Ensuring exploration and production in developing countries

R.J.R Ross

 

Overview

Continued exploration for and production of oil and gas in developing countries are constrained by the fundamentally different perspectives of the governments of these countries and the transnational corporations that are engaged in the oil and gas sector. The objectives of governments focus on domestic concerns, whereas the objectives of industry focus on corporate profitability in a global setting. Governments are often constrained by a limited number of development options, whereas industry has the flexibility to invest in different parts of the world under potentially quite different regimes. These factors contribute to the markedly different strategies that governments and industries might have for oil and gas exploration and production. Reconciling these strategies requires careful cooperation between industries and governments. In many circumstances, it must be recognized that the strategies are so divergent that there is inadequate common ground for working together. To address these circumstances, alternative institutions are required to ensure that feasible oil and gas prospects are discovered and developed in developing countries. For example, a company might be established explicitly to explore for and produce hydrocarbons in developing countries and to concentrate on opportunities currently being neglected by transnationals.

Analysis

National governments and transnational corporations have quite different objectives in the exploration and production of petroleum. Governments require technical programs that can delineate the detailed extent and producibility of their resource base and pay attention not only to large-scale oil potential but also to small deposits and to natural gas. Transnationals, because of the diversity of global prospects, require a more general assessment of exploration potential and risk to establish whether a region warrants additional investment compared with options elsewhere. Transnationals concentrate on large-scale oil potential, and natural gas is usually not the primary target because of its limited marketability. Governments require commercial arrangements that provide adequate financing and transfer the risk to an external operator, but they do not give up control over the rate of development of the resource. Transnationals, on the other hand, require arrangements that provide expected financial rewards under fiscal, legislative, pricing, and production-sharing regimes that are comparable with those available elsewhere. Governments require that local personnel be trained, that local industry be developed, and that technology and information be transferred. Transnationals are often concerned with the confidentiality of information and technology and with their freedom to make decisions that would increase the operational success of the venture. Finally, governments are often concerned with ancillary objectives (for example, environmental impacts or conflicts between different sectors of development).

Limited Choices

In contrast to the many objectives that the government of a developing country might have, its available options for developing the resource are quite limited. Self-reliance is difficult even for the richest of nations. Reliance on foreign assistance is too often tied to the use of technologies that may not be appropriate. The development of a national oil company is not a realistic short-term option for most developing countries that do not already have one. Complete reliance on transnational corporations creates problems if the country does not have the means to attract and retain these companies in the first place.

Divergent Strategies

Because of these different objectives and constraints, governments and industries will typically adopt different strategies for exploration and development. To supply local markets or obtain hard currency from exports, the government will want to use whatever technology is available to recover the resource (however small). Industrial strategies, in contrast, will concentrate on using tried, tested, and trusted technologies to find and develop large prospects with readily marketable products. Different strategies for technology transfer, training, and information transfer will also be adopted. Governments often see these transfers as a source of power or wealth, but some experiences have shown that the transfer of inappropriate technology or the misuse of proprietary data can lead to further conflicts. These transfers should only be conducted if it can be demonstrated that the technology can be used and that the transfers realistically take into account the learning curve of 2-5 years that is often required.

Role of an Alternative Institution

If objectives, options, and strategies diverge so considerably, how can a developing country develop its modest hydrocarbon potential if it cannot attract and retain industry's interest? A cooperative, regional, or alternative institution could provide an appropriate mechanism. The role of the institution would be to assess when and how to use transnational corporations, to cooperate with several transnationals in certain ventures, to use medium-size oil companies as appropriate, to retain land, to structure arrangements to ensure appropriate technology transfer, and to meet local employment and industrial objectives. Tasks that such an institution would need to fulfill include exploration and development, marketing, provision of information about transnationals, local sourcing, financing, and research. Adequate financing of such a venture would be required to ensure flexibility and credibility and would best be sought from developing countries and from organizations that assist with development. To ensure its success, this type of institution would have to focus on South-South cooperation and continue to search for alternatives.

Suggestions for Further Research

To ensure that exploration for and production of reserves in developing countries proceed effectively, additional research needs to be undertaken to

· Develop methods to stimulate exploration and production in the Third World, especially in oil-importing developing countries,

· Enumerate the activities of transnational companies to identify the types of activities that are currently being left out and that might profitably be pursued by an alternative institution,

· Assess the feasibility of establishing a company that would explore for, and produce, 10-20 of the best opportunities that are currently being neglected by transnationals (gas and small deposits of oil would be accepted as good candidates), and

· Assess the feasibility of establishing a technology centre that would emphasize technology transfer, funding, and commercial applications.