Are foreign firms the good guys or the bad guys?

For better or for worse, privatisation and free trade are knocking on the region's door

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By  Nicholas Wilson Published  November 14, 2005

Comment|~||~||~|Globalised winds of change breeze across the Middle East, carrying economic and political challenges.

Free trade, privatisation, currencies pegged to the dollar--their nations’ interest rates de facto decided in Washington--and women standing for election in chambers of commerce are signs of the times. And more is to come: On the horizon is the sight of Total and Exxon petrol stations dotting the landscape from Tehran to Algiers.

In October, Kuwait’s parliament was due to vote on giving foreign oil firms a far greater say in the country’s future; the share launch of the region’s first private gas producer, Sharjah-based Dana, was a sizzling success; and Saudi Arabia cleared the final obstacle that blocked its joining the World Trade Organization (WTO).

This month Dubai opens the region’s first commodities exchange, and Iran will soon privatise its petrochemical industry.

The global forces that economist Adam Smith called “The unseen hand” are guiding, pushing, and prodding the region through the 21st century, as its governments want access to US markets, to diversify away from oil, provide jobs for growing young populations, and squeeze more crude from diminishing reserves.

They spark explosive arguments.

Oil is the region’s lifeblood. Globalisation supporters see foreign investment and competition as the best way to keep it pumping. Its opponents think that lets outsiders slit their countries’ veins and drink freely.

Oman became the fifth Middle Eastern country to negotiate a free trade agreement (FTA) with the United States, completing its negotiations in October to eliminate trade barriers between the two nations. The US said it expects to complete FTA talks soon with Bahrain, and will announce if it will have them with Egypt, to create a Middle East free trade zone by 2013.

The US FTA deals go hand in hand with WTO membership, which is also sought by Yemen, Saudi Arabia, and Iran.
The Saudis recently ended successful talks with the US and EU, and now confidently expect admission to the WTO, gaining access to the world’s two biggest economies.

The EU announced recently that it had reached a deal about the kingdom’s supplying its petrochemical sector with subsidised gas, allowing it to compete unfairly with European firms. The agreement ended the final objection of any WTO member to its joining the club.

The organisation is adding energy to the list of commodities that it insists are open to free competition from all parties. The move will probably open the downstream sector to foreign firms, especially in the retail field. Most state-owned oil firms enjoy a petrol station monopoly, which would be broken up under the new rules.

The WTO’s rules that pushed the liberalisation of the UAE’s economy drove October’s move by Abu Dhabi Chamber of Commerce and Industry to restructure, according to local and ex-pat businesspeople. Its board will now hold elections allowing foreigners and women on it.

Saudi Arabia has also allowed women to stand for election on chambers of commerce, and Kuwait granted them full political rights this summer. Bahrain has female cabinet ministers.
Syria and Libya, once the region’s bad boys in US eyes, have found the winds to be a freezing gale. Now that it is in from the cold, Libya has foreign firms drilling away to massively increase its oil output. Syria, whose oil is drying up fast, needs foreign investment, too, but knows as long as the US accuses it of backing terrorism, it will have to pay a heavy price to attract them.

Yemen also invited in the majors with their know-how and technology to squeeze more oil from its ageing wells.

Critics of foreign involvement say that foreign employees, consultants, and equipment can be hired. So why give a percentage of a nation’s wealth to overseas investors? Wouldn’t oil money be best spent on clinics and schools rather than lining the bank vaults of foreign shareholders?
Pro-globalisation enthusiasts say that private firms are run by geologists, engineers, and economists who solely focus on getting oil out of the ground in the most efficient way possible and constantly innovate as they face fierce competition. In contrast, they argue, state-owned firms are run by politicians following different objectives. If you had to drill for oil, they ask, who would you rather have do it, several foreign majors competing against each other, or idle, government bureaucrats?

They say taxing efficient firms creates greater net revenue for governments than public companies do.
Furthermore, the lack of transparency in state-owned companies, where the real production and reserve figures are state secrets, provide a golden opportunity for corruption and causes under-investment.

For decades Mexico’s ruling party plundered Petroleos Mexicanos, the government-run monopoly and byword for corruption. John Paul Getty called it the world’s only oil firm to make a loss.

In addition, it has to fund government services with 60% of its sales going straight into the treasury and politicians’ pockets. The result is massive under-investment, declining oil production, 1970s’ technology, a hideous safety and environment track record, and the nation predicted to become a net importer of oil by 2010. Mexico’s constitution blocks foreign ownership of the nation’s hydrocarbons, which rules out any percentage of finds being shared with majors.
Kuwait’s constitution also forbids this, but the government is trying to get around it with Project Kuwait, where majors will receive a fee per barrel, instead of the fee per task for which they currently work.

Venezuela’s PDVSA workers challenged the authority of President Hugo Chavez by striking a few years ago. He fired them and replaced them with those loyal to him. Analysts expect the state-owned monopoly to suffer long-term damage because of this. Furthermore, authoritarian regimes often bolster political support through patronage jobs handed out in gravy-train oil firms.

State control by corrupt governments can be used as a stick to beat foreign firms. When human rights groups pressured majors operating in Angola to release figures for the fees it paid the government, BP obliged. The groups said the government was siphoning off billions of dollars into private bank accounts. The government threatened to ban BP from concessions.

Proponents of state ownership, however, say that governments are not greedy, short-sighted shareholders, and long-term planning is more likely. They point at Shell’s short-term-thinking stockholders, who dropped the price of Shell shares when the company announced that to shore up its proven reserves, it was investing US $12 billion in exploration. They did not want it to replenish its reserves.
As the debate rages, it is stoked by the hot winds of change that sweep across the region’s deserts, fueling it with dollars, euros, and yen.
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