International Oil

Late in the year the representatives of four Persian Gulf members of the Organization of Petroleum Exporting Countries (OPEC)—Saudi Arabia, Kuwait, Abu Dhabi, and Qatar—and of the international oil companies operating within their borders reached an agreement providing for joint ownership by the countries and companies of the major oil concessions previously owned and managed solely by the companies. It was a development that could have profound significance for the future of international oil.

This so-called "participation" agreement caps a series of earlier accords between a larger group of oil-producing countries and companies, leading to sharply rising per-barrel oil revenues accruing to these governments. As a consequence of negotiations spread over the last several years, these increases in the countries' oil revenues are the combined result of increased posted prices, higher tax rates, and a compensatory adjustment for the devaluation of the dollar. Even before the most recent participation agreement, these improved terms for the exporting countries had led to a sharp rise in per-barrel oil revenues.

For the Persian Gulf area as a whole, payment to the governments increased from 86 cents per barrel in 1970 to $1.24 per barrel in 1971, an increase of 44 percent; for Libya, the increase was 64 percent from $1.09 to $1.79 per barrel. An escalation schedule of annual increases will by 1975 result in payments of about $1.45 per barrel in the Persian Gulf, and considerably more in Libya—mainly because of a "transportation premium" arising from its proximity to Western European markets. Thus, even in the absence of participation, existing agreements point to rapidly rising oil revenues for the Persian Gulf countries and Libya (not to mention still other oil-producing countries during the next decade), easily two to three times the $8.9 billion level recorded in 1971.

In general, the participation agreement calls for an initial 25 percent ownership of the oil concessions by the producing governments (the detailed terms are to be settled in negotiations between the individual countries and their respective concessionaires). This share would rise in steps to 51 percent by 1983, remaining at that level until expiration of the concessions some years later at dates varying among countries. Compensation for the acquired interests was to be based on book values, with some allowance for inflation but none at all for forgone future production.

Libya, Iraq, and Iran did not join in the overall participation accord. (Still other oil-producing countries could be expected to work out subsequent arrangements patterned on the Persian Gulf accord or to adopt a more independent stance.) Libya was pressing for majority ownership at the outset, while Iraq, which earlier in 1972 had nationalized the principal concessions of the Western-owned Iraq Petroleum Company, was reported to incline towards lower compensation than offered by the other countries in settlement of any acquired interests. In the case of Iran, the international oil companies had relinquished ownership of their properties following nationalization in the early 1950s and had thereupon operated as a consortium of producers under a 25-year agreement expiring in 1979. Formally, therefore, Iran had already gone beyond the participation pattern some time ago, but management continued to be in the hands of the consortium. Negotiations to extend this 1954 agreement to the mid-1990s were in progress at the end of 1972. They are said to call for a doubling (within the present decade) of the rate of oil production by the consortium which, when coupled with price increases already in force under the agreements noted above and others that remained to have worked out, could quickly lift Iran's total oil earnings substantially above the recent annual level of $2.2 billion.

The participation formula includes a provision requiring the international companies to buy back as much of a country's share of crude as the country may wish at an average price falling somewhere between the tax-paid cost of the crude and the posted price, but—it is presumed—sufficiently below the market price to assure some tolerable profit margin for the companies. Such a "buyback" provision does more than ensure that country revenues would not collapse under the weight of the sale of country-owned crude oil on world markets; revenues would be higher and the concessionaire companies would continue to serve as the instrument by which the taxes imposed by the producer governments were passed along to consumers in other countries. In addition, the participation arrangement ensures continued orderly marketing of oil by the companies, relieving the producing countries of an area of responsibility in which, up to the present time, they lack both experience and facilities.

The participation agreement suggests that, for the time being at least, a workable device for greater host-country control over petroleum resources has been found. However, the agreement, when coupled with other measures benefiting the producer countries, carries vast, if uncertain, implications for oil prices, for the management of oil production, for international capital markets , and for the future of company-government relations in oil-producing countries—indeed, in raw-materials producing countries in general—throughout the world.

The monetary flows may exceed the capacity of many of the oil-exporting countries to absorb funds productively within their own economies. If this happens, what problems are indicated for the stability of the world monetary system? To look in another direction: to what could such amounts of money, if partly directed to armaments, serve to alter the balance of military power within the Middle East?

One of the possible consequences of these monetary flows, recently evident, is that the oil-exporting countries might become large equity holders in companies in the United States and other industrialized countries. A proposal has already been made by Saudi Arabia, through its Minister of Petroleum and Mineral Affairs, that there be a commercial agreement between the United States and Saudi Arabia providing for a preferred place for Saudi oil in the United States and the investment of Saudi capital in marketing of oil in this country. The economic, political, and strategic implications of such investments by oil-exporting countries, perhaps embodied, as in this case, in broader arrangements, call for careful appraisal

The long-term effect on oil prices is a key question. Will effective and enduring devices be found to continue the oil companies in their role of providing the producing countries with a high and assured take per barrel of oil exports? Or will country competition eventually erupt, if and when national companies attempt to enter the international oil market on a significant scale?

If oil prices are held up by reason of arrangements between the companies and producer governments, a detached response of acquiescence on the part of major importing countries (Western Europe, Japan, to an increasing extent the United States, and conceivably, the energy-deficient less-developed countries) cannot be taken for granted. The importing countries have on the whole made no persistent attempt to modify the existing market structure, which permits producing countries and, to a diminishing degree, companies to enjoy the great economic rents arising from oil production at going prices. It is interesting to speculate on the extent to which the importing countries could cut into the very wide and ever growing margin between real production costs and market prices if they were to use the bargaining power they appear to possess.

It remains to be seen how the companies and producer countries work out their relationships in the area of managerial prerogatives. At levels of participation below 51 percent, the deciding voice will still be that of the companies. However, as country participation moves towards the 51 percent level to be achieved in 1983, a considerable amount of friction seems bound to develop in management decision making.