Toward- Third World Oil Independence

Tanzer has advised several developing country governments and the state of Alaska on appropriate oil development strategies. He currently serves as chairman of the Economic Development Bureau, a non-profit consulting firm based in New Haven, Connecticut. In April, 1981 he will lecture in an EDB-sponsored course for Third World government officials on minimizing foreign corporate participation in the exploitation of oil reserves.

MULTINATIONAL MONITOR: Let's discuss the power of the major oil companies. What is the extent of corporate control over the exploration, drilling and marketing of petroleum throughout the world? In what area of the production process is their control most pronounced?

MICHAEL TANZER: I think the power of the giant international oil companies really arises from their tremendous overall assets and capital, and a certain mystique that they control not only capital but the technology needed to explore and drill for oil.

The critical thing is to separate out these areas. They have the capital, there's no question about that. But the major corporations don't really control a lot of the key technology-certainly in the oil exploration area. They themselves hire other firms to do it. There is a - real confusion here, a confusion between capital and technology.

MONITOR: Certainly, though, it is often said that relatively few firms hold a near monopoly over oil technology, particularly for offshore drilling. Is this the case? �

TANZER: No, there are a fairly large and growing number of firms which provide oil technology and are basically competitive. The major oil companies like Exxon or Gulf do not control oil technology. There are specialized drilling firms (Ocean Drilling and, Global Marine are two examples) which contract with the majors. When we talk about the power of the oil industry, most people have the seven majors in mind. We must, however, distinguish between the specialized companies that actually service the giant corporations and the companies that control the production and distribution of oil.

Basically, these service companies are willing to work for anybody; they are in the business of selling technology, skills and knowledge. Their services are available to the governments of Iran and Saudi Arabia as well as Exxon. They are, in essence, independent of the major oil companies, even though they naturally have good long-term relationships with the majors, who still buy the bulk of their services.

MONITOR: Flow significant is it for a developing country to contract with one of these service companies if it has to market its oil through the majors? Are there substantial benefits to be gained strictly in the drilling and exploration phases?

TANZER: Certainly since 1973, the exploration and production areas have become the key to the oil industry; that's where the enormous profitability lies. Ten years ago, crude oil was selling at under $2 per barrel, and accounted for about two-thirds of the cost of the final product. Today, crude costs between $30 and $35 per barrel, and makes up about seven-eighths of the final cost. Crude oil is really the critical focal point; once you are producing the oil, there is pretty much a ready market for it around the world.

MONITOR: You seem to be suggesting that in the technical field, the power of the major multinationals is somewhat illusory. Why then have Third World countries failed to strike better agreements with the oil companies?

TANZER: First, the problem of capital is clearly very serious. Drilling is an expensive business, and a risky one. On the other hand, its costs have been greatly exaggerated; governments have not correctly 'analyzed the situation. Another part of the problem is the mystique of the international oil industry-the idea that oil production is, too big for governments to handle, governments can't get the technology, so they have to leave it to the private companies. As if that solution doesn't have its own enormous problems.

Most Third World countries were at one time colonies and went through the whole psychological brainwashing associated with colonialism. Colonialism left a structural reality: knowledge of the industry was kept outside these countries. The oil companies have consciously resisted training people from Third World countries in higher-level jobs; that's very natural, control over technology is a powerful bargaining lever.

There's also another major element-pressures from international organizations, particularly the World Bank and International Monetary Fund. The classic case is India, which faced constant pressure from the Bank and IMF not to have government refineries built and not to promote government exploration. The lending agencies always told developing countries that capital was available from the private companies, therefore, leave it to them and we will lend you money for infrastructure.

MONITOR: Did the Bank have a firm position?

TANZER: Oh, I think it was quite clear that was its policy; it was explicit. The fact is, the Bank never did lend to finance exploration or government construction of a refinery.

MONITOR: What were the reasons for that approach? Was it a misconceived but honest analysis, or was it direct kowtowing to the industry?

TANZER: According to the first article in the World Bank charter, the fundamental mission of the Bank is to promote private investment. The Bank was established to get money into countries to fund infrastructure, so that foreign companies could come in and invest. The Bank is just following the logic of its mandate, the principle that where foreign capital is willing to invest, a developing country government shouldn't. Let's face it, the World Bank was set up by the industrialized countries.

MONITOR: We've heard reports about controversies within the Bank over changes in lending policies towards the oil industry, with the Bank now looking to promote energy development in the Third World ...

TANZER: That's a very interesting situation. As I see it, the Bank's mandate is to represent foreign private capital in general. In the area of oil, it had mechanically followed the interests of the oil companies because there were no basic conflicts of interest between the oil companies and industry in general.

But a conflict has developed. Industrialized countries are now primarily interested-in gaining access to oil and security of supply; they are not as concerned about the profitability of their oil companies as they used to be. In short, a split has developed between the oil and non-oil sectors, and this struggle has manifested itself within the World Bank.

The issue also created a split between the oil companies themselves. Exxon, for example, most adamantly opposed the idea of the World Bank taking the lead in providing capital to foreign governments for oil exploration and development: Some of the other big companies were supportive, because the Bank's policy was that while it would lend money to governments, it would do so only if borrowing countries hookup with the major international oil companies as partners. One of the first projects supported in this area, for example, was a deal between Gulf Oil and Pakistan. Gulf, unlike Exxon, is experiencing problems supplying oil for its refineries. Each company is pursuing its own interest as they always do, and in this case interests are diverging.

Overall, it seems that splits in the oil industry and industrialized world concerns about oil supplies led the Bank to reverse itself in this area. Also, I think the Bank feared that if they didn't do it, these countries would go ahead with exploration and development themselves, since it's becoming so incredibly profitable and almost a necessity.

MONITOR: Are there examples of countries that have been able to successfully undergo a process of demystification and increase their gains from oil production?

TANZER: I can cite three examples of what I consider -outstanding cases. First, the experience of Mexico is instructive. In the late thirties, Mexico nationalized a sort of run down oil industry, and for many years simply struggled along. By focusing on meeting domestic demand, they were able to generate their own technology and capital, to provide slow and steady growth in oil production and to learn to manage the industry over long periods Throughout this period, they followed a policy of producing for their own needs, not becoming net exporters. In recent years, of course, they've had tremendous exploration success and are moving into the ranks of the large exporters. Basically,. Mexico's oil industry grew through its own know-how, its own people built up over many years.

More recently, there is the example of India, which was a focal point in the ,struggle over whether governments or private industry should develop oil.

After the price hikes of 1973, out of sheer desperation, Indian officials decided to move into offshore exploration, using their own risk capital, hiring technology and spending about $25 million. They soon discovered the Bombay High fields, the oil in which is now worth between $20 billion and $30 billion. This was an enormously successful venture based on risking some capital, hiring the technology and doing the exploration. After India discovered oil, commercial banks agreed to provide money for development. Oil in the ground is the most bankable asset in the world.

The third example, the most recent one, points up how fast a country can develop this capability if it understands how the market works and uses this knowledge well. This is the case of Vietnam. There had been a couple of wells drilled off South Vietnam before the war ended, and they looked like promising prospects. When the new government took power in 1975, it was offered the same kind of profit splits by the oil companies that the old government had accepted -something like 55 percent for the government and 45 percent for the companies. Instead of agreeing, the Vietnamese went around the world, studied, learned how to play off the different forces and ended up signing agreements for certain areas with state oil companies eager to find oil and gain steady supplies. The companies take all the risk, provide the technology, and the Vietnamese government will end up with between 93 and 97 percent of the profit. That's an incredible advance, far, far beyond what any Third World country has been able to contract for.

Overall, I think the method of preferred choice is for countries themselves to put up their own capital, take the risks; hire the technology. Then, if they find oil, they control it and have the power to decide how to exploit it, including leaving it in the ground, producing it at a slower rate.

MONITOR: It seems that for you, the bottom line is capital. Necessary technology is available at a rate that leaves a substantial share of the benefits to developing countries. But what about countries such as Upper Volta and Haiti, countries where capital requirements could be a serious obstacle?

TANZER: Even in the poorest of Third World countries, far more capital is wasted on the import of luxury consumer goods, which reflects a skewed income distribution, than is needed to form a pool of capital for risk-taking. Let's look at a specific case close to home. A few years ago in Puerto Rico there were good prospects of finding oil; government seismic studies conducted for the construction of a nuclear facility more or less stumbled onto evidence of oil deposits. Oil companies and conservatives in the U.S. and Puerto Rico argued that the government ought to turn over exploration to the majors, letting the companies take all the risks, and saving the people of Puerto Rico between $10 million and $20 million. The corporations, of course, would then take a big share of the profits from the fields. That, to me, seems the ultimate absurdity. Puerto Rico has a GNP of a couple of billion dollars, so the necessary risk capital was less than one percent of GNP; I can't believe the economy wastes less than one percent of GNP each year.

Thanks to the efforts of groups who are concerned to defend the island's natural resources, the Puerto Rican governor decided that the next exploration step would be handled by Puerto Rico. The final outcome is still unclear because of disputes with the federal government over who has jurisdiction.

MONITOR: It seems that you are now focusing on much larger questions of political will and the power of governments.

TANZER: This is the absolutely fundamental question. Ignorance, as I said, is a major problem. There is a mystique about the oil companies; these countries have undergone a brainwashing job. But a second problem, a very basic one, is corruption. You have ruling groups in Third World countries that can be bought by the oil companies, whether explicitly or implicitly. Prospects in the energy area all involve very long lead times; it may be five to seven years between when you discover oil and begin pumping it. Now if you're a corrupt government that doesn't know if it's going to be around in five or seven years, you aren't going to become involved in extensive negotiations. One of the things about the multinationals is that they are willing to pay bonuses early on in an agreement. These types of arrangements are appealing to corrupt and unstable regimes.

MONITOR: Are you suggesting that political change has to precede attempts to strike a good bargain with the oil companies?

TANZER: Unless , you have basic political reforms, unless you have governments that are really committed to helping all of the people, whatever is done in the oil sector is not going to have a decisive developmental impact, even if a country gets a higher share of the profits. If there isn't a structure that allows for real economic development oil -revenues will simply be dissipated.

One of the biggest problems facing new countries is the tremendous pressures they feel, rightly, to deliver something to their people. Governments feel enormous pressure to bring about quick economic development, that's quite natural. At the same time, they are under tremendous pressure from foreign companies and international agencies to sign contracts, to get some capital in and get the process going. What is needed, fundamentally, is the political will to resist this short-term pressure, and see that the problem of oil, as of economic development, is really a very long-term one. The other concept to recognize is that we are in a new era, an era in which oil is basically a scarce commodity, and will have increasing value in real terms. As I have said many times, oil has been in the ground for millions of years, and it will wait a few more until a country gets the capacity to handle it. It's difficult to resist those short-term pressures, but I think it's absolutely crucial.

MONITOR: Do you see important differences in developing countries working with state-owned oil corporations who function directly as arms of Western governments, and private companies, who are more concerned with immediate profits?

TANZER: That's a tremendously significant distinction, the distinction between those oil companies seeking monetary profit above all, and those state-owned companies whose main goal is to gain security and diversity of supply for their countries, even if it means a lower rate of profit. The most important state-controlled companies are ENI of Italy, Dentinex of West Germany and ERAP of France. These are the firms to which an intelligent strategy looks first. I don't think it's coincidental that the first two Vietnamese contracts were signed with ENI and Deminex.

MONITOR: The OPEC countries are one obvious and major source of capital. What about the possibility of OPEC floating exploration by Third World countries?

TANZER: I think that's a very important idea. I'd like to see the OPEC countries pursue it. Up until recently, as I read the situation, the OPEC countries have basically been funnelling their money through the commercial banks,

World Bank and IMF, to the international system. To the extent that they have put up money-and they have put up sizeable amounts of money-to help countries meet their oil import bills, that seems to me just a bandaid on a hemorrhage. It would be far more useful for the OPEC countries to set up a pool of money to loan to the developing world for oil exploration-that's the critical thing: If developing countries can get the capital to explore for oil, they won't have any problem in getting money to develop oil. That seed ` capital, risk venture capital, is the critical thing.

MONITOR: Is there enough competition out there among the smaller Western companies that have tech, nology to offer and the Western state companies that handle all phases of" production, so that all Third World countries could do better by conducting a more thorough search for options? Or is the "Vietnam" phenomenon a marginal one that one really can't base generalizations on? How important is it for Third World countries to become more independent by developing their own oil technology?

TANZER: That's a complex series of questions that has to be handled on two levels. In terms of production for the world market, I think there are plenty of competitive firms out there-the Vietnam experience does not have to be special. That certainly does not mean that Third World countries should not attempt to become more self-reliant, technology-wise. Technology in general, and in the oil industry in particular, is generated out of the needs of the industrialized countries. The oil companies have not developed technologies appropriate to meet the domestic needs of Third World countries, particularly the smaller ones.

There are alternatives, though. The Chinese got their start in the offshore business by taking two old boats, cutting them in half and putting them . together. India utilized an innovative method of bringing oil to the surface and then delivering it to, shore in small tankers. Through this method, the country initially avoided having to build a huge pipeline. The scheme then helped generate the cash flow needed to eventually pay for a pipeline. The Indian case should teach us that today's price for crude oil makes innovation eminently practical. .

MONITOR: Are western corporations, normally involved in capital-intensive drilling methods, planning to move in a small-scale direction, or will the field be left open for the Third World?

TANZER: I don't think the companies will move in that direction. Basically, the trend in the industry is to look for what the oil companies call "the elephants," the fields of a billion barrels or more. That's what they're set up to handle, and that's where the big payoffs are. A 500-barrel-per-day, 1000-barrel-per-day field off the coast of West Africa brings with it all sorts of political problems, managerial problems. But for ao small African country, it could mean life or death. We know there are cases where the large companies have found small fields, said they weren't economical, and moved on. These fields should be looked at again by developing country governments.

MONITOR: What about the prospects of cooperation among countries for the development of small-scale technologies?

TANZER: The fact is, small-scale exploration and development is often economical, given the current price of oil. Exploitation costs for small fields may be above the world average, but they may still be far below, the current market price for oil. I think regional cooperation in the technology area would be a very good idea. In the past, most attempts at regional cooperation in-the oil area have foundered on the rocks of nationalism, and the problem, for example, of deciding 'in which country a regional oil refinery, which is a major investment, would be built. However, agreement on the location of a regional Research and Development Institute for Applied Oil Technology would perhaps not be so difficult.

MONITOR: What are your thoughts on prospects for a two-tiered oil pricing system? In. that way, foreign exchange now going to purchase high-priced oil could be used to increase exploration.

TANZER: One of the technical difficulties always raised is that there's no guarantee that oil sold cheaply to a developing .country wouldn't find its way to a developed country. Of course, the majors would be the intermediaries for those transactions, with them taking the financial benefits.

But I see more fundamental problems with the proposal. It's not very meaningful to talk of OPEC as if it were one country; it is a very diverse group. Some of these countries are very poor themselves, countries like Indonesia and Nigeria. The vast surplus of oil wealth lies in countries with governments which tend to be extremely conservative. They have no interest in giving money to the poor countries; they have a very capitalistic approach to things. More importantly, for many years the developed countries did nothing for the underdeveloped countries. They let them starve blindly. Some of the OPEC countries have now hit it rich, and are moving into the upper tier. I can see the justice in OPEC asking why they should suddenly become the donors of the world. The developed countries have never had any problem telling Third World countries "it costs us ten cents to manufacture a drug, and we are going to charge you ten dollars, and if you don't like it, you die." I think there is an enormous amount of hypocrisy in the developed country position.

MONITOR: To move on to the course -you are planning. Can you give us some details?

TANZER: The course, entitled Towards Increasing Third World Control Over Petroleum, is being offered by the Economic Development Bureau, a nonprofit, progressive consulting organization based in New Haven, Connecticut.

The title fits the aims of the course exactly-to train people in the Third World in all aspects of the political economy of the oil industry. It will begin in the spring of 1981 and will be given twice a year for a three-month period.

MONITOR: How is the course being funded? Do you see yourselves being selective as to which countries can participate?

TANZER: The first part of the planning for the course was funded by the Dutch government. We'd like to get grants from other countries, particularly Third World countries, for the remaining development of the course, as well as for its operations. We'd like to have a diversity of students attend-both from richer and poorer developing countries. If we're successful in raising outside sources of funding, we'll be able to offer a substantial number of scholarships-both on the basis of which students would benefit most from the course, and which have the greatest financial need. But we certainly ' shouldn't accept government students from countries at the extreme end of repression. I can't see us taking somebody from the state oil company of Chile, let's say.

I really see education as a great liberator, you know, "you shall know the truth and it will set you free." Our real goal is to educate people all over the world, and then what they do with the knowledge, I think, has to be positive in some long-run sense.