23 August 2006

Oil's dark secret

While Danny Williams boasts of battling big oil, he is tackling a small fry, according to The Economist.

The leading business magazine noted in its August 12th issue that of the 20 biggest oil firms in the world, 16 are nationally-owned companies (NOCs). ExxonMobil is the 14th largest company by oil reserves. The top 13 are all NOCs. [Note: the link is to a condensed version of the special feature on state-owned oil enterprises. The full edition is still available in some local bookstores or online at economist.com]

The editorial accompanying the article notes the cost paid for such a concentration of oil wealth and the warning is worth noting in light of plans to turn the province's own electricity company into an oil company or, as the legislation provides, a hydra corporation able to get into any business approved by cabinet.

As The Economist puts it (p.11):
Few of the princes, politicians and strongmen who wield ultimate authority over these firms can resist the urge to meddle. At best, that leads to the sort of inefficiencies found at most state-owned firms: overstaffing, underinvestment and so on. At worst, business of pumping and selling oil is totally subsumed by politics, as in the case of Petroleos de Venezuela, one of the biggest NOCs. In either case, NOCs produce less oil, more expensively, than they should.
The approach being taken by the Williams administration is exactly contrary to the one proposed by The Economist, namely to privatise state-owned oil companies in whole or in part and reap the benefit: "The less bureaucrats interfere, after all, the more money their oil companies will generate for them to spend".

In Norway - Williams' supposed model - Statoil and Norsk Hydro operate essentially as private sector companies with the state owning, respectively 71% and 43% of the company's shares. The companies also do not have any special advantage over private companies when it comes to land sales and government regulation. The three elements - policy and taxation, regulation, and business enterprise - are run separately from one another.

In Newfoundland and Labrador, the effort seems to be to bring all entities under one single umbrella directed from the provincial cabinet room or worse, the Premier's Office. The initiative to turn Hydro into an oil and gas company did not come from its board of directors. The role was imposed on it by politicians. The entire affair proceeds bereft of a strategic plan or a business plan, two of the fundamental elements of sound private-sector business operations.

The relationship between government and its wannabe oil company is also in a fundamental conflict of interest when it comes to taxation. Bond Papers put it this way, in May 2006:
So close is the relationship that Hydro's chief executive officer served as the lead provincial negotiator with the Hebron consortium. The obvious conflict of interest in this situation was ignored by government, but not by the private sector companies in the Hebron group.
The third element to be joined into the morass is regulation. Danny Williams' efforts to appoint his own candidate to head the offshore regulatory board is hardly disguised. Williams' intention appears to be to gain effective control over the board or gain at the board an ally who will follow the general direction set by Williams.

Two of the three conflicts of interest have been realized. The third is being frustrated only by a handful of circumstances that we should hope and pray do not change.

As The Economist notes, the ultimate loser in this venture is the taxpayer. The publicly-owned oil and gas company will be run, as the electricity company is now, by bureaucrats and politicians. Even if, by some miracle, the current crop of politicians, bureaucrats and political-appointees do a half-decent job of running the Hydro corporation - and that would run contrary to experience locally and globally over decades - there is no guarantee the next crowd or the one after will be as good.

Even the current crowd have shown themselves likely to make dubious decisions. They have embarked on a Lower Churchill project without even the most basic business decision-making tools. If trends continue, Williams will commit the province to a project that has the potential to double the size of the provincial government debt.

In the same fashion, the Lower Churchill project office is run just as it has been since it was created when Brian Tobin was premier and Dean MacDonald sat as board chairman, just as he does now. The Hydro board voted the cash, the office reported to the premier and the entire affair was managed out of sight of any public scrutiny.

The Economist article is a timely warning, if one is inclined to heed it. If not, it should give more than a moment's pause. The decisions being taken today will have ramifications for generations to come.

They do not look good.