National Interest & the Oil & Gas Industry

The last paper discussed licensing through concessions and risk service
contracts. This paper will focus on the national interest concerns or
issues, which drive the regulation of the oil and gas industry. The
purpose is to highlight these issues and not to discuss them or the
mechanisms through which governments try to protect the national
interests in-depth.

For the purpose of this paper, national interest is described as issues,

which concern the welfare of a nation, which means seeking to
accumulate benefits for it as well as defending it from harm. It
inevitably requires a balancing act of both various interest
considerations, and the interests of constituent parts of the nation. The
effect is that not all constituent interests would be satisfied as the
satisfaction of one may be to the detriment of another.

In order to translate the description of ‘national interest’ above to the

oil industry, it is important to give a very brief summation of the
industry and its product.

Petroleum is a finite resource. It does not exist for eternity and once
extracted cannot be renewed. It is however, a valuable resource, which
can be a significant source of income for whoever owns it or has rights
to it. Generally petroleum is owned by the country in which the
resource is found. The manner in which petroleum is extracted is
important in determining how much of it is eventually extracted from
the deposit, and hence how much of it is sold. The extraction of
petroleum can have a number of effects on the immediate
surroundings of the area in which the operation is conducted. It will
affect the environment negatively and consequently, the traditional
livelihood of the local community with the pollution of land and water.
It may also have positive effects on the local community and the
nation, by providing employment and contracting some of its ancillary
services to local or national businessmen. The products made from the
industry are essential factor inputs for transportation, power
generation, industrial usages, among other uses, which are critical to
modern day living.

From the above, we can extract some of the “national interests”, based
on the description of the concept above. The “national interests”,
which we may find in the petroleum industry fall into two categories –
effects that the nation seeks to enhance, and effects, which the nation
must minimise. Some of the national interests, which we may identify
include:
• Resource management;
• Maximisation of earnings;
• Protection of the environment;
• Catalytic development of the economy;
• Security of supply for local economy.

A. Resource Management
Petroleum is a finite resource. It is thus important to the government
of, and the state in which, the resource is found to ensure that it is
exploited in an efficient manner. Governments are concerned that
companies may exploit in a manner, which only benefits them and may
ultimately be detrimental to the state. This can be witnessed across
the various stages of petroleum exploitation.

For example, governments have an interest in ensuring that the rate of

exploration is maximised. They would like areas in which exploration
rights have been given to be explored under a substantial work
programme with the best available techniques. This interest may not
be initially shared by the oil companies as the factors influencing their
rate of exploration are slightly more complex. These include the access
to crude elsewhere among other factors.

In the development stage, governments will be keen to ensure that any

discovered reservoirs are developed as quickly as possible. This may
contrast with the decisions of oil companies, who may need to consider
the development of specific reservoirs rationally within the context of
their global operations.

Further, at the production stage, governments may need to exercise

control over the rate of production in a field. This may be due to their
obligations to organisations like OPEC or a perception of the demand
and supply dynamics in the world oil market, which has an effect on
the price of oil. Governments also have an interest in controlling the
rate of extraction in order to ensure the maximisation of ultimate
recovery and conservation. Generally, in relation to the depletion of a
vital resource such as oil, governments are more likely to consider a
longer time horizon than private companies or foreign investors and
prefer to stretch out the lifetime of reserves. Thus, the interests of the
nation must be protected by regulating and supervising how the
resource is exploited.

B. Maximisation of Earnings
For many oil exporting developing countries the resource constitutes
the mainstay of their economy. It is in the ‘national interests’ of these
countries to maximise the financial benefits, which they may gain from
the exploitation of the resources, while ensuring that the product is
exploited profitably.

C. Regulation of Safety, Health, and Environmental

Matters
The process of exploiting petroleum resources can have significant
environmental consequences for the area in which they are found.
Environmental issues arise through the entire process of petroleum
exploitation from exploration through to decommissioning. Such
environmental consequences could include significant damage to air
quality through sustained gas flaring, this of course has the ancillary
effect of contributing greenhouse gases to the Earth’s atmosphere
without any benefit being accruing to anybody. Further, damage could
occur to the environment through oil spillages, which may have the
effect of destroying the means of livelihood of local indigenes, such as
farming & fishing, as well as causing damage to marine, plant and
animal life. It is in the interests of a nation to minimise the impact of
the exploitation of petroleum on the environment and the indigenes of
nearby communities. With regards to health & safety, the government
is faced with similar concerns i.e. the need to protect its citizens from
the negative impact of exploiting for petroleum.

D. Catalytic Development of the Economy

Under this broad heading comes two particular national interest
concerns; the maximisation of local content in the petroleum supplies
industry and the training of nationals to empower them to work in the
industry. The exploitation of petroleum resources can serve to boost
other sectors of the economy by, among others, the procurement of
raw materials and services from other companies within the country.
As oil constitutes the mainstay in the economies of most petroleum
producing developing countries, the more the industry draws on local
suppliers, the better.

It is also important that the nationals of the country be trained and

employed in the industry. In contrast to foreigners, most nationals
would save and spend a significant proportion of their income within
the country, thus boosting other sectors of the economy. It also helps
to increase the knowledge base in the economy.

E. Security of Domestic Supply

This was the pre-eminent reason for the creation of National Oil
Companies NOCs in petroleum importing developed countries pre-
1960. According to Zakariya; “one of the main reasons for setting up
these state companies was to engage in petroleum operations abroad
for the sake of ensuring to the respective governments the security of
foreign supply on the most favourable terms possible.” Issues of
security of domestic supply relate in particular to petroleum importing
countries as opposed to petroleum exporting countries. For countries
with little or no petroleum, the need to have a secure source of supply
of the natural resource, which even at that time was becoming a
dominant fuel for powering motor vehicles, electricity e.t.c., factors
that had become essential to economic growth, can easily be seen as
national interest. The International Energy Agency (IEA) was initially
formed by developed countries in response to the oil shocks in 1973/74
and to help combat issues of security of supply. The issue of security of
supply remains an abiding issue today. Even for countries, which are
petroleum rich, it is important that these countries are able to secure
sufficient petroleum for domestic use and the development of the local
economy.

Concluding Remarks
The discussion above has highlighted some of the issues which drive
governments in the regulation of the oil and gas industry. The ways in
which the