Angering Petro States, Or Why Chevron Is Its Own Worst Enemy

by Joshua Foust on 11/7/2007

Steve Levine has an excellent primer on why international oil companies are their own worst enemies:

Chevron, for instance, is in hot water in Kazakhstan (which though not fully apparent now, will become so in the coming months).

One reason is that at key, needy moments over the years — needy on the Kazakh side, that is — the California company declined to accelerate the payment of huge bonuses it owed to the government, to help the Kazakhs obtain cheap loans, or to lend them money itself…

This attitude is blind. It misunderstands the history and enormity of Big Oil in the countries where it works. Oil executives saunter into these poorer nations like heads of state, and the contracts they sign are often seen within the countries themselves as the equivalent of a treaty with a superpower — as a means of protection and prosperity.

Oil executives and negotiators of course know this, and use it to their advantage to get the deal. Then they conveniently forget, even when a favor sought by the host country isn’t welfare, but reasonable need that would be no big deal fulfilling.

And the attitude is currently tripping up both Chevron and Exxon.

There is more, and it is difficult to quote properly, so it is worth reading. But it definitely adds some good context to a talk I attended today at CSIS called “Dialogue for Global Energy Security: The Role of the International Energy Forum” (no link to transcripts are up yet). The speaker was the IEF Secretary General, a Norwegian diplomat named Arne Walther.

Much of it, including (perhaps especially) the Q&A was pleasing-yet-empty diplospeak, with the exception of Frank Verrastro, who mentioned that “dialogue for dialogue’s sake” can actually be a positive thing. I was prepared at first to scoff, but then I realized that was the central theme of Ambassador Walther’s talk.

The central dynamic of the oil market in recent decades was an antagonism between suppliers, who wish to keep prices (and thus profits) as high as possible, and consumers, who wish to keep prices as low as possible. The IEF exists to cross that bridge, and to foster communication between energy ministers and CEOs. The idea is to, through nothing more than unstructured dialogue, create a certain measure of trust among the major players so that uncertainty, and thus price volatility, might be minimized (there was almost casually dropped a reference to treating energy as a public good rather than a commodity, and that bears exploring on its own, later). By creating a space in which these ministers and CEOs can speak freely, they reduce the mistrust that has traditionally flowed between them, and this can have some tremendously positive real world payoff—Amb. Walther described the comparatively minimal price fluctuations surrounding the invasion of Iraq in 2003 as the result of this improved relationship.

Bringing this back to LeVine’s point, it is this antagonism that exists between Russia’s energy ministry and western oil companies that has, to a great degree, stalled further energy exploration on the Caspian. Correction: it is Russia’s assertive stance, which is not the meek and gullible position many oil companies prefer countries to be in, that has created such angst: by aggressively leveraging its position as a choke point of sorts for oil and natural gas coming from the eastern shore of the Caspian, Russia can play a decisive role in its exploitation and distribution.

This is precisely what they have done. And unfortunately, as LeVine recounts, western companies like Chevron and ExxonMobile don’t seem to want to accept this: they would rather complain about being muscled into a deal they don’t like than realize they do the exact same thing to their host countries and simply accept it as the cost of doing their business. That Nazarbayev has chosen to hitch his wagon to Russia’s export network speaks volumes of his confidence in the western companies to serve his interests. Similarly, though it may be fun to watch him play all sides, Berdimuhamedov is operating a similar game: Russia and China offer less uncertainty than an international oil company in pipeline construction.

Lurking in the background is a growing wave of nationalization. Many countries—including Russia, and Venezuela—have chosen to nationalize their oil assets to better control revenue streams. It is not a free-market move, but it does treat energy wealth as a national security asset, which it is—and not as warrantless as some in the west prefer to portray it (especially considering the silly protectionism in the U.S.). Are other producer countries, like Kazakhstan, on the verge of nationalizing their oil assets? I doubt it, at least not any time soon.

But the arrogant behavior of the oil companies will not end well for anyone who consumes oil. The relative decline of the private oil industry will upset the precarious balance groups like the IEF are trying to establish between producers and consumers—and it is you and I who will be worse off for it.

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This post was written by...

– author of 1848 posts on 17_PersonNotFound.

Joshua Foust is a Fellow at the American Security Project and the author of Afghanistan Journal: Selections from His research focuses primarily on Central and South Asia. Joshua is a correspondent for The Atlantic and a columnist for PBS Need to Know. Joshua appears regularly on the BBC World News, Aljazeera, and international public radio. Joshua's writing has appeared in the Columbia Journalism Review, Foreign Policy’s AfPak Channel, the New York Times, Reuters, and the Christian Science Monitor. Follow him on twitter: @joshuafoust

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