International Petroleum

Chapter 10

International Petroleum

Chapter collaborators:
Meeren Amin (WF ’12)
Leslie Cockrell (WF ’12)
Scott Douglass (WF ’12)
Lea Ko (WF ’13)
Wade Sample (WF ’12)
Kyle Simon (WF ’12)

While the United States was primarily responsible for the discovery and early mass-production of oil and petroleum-based products, the American economy now depends on foreign oil as domestic demand has come to outstrip domestic supply. Today’s oil markets are only understood by considering the history and evolution of the international petroleum market. Further, understanding the economic, social, and political forces that have shaped the relationship between the American economy and foreign oil resourcesframes the current debate about the future of the international petroleum trade.

In this chapter, you will learn about: [AP: Track more closely the organization and points in chapter?]

• The difference between the United States and Canada and other nations around the world with respect to ownership of mineral rights
• The international petroleum industry’s evolution from an American-centric industry to an industry marked by international competition and decentralization
• The international oil market’s inception in the early 20th century and the factors that caused turbulence in the oil markets in the 1970s
• Changes over the last half century in the international oil market as a result of political, economic and social forces
• The formation of the OPEC cartel and the current impact of OPEC on the international petroleum market
• The national security implications of relying on foreign oil sources
• The reasons why countries nationalize their oil resources and the justifications given for the nationalization of oil resources
• The three modern forms of petroleum agreements that countries use to grant operating rights to private investors
• The role of sovereign immunity, political question, act of state, and forum non conveniens on US litigation involving international oil disputes
• The human rights issues associated with international oil trade
• The role of the Alien Tort Claims Act in litigation alleging abuses by international petroleum companies

Chapter 10 – International Petroleum [AP: do headings coincide with text?]
10.1Oil: History and Politics
10.1.1Geopolitics of Oil
10.1.2Are we Running Out of Oil – Peak Oil?
10.1.3 National Energy Security
10.2Law of Oil Extraction
10.2.1Earliest Concessions
10.2.2 Modern Forms of Petroleum Agreements
10.3Nationalization of Oil Assets
10.3.1 Law and Policy of Nationalization
10.3.2 Reactions to Nationalization
10.3.3Recent Examples of Nationalization
10.4Dispute Resolution – International Oil Agreements
10.4.1Barriers to Litigating in US Court
10.4.2International Arbitration
10.5 Human Rights and Oil Companies
10.5.1 Alien Tort Claims Act
10.5.2Nigeria

10.1Oil History and Politics

Between 1930 and 1970, the Middle Eastern oil market exploded as the international demand for oil increased. The 1970s marked a time of drastic fluctuation in oil prices as a result of the uprising in Iran, the Iran oil embargo, and Iraq-Iran war. Further, the 1970s marked the increased importance and power of OPEC, a cartel of oil-producing nations. Today, the OPEC nations exert a great deal of influence over the future of the world’s energy markets and oil prices. As the United States and other developing nations began importing lots of oil, host-nations with petroleum resources often nationalized their oil fields by asserting that mineral rights belong to the people rather than the private land-owner. The nationalization of natural resources by these host-nations has resulted in many legal and political debates.

As the United States began to more heavily rely on foreign oil sources to meet its domestic demand, it has been forced to consider the national security implications of purchasing large amounts of foreign oil. The increased dependence on foreign oil has also compelled the American consumer to consider the human rights implications of purchasing foreign oil. Further, American must consider the “peak-oil” debate in developing an energy plan for the future when considering the importance of domestic v. foreign oil.

With an increased dependence on foreign oil, American investors have increasingly sought remedies in the American courts as a result of disputes concerning the oil trade. American courts consider the sovereign immunity doctrine, the political question doctrine, the Act of State doctrine, and the doctrine of forum non conveniens when determining if they are the appropriate forum for dispute resolution.

Canada and the United States are virtually the only countries in the world where minerals can be owned privately. Bosselman, 353. In other countries, the government owns mineral rights. For example, Pemex(the Mexican state-owned petroleum company) had assets of $415.75 billion as of 2010, making it the second largest non-public company in the world by total market value. However, the majority of its shares are not publicly listed, but under the control of the Mexican government. Its publicly listed shares, valued at $102 billion in 2010, represent approximately one quarter of the company's total worth.Wikipedia, “Pemex.”

[needs introduction / roadmap]

10.1.1Geopolitics of Oil

After oil was first discovered in Pennsylvania, the United States was the primary exporter of oil products to other countries. Bosselman, 354. In the first decades after oil was discovered, “boom and bust” conditions characterized the oil industry, which was primarily an American industry. Bosselman, 354. These boom and bust condition started to subside in the 1880s when John Rockefeller’s Standard OilCompany asserted monopoly control over the oil refineries in the United States. Bosselman, 354. Standard Oil was the largest oil refiner in the world and operated as a major company trust. Wikipedia, “Standard Oil.” The Standard Oil Trust agreement allowed the company to control the production of refined petroleum. Bosselman, 255. However, in 1889, Congress enacted the Sherman Anti-Trust Act, aimed directly at protecting consumers from the predatory practices of monopolists, especially the Standard Oil Trust. Bosselman, 354-55.

In 1911, the US Supreme Court declared Standard Oil to be an unreasonable monopoly under the Sherman Antitrust Act and ordered the company to be dissolved into 34 independent companies. Standard Oil Co. of New Jersey v. United States. The two major separate entities were Jersey Standard (Standard Oil Company of New Jersey), which eventually became Exxon, and Socony (Standard Oil Company of New York), which eventually became Mobil. Wikipedia, “Standard Oil - Breakup.” In 1999, Exxon and Mobil merged into ExxonMobil, which has become not only the largest oil company, but also the largest public company in the world. Forbes, “The World’s Biggest Public Companies.”

In the late 1800s, the United States began to encounter competition in its dominance of the international, petroleum market. In the 1890s, Russia and Sumarta began to provide competitive sources of kerosene. Bosselman, 355; SeeOil of Russia, “Italian Gambit.” In 1901, oil was first discovered in the Middle East by a British company in modern day Iran. Bosselman, 355; SeeWikipedia, “Iran.”Thus, the twentieth century, marked a new era in the international petroleum market as the United States began to see its 100% dominance wane.

From the 1930s to 1970s . By the 1930s as the discovery of new oil wells waned, many thought that it would be very difficult in the future to continue to extract oil. Bosselman, 355. These concerns were especially voiced during the Second World War as the importance of petroleum products was paramount; however, it was uncertain as to whether the oil could continue to be extracted since it appeared likely that all of the oil fields that existed had already been discovered. It is realistic to think technology will continue to outpace diminishing oil returns in already discovered oil fields?

The pessimism about the future of oil in the United States led to a phenomenon called the “conservation theory.” Bosselman, 356. Conservation theory states that the United States has to control and develop “extraterritorial foreign oil reserves in order to reduce the drain on domestic supplies, conserve them for the future, and thus guarantee America’s security.” Bosselman, 356. Is this viewpoint a realistic position to ensure national security?

Between 1940 and 1970, the Middle Eastern Oil market exploded. Between 1953 and 1972, more than 350 companies entered the foreign oil industry. Bosselman, 356. Among these new international firms, 15 were large American oil companies, 20 were medium sized American oil companies, and 10 were large American natural gas companies, and 25 were non-American firms. Bosselman, 356. The increase in competition among international petroleum firms led to a decrease in profitability of those firms operating in the oil industry. Bosselman, 356. The transition from coal to oil in much of Europe, especially in Britain, led to oil becoming increasingly important in the global market place between 1930 and 1970. SeeDownsizing the Federal Government, “A Brief History of Energy Regulations.”

The 1970s marked a drastic shift in the reliance that the world markets had on Middle Eastern and African oil. Bosselman, 357. In 1970, American oil production peaked at the highest level it would reach when it produced 11.3mm barrels of oil. Bosselman, 357. However, as American production deceased in the 1970s and its domestic demand continued to increase, the American economy had to turn to the world oil market. Bosselman, 357. From 1967 to 1973, imports as a share of total consumption rose from 19% to 36%. Bosselman, 357.

Further, environmental concerns in the 1960s and 1970 prompted many utility companies to shift from coal based to oil based products. Bosselman, 357. This further increased the demand for oil, and consequently the demand for foreign oil.The Santa Barbara oil spill of January 1969, however, highlighted some of the environmental concerns of using petroleum. See Wikipedia, “1969 Santa Barbara Oil Spill.” In that case, an oil rig being drilled by Union Oil Company blew out and leaked a total of 100,000 barrels of oil over the span of 8 days. The Pew Environment Group, “Santa Barbara Oil Spill.” After this incident Congress rapidly enacted a succession of environmental acts: the National Environmental Policy Act of 1969 (NEPA), 42 USC § 4321 et seq., the Marine Protection Research and Sanctuaries Act of 1972, 33 USC § 1401 et seq., the Coastal Zone Management Act of 1972 (CZMA),16 USC § 1451 et. seq., the Endangered Species Act of 1973,16 USC § 1531 et seq.,massive Clean Water and Clean Air Acts of 1977, 33 USC § 1251 et seq.; 42 USC § 7401 et seq., and a revision of the Outer Continental Shelf Lands Act of 1953 (OCSLA) in 1978, 43 USC § 1331 et seq. Bosselman, 287-88. [LK: this is from chapter 9 – same exact info]

First Oil Shock: Nationalization, War, and Embargo. The relative stability of oil prices ended on October 6, 1973 when Syria and Egypt attacked Israel. Bosselman, 358; SeeWikipedia, “Yom Kippur War.” The United States supported Israel with supplies. Bosselman, 358. In retaliation for supporting the United States, the Arab nations attacked and declared an embargo on the shipment of oil to the United States, which lasted from October 1973 until March 1974. Bosselman, 358; See Wikipedia, “1973 Oil Crisis.”“The events of the 1970s unsheathed the power of the oil weapon and led to radical transformation in the international oil industry. In 1970, large, vertically integrated companies dominated the industry. They owned 94 percent of oil production in the non-Communist world. By 1984, the large company’s share of crude oil has been reduced to less than 40% as most African and Middle East countries nationalized their oil reserves and production.” Bosselman, 358.

Prior to the oil crisis of 1973, the Seven Sisters (Royal Dutch Shell, Exxon, Gulf, Texaco, BP, Mobil and Chevron) dominated the world oil market. Bosselman, 358. The members of the Seven Sisters together controlled around 85% of the world’s petroleum reserves. Wikipedia, “Seven Sisters.” These companies were vertically integrated and thus had the flexibility and market power to dominate the world oil market. Bosselman, 358. Originally, these major oil companies received commissions from the oil-bearing countries of Latin America and the Persian Gulf, under which these companies developed oil fields in certain areas for a given length of time. Bosselman, 359. In return the companies paid royalties or taxes to their host governments. Bosselman, 359.

In September of 1960, the Organization of the Petroleum Exporting Countries (OPEC) was founded by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. OPEC, “Brief History.” OPEC is a permanent, intergovernmental organization that seeks to coordinate and unify petroleum policies among its member countries in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry.

The sharp rise in oil prices in the 1970s as a result of the oil embargo angered many American consumers. Bosselman, 359; SeeThe Guardian, “Background: What caused the 1970s oil price shock?”Thus, politicians became involved in the pricing and regulation of foreign oil imports. Bosselman, 359. Between 1970 and 1981, the federal government maintained a system of oil price controls as both an anti-inflationary measure and then to prevent domestic oil producers from making too much money when foreign oil was prohibitively expensive because of the oil embargo. Bosselman, 360. The Emergency Petroleum Allocation Act, 15 USC § 751 et seq., required the President to promulgate regulations for allocation and price controls of petroleum products in response to the 1973 oil crisis. Wikipedia, “Emergency Petroleum Allocation Act.”The general policy of the program was to encourage producers to explore for new oil by allowing them to sell such oil at a higher price, while preventing them from raising the price of old oil and reaping windfall profits. Bosselman, 360. Was government inference of this nature a sound policy to preserve energy prices or a unwieldy use of government power to interfere with the private markets?

Second Oil Shock: The Ayatollah. The sharp price increases that followed the Yom Kippur war of 1973 became known as the first oil shock. Bosselman, 360; SeeJewish Virtual Library, “The Yom Kippur War.”A second shock hit in 1979 when the Shah of Iran was ousted and replaced by a theocratic government headed by the Ayatollah Khomeini. Bosselman, 360; SeeWikipedia, “History of Iran.”In response, President Jimmy Carter prohibited oil from being imported from Iran. Bosselman, 360. The Iran government responded by prohibiting Iranian oil from being exported to the United States and oil prices skyrocketed again. Bosselman, 360. With supply down by about 2,000,000 barrels a day and demand increased by 3,000,000 barrels a day because of panic buying, the price of oil increased from $13.00 to $34.00 a barrel. Bosselman, 361.

Role of OPEC. OPEC was formed in 1960 and currently includes 12 different member countries. OPEC, “Member Countries.”In the 1970s with the revolution in Iran and the Iraq-Iran war, oil prices soared as production decreased and demand increased; thus, the power of OPEC was illustrated. It is important to remember that all OPEC nations are different and thus they have different interests. For economic reasons, countries with large reserves like Saudi Arabia, the United Arab Emirates, Kuwait and Qatar can be expected to pursue a policy of moderation as those countries have extensive investments in the West and do not want to see Western economies hurt or the power of the Westerns governments undermined. Bosselman, 363; See The Redwing Report, “Saudi Arabia’s Oil Policy Vacancies.”For some OPEC nations like Iraq, Iran, and Libya economic conditions as not as important as these nations are generally hostile to Western nations. Bosselman, 363-64. For these countries, economic prosperity is incidental to political ambitions.

[LK: discussion of OPEC seems out of place]

Third Oil Shock: Prices Drop .The third oil shock came when consumers began to switch from expensive oil to other fuels that offered either economic or environmental benefits. Bosselman, 364. Energy conservation was largely the result of fuel switching and technological information. Bosselman, 364.

[LK: more here about the third oil shock – title says prices dropped? How was this like the other oil shocks, where prices went up?]

Oil on the Commodity Exchange. After the Third Oil Shock in the early 1980s, both OPEC and non-OPEC nations agreed to help regulate oil prices. Bosselman, 366. Beginning in 1986 and lasting for the next thirteen years, oil prices stayed in the stable range of $15 to $19 a barrel. Bosselman, 366. Nations agreed that the 1986 price collapse to $10 a barrel could not happen again as it would cripple the American oil industry. Bosselman, 366. In order to help foster higher oil prices, then Vice President George H.W. Bush warned the Saudi oil companies that if prices remained that low, the United States would place a tariff on imported oil. Bosselman, 366.

Obviously, the moderate prices on oil did not last. The oil market is notoriously volatile, and the oil companies can no longer control the price. Bosselman, 366. Even the OPEC countries have limited success in maintaining fixed oil prices. Bosselman, 366. While world events often affect the prices of oil (note September 11th), it wasn’t until 2002 that oil prices seemingly only increased. Bosselman, 366. Then, in July 2008, prices passed the $140/barrel mark-a new high. Bosselman, 366. When the global financial crisis hit that September, oil prices dropped to as low as $33 a barrel, a staggering decline. Bosselman, 366.