Wednesday, December 15, 2004

The Big Sucking Sound
The finances of the big national oil companies aren't usually very transparent. If the picture of Pemex, Mexico's state oil company, in the current Business Week article (site registration may be required) is representative of its counterparts in other key producing countries, there could be serious trouble ahead. These companies have monopolies over the most productive oil resources on the planet, along with the lion's share of the world's untapped oil reserves. If they cannot generate the capital to develop these reserves in a timely manner, then the world's oil pipeline has a great big slug of air coming our way, somewhere in the 5-10 year timeframe.

Pemex's balance sheet is shaky because of a phenomenon we also see in the Middle East and Venezuela: it is easier for these governments to dole out oil industry profits for social welfare and infrastructure projects than to tax their citizens. But even in countries blessed with huge oil endowments, some level of reinvestment is essential to keep oil reservoirs healthy and to sustain future production. The worst example is in Iraq, where the fall of the Ba'ath regime exposed a decade of starvation diets for both the oilfields and oil infrastructure, with Oil-for-Food money skimmed off to build palaces and missiles.

A growing industry chorus is calling for the producing countries to provide commercial access to their resources to the international oil companies, which have the best technology for managing them. But a side benefit might be improved governance that would treat reinvestment as a priority and withhold these funds from remittances to the state. This would benefit all parties in the long run, by improving the stewardship of these resources.

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