Resource Nationalism: How Big Oil Was Late to the Shale Boom

Michael Teague |

October marks the 30th anniversary of the oil embargo of 1973 during which the Arab members of OPEC, in reaction to US and Western support of Israel in the Yom Kippur war earlier in the year, took the radical and unprecedented measure of both raising the price of crude by 17 percent to $3.65 per barrel, and cutting back production by 25 percent.

This watershed moment brought the petro-monarchies of the Gulf to a new place of prominence in the global political economy, and would have profound implications for the way oil majors did business. The embargo was by no means the first instance of what is now commonly referred to as resource nationalism, as Mexico had nationalized its oil industry in 1938, and Iran had at least attempted to do so in 1953, but it was the most potent and consequential manifestation of the phenomenon that had been seen up to that point.

It is, of course, not shocking or unreasonable that nations struggling to take their place in the developing world would see greater control and leveraging of their own resources as a means of achieving that goal. And while much has changed in the way oil in particular is bought and sold around the globe, resource nationalism is still very much a part of the energy economy.

Last July, for instance, Ernst & Young released a report listing the greatest risks for minerals and mining companies in 2012-2013, and put resource nationalism at the top of the list. The report cited three aspects that should be of particular concern to miners, but that could easily be extended to any sort of resource-producing company: higher royalty fees, increased export levies, and last but not least, state-ownership of resources.

In terms of energy and the world energy economy, resource nationalism has taken the largest toll on the so-called “super-majors”, the oil and gas mini-states like ExxonMobil (XOM) , BP (BP) , Chevron (CVX) , and its influence is still visible today.

Indeed, resource nationalism can be seen as the one of the reasons that super-majors exist in the first place. The quasi-spectacular mergers of the 1990’s, such as the one that brought together Exxon and Mobil, were a more or less direct consequence. For the shareholders of major integrated oil and gas companies, the most important metric has long been the year-over-year replacement of its own booked reserves.

For a company like ExxonMobil, for instance, this means that the average 4.5 million barrels of oil and oil equivalent that it pumps out of the ground on a daily basis must be maintained, or preferably increased every single year if it is to maintain the value that its shareholders have come to expect. The embargo of 1973 had greatly complicated the task, however, as it cut off major western companies from reserves they had previously taken as a given.

The mergers of the 1990s were intended to make exploration and production of ever larger amounts of reserves easier, as well as facilitate competition with increasingly large state-owned oil companies. But they also encouraged super-majors to take ever greater risks. Geologically speaking, exploration has gradually focused on reserves that are much harder to reach, such as the kind of deep-water drilling that led to 2010’s Deepwater Horizon/BP disaster in the Gulf of Mexico. Politically-speaking, oil companies more often found themselves in climates where they became embroiled in conflicts between kleptocratic elites and their subject populations, such as ExxonMobil’s entanglement in Aceh, Indonesia during the 2000’s.

Another consequence of resource nationalism for major oil is also still with us, however. The current “shale-boom” that has been a premium subject of conversation throughout the year has largely caught the majors off-guard. Indeed, they were too busy replacing reserves in the world’s far-flung conflict-zones to secure space in the US’s many oil and especially gas-rich shale formations. Subsequently, the main beneficiaries of the shale rush so far have been smaller producers, who have claimed the best prospects for themselves, leaving the the majors to pay high premiums for the chance to tap reserces in the relative calm and security of US shale.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
CVX Chevron Corporation 113.00 -0.29 -0.26 6,167,368
XOM Exxon Mobil Corporation 87.04 -0.20 -0.23 9,706,648
BP BP p.l.c. 35.48 0.09 0.25 5,267,447
OPUS Opus Magnum Ameris Inc n/a n/a n/a 0

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