Sunday, May 22, 2005

A win-win-win strategy for Big Oil, Houston, and developing countries

The McKinsey Quarterly had a recent article titled "What's Next for Big Oil?" (subscription required) which talks about how the big oil companies are having trouble replacing their reserves as fast as they are using them up. This is primarily because most governments of countries with the reserves are hesitant to let them in. Here is the abstract:

The petroleum industry's prosperity masks a growing uncertainty about the long-term ability of big international oil companies to replenish their energy reserves. They have limited access to the Middle East, which holds half of the world’s known oil and natural-gas reserves, and potential new sources—such as those located in extremely deep water or the Arctic—are difficult and expensive to extract. Big Oil has let its technological leadership lapse over the past decade or so, and it faces increased competition from national oil companies and increasingly global midsize players.

The take-away
To be more attractive as partners to the national governments controlling oil and natural-gas reserves, major international oil companies need to build capabilities that give them a clear advantage over their rivals.

and one of its major recommendations:

Make a positive economic impact
Paradoxically, petroleum-rich countries often suffer as a result of their energy wealth. In many cases, the influx of foreign funds raises the value of the local currency. As a result, the country's other exports can't compete on the world market, so that whole sectors of the economy are decimated. Indeed, such problems prompted Juan Pablo Perez Alfonso, a founder of the Organization of Petroleum Exporting Countries (OPEC), to describe oil as "the devil's excrement." Nigeria is often cited as an example of what can go wrong: it remains one of the world's poorest countries, despite having earned some $300 billion from oil exports since the late 1950s.

International oil companies can capture an important competitive advantage and improve their chances of gaining access to important new reserves by demonstrating the broad positive economic impact their presence can have. At best, the record of oil companies in this respect is mixed, and clearly there are limits to what they can achieve...

The oil majors could also do far more to enhance the positive economic and social impact of their investments. Too often, energy projects create pockets of wealth for a privileged few but fail to lift the economy... Similarly, oil companies can partner with governments and international organizations to improve standards of governance, thus reducing the risk that oil revenues will be wasted by public bodies. Anticorruption efforts—for example, the Extractive Industries Transparency Initiative—offer companies other ways to engage with governments.

In practice, none of these propositions is easy to act upon. Moreover, companies cannot single-handedly solve the deep-rooted problems of poverty and underdevelopment. During the course of a 30- to 50-year relationship between an oil company and a country, however, even partial successes can have a significant impact. Companies that are astute enough to navigate these complex and politically sensitive issues are likely to have an edge over their rivals.

So here's an idea: could the local oil & gas industry in Houston sponsor a non-profit institute to provide "best practices" advice and direct support to countries developing their governance and infrastructure, drawing on expertise in Houston and Texas? Essentially, when an oil major is proposing to work with a country, part of its proposal would be to pay this institute to help with infrastructure development in that country. As this institute developed a track record of achievements, its inclusion in bids would be more and more attractive to countries desperate for effective development.

Not to say that Venezuela is a model way to do this, but this Chronicle article gives examples of positive ways the oil money can be spent.

Everybody wins. The countries get better development, Houston city and county governments get extra funds to develop and share best practices through the institute, and local oil companies get better access to more reserves, which helps them grow in Houston and create more jobs here. It also could go a long way in improving Houston's international profile.

I'm thinking the right groups to look at possibly setting something like this up would be the Greater Houston Partnership and the Mayor's Office of International Affairs and Development (good newsletters worth a browse at the bottom of the page). Not an easy project by any means, but one that could pay very nice dividends down the road for the city, industry, and developing world.


At 4:34 PM, May 29, 2005, Blogger hcpark said...

This is interesting stuff. Perhaps the Baker Institute Energy Forum?
At a recent conference I attended, someone suggested that for accounting purposes, the reserves be stated as "barrel of oil equivalents", including emerging energy sources (hydrogen, solar, sulfates, gas in storage, etc.).

At 11:15 AM, May 31, 2005, Blogger Tory Gattis said...

The Texas Monthly rankings are harsh and overly penalize Texas for being a high-immigration state. Sure, Texas has problems, but there's no way we can rank high on a lot of their criteria vs. states like Vermont when we have waves of uneducated new immigrants coming in every year and they don't.

California government is pretty much the polar opposite of Texas, with a similar immigration issue, and they're even more of a basket case then we are (from an economy, cost of living, taxes, and state government perspective).

I'm simply saying that a whole lot of underdeveloped countries with oil would *love* to have the equivalent of Texas' infrastructure and governance, and if we can create institutions where everybody wins, we should.

At 11:18 AM, May 31, 2005, Blogger Tory Gattis said...

Love the Baker Institute idea. I'm going to pass this along to them. Thanks.


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