PETROANALYSIS || ARTICLE

The Dynamic Performance of a NOC during a Windfall – part 2

Published on

August 6, 2018

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Article by

Omar Chique

Continued from the Dynamic Performance of a NOC during a Windfall – part 1.

The stock of commitments increases as availability stagnates and then decreases. The average collection time of contractors increases. Payment delays increase commercial risk of contractors, raising costs that reflect on the stocks of commitments, over time. Future outflows increase, and the financial availability strategic resource shrinks.

Bank debt increases when oil prices increase, it then stagnates as new loans become scarce and costlier. Annual cash to government peaks and starts declining with financial availability. The simulated values are consistent with overall observed behavior.

The case shows the potential consequences of the lack of institutional mechanisms to prevent heavy reliance on the mineral sector and high spending policies; as indicated by Jones and Weinthal (2010). The situation may worsen in the presence of a commodity shock, as 2015 shows. The institutional mechanisms that may control the ability of the state to tax and spend do not seem to be synchronized with the performance of the oil company. In any case, the solidarity policy did not arise out of technical reasons. The institutional framework existent at the time decided the rules to allocate the associated oil proceeds, as suggested by the World Bank (2007) in cases of high oil rents.

As theorized by John and Margetts (2003) the solidarity with the Caribbean agenda gathered momentum once the government had enough impetus to implement it. The political image was high, and the oil prices increased enormously, creating a windfall. Once decided in 2007, the program expanded in a non-linear fashion. It did not look as an incremental process; rather, it gained disproportionate attention from policy makers that same year, as posited by Baumgartner and Jones (1993; John and Margetts 2003). The observed behavior of policy makers seems compatible, then, with the Dynamic Model of Choice for Public Policy (DMCPP) stated by Baumgartner and Jones (2005).

The disproportionate attention obtained by the solidarity program contrasts with the lack of action to cope with the deterioration of the financial fundamentals of the oil company; and the lack of risk mitigation strategies against an oil commodity shock, or price reduction. Baumgartner and Jones (2005) postulate that policy makers are frequently biased; government bought the idea that the era of cheap oil prices was over. Activists with political positions close to the government supported the idea with public documents, including books. Experienced analysts alerting that high oil prices would favor also international oil companies, increasing supply and decreasing prices in the future, were ignored.

References:

Baumgartner, F., and Jones, B. (2005) The Politics of Attention: How Government Prioritizes Problems, University of Chicago Press, USA
Chique, O. (2016) Dynamic Performance Management of Upstream Oil Companies, PhD dissertation, University of Palermo, Italy
John, P., and Margetts, H. (2003) Policy Fluctuations in the UK: Fluctuations and Equilibria in Central Government Expenditure since 1951, Public Administration Vol. 81 No. 3, 2003
Jones, P., Weinthal E. (2010) Oil Is Not a Curse: Ownership Structure and Institutions in Soviet Successor States, Cambridge University Press, U.K.
World Bank (2007) Investing in Oil in the Middle East and North Africa: Institutions, Incentives and the National Oil Companies, Sustainable Development Department, Middle East and North Africa Region, Report No. 40405-MNA

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