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Table 39. Worldwide Crude Oil Production of 20 Leading Companies, 1972 and 1992 (Thousand Barrels per Day)

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aFor 1972, only non-Communist world oil production and Communist bloc (including China) exports to the non-communist world are included, while 1992 includes total world production. Sum of components may not equal totals due to independent rounding. Shares were calculated based on unrounded data.

Sources: Company data 1972: Jacoby, Neil H., Multinational Oil (New York, 1974, pp. 192-193) and company annual reports. Company data 1992: Petroleum & Energy Intelligence Weekly, Inc., PIW - Special Supplement Issue (New York, December 13, 1993). China production data: Oil and Gas Journal, “State Companies Dominate OGJ100 List of Non-U.S. Oil Producers" (September 20, 1993), p. 79. Worldwide total 1972: Based on data which appeared in Energy Information Administration, International Petroleum Statistics Report (Washington DC, August 1994), Tables 4.1 and 4.3, pp. 38-40, 42. Worldwide total 1992: Based on data which appeared in Energy Information Administration, International Energy Annual, DOE/EIA-0219(92) (Washington, DC, January 1994), Tables 1 and 2, pp. 6, 8.

private sector in 1993.173 Other countries, while not relinquishing ownership of their state-owned companies, have begun efforts to make these companies more efficient and accountable. Nigeria, a member of the Organization of Petroleum Exporting Countries (OPEC), realigned its national petroleum company in

1988, to bring it into line with private sector
standards.174
In 1992, the Mexican government
divided Pemex into four operating units, ordering each
to turn a profit. Mexico is also reported to be
considering requiring better financial and operating
disclosure from Pemex.175

173"YPF Sell-off Back on Track," Petroleum Economist (November 1992), p. 12.

174Cambridge Energy Research Associates, "Oil and Politics: The Shape of Things to Come," Private Report (Cambridge MA, January 1989), pp. 4-5.

175" Leaked Government Documents Point to Deeper Mexican Privatization," Oil and Gas Journal (August 16, 1993), p. 26.

In Russia, where the push toward privatization is not limited to oil companies, the oil production associations, formerly reporting to the Ministry of Fuel and Energy, are currently being transformed into joint (public and private) stock companies.176 Several vertically integrated regional companies, including Lukoil, Surgutneftegaz, and Yukos in western Siberia, have combined production associations with refineries. However, the privatization process has been complicated by lack of clear lines of authority and ownership, and the accompanying financial and political risk has kept investors cautious. For most of the post-embargo period, oil production from the Former Soviet Union exceeded that of Saudi Arabia, but through lack of investment, production dropped steadily since 1988 and fell below that of Saudi Arabia in 1993.177

In addition to relieving the government of fiscal and managerial responsibility for oil production, privatization can benefit a company's operations by providing access to sources of investment funds in addition to the state treasury. State oil companies have often found themselves forced to forego potentially profitable exploration and development projects, because they had to compete with politically popular social programs for limited state funds. In 1993, Pemex's exploration budget was used for Mexico's social spending program. Brazil considered cutting Petrobras' budget in half in 1994 as part of an effort to reduce spending and control inflation.179 In 1993, the cash-starved Russian energy network shut in more wells than it completed.180

178

Another incentive for privatizing state oil companies is to gain access to efficient, cost-saving technology used in private sector operations. Desire for access to the technical and managerial expertise of a number of FRS companies has led to joint exploration and development

projects in the Former Soviet Union and other regions. Chevron's joint venture with Kazakhstan promoted development of the Tengiz field, where sour crude oil under high pressure caused blowouts and gushers with old Soviet equipment.181 DuPont's Conoco reported that training Russian crews in western drilling technology reduced drilling time from 144 days to 60 days.182 BP and its partners (including Unocal) plan to use North Sea development methods for Azerbaijan's section of the Caspian Sea.183 Enron and British Gas bought into YPF's natural gas distribution network and, with the help of the first stage of price decontrol, increased Argentina's proved reserves of natural gas 17 percent in a single year.184 Petrobras, employing Brazilian and foreign engineers, uses the world's most advanced offshore techniques to keep the cost of Brazilian oil competitive.185 Smaller drilling and tool companies, looking to replace sluggish demand in the United States, have found markets for their equipment and expertise in Russia, Kazakhstan, and Brazil. 186

From Confiscatory to Competitive Taxation

Generally, oil-producing nations have moved from confiscatory to competitive taxation of oil and gas operations. When oil prices were high, taxes were viewed by governments as a vehicle for confiscating part of the enormous gains in the oil companies' corporate earnings. As tax authorities collected large sums throughout the early 1980's, they also increased tax rates. In the United States, Congress imposed the Windfall Profits Tax in 1980. Largely due to the Windfall Profits Tax, 25 percent of the FRS companies' U.S. revenues from the sale of oil and gas were collected as petroleum taxes in 1981 (Figure 24). Prior to the Windfall Profits Tax, the comparable tax share was 6 percent.

176 "Siberia's Oil Generals Look for Freedom and Finance," Petroleum Economist (February 1993), p. 5, and “Marketing in Mother Russia," National Petroleum News (November 1992), p. 39.

177"Russian Crude Output Seen Lower, Exports at Risk," The Reuter Business Report (November 8, 1993) and British Petroleum Company, p.l.c., BP Statistical Review of World Energy (London, England, June 1994), p. 5.

178" Reform and Privatisations Transform Investment Scene," Petroleum Economist (June 1993), p. 18.

179

"Brazil's Development Plan Centers on Deepwater Oil," Oil and Gas Journal (January 3, 1994), pp. 18-20.

180Russian Financial Crunch Triggers Cycle of Unpaid Debt, Production Cuts," The Oil Daily (February 14, 1994), p. 1.

181"In Russia, Turning Oil into Money is Actually Hard," The New York Times (March 20, 1994), p. E5, and Energy Information Administration, "Energy Analysis Brief: The Former Soviet Republics," (September 1991).

182"U.S. Oil Firm's Venture in Russian Arctic Passes First Test," The Washington Post (September 1, 1994), p. A23.

183"North Sea Style Development Eyed for Pair of Oil Fields off Azerbaijan," The Oil and Gas Journal (February 28, 1994), p. 20.

184 British Gas, Annual Review and Summary Financial Statement, 1992, p. 5, and "Natural Gas: Prices Become the Paramount Factor," Petroleum Economist (August 1993), p. 11.

185" International Report," Offshore/Oilman (May 1993), p. 30, and "Ultra Deepwater Development Projects Under Study by Petrobras," Offshore International (October 1993), p. 39.

186"Several Russian JV's Advancing," Oil and Gas Journal (August 30, 1993), p. 31, and "Striking Oil But Straining Families," New York Times (July 7, 1994), p. D1.

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costs (due to the favorable geological and geophysical characteristics of their producing fields) usually have high levels of production taxes, and vice versa, which tends to equalize the cost of production across the various parts of the world.188 In the early 1980's, production taxes and royalties accounted for the bulk of the FRS companies' lifting costs in both high-cost and low-cost areas (Figure 25).189

In addition to production taxes, oil and gas producers pay corporate income taxes. Unlike production taxes, however, income tax rates remained relatively unchanged during the period of increasing oil prices (Figure 26). The effective rate of taxation paid by the FRS companies' foreign production segment averaged nearly 70 percent in the early 1980's; the rate paid in the United States was close to the legislated 46-percent corporate tax rate.

In the wake of the oil price collapse of 1986, governments of oil-producing countries reversed earlier policies and offered tax relief intended to attract exploration and development projects. In the United States, Congress scrapped the Windfall Profits Tax and, with the Tax Reform Act of 1986, reduced the corporate income tax rate to 34 percent. The FRS companies also benefitted from tax credits for production of natural gas from coal seams and other non-conventional energy sources in the United States. The effective tax rate on FRS petroleum production in the United States fell to 31 percent by 1993 (Figure 26).

After the oil price collapse, even countries with low production costs found they had to offer tax breaks to stay competitive, and tax differentials between countries began to narrow (Figure 25). Indonesia reduced income taxes from 56 to 48 percent, and Nigeria adjusted income taxes and royalty rates to assure companies a $2-per-barrel accounting profit. Venezuela began considering rate reductions from 60 to 30 percent on taxes applying to joint ventures with foreign petroleum companies. 190 The effective income tax rate on FRS companies' foreign operations fell from about 70 percent in 1985 to 50 percent by 1993 (Figure 26).

187 The Barrows Company, Inc., World Petroleum Arrangements (New York, 1989), p. 1036.

188 Production costs include direct lifting costs, the out-of-pocket costs incurred to operate and maintain wells, related equipment, and facilities. These direct lifting costs include such costs as labor, fluid injection and improved recovery projects, and operation of gas processing plants. Production costs also include severance taxes and royalties, usually levied on a per-barrel basis.

189 The FRS operations in high-cost areas are those in which direct lifting costs are above average for the FRS companies' worldwide operations as a whole. These areas are onshore and offshore United States, Canada, and OECD Europe. Low-cost areas are the Middle East, Africa, the Other Western Hemisphere, and Other Eastern Hemisphere.

190"International Petroleum Operators Have Good Reason to Consider Venezuela," The Oil Daily (September 17, 1991), p. 2.

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Production taxes also became more favorable, via new legislation in the United Kingdom and Canada (among other countries).191 By 1993, the FRS companies' total lifting costs, including production taxes, were about $5 per barrel in both low-cost and high-cost parts of the world, compared with $13 and $15, respectively, when oil prices were at their peak (Figure 25). Nearly all of the decline in lifting costs is traceable to reduced production taxes. As a share of oil and gas production revenues, production taxes fell from 25 percent to 4 percent in the United States, and from 15 percent to 6 percent abroad over the same period (Figure 24).

Expanded Opportunities for Natural Gas Investment

While low oil prices in the late 1980's and early 1990's discouraged oil exploration and development, prospects improved for natural gas operations. In the United States, the Natural Gas Wellhead Decontrol Act of 1989 lifted price controls completely as of January 1993, as

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19 Energy Information Administration, Performance Profiles of Major Energy Producers, DOE/EIA-0206(90) (Washington, DC, December 1991), p. 100.

Like the United States, Britain is deregulating its natural gas industry. British Gas is currently gearing up for increases in demand, by vertically integrating into North Sea gas production operations. However, it is unlikely that growing western European demand can be met with indigenous production alone.192 Gas from Algeria will be piped across the Straits of Gibraltar, to Spain and Portugal, and eventually to France and Germany.193 Gazprom, the huge Russian/Ukrainian/ Belorusian company, plans to pipe natural gas from Siberia through Belarus and Poland to Germany.194

Although western European demand is expected to rise in the future, the majority of the increase in both natural gas demand and production has been in Eastern Europe and the Former Soviet Union (FSU). From 1974 to 1992, gas production in this region more than doubled, and at 29 trillion cubic feet per year, is the greatest of any region of the world.195 Gazprom produces more natural gas than the other largest gasproducing companies combined (Table 40). Its exports to non-FSU countries amount to about 3.4 trillion cubic feet per year, more than the entire production of the next largest company.

196

Excluding Gazprom, the world natural gas market is
less concentrated than the crude oil market. The top 19
gas-producing companies after Gazprom account for
about 26 percent of the market (Table 40). There are
fewer state-owned companies among the largest in gas
production than in oil production. Exporting dry
natural gas requires highly developed infrastructure,
including processing plants and
plants and transportation
networks. Overseas transport depends on expensive
refrigerated tankers to transport liquefied natural gas.
Because natural gas is typically expensive to export,
gas-producing companies generally serve smaller
domestic markets, and do not provide the foreign
exchange earnings that made oil companies attractive as
state-owned enterprises.

Despite transportation costs, demand for natural gas in Japan and the Far East is growing rapidly. From 1981 to 1993, the FRS companies' production in the Other Eastern Hemisphere region grew an average of 11 percent annually, reaching a level of over one trillion

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Note: Sum of components may not equal total due to independent rounding. Shares were calculated based on unrounded data. Sources: Company data: Petroleum & Energy Intelligence Weekly, Inc., PIW- Special Supplement Issue (December 13, 1993). Gazprom production data: "Russia's Huge Gazprom Struggles to Adjust to New Realities," Oil and Gas Journal (October 18, 1993), p. 39. China National Petroleum Co. production data: Companies Dominate OGJ100 List of Non-U.S. Oil Producers," Oil and Gas Journal (September 20, 1993), p. 79. Worldwide total: Energy Information Administration, International Energy Annual, DOE/EIA-0219(92) (Washington, DC, January 1994), Table 3, p. 10.

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cubic feet per year in 1993.197 Enron, an FRS company, aggressively pursues utility, pipeline, and exploration projects in Asia, where environmental concerns are catching up with economic growth.198

192"Gas in Europe: Supply," Petroleum Economist (March 1994), p. i.
193"Gas in Europe: Pipeline Construction," Petroleum Economist (March 1994), p. iv.
194"Gas in Europe: Pipeline Construction," Petroleum Economist (March 1994), p. vii.

195 Energy Information Administration, International Energy Annual, DOE/EIA-0219(92) (Washington, DC, January 1994), pp. 10, 26. 196"Russia's Huge Gazprom Struggles to Adjust to New Realities," Oil and Gas Journal (October 18, 1993), p. 43.

197 The FRS geographic regions are defined in the Glossary (under "Foreign Operations").

198 British Gas, Annual Review and Summary Financial Statement 1992, p. 4, and Enron Corp., 1993 Annual Report to Shareholders and Customers, p. 33.

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