August 25, 2009

On Major Publications on Natural Security: National Oil Companies and National Security

Natural security issues are gaining major traction in the media lately, most notably a cover feature on oil in Foreign Policy magazine and climate change taking the spotlight on the cover of the September/October issue of Foreign Affairs. To celebrate, over the next few weeks the Natural Security Blog will review and expand upon the issues raised by these publications, with the goal of identifying the U.S. national security implications of the ideas presented. Please feel free to comment on our posts or email us as we do so, as we sincerely hope that this new spotlight on topics of natural security sparks a new and vigorous debate about them. As today's title indicates, the first installment adds a security angle to an FP piece on national oil companies.

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In Foreign Policy magazine’s September/October special report, “Oil: The Long Goodbye,” Dr. Valerie Marcel of Chatham House provides an excellent overview of some of the largest national oil companies in the world, and the differences among and challenges facing them. Here at the Natural Security Blog, we thought we’d take the opportunity to use Dr. Marcel’s piece as a chance to explore some of the security issues surrounding national oil companies.

Dr. Marcel examines the wide gamut that national oil companies run in structure, from the extremely well-run (Kuwait Petroleum Corporation) to the transparency nightmares (Nigerian National Petroleum Corporation.) Her argument against considering all national oil companies the same is important in the business context, but is also important vis-à-vis security issues.

As the author notes, some national oil companies are run essentially as government agencies, with direct governmental management, ownership, and budgetary oversight. The problem with these from a security standpoint is that they tie the price of oil – which is subject to wild swings in price – to the government budget in a very direct and significant way. Dr. Marcel writes that national oil companies “can be forced to transfer more revenues to the government in times of falling oil prices and dwindling state coffers.” When this type of situation collides with another frequent feature of national oil companies – inefficiency – the security implications can be serious.

The best example of this is Mexico’s Pemex, which I wrote about here in depth last week. Essentially, Pemex’s profits fund about 40% of the Mexican government’s expenditures. As such, the Mexican budget is directly linked to Pemex’s performance. Unfortunately, since Pemex has a monopoly on oil production in Mexico, they’ve fallen behind in technical drilling capacity, which means they’re having serious issues developing new fields in the face of falling oil production. As such, the reliance on Pemex to provide government revenue, combined with the government-provided monopoly of Pemex, has created the possibility of a huge source of government income quite literally drying up during an already-trying time for the central government.

While Mexico faces the most serious decline in production, other countries are just as dependent on their national oil companies for money. While he never explicitly mentions it, lurking in Prince Turki al-Faisal’s description in another FP piece in this series that calls for “energy independence” are dangerous “demagoguery” is the recognition that widespread “energy independence” would the translate into the disappearance 90% of his country’s export earnings (David Rothkopf also touches upon the potential instability a post-oil world economy could provoke, but we’ll have more on his arguments later in the week).

Another potential security problem is that when you have a government as wrought with corruption as Nigeria’s running an oil company (Nigerian National Petroleum Corporation), the result is a massively corrupt oil company. That, in turn, creates an atmosphere of zero oversight, which can lead to devastating consequences for local communities, as writer and author Peter Maass vividly describes in a separate FP piece. A direct consequence of this has been an unrelenting insurgency targeting the oil industry, which has led to a sharp decline in Nigeria’s oil production.

While an insurgency is obviously a security problem, from the perspective of the U.S. military declining production is a potentially big deal in of itself. It is important to remember that from the military’s perspective, the price and availability of oil are top issues. That said, such problems can’t be entirely pinned on national oil companies, and wild speculation can also play a major role in determining oil prices.

Finally, as Bulgaria can testify, national energy companies raise the specter of energy being used as a tool of aggressive state diplomacy. Russian gas giant Gazprom has shown itself more than willing to turn off the taps to bolster Kremlin policy. While the there is a tendency for this threat to be slightly overblown with regard to national oil companies – let’s not forget that an oil-dependent economy is dependent on oil being sold, which doesn’t happen if the taps are off – it’s still an important consideration when a country (or region) is as entirely dependent on one source as western Europe is on Russian gas.