Are oil and gas reserves an economic curse or cure?

When governments and other national stakeholders take control of oil and gas reserves, there can be disadvantages as well as the seemingly obvious advantages, writes Jim McClelland

It is easy to assume newly discovered oil and gas reserves represent a no-lose situation for a country or government, as well as commercial partners. However, with increased export duties, restrictions and measures, such as legislated local ownership, all potentially impacting supply and viability, there can be pitfalls and risks.

Rather than boosting political independence and sovereign wealth, reactive approaches to resource nationalism can have unintended, adverse consequences for energy security.

“A degree of resource nationalism can be a good thing,” says Sam Wills, research fellow at the Oxford Centre for the Analysis of Resource-Rich Economies. “Harnessed properly, it makes countries better places to do business, plus it helps bring the greatest economic and social benefit to the population. However, taken too far, it forgoes benefits of foreign finance and expertise, limits transparency, and can lead to corruption, poor investments and inflation.”

The poster child for resource nationalism is Norway. The country has transitioned from a 10 per cent royalty on 1969 North Sea oil, to collecting 78 per cent of oil and gas revenues in taxes and a sovereign wealth fund worth more than $100,000 per capita.

Governments don’t just want economic exposure, but much greater involvement in the supply chain and operations

If Norway is the past and present, East Africa could be the future, as Dr Wills suggests: “In November 2013, leaders of the East African Community endorsed a move towards monetary union. However, the past three years have seen huge oil and gas discoveries in Kenya, Uganda and Tanzania.

“Confining this wealth within each country would see them grow at vastly different rates. Resource nationalism could mean the difference between a vibrant, emergent East Africa and instability in a developing region of 150 million people.”

Potential pitfalls of resource nationalism are many, as global oil & gas transactions leader at professional services firm EY, Andy Brogan, explains. “Oil and gas ‘crowds out’ other activity, leading to a lopsided economy which becomes vulnerable to shocks. Inadequate local engagement and content can also mean employment and long-term investment is imported, giving rise to very narrow distribution of economic gains,” he says.

Not necessarily just about the money, there is more to resource nationalism than export restrictions and tax revenues alone, he argues. “Governments don’t just want economic exposure, but much greater involvement in the supply chain and operations. This can be positive, but also negative if there is inadequate local supply of people, services or kit,” he says.

“International oil companies [IOCs] need to become experts in local stakeholder engagement and in partnering with national oil companies on a more equal basis. IOCs are successful when they can articulate the benefit they bring – historically this used to be capital, but now it needs to be much more.”

While cash might not always be king, what if the resource value cannot be realised and numbers stop adding up?

Depending on quite how the game plays out, countries or companies sitting on ill-chosen or badly-managed fossil-fuel assets are increasingly in danger of being left holding expensive, unplayed cards.

Divestment campaigns are upping the ante, as Ben Caldecott, director of the stranded assets programme at Smith School of Enterprise and the Environment, University of Oxford, points out.

“Countries with relatively high-cost reserves may never be able to extract them profitably as new factors continue to place downward pressure on demand and price. These include significant developments in renewables deployment, shale gas, efficiency, air pollution, water stress and social factors such as divestment, as well as climate policies,” he says. “All things being equal, fossil-fuel divestment will put higher-cost reserves at more risk of becoming stranded assets.”

The global grassroots movement of the divestment campaign is growing, particularly in church and on campus. Endorsed by religious leaders, communities and multi-faith groups, it is also mobilising support across universities, schools and colleges, particularly in the United States, as evidenced at Harvard by an open letter, signed by nearly 100 faculty members, calling for divestment of the $33billion university endowment.

Author and environmentalist Bill McKibben, founder of 350.org, which has led the campus divestment campaign, is direct in his description of new discovery issues. “Finding new hydrocarbons is a serious Midas problem. We can’t burn them without wrecking the planet, but each new mine or field creates a small group of potential billionaires who will do anything to get them out,” he says.

The prognosis is apocalyptic in his forecast of what the future holds for fossil-fuel assets.

“It all depends on whether the world ever takes global warming seriously. If it does, they’ll take a bath, and if it doesn’t, well, then we’ll all take a different kind of bath.”

Oil and gas professionals not yet persuaded by the rhetoric to take divestment seriously, might be interested to learn which nation opened debate this year on pulling its $840-billion wealth fund out of fossil-fuel stocks – the country is Norway.

Stakes just rose for resource nationalism.