GRM 2010 GRM 2011

Abstract Details

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Title of Paper:
Upstream Sector Policies in the Gulf: Compare and Contrast
Paper Proposal Text :
Oil is a dominant theme on the international political agenda. The Arab Spring has caused a lot of concern among petroleum-importing countries about the looming threat of supply disruptions. The world’s dependence on the Middle East oil is a fact. On these grounds, understanding the functioning of the oil production and exploration sector (also known, as the upstream) in the Gulf petroleum-exporting countries is not a whim but a must.
Ever since the era of oil nationalizations, within-country variation in the oil upstream policies pursued by the Gulf countries has been rather limited; in turn, cross-country variation in the region has been large. Within the confines of this paper, oil upstream policy looks into the control structures present in the exploration and production sector within the petroleum value chain. Upstream control translates into the ratio of upstream production operated by the National Oil Company (NOC) to total production per country. Depending on the legal regime and fiscal system in place, this ratio is a proxy for the percentage of profit shares between host government (i.e. state control) and International Oil Companies (IOCs) (i.e. foreign control).
Over the past four decades, Kuwait and Saudi Arabia have kept the upstream sector largely under state control. If present, IOCs have operated under execution mandates with hardly any decision-making rights. Comparatively, Oman, Qatar and the United Arab Emirates (UAE) have made their NOCs share production and profit in the upstream with IOCs to a rather considerable extent (above 40%).
Despite its relevance to the energy security agenda, this variation in upstream sector policies across the Gulf oil producer countries has not been satisfactorily explained so far.
From an economic point of view, energy sector liberalization should be the likely trajectory given the globalization trends from the past decades. While the state has been loosening the grip on almost every sector of world economic activity, the pattern is quite the reverse in the hydrocarbons sector. Since the 1970s and increasingly so from the late 1980s, state-owned oil companies have regained and retained firm control over the vast majority of world’s petroleum reserves. Previous studies have shown that privatization in the energy sector offers greater long-term prospects for economic growth (Henisz and Zelner 2001, Henisz et al. 2005) whereas state control is more likely to generate corruption and financial mismanagement (Ross 1999, Wantchekon 1999, Wolf 2008, 2009).

From a political point of view, it is yet rational for state leaders in authoritarian regimes to retain state control over the energy production sector as this provides them with easier access to revenues and enhances their ability to stay in power. This way they have the means to meet the interests of their supporters and at the same time, placate or overpower their opponents (Guriev et al. 2009, Jones Luong and Weinthal 2001, 2010). Common wisdom holds that public ownership is grounded in the political motives of petroleum states (rather than inherent market failures or financial losses) as state leaders perceive value in the direct control of resource development via a state-owned enterprise (Nolan and Thurber 2010, Wolf 2009).
Given this tension between economic and political rationality and the various decisions undertaken by petroleum producer countries in the upstream, the research question of this paper is: Why have oil producer countries in the Middle East’s Gulf region pursued different policies in the upstream sector since the era of oil nationalizations?
To provide a comprehensive and multifaceted answer, this paper will fist review and revisit the existing studies on expropriation/ privatization in the energy sector. Drawing on this, an analytical framework, which reunites technological, economic and politico-institutional explanations, is proposed to account for the variation in the Gulf’s upstream sector policies over the past four decades. Empirically, the framework is then tested within a cross-country analysis featuring two main cases, i.e. that of Saudi Arabia and the UAE, with analogies and lessons drawn for the other oil producer states in the Middle East’s Gulf. Primary data for the two main country cases has been collected through interviews with government, industry and think-tank experts over the course of 10 months. Finally, in light of their current upstream sector policy, the potential for economic diversification of these Gulf oil producer countries will be problematized and critically examined.

Selected bibliography:
Guriev, S. et al. (2009): Determinants of Nationalization in the Oil Sector: A Theory and Evidence from Panel Data, Working Paper, available at, status: 04.12.2011.
Henisz, W. and B. Zelner (2001): The Institutional Environment for Telecommunications Investment, in: Journal of Economics & Management Strategy 10:1, pp. 123-147.
Henisz, W. et al. (2005): The Worldwide Diffusion of Market-Oriented Infrastructure Reform, 1977-1999, in: American Sociological Review 70:6, pp. 871-897.
Jones Luong, P. and E. Weinthal (2001): Prelude to the Resource Curse: Explaining Oil and Gas Development Strategies in the Soviet Successor States and Beyond, in: Comparative Political Studies 34: 4, pp. 367-399.
Jones Luong, P. and E. Weinthal (2010): Oil Is Not a Curse. Ownership Structure and Institutions in Soviet Successor States, Cambridge: University Press.
Nolan, P. and Thurber, M. (2010): On the State’s Choice of Oil Company: Risk Management and the Frontier of the Petroleum Industry, Working Paper #99, PESD Research, Stanford University.
Ross, M. (1999): The political economy of the resource curse, in: World Politics 51:2, pp. 297-322.
Wantchekon, L. (1999): Why Do Resource Dependent Countries Have Authoritarian Governments?, New Haven: Yale University.
Wolf, C. (2008): Drivers of Performance Change during Privatization, University of Cambridge, Working Paper.
Wolf, C. (2009): Does Ownership Matter? The Performance and Efficiency of State Oil vs. Private Oil (1987–2006), in: Energy Policy 37, pp. 2642–2652.