-term benefits.

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

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