Oil’s Power Players

The investments, organizations, and profits of national oil companies are as massive as they are misunderstood. As the United States rises to the top of oil (and natural gas) markets, having become the world’s largest single producer, it may be tempting to write off national oil companies as a thing of the past. But together, they remain the dominant global market force, producing the equivalent of 85 million barrels of oil and gas a day—roughly 55 percent of total production. Better understanding the motivations, business tactics, and governance of these companies is essential for U.S. foreign policy and energy statecraft. And a new database by the Natural Resource Governance Institute (NRGI)—where two of us work—that shines light on the secret workings of under-scrutinized state oil companies can help.

State companies dominate energy production in some of the world’s most oil-rich countries, including Iran, Mexico, Saudi Arabia, and Venezuela, and they play a central role in the oil and gas sector in many emerging producers. In 2017, national oil companies that published data on their assets reported combined assets of $3.1 trillion. And in April, Saudi Aramco lifted the curtain on its own financials, which revealed its net income last year to be over $100 billion, making it by far the world’s most profitable company.

Some national oil companies exert major influence on economies well beyond their home country’s borders. The Russian giant Rosneft is alleged to be providing a financial lifeline to help Nicolás Maduro evade sanctions and hang on to power in Venezuela. Sinopec and China National Petroleum Corp., meanwhile, sit at the center of China’s Belt and Road project and are collaborating with governments from Iran to South Sudan to help them extract oil and finance public spending.

In some ways, today’s internationalized national oil companies behave like traditional oil players such as ExxonMobil and BP. They offer skills, capital, and risk tolerance to partner governments in exchange for access to increasingly precious energy reserves. In other ways, though, their approach differs. These companies support the diplomatic priorities of their home governments, and they combine traditional commercial goals with a broader set of imperatives such as large-scale public employment and energy security.

In many cases, they are involved in conflict, too. Jeff Colgan, a prominent scholar on the topic, has found that oil is a leading cause of war and can exacerbate conflict in multiple ways. Authors of one study concluded that the strategies of internationalized national oil companies have been inextricably intertwined with conflict and that “the abnormal returns of the companies in countries that did participate in the conflicts were higher than those of the companies in countries that did not participate.”

To be sure, it is hard to tell exactly what these companies are up to at any given time; 62 percent of them exhibit “weak,” “poor,” or “failing” performance on public transparency, as measured by the Resource Governance Index. In turn, they are frequently treated as an afterthought in foreign policy.

But the new NRGI data presents an opportunity to reconsider the U.S. approach to national oil companies. In dozens of countries, these companies play a more dominant fiscal role than had previously been understood. In spite of their large revenues, many of them have racked up sizable debts—in the study, there were 18 companies whose debt was equal to more than 5 percent of their countries’ total GDP. This has a fundamental impact on economic stability and security, especially when a national oil company is unable to pay its debts and costly bailouts are required, as has happened in Mexico, Kazakhstan, and Venezuela.

For the United States, meanwhile, the energy landscape has changed dramatically: The country now exports liquefied natural gas to 30 countries and produces around 12 million barrels of oil a day. At the same time, the U.S. Navy’s Fifth Fleet still protects the Strait of Hormuz, the world’s largest oil trade chokepoint. As geopolitics and markets change, the United States must update its approach—not only to account for changing oil trade flows, but also for the dramatically changing flow of liquefied natural gas globally.

Beyond that, it will have to pay attention to corruption. National oil companies have a mandate to develop their domestic oil sectors, access reserves abroad, and generate profits. In pursuit of these goals, many of them look to bring in foreign companies and financing via joint ventures, service contracts, bond issuances, stock listings, and foreign ventures. Some of these companies also engage in illicit activities and large-scale corruption. The foreign-policy and business community, traditionally loath to interfere in the governance of state companies, can push for stronger anti-corruption practices with partner national oil companies, and they can help them launch modern corporate governance programs.

Further, the United States should recognize the tremendous potential in reforming these oil companies. A recommitment to international initiatives designed to promote more transparent reporting would be a good start. The Extractive Industries Transparency Initiative, an organization with 52 member countries, is building an ever-stronger set of norms on reporting by governments and state-owned enterprises. The United States withdrew from the initiative in 2017; rejoining would be a critical first step to engaging on oil sector transparency in a serious way.

A nuanced approach to supporting enhanced transparency and corporate governance would make a difference in the lives of the millions of people living in oil-producing countries. National oil companies dominate political and economic life there. The NRGI data reveals that there are at least 25 countries dependent on their oil companies worldwide, in which a single firm collects funds equivalent to 20 percent or more of all government revenues. In such situations, the national oil company is a critical stakeholder in terms of both economic development and security. These companies were created to help their citizens benefit from the dominant national industry, and some of them have thrived in this role. But where there are insufficient systems to ensure that the company manages these public resources efficiently and in the long-term national interest, development prospects are dim.