States and Markets in Hydrocarbon Sectors

Markets, technologies, and policies constantly evolve at different levels in various countries, and this has led us to analyse these aspects as the drivers of energy policies. All have a policy and regulatory impact on market structures, which further stimulates technological development. It is noteworthy that the causes of the energy transition may either stem from the state or from market forces. Therefore, interaction between the state and the market is a key topic when analysing the hydrocarbon sectors.

The oil industry is touched by many aspects of international political economy (IPE) studies: the role of the state as owner or custodian of natural resources, the relation between state and government, between governments internationally; the economic forces rewarding international trade in oil and oil-related assets and transfer of technology; the independence, formal or real, of companies with oil resources and markets, governance of companies within the corporate sector of private sector economies, and within the state sector where that dominates the economy; and the role of ideas, sometimes mobilized by non-governmental organizations (NGOs).

States and markets are key to energy policy and as such belong to the very core of energy policy analysis. How exactly they are linked is always an empirical puzzle, the solving of which depends on time and geography. As the contributions to this book indicate, it matters where we are. For example, in post-Lisbon Treaty Europe the energy policies of EU member states are slowly but painfully converging as a result of supranational regulation initiated by the member states, forcing more competition among energy market actors. In Asia, by contrast, market actors mostly face regulation by state-level institutions, with emerging sub-regional integration mostly led by multinational companies.

This chapter aims to analyse the relationship between energy market trends in fostering infrastructural interdependencies, on one hand, and institutional integration at the regional level, on the other. This interrelation is inherent in the classical theoretical debate on the influences of institutions upon infrastructures and vice versa. Theoretical discussions about political influence on economic development were embedded in classical institutional theories. For instance, Clarence Ayres (1944) pointed out the role of political instruments and economic habits in technological development. Furthermore, neo-institutional theories focused on formal and informal practices and norms that stimulate economic development on a national level (North, 1990; Hogson, 1998). Considering an ever-increasing role of regions in the academic debate (Hurrel, 2007), our chapter aims to uncover the most typical models linking regional institutions with energy markets.

The neo-liberal consensus which characterized the political economy of oil and minerals since the late 1980s began disintegrating towards the end of the first decade of the 21st century (De Graaff, 2012; Gustafson, 2012; Dannreuther and Ostrowski, 2013). Subsequently, the politics of resources started uneven transitions towards a new form of arrangement labelled as state capitalism. This state capitalism is likely to impact on the rules of the game in relationships surrounding the access to resources which took shape during the neo-liberal period. However, the question arises: what will change and what will stay the same?

Russia’s hydrocarbon sectors and policies represent a number of interesting specificities. Russia’s infrastructural potential and significant domestic market reflect a difference from developing petro-states. At the same time, Russia is ever-increasingly dependent on oil and gas export revenues, which distances it from industrialized energy exporters.

Many scholars — particularly those from Britain and America — have been studying national oil companies (NOCs) from the perspective of the social sciences. A large part of this literature has been focused on a single company, often highlighting a specific period in its history. Others have sought to analyse the specific features of state companies in order to differentiate them from the private ones. Most of these studies have aimed to explain the difficulties that the state companies face in order to efficiently manage the hydrocarbon industry. Finally, other studies have been devoted to the comparative analysis of state-owned companies of a specific region (Middle East, Latin America, Africa, etc.). However, to the knowledge of this author, no academic work has attempted to understand the reason why the evolution of NOCs differs between countries (and regions). Actually, the comparative studies of NOCs confirm these differences. While they tend to spotlight their similarities, they do not seek to explain them. Yet, for many reasons, the differences are striking.

Most students and informed observers of the global energy security environment, such as Fadil J. Chalabi (2011) and Gawdat Bahgat (2012), appreciate the significance of the wider Middle East within international energy markets. We need little reminder of the region’s oil and gas significance in terms of either numbers or the strategic nature of the region’s geography, particularly since oil started to become the lifeblood of the international economy during the course of the last century. Neither do we need to remind ourselves that the history of the modern Middle East, particularly the period since the foundation of the state of Israel in May 1948, has been marred by conflict, instability, and turbulence. This has invariably had a significant impact on the oil markets, at both the regional and global level. In fact, Middle East experts like to flirt with the idea that a geopolitical event of game-breaking proportions sends major shockwaves through the region at least once every decade or thereabouts (Strange, 1988).

On 9 September 2012, Noble Discoverer, a Royal Dutch Shell’s drill ship, began drilling in the Chukchi Sea 70 miles off the Alaska coast, signifying the return of active offshore exploration in the US Arctic (Broder, 2012a). Another Shell drill vessel, Kulluk, commenced drilling in the Beaufort Sea on 3 October 2012 (Shell, 2013). Yet Shell’s foray into the US Arctic offshore was brief — the exploratory drilling in the Chukchi Sea lasted just over a week and in the Beaufort Sea for three weeks (Krauss, 2012). Shell’s 2012 US Arctic campaign was also unproductive. After spending over US$4.5 billion, Shell had only two top holes to show for it at the end of the season.¹ The main reason why Shell was not allowed to drill into the hydrocarbon-bearing reservoir is because it was not authorized to do so by the US government. The drilling permits issued by the Bureau of Safety and Environmental Enforcement (BSEE)² were limited to drilling top holes because Shell failed to deploy the Arctic Containment System fully tested by BSEE before commencing drilling activities (DOI, 2013, p. 16).

The European Union (EU) is among the world’s largest integrated energy markets and is now in transition towards the Europeanization of its energy policies. EU energy policy is currently searching for the optimal regulatory framework. The previous overly market-based ideology is rapidly changing to a more interventionist policy based on public intervention for security of supply and, increasingly, also for environmental purposes. The market-based method is being (partially) replaced by stronger public sector involvement and solidarity between EU member states. Since markets fail to deliver security, despite economic theory suggesting that they could, states and the EU step in and provide for state responses to energy security threats. This is visible in many areas of EU energy law and policy, infrastructure investments being one of them. Here, the mechanism to make the investment decisions and EU ‘solidarity’ provide examples. Similarly, the push for renewable energy is changing the role that the state and the public sector play in the markets. Despite claiming to be a market-based system, this area of energy business is driven by state subsidies. The final area where state intervention into the markets in the name of the environment becomes particularly visible concerns the shale gas exploration in EU member states. Here, states make the decisions on activities in this area based on sustainability and security considerations.

Over the last 20 years, the role of the market in China’s economy has steadily grown so that much of the economy is driven almost entirely by market forces with minimal and sometimes too little regulation. The energy sector is a major exception to this trend, for private ownership and market forces continue to play only a subordinate role. Majority ownership of most energy-production companies (oil, gas, coal, power) lies in the hands of the state, though often at sub-national level, while prices for refined oil products, natural gas, and electricity are controlled by the government. Yet, the state is not all-powerful. State-owned energy companies have been commercialized and partially privatized and have developed their own strategies to maximize revenues and profits, both at home and overseas.

Australia and Japan have much in common. Both countries are developed economies, located in the Asia-Pacific region, and are members of the International Energy Agency (IEA). Given these general similarities, one would anticipate that their governments adopt similar approaches to energy markets. However, this chapter demonstrates that there is much contrast in their respective approaches to energy markets. On one hand, in Australia, the government adopts a laissez-faire approach to energy markets, largely behaving as a facilitator of investment in upstream activities. The Australian hydrocarbon sector is dominated by international energy companies, which control both upstream and downstream sectors, and are responsible for supplying much of Australia’s energy. On the other hand, having first-hand experience from the 1970s oil crises, the Japanese government perceives energy resources as strategic commodities. Unlike in Australia, energy in Japan is securitized, where the government plays an active role in ensuring that Japan has access to uninterrupted supplies of affordable energy. Against this backdrop, this chapter explores contrasting approaches to hydrocarbon sector by the Australian and Japanese governments and highlights key similarities and differences between the two cases.

The analysis presented in this book aimed at demonstrating an evolving character of the state-market relations in one of the most strategic spheres of IPE. This book’s contributions revealed that states and markets reflect interdependent institutions, which change their essence over time. Structural powers of production, knowledge, finance, and security have a strong impact on the hydrocarbon markets and policies (Chapter 1). At the same time, the primary institutions of states and markets are different and therefore both follow divergent logics (Chapter 2). Strategies of actors, their expectations of results, and priorities cannot be the same. Once again, the general observation was confirmed: states tend to use hydrocarbon markets to their advantage, whereas market institutions (companies and traders) tend to bypass national borders. Security and sovereignty are state priorities, while managing a complex chain of the sectors and getting profits are the inherent logic of the markets. National laws and policies, energy diplomacies, and various inter-state institutions are based on sovereignty. Norms and practices in the hydrocarbon sectors themselves stem from trade and investment institutions.