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8_Dicken_2015_Global_Shift_CH12.pdf
Twelve ‘MAKING HOLES IN THE
GROUND’: THE EXTRACTIVE INDUSTRIES
CHAPTER OUTLINE Beginning at the beginning 396 Production circuits in the extractive industries 397 Global shifts in the extractive industries 400 Oil 400 Copper 402 Volatile demand 402 Technologies of exploring, extracting, refining, distributing 404 The centrality of state involvement in the extractive industries 408 Nationalizing the assets 408 Controlling prices 409 A (partial) return to privatization 410 Power games: states and firms; states and states 411 Corporate strategies in the extractive industries 413 Consolidation and concentration 413 The oil industry 413 The metal mining industries 414 Organizational and geographical restructuring 416 Resources, reserves and futures 419
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BEGINNING AT THE BEGINNING
In a very real sense, the extractive industries represent the ‘beginning of the begin- ning’: the initial stage in the basic production circuit and in the web of GPNs that make up the global economy:1
Minerals … [excluding oil] … account for a small share of world production and trade. Nonetheless, their supply is essential for the sustainable development of a modern economy. They are basic, essen- tial and strategic raw materials … No modern economy can function without adequate, affordable and secure access to raw materials.2
The basis of the extractive industries is the notion of the natural resource: materi- als created and stored in nature through complex biophysical processes over vast periods of time. However, natural resources are not, in fact, ‘naturally’ resources. An element or material occurring in nature is only a ‘resource’ if it is defined as such by potential users. In other words, it is both a socio-cultural and a political con- struction. It is given meaning by its socio-cultural context and given differential priorities through political choices.3 Basically, there must be an effective demand, an appropriate technology, and some means of ensuring ‘property rights’ over its use: ‘If any of these conditions ceases to hold, resources could “unbecome”.’4 The resources that form the basis of the extractive industries (energy materials like oil, as well as ferrous and non-ferrous minerals like iron ore and copper) are, effectively, non-renewable. They are fixed in overall quantity, at least under known technologi- cal conditions. The more we use today, the less will be available for tomorrow.
Quite apart from their finiteness, extractive resources are locationally specific. They are where they are. They have to be exploited, at least initially, where they occur, although later stages of refining might well be located elsewhere. In either case, their use involves vast investment and expenditure, not only on exploration, extraction and processing, but also on transportation infrastructures:
The most significant differences about the extractive production net- work relate, in one way or another, to the ‘landed’ nature of assets … on the one hand, the nature-based character of extractive enterprises and the influence that the materiality of [the resource] exerts on the organization of production; and on the other … the territoriality of [the resource] in the sense of its embeddedness in the territorial structures of the nation-state … Resources are closely bound to notions of sov- ereign territoriality and national identity.5
This triadic combination of finite quantities, fixed locations and territorial embed- dedness creates the specific shape and developmental path of the extractive indus- tries.6 It helps to explain why the extractive industries are so sensitive economically,
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THE EXTRACTIVE INDUSTRIES 397
politically, environmentally and even culturally; why they are the focus of such intense conflict and bargaining between firms, between states and between firms and states. To a greater extent than most other industries, the extractive industries are made up of a strong mix of private firms (TNCs) and state-owned enterprises (SOEs). They are also dominated by giant firms: a significant number of the 50 largest companies in the Financial Times Global 500 are oil or mining companies. They are overwhelmingly producer-driven industries.
These industries, then, are at the heart of many of the most pressing and most controversial debates in the global economy. As we saw in Chapter 2, the roller- coaster trajectory of production and trade in the past 50 years has often been closely related to sharp fluctuations in the supply – and, therefore, the price – of oil and other natural resources. ‘The race for resources’ has been a central compo- nent of the development of a global economy for centuries.7 It still is, as the insatiable growth of China’s demand shows so very clearly.8 The extractive indus- tries are also at the centre of the development dilemma – the so-called ‘resource curse’ (see Chapter 10) – facing many resource-rich, but deeply impoverished, countries, especially in Africa.
PRODUCTION CIRCUITS IN THE EXTRACTIVE INDUSTRIES
As Figure 12.1 shows, the extractive industries fall into three broad categories based upon the kind of minerals involved. In this chapter we will focus primar- ily on two of these industries: oil and copper (one of the most important of the metallic metals industries, accounting for a little under one-fifth, by value, of world metallic mineral production).9 Both oil and copper are employed in an enormous variety of end uses. In the case of oil, this includes both final consumer demand for transportation and heating fuel as well as providing the feedstock for chemicals and related industries. Copper, on the other hand, like most of the base and ferrous metals, is overwhelmingly a producer commodity:
Copper is one of the oldest metals ever used … Because of its proper- ties, singularly or in combination, of high ductility, malleability, and thermal and electrical conductivity, and its resistance to corrosion, copper has become a major industrial metal … Electrical uses of cop- per, including power transmission and generation, building wiring, telecommunication, and electrical and electronic products, account for about three quarters of total copper use.10
Figure 12.2 outlines the basic production circuit for extractive industries. At the most general level, it is a relatively straightforward sequence of stages, from exploration
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through to final consumption, although, in fact, it is a highly complex and contested process. Something of that complexity is shown in Figure 12.3, which goes beyond the basic production circuit to depict the production of oil as a
global production network of inter-firm and firm–state relations that link nationalized oil companies, resource-holding states and publicly traded, transnational firms. It reveals a number of lateral/horizontal relations not captured by the linear commodity chain.11
Electricity, organic chemicals/plastics,
process fuel, transportation
Aerospace, construction, electronics,
engineering, manufacturing,
steel making
Jewellery, monetary, industrial
Construction, electrical/electronic,
engineering, manufacturing
Construction Ceramics, chemicals, foundry casting, fillers/pigments,
fuel, gas, iron, steel, metallurgy, water treatment
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tantalum, titanium
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Diamonds, gems
Ferrous metals
Precious metals
Base metals
Construction minerals
Industrial minerals
Precious stones
Metallic minerals
Energy minerals
Non-metallic minerals
E N D U S E S
Figure 12.1 Classification of extractive industries
Source: based on UNCTAD, 2007: Box III.1.1
Exploration Development Extraction Processing Distribution Consumption
Transportation Transportation Transportation
Identification of resource
deposits
Preparation of site for extraction
Use of smelters to produce
concentrates
Estimation of size and geophysical
characteristics
Additional delineation of deposits
Removal of resources from
the ground
Removal of waste material
Figure 12.2 The basic extractive industry production circuit
Source: based, in part, on Turner et al., 1994: Box 16.4
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Overall, the production circuits in the extractive industries are highly capital and technology intensive, involving primarily large firms (or consortia of firms), both private and state owned.
GLOBAL SHIFTS IN THE EXTRACTIVE INDUSTRIES
Oil Between 1975 and 2012, world oil production grew by 54 per cent, from 56 bil- lion barrels to 86 billion barrels. Production of crude oil is quite widely spread geographically, as Figure 12.4 shows. But, in many cases, the quantity produced is relatively small. In 2012, twelve countries accounted for 67 per cent of the world total, two of which – Saudi Arabia and the Russian Federation – produced more than one-quarter of the total. However, major changes have occurred in the global map of oil production since 1975 (immediately after the ‘first oil shock’). Important new producers emerged. So, although the Middle East still accounted for 33 per cent of world oil production in 2012, the world production map is much more complex than it was 30 years ago. And it is changing even more as oil extracted from shale is becoming a major feature of the industry, particularly in the USA and the Russian Federation, but also elsewhere as the controversial ‘fracking’ industry expands its reach.
12,000
6,000
1,000
100
Oil production (thousand
barrels per day)
20121975
Figure 12.4 The changing geography of global oil production
Source: based on data in BP Statistical Review of World Energy 2013
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THE EXTRACTIVE INDUSTRIES 401
The pattern of world trade in oil is shown in Figure 12.5. Almost half of total oil imports go to Europe and the USA, with a further one-quarter going to Japan and China. In particular, China’s significance as an oil importer has increased at enormous speed as its economy has grown at the dramatic rates discussed in Chapter 2. In the early 1990s, China was the biggest exporter of oil in Asia; today it is the fastest-growing importer of oil in the world. Much of that shift has involved China’s sourcing of oil from Africa, as we will see in later sections. For many of the world’s major oil exporters, oil is by far the most important com- modity, constituting, in some cases, virtually the entire basis of the country’s export sector.
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West
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17.6
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1
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Crude exports
Crude imports
Figure 12.5 Patterns of world trade in oil
Source: based on data in BP Statistical Review of World Energy 2013
However, the global map of oil trade seems likely to change dramatically in the next few years if the predictions of the International Energy Agency are borne out. In particular:
By around 2020, the United States is projected to become the largest oil producer (overtaking Saudi Arabia until the mid-2020s) … the result is a continued fall in US oil imports, to the extent that North America becomes a net oil exporter by 2030. This accelerates the switch in direction of international oil trade towards Asia … The United States, which currently imports around 20% of its total energy needs, becomes all but self-sufficient in net terms – a dramatic reversal of the trend seen in most other energy-importing countries.12
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Copper World copper production has increased even more rapidly than that of oil during the past two decades: by 84 per cent between 1988 and 2011 (from 8.8 million tonnes to 16.2 million tonnes). Such growth reflects the particular qualities of copper in a wide range of end uses and, again, the growth of China and its seemingly insatiable hunger for raw materials. Figure 12.6 maps the world distribution of both mine production and refined copper. Five countries produce 61 per cent of mined copper. Chile is by far the biggest producer, with 33 per cent of the world total; its share of world production doubled between 1988 and 2011. Copper production in Africa, notably in Zambia and the Democratic Republic of Congo, as well as in China, has also grown significantly. Indeed, China was the world’s second-largest producer of mined copper in 2011 having overtaken the USA. China is by far the world’s largest producer of refined copper (with 27 per cent), followed by Chile (16 per cent). The pattern of refined copper production reflects the fact that it incorporates about 20 per cent of copper scrap in its production, such scrap being generated by major copper users. This explains, for example, the pres- ence of countries like Japan and Germany as major producers of refined copper only.
5,500
2,500
1,000
100 10
Copper production (thousand tonnes)
Refined copper
Mine production
Figure 12.6 The geography of world copper production
Source: based on data in Brown et al., 2013: pp. 19, 21
VOLATILE DEMAND
Welcome to the new world of runaway energy demand (Financial Times, 14 November 2007) Global oil demand to collapse (Financial Times, 10 December 2008)
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THE EXTRACTIVE INDUSTRIES 403
These two headlines, separated by almost exactly one year, illustrate the extreme volatility of the market for the extractive industries. Periodic boom and bust are the norm. Periods of strong economic growth intensify the demand for commodities; periods of economic decline produce the opposite effect so that demand may collapse, at least until the next upturn. This means that the extractive industries are much more sensitive to the general state of the economy than most other sectors, although the speed of adjustment to ups and downs in the cycle may not be immediate and this can cause problems of over- and under-capacity.
Figure 12.7 Fluctuations in the prices of oil and metallic minerals (base year 2000 = 100)
Source: based on UNCTAD, 2007: Figure III.1
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Such massive swings in demand are, of course, reflected in equally massive fluc- tuations in prices. Figure 12.7 shows how the prices of oil and metallic minerals fluctuated in the six decades since the 1940s in response to changing market conditions:
1974 marked the end of the 30-year ‘golden period’ of strong world economic growth, and high demand for minerals that began after the Second World War … From the first oil crisis in 1973–1974 until the early 1980s, oil prices began to climb steeply … Metal prices, on the other hand, began a long-term declining trend … Crude oil prices also began to decline in real terms in 1985 … The depressed mineral prices of the 1980s and 1990s had important consequences: instead of being regarded as strategically important to economic development, oil and metals were increasingly treated as simple commodities …
It is only in recent years that the gradual decline in mineral prices has been reversed.13
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In fact, this reversal, especially in the case of minerals, was unexpectedly sudden. The first half of the 2000s, especially after 2004, saw what were, in effect, ‘gold rush’ conditions. This acceleration in demand reflected, in general terms, the rapid overall growth of the global economy but it was especially driven by the vast increase in demand for resources from some developing countries, most notably China. Depiction of China as ‘a ravenous dragon’ became common:14
There is no exaggerating China’s hunger for commodities. The country accounts for about a fifth of the world’s population, yet it … has swallowed over four-fifths of the increase in the world’s copper supply since 2000.15
In light of these new circumstances, the predictions in 2007 were that prices would remain high, and even accelerate:
The economic ascendancy of China, India and other developing countries, along with the resource-intensive stages of their current development phase could well result in a long-running acceleration of commodity demand growth. This can be seen as a new stage in interna- tional commodity markets, with prices remaining at unprecedentedly high levels … there are no indications of an impending world recession.16
Of course, this reflects China’s increasingly significant role as an export producer of a whole range of metal-intensive (and energy-intensive) manufactured goods.
So much for prediction. One year later, the financial conflagration had resulted in a collapse of commodity prices. The price of oil fell from $150 per barrel in July 2008 to below $40 a few months later. The price of copper fell from more than $8000 per tonne in June 2008 to less than $3000 per tonne in June 2009. The bonanza was, apparently, over. Of course, if history is the guide, the process will occur again at some time in the future, although we cannot know when, and precisely how, this will hap- pen. There has indeed been some recovery in prices: in mid-2013, oil was around $100 per barrel and copper around $7000 per tonne. It is likely, however, that virtually all the growth in the demand for oil and many other commodities over the next 20 years will come from developing countries. Of course, these shifts in demand reflected in price fluctuations are not only the result of changes in the market for oil or metals. Supply-side changes, especially those generated by changes in state policies and cor- porate strategies, play a highly significant role, as we will see in subsequent sections.
TECHNOLOGIES OF EXPLORING, EXTRACTING, REFINING, DISTRIBUTING
The core of the extractive industries, as Figure 12.2 shows, is the sequence of stages from exploration, through development, extraction, processing, distribution, to
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THE EXTRACTIVE INDUSTRIES 405
consumption. Each of these poses immense technological challenges. The reason lies in the basic characteristics of the resource-based industries alluded to earlier: their finiteness and their locational specificity. In general, highly expensive, sophis- ticated technologies have to be employed at all stages of the production circuit:
Building a large base-metals mine can cost over a billion dollars. The magnitude of investments in the oil and gas industry is even greater. Constructing a pipeline, developing an oil deposit or revitalizing an ailing, underinvested mineral industry can run into many billions of dollars.17
As a consequence, capital intensity is extremely high while labour intensity is low. These industries employ comparatively few workers relative to their size. For example, the biggest non-state oil company in the world, ExxonMobil, employs around 80,000 workers. The biggest metal mining company, BHP Billiton, employs 42,000. In comparison, the retailer Wal-Mart employs 2,100,000 workers while the automobile company Toyota employs more than 300,000. The difference is especially dramatic if we compare sales per worker: ExxonMobil $4.83 million; BHP Billiton $1.43 million; Wal-Mart $180,000; Toyota $730,000.
Firms in the extractive industries face three closely related technological chal- lenges: finding new sources of supply, extracting the highest yield from these sources, and getting them to the market. Of course, such challenges face firms in all industries. But the extractive industries are unique in that they are faced with ‘managing a depleting asset’.18 Unlike the agro-food industry, for example (see Chapter 13), a new crop cannot be grown next year. Once an oil well dries up or a copper mine becomes exhausted it cannot be regenerated, although in some cases technological innovation enables some further extraction to occur.
New sources of supply must continuously be sought as existing sources become exhausted and/or too expensive to exploit at prevailing market prices. This is not unlike searching for needles in haystacks. Immensely sophisticated techniques of geochemical, geophysical and satellite remote sensing techniques are involved:
The exploration period may take up to 10 years, and in many cases such investments turn out to be unsuccessful … Even if the explora- tion is successful and a new mine is developed and brought into pro- duction, the investor still faces various technical risks, market risks (related to demand and price forecasts), political risks (e.g. changes in mining laws, nationalizations), and social and environmental risks.19
In addition, the time (and investment) needed to develop a new resource – its gestation period – can be very long indeed. The situation is not unlike that in the pharmaceuticals industry, where vast investments are made over many years in the hope that a drug breakthrough will occur. In fact, of course, the majority fail, and that is also true of the extractive industries:
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[I]n the actual process of extraction, the raw materials tend to get more and more difficult to harvest as time goes on; for example, sur- face deposits of minerals are used up and people have to dig deeper, the most pure ores are depleted and users must shift to more amalga- mated sources, etc. This requires the application of bigger, more pow- erful equipment, new techniques, etc.20
A major problem, therefore, is that most of the easily accessible sources have already been exploited. New resources almost invariably tend to be found in less accessible locations and also often in circumstances making their extraction extremely dif- ficult and, therefore, costly. The deeper the resource below the surface, the greater the problems involved. The lower the degree of purity, the greater the cost involved in extraction and processing to the point where it becomes uneconomic. In the case of oil, for example,
variations in the quality of crude include its density (lighter grades … are more highly valued than heavier grades because they contain a higher gasoline and kerosene fraction), the lack of sulphur compounds (a ‘sweet’ oil is more highly valued than a ‘sour’ oil because sulphur compounds require additional ‘cleaning’ for transportation and refin- ing), the pouring point (related to the wax or bitumen content) and the presence of salt or metal (vanadium, nickel, iron).21
There is, inevitably, a close connection between explorative activity and market (i.e. price) conditions. Periods of high prices for oil and minerals stimulate a wave of exploration and the bringing into use of what are, in less favourable market con- ditions, marginal supplies. Conversely, when prices fall – especially when they fall very steeply and rapidly, as happened in 2008 – investors pull back from such risky ventures. A notable example is the Canadian oil sands project in Alberta:
Until recently, Canada’s oil sands were the venue for one of the most spectacular races for profit of modern times. The remote, boggy land- scape contains between 1.7tn and 2.5tn barrels of oil, of which an estimated 173bn can be extracted using expensive, hi-tech filtering technology. Canada’s reserves are second only to Saudi Arabia’s, and a year ago 60 projects were being constructed … But since oil prices began a downward tumble, energy companies … have shelved more than US$90bn worth of oil sands investment.22
Boom and bust is the way the extractive world works – and will no doubt con- tinue to do so in the future. Today, much of the attention in many parts of the world is on extracting oil and gas from shale deposits. Unlike the Canadian oil sands, shale oil and gas are very deeply buried and have to be extracted using a
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THE EXTRACTIVE INDUSTRIES 407
method known as ‘fracking’ or hydraulic fracturing. This technique combines deep vertical drilling with horizontal drilling. A combination of water, chemicals and sand is injected at immensely high pressure to crack the shale strata and then to extract the oil or gas. There are vast shale deposits in many parts of the world that have the potential to yield huge quantities of oil and, especially, gas. It is this technique that is revolutionizing the US energy industry and may well do the same globally if US Department of Energy estimates are accurate:
‘technically recoverable’ shale oil resources of 345bn barrels in 42 countries [were identified, equivalent to] … 10 per cent of global crude supplies … [the] assessment indicated that Russia had the largest shale oil resource with 75bn barrels. Russia and the US [with 58bn barrels] were followed by China at 32bn. The report estimated UK shale oil resources at 700m barrels. The US report looked at techni- cally recoverable resources without regard to profitability … ‘the extent to which technically recoverable shale resources will prove to be economically recoverable is not yet clear’.23
This latter caveat is the crucial one. Both the exploration and extraction/processing of oil and mineral resources
involve very high sunk costs.24 The same is also true of the distribution stage. Again, all industries face problems in getting their products to market. But the particular characteristics of the extractive industries – especially their bulk and remoteness from markets – generate the need for a massive scale of transportation infrastructure that is virtually unique. The trade-off between increasing the scale of production and being able to transport the outputs is a central problem in these industries. Massive investments in pipelines, supertankers, port facilities, and the like are a prerequisite. Not only are these costly but they, too, have a long gestation period. They represent a very high sunk cost indeed, not least because many of these facilities are highly specialized and not easily transferred to alternative uses.
The effects of such transience are graphically reflected in those places where the ‘resource frontier’ has moved on, leaving behind the relics of technology:
Few sights are as impressive as the massive port works, open-pit mines, and 500-mile railways developed to tap the natural resources of fron- tier regions, or so bittersweet as the relic landscapes left behind in the wake of resource booms. Abandoned mines, idle processing facilities, vacant warehouses, empty ports, disused railroads, boarded-up build- ings, and under-employed residents in once vibrant regions speak not only to the capricious nature of resource economies but also to the salience of ‘rigidities’ in investments in extractive industries.25
The environmental costs of resource exploitation are immense and long lasting.
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THE CENTRALITY OF STATE INVOLVEMENT IN THE EXTRACTIVE INDUSTRIES
A central argument of this book is that the state plays a major role in all GPNs. However, nowhere is the degree of state involvement as deep or as pervasive as in the extractive industries. In these industries, the state is absolutely central. The rea- son, of course, lies in the unique territorial embeddedness of resources. Access to such resources is controlled, ultimately, by the national state in which they are located.
As Figure 12.3 shows, the state operates within an extractive GPN in two main ways:
•• as a regulator (of access, taxation, health, safety and environmental issues); •• as an operator (an actual producer).
Where such dual roles exist, states have potentially enormous power over how such resources are exploited. How effective that power is, and how it is exercised, of course, depend very much on the nature of the state in question, notably its strength (both domestically and internationally) and its political orientation. This, of course, brings the state into sharp confrontation with private companies, espe- cially TNCs, as well as with other states. The history of the resource extractive industries, therefore, is one of continuously shifting power struggles between firms and states, states and states, and firms and firms. Again, although this is true of vir- tually all industries, it is especially evident in the extractive industries. However, its precise form varies between different extractive industries, especially between oil on the one hand and metal mining industries on the other.
Nationalizing the assets The central problem facing all resource-rich states is how to exploit their resources to achieve the maximum gain when, as we have seen, the costs of finding, develop- ing, extracting, processing and distributing the product can be astronomically high. Given that such a large proportion of the world’s extractive resources are located in poorer countries, this poses immense problems. To what extent can a state develop its own indigenous resources using domestic capital and know-how? How far must it depend on outside investment by foreign TNCs which will, inevitably, result in some loss of control? Over time, these problems have been approached in different ways.
In most cases, the initial development of a country’s resource industry has depended on outside investment. Indeed,
in the early twentieth century, FDI went mostly into these industries, reflecting the international expansion of firms that originated from the colonial powers. The objective of TNCs in the extractive industries was to
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THE EXTRACTIVE INDUSTRIES 409
gain direct control over the mineral resources required as inputs for their growing manufacturing and infrastructure-related industries. During the Great Depression (1929–1933), the international expansion of oil compa- nies continued unabated despite the crisis in other overseas investments.26
However, by the 1960s, this situation had changed radically:
As former colonies gained independence after the Second World War and with the creation of the Organization of the Petroleum Exporting Countries (OPEC), many governments chose to nationalize their extractive industries, resulting in a declining involvement of the TNCs that hitherto had been dominant.27
In fact, nationalization in the extractive industries – the complete transfer of own- ership from a private firm to the state – has a long history. This is especially true in the case in the oil industry:28
Outright nationalization of oil and gas … first took place in the con- text of the Russian Revolution in 1917. This was followed by nation- alizations in Bolivia (1937, 1969), Mexico (1938), Venezuela (1943), Iran (1951), and Argentina, Burma, Egypt, Indonesia and Peru in the 1960s … In the 1970s, nationalizations occurred in Algeria, Iraq, Kuwait, Libya and Nigeria and there was a gradual increase in Saudi ownership of Aramco … [Such nationalizations] have changed the global landscape of petroleum extraction and contributed to the emergence and subsequent strengthening of State-owned firms.29
A clear indication of such a change in the global landscape is provided by the prominent position of state-owned firms among the world’s largest oil companies (see Table 12.1, p. 414). Indeed, national oil companies (NOCs) control the vast majority of the world’s oil reserves.
Controlling prices The nationalization of oil production makes possible (though far from inevita- ble) collaboration between oil producing countries to control production lev- els and, therefore, prices. The clearest example is OPEC, the Organization of the Petroleum Exporting Countries. OPEC was set up in 1960 as a reaction to the cut in the oil price made unilaterally by Standard Oil. Its aim was
to defend the price of oil – more precisely, to restore it to its [1960] level. From here on, the member countries could insist that the com- panies consult them on the pricing matters that so centrally affected their national revenues.30
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The original OPEC membership consisted of five oil producing countries: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. A further seven countries subsequently joined: Qatar (1961), Libya (1962), United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973; left and rejoined 2007), Angola (2007).
OPEC’s influence was limited until the outbreak of the 1973 Arab–Israeli War when
it was the oil weapon, wielded in the form of an embargo – produc- tion cutbacks and restrictions on exports – that … altered irrevocably the world as it had grown up in the postwar period … The embargo signalled a new era for world oil … The international order had been turned upside down. OPEC’s members were courted, flattered, railed against, and denounced. There was good reason. Oil was at the heart of world commerce, and those who seemed to control oil prices were regarded as the new masters of the global economy.31
Today, although OPEC’s influence is lessening in the light of new oil discoveries elsewhere – notably shale oil – it remains highly significant and reminds us of the highly politicized nature of the oil industry. OPEC member countries produce around 40 per cent of the world’s crude oil; their exports account for around 60 per cent of world oil exports.
A (partial) return to privatization Nationalization has also been a strong trend in the metal mining industries. For example, the number of expropriations of foreign mining enterprises increased from 32 between 1960 and 1969 to 48 between 1970 and 1976.32 As in the oil industry, this resulted in a squeeze on the private companies:
For example, the share of the seven largest TNCs in copper mining outside the centrally planned economies fell from 60% in 1960 to 23% in 1981 as a result of nationalizations … By the early 1980s, the par- ticipation of TNCs in many developing countries had become limited to minority holdings and non-equity agreements with State-owned enterprises. However, many of the nationalizations undertaken in Africa and Latin America in the metal mining industry turned out to be failures.33
As a result of such failures, the emphasis has shifted towards a greater liberalization of the ownership/exploitation laws in many mining countries. Between 1985 and the early 2000s, more than 90 states introduced new laws, or relaxed existing laws, in order to attract foreign investment.34 Widespread privatization, often as part of a broader neo-liberalization project, became the norm: ‘By the early 2000s, the
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THE EXTRACTIVE INDUSTRIES 411
privatization process in the [metal mining] industry worldwide, apart from China, had been more or less completed.’35
Power games: states and firms; states and states As we saw in Chapter 7, the power relationships between states and firms are highly dynamic and contingent. In some cases, the balance of power lies one way, in other cases it lies the other way. That balance tends to shift over time. In Chapter 7, we met the term obsolescing bargain which refers to the situation in which once private capital is ‘sunk’ in a fixed form the advantage tends to move away from the inves- tor to the state that controls access to the resource. Although this situation may not generally prevail in many sectors, it certainly applies in the extractive sector. A detailed study of the development of the oil industry in Kazakhstan36 provides evi- dence of how a state can learn how to renegotiate contracts with a foreign investor; in other words, it shows how the balance of power can shift over time.
Kazakhstan achieved independence in 1991. It was rich in oil but lacked the technology to develop its resource. It needed foreign investors. Like many other former Soviet Republics and allies, Kazakhstan rushed into the wholesale privati- zation of its assets, primarily its resource extraction activities. By 2002, around half of the FDI entering Kazakhstan was concentrated in the petroleum industry. One- quarter of the country’s oil production originates from the Tengiz oilfield in the west. It is a rich field, but difficult to exploit:
it is the deepest high pressure deposit in the world, with oil that emerges from the ground scalding hot, at a very high pressure, and laden with poisonous hydrogen sulfide, which must be removed from the oil.37
Such a challenging field required a very sophisticated technology. The US com- pany Chevron had started negotiations with the Soviet government in 1990. After independence, the negotiations shifted to Kazakhstan, a state with absolutely no experience in such complex political bargaining. In contrast, Chevron, one of the world’s biggest and oldest oil companies, was a very old hand at this game. Ten years after the contract was signed, Kazakhstan attempted to renegotiate the terms, based on the kinds of circumstances implied in the obsolescing bargain concept:
the agreement had been made, the investments were sunk, the oil was beginning to turn a profit for the corporation, and the state started to feel that the distribution of benefits were too much in favor of the MNC. The country called for renegotiations.38
Kazakhstan had already negotiated some improvements over a period of time but without a firm contractual basis. It was this that was now being sought:
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In such an event, the renegotiations in question were not a simple affair and likely did not progress as Kazakhstan had predicted. The renego- tiations involved the financing arrangements for major gas processing and recycling projects designed to reduce pollution as well as for pro- jects to increase production at the TengizChevroil venture. Looking back … it may seem surprising that Chevron would shut down its operations in protest of the renegotiations. Yet initially it did … the result of Chevron’s following through on its threat, and being taken by surprise that Kazakhstan indeed demanded renegotiations. After recal- culating its costs, expected value, and strategic play, and given the strategy revealed by the State’s move, Chevron reversed its decision after just two months. TengizChevroil’s operations were resumed in January of 2003, with Chevron agreeing to some revisions in the con- tractual terms.39
On the basis of this learning experience, Kazakhstan subsequently managed to introduce a series of regulatory measures for its oil industry as a whole: renegotia- tions with other companies; more stringent rules for foreign investors; a reversal of over-generous VAT exemptions; power to cancel a contract that did not meet its economic expectations; introduction of a new oil export duty; better environmen- tal provisions, including the banning of all gas flaring. Eventually, in 2002, the state set up its own NOC to ensure a more active role in its extractive sector.
This example is one of state–firm rivalry. But given the strategic importance of extractive resources for all states, these industries are also characterized by a high degree of state–state rivalry. This is especially true of the major users of resources: the established industrialized countries and the newer, fast-growing countries of Asia. For those countries possessing a substantial resource base of their own, like the USA, for example, a major aim is to sustain as much of that resource as pos- sible for strategic reasons while importing resources to meet their needs. In this latter case, there is a strong incentive to attempt to control access to resources located overseas through either state-owned or private firm investment. In other words, it is in the resource extractive industries that direct state–state competition is most evident.
Currently, the most obvious example concerns the involvement of both the USA and China in the ‘scramble’ for oil and other minerals in Africa, through direct or indirect government participation:
The US and China are competing to secure access for the oil riches of Africa … Both the American and Chinese governments were important in paving the way for American and Chinese oil interests in expanding in Africa. The US government used diplomatic instruments … economic incentives … and military aid (the largest portion of US military aid to Africa was aimed at Nigeria and Angola). While the US government
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THE EXTRACTIVE INDUSTRIES 413
assisted private US firms in obtaining oil concessions for oil exploration and production, the Chinese government focused instead on securing oil supplies through bilateral agreements. As the most notable example, Sinopec – a Chinese state-owned oil company – acquired oil concessions in [Angola] … on the back of a US$2 billion oil-backed credit from China’s Eximbank in 2004 to rebuild the country’s railways, government buildings, schools, hospitals, and roads … The Angola example demon- strates how China has adopted an aid-for-oil strategy.40
Interstate rivalry for resources is also apparent in international trade disputes. Again, it is not surprising that the most recent cases involve China. In mid-2009, the USA and EU initiated action in the WTO against China for its alleged restrictions on exports of key materials, such as silicon, coke and zinc:
China imposes restrictions, including minimum export prices and tariffs of up to 70% on a range of raw materials of which it is a major producer. The EU claims these not only break general WTO rules on world trade, but specific promises China made when it joined the organization in 2001, becoming a fully fledged player in global markets.41
CORPORATE STRATEGIES IN THE EXTRACTIVE INDUSTRIES
Consolidation and concentration The oil industry The top 10 companies shown in Table 12.1 account for around 60 per cent of world oil production. No fewer than 3 of the top 5, and 15 of the world’s 25 larg- est oil producers, are fully or majority state owned, the result of the widespread nationalizations discussed in the previous section. This is in stark contrast to the situation that prevailed before the early 1970s:
Until the 1970s, a few major TNCs from the US and Europe domi- nated the international oil industry. In 1972, 8 of the top 10 oil pro- ducers were privately owned … including the so-called Seven Sisters … These were fully integrated oil companies, active in the extraction and transportation of oil as well as in the production and marketing of petroleum products.42
In order to compete on what the private oil companies see as a very uneven playing field, there has been a great deal of consolidation through merger and acquisition, as well as a proliferation of collaborative ventures between private firms and also
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between private firms and state-owned companies. The most recent – and biggest – was the acquisition by the Russian company Rosneft of TNK-BP for $55 billion in 2013. This made Rosneft the largest listed oil and gas company in the world in terms of total production and proven reserves, ahead of ExxonMobil.43 Nevertheless, the private oil companies ‘are increasingly being squeezed by the growing power of the national companies and by dwindling reserves and production in accessible and mature basins outside OPEC countries. The super-majors have been struggling to replace their proven reserves and expand production.’44 At the same time, the capital intensity of production, refining and transportation reinforces the position of the major companies and raises the already high barriers to entry.45
The metal mining industries Historically, the metal mining industries have been highly fragmented, but this is changing rapidly as a smaller number of very large companies control an increas- ing share of world production:
Table 12.1 The world’s largest oil and gas companies, 2012
Rank 2012 Rank 1995 Company Home country
State ownership (%)
Total production
(million barrels/day)
1 1 Saudi Aramco Saudi Arabia 100 12.5
2 3 Gazprom Russia 9.7
3 3 NIOC Iran 100 6.4
4 5 ExxonMobil USA 5.3
5 7 PetroChina China 100 4.4
6 13 BP UK 4.1
7 6 Royal Dutch/Shell UK/Netherlands 3.9
8 4 Pemex Mexico 100 3.6
9 16 Chevron USA 3.5
10 9 KPC Kuwait 100 3.2
11 23 ADNOC UAE 100 2.9
12 Sonatrach Algeria 100 2.7
13 33 Total France 2.7
14 20 Petrobras Brazil 100 2.6
15 Rosneft Russia 2.6
16 MoO Iraq 100 2.3
17 QP Qatar 100 2.3
18 11 Lukoil UAE 2.2
19 ENI Italy 2.2
20 Statoil Norway 100 2.1
Source: based on material in Helman, 2012; UNCTAD, 2007: Table IV.8
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THE EXTRACTIVE INDUSTRIES 415
Worldwide … there are more than 4,000 metal mining firms, mostly engaged in exploration and extraction … Most of the 149 ‘majors’ are TNCs, the majority of which have production facilities covering min- ing, smelting as well as refining. These companies account for some 60% of the total value at the mining stage of all non-energy minerals produced … The degree of concentration in the metal mining indus- tries increased significantly between 1995 and 2005.46
The top 10 metal mining companies shown in Table 12.2 produced around one-third of total world output in 2007. Whereas the oil industry is now dominated by national companies, the degree of state ownership in metal mining is significantly lower. Only one of the top 10 mining companies, the Chilean company Codelco, is fully state owned and only one other, the Brazilian company Vale, has significant state involve- ment. This is a consequence, as we saw in the previous section, of the widespread adoption of privatization policies by many national resource holders in recent years.
At the same time, there has been a wave of mergers and acquisitions in the metal mining industries, largely stimulated by the surge in commodity prices that occurred in the mid-2000s (see Figure 12.7). In 2006 alone, the value of mergers and acquisi- tions in these industries was $55 billion. Two of the biggest acquisitions in that year were of Inco (Canada) by the Brazilian company Vale, and of Falconbridge (Canada) by Xstrata, the Swiss mining company. The pace accelerated in 2007 and included Rio Tinto’s acquisition of the alumina producer Alcan, and the attempted hostile acquisition of Rio Tinto by BHP Billiton. This latter case turned out to be highly
Table 12.2 The world’s largest metal mining companies
Rank 2007
Rank 1995 Company Home country
State ownership (%)
Percentage share of world production
1 6 Vale Brazil 12 5.2
2 4 BHP Billiton
Group
Australia 4.6
3 1 Anglo American
plc
UK - 4.3
4 2 Rio Tinto plc UK - 4.0
5 5 Codelco Chile 100 3.4
6 11 Freeport
McMoran
USA - 3.3
7 7 Norislk Nickel Russian Federation -• 2.7
8 8 Xstrata plc Switzerland - 2.4
9 14 Barrick Gold
Corp.
Canada - 2.3
10 22 Grupo Mexico Mexico - 1.6
Source: based on Ericsson, 2008: Table 1; UNCTAD, 2007: Table IV.4
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contentious and was abandoned in 2008, largely because of the collapse in commod- ity prices. This situation was made especially complex because the Chinese state- owned company Chinalco attempted to double its equity stake in Rio Tinto in order to stop the BHP Billiton takeover. What would have been China’s biggest overseas investment was acrimoniously prevented by Australian pressure. The disagreements were exacerbated by the proposal of BHP and Rio Tinto to form an iron ore joint venture. Again, we see the immensely political nature of the extractive industries. Talks also began in 2009 on a possible merger between Xstrata and Anglo American to create a rival to BHP Billiton and Rio Tinto. This venture was abandoned.
A far more revolutionary merger was concluded in 2013 between Xstrata and Glencore. This $90 billion merger brought together one of world’s largest metal min- ing companies (Xstrata) and the leading commodities trading company and metal mining company (Glencore). The unique feature of this huge merger47 is its creation of a fully vertically integrated company ‘from the shovel to the shelf ’ whereby ‘Glencore/Xstrata combined will cover all areas from exploration to marketing’ with the intention of ‘capturing each and every dollar along the supply chain’.
Whether or not this vertically integrated model will spread to other major companies in these industries is far from clear; if it were to do so it would dra- matically reconfigure the mining industries. Whatever the ultimate outcome of this and other mergers, one thing is clear:
The fragmented structure of mining is slowly disappearing … [T]he industry is getting more and more polarised, to the one side there are the large, established mining TNCs controlling a major share of global metal production and on the other side are the junior exploration companies without any production, only ‘blue sky’ hopes of future production. There is a lack of medium and small sized producers, which can grow organically and become major producers with time. These companies are important in that they concentrate on smaller deposits which often have good grades but which are discarded by the majors.48
Organizational and geographical restructuring The geography of the extractive industries is, as we have seen, basically constrained by the distribution of the territorially embedded resources on which they are based, together with the need to transport outputs at each stage of the produc- tion circuit, particularly to the final market. In the case of the oil industry, it is also strongly influenced by the ownership of the firms involved. In general, most of the state-owned firms have a very restricted geography, mostly limited to their home territory. In contrast, the production spaces of the private companies are globally extensive. However, some state companies have begun to develop more extensive geographies. CNPC, for example, has operations in 14 foreign locations, Kuwait Petroleum Corporation and Petrobras in 8. Figure 12.8 maps the geographical distribution of some of the leading oil companies.
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THE EXTRACTIVE INDUSTRIES 417
B E P R T
B C E K TB E
P T
B C E B K R
B C E R
B E R T
B K R B K R
B P T
B P T
T T T
T
E
E
C
C
C G
RB
E
R
R TE R
C TC RC K E T
E T B T
R T C P
C P
E R T C R T
B E T
E K T C E R T
B C E P R T
G E
B
R
C
T
K P
British Petroleum CNPC ExxonMobil Gazprom Kuwait Petroleum Petrobras Royal Dutch Shell Total
Figure 12.8 Geographies of oil production by some major companies
Source: based on data in UNCTAD, 2007: Table IV.10
0
5
10
15
N u
m b
e r
o f
co u
n tr
ie s
in w
h ic
h co
m p
a n
y is
in v
o lv
e d
Exploration
Mining production
Refining/smelting
BHP Billiton
Rio Tinto Vale Anglo American
Grupo México
Xstrata plc
Glencore International
Figure 12.9 Distribution of exploration, production and refining/smelting projects by leading mining companies
Source: based on data in UNCTAD, 2007: Tables IV.5–IV.7
Figure 12.9 shows the distribution of some metal mining companies’ opera- tions. Their geographical extensiveness varies considerably both by size of firm and by type of operation (exploration, production, refining/smelting):
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In exploration, the activities of certain TNCs, such as Anglo American and Xstrata (present in 14 countries each) were widely spread … All but four of the top-25 producers … were involved in exploration activities in at least one foreign country. In terms of mining production, Rio Tinto was the company with activities in the largest number (10) of host countries … In smelting and refining, Glencore was the most internationalized top metal mining company, with a presence in 13 host countries, followed by BHP Billiton (9) … Leading firms appear to be more internationalized in exploration and mining production than in smelting and refining.49
The major extractive companies vary enormously in their degree of product diver- sification. Some focus on one or two specific resources; others operate as highly diversified companies. They also differ in the extent of their functional integration along their production circuit. Four broad types can be identified:50
•• Vertically integrated companies: active in all stages of exploration, development, extraction, refining and distribution. In the case of oil companies such vertical integration extends into retailing.
•• Independent producers: specialize in upstream activities with very limited down- stream activity.
•• Independent transporters, refiners and distributors: specialize in the middle and/or the downstream segments of the production circuit.
•• Service companies: provide ‘drilling, interpretation and logistical services to producers’.
One of the most significant developments in the organization and operation of the extractive industries has been the huge increase in the influence of specialist services firms. In the case of oil, for example,
drilling operations are often outsourced to a contract drilling com- pany who may also provide the rig or drill-ship (e.g. Parker Drilling) and who undertakes to crew the rig. Drilling tool supply may be contracted to a specialist tool company (e.g. Baker Hughes), with data logging, data analysis and well maintenance contracted to another firm (e.g. Schlumberger). For many large projects, engineering, design and project management functions may also be outsourced (e.g. AMEC). These specialist upstream oil service companies operate on a global scale, with patterns of inter-firm relations developed in one geographical setting (e.g. Gulf of Mexico) often replicated in other regional contexts (e.g. offshore West Africa or the North Sea) … This … dramatic growth of the oil service market has led several commentators to suggest that the balance of power is shifting away from the majors as a number of oil service providers – Halliburton,
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THE EXTRACTIVE INDUSTRIES 419
Schlumberger, Baker Hughes – assume an increasingly dominant role in the production chain.51
A similar trend towards the increasing importance of specialist service suppliers is also evident in the metal mining industries:
The growing role of such suppliers is being driven by the reorganiza- tion of global mining production and technological rejuvenation of the industry, with continued improvements in exploration, mining and mineral processing. Suppliers are focused on specific niches in which they have a globally dominant position …
Examples … include large international consulting firms that integrate engineering, project management, procurement and construction activities, such as Kvaerner (Norway), Hatch (Canada), and Bechtel Group (US); medium-sized specialized engineering consulting com- panies, such as Bateman (South Africa), SRK Consulting (South Africa), and AMC Consultants (Australia); and small- to medium-sized mining and geological software providers, such as Maptek (Australia).52
RESOURCES, RESERVES AND FUTURES
The dilemma facing all extractive industry producers, whether state owned or pri- vately owned, is that ‘as extractors of non-renewable resources … they necessarily consume their resource base during production’.53 Hence, there is a continuous search for new sources of supply and for new techniques that enable the extraction of materials from less and less pure deposits. The big question, of course, is the extent to which the world is running out of viable resources. On this issue, views are highly polarized.
On the one hand, there is the ‘Malthusian’ view that resource exhaustion is inevitable; the only question is the timescale over which such exhaustion will occur. On the other hand, there is the view that new technologies of exploration leading to discoveries of new reserves (e.g. shale oil and gas), better means of exploitation leading to more efficient use of the resource (including recycling), and the development of appropriate substitutes will put off the dreadful day. Such polarization of views is reflected clearly in the arguments about ‘peak oil’: the assertion that oil production is about to peak and then move into inexorable decline.54 The problem is that there are so many variables at work that it is extraor- dinarily difficult to assess the extent of future reserves of minerals. All the estimates of future are based on assumptions. A small change in one of the variables, whether on the demand or the supply side, can drastically change the predictions.
Figure 12.10 provides a framework (known as a McKelvey Box) for under- standing the complex relationships between reserves and resources:
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PART FOUR THE PICTURE IN DIFFERENT SECTORS420
The reserves category includes all geologically identified deposits that can be economically recovered and is subdivided into proved, probable and possible reserves on the basis of geological certainty. All other deposits are labelled resources, either because they have not yet been discovered or because their exploitation is not currently feasible (tech- nical and economic problems are inhibiting their extraction) … Thus, resources are continuously reassessed in the light of new geologic knowledge, scientific and technical progress and changing economic and political conditions. Known resources are therefore classified on the basis of two types of information: geologic or physical/chemical characteristics (grade, quality, tonnage, thickness and depth of material in place); and financial profitability based on costs of extraction and marketing at a given point in time.55
This way of looking at resources and reserves is essentially techno-economic. But there are also environmental, ecological and geographical dimensions56 that relate to the impact of continued resource exploitation on sustainable development and the effects of resource extraction on the places where it occurs and of transporta- tion between places of extraction, production and consumption (see Chapter 9). In
Identified Resources Undiscovered Resources those whose location, grade, quality and quantity are known or estimated from specific geologic evidence. This includes economic and subeconomic components and can also be subdivided on geologic certainty grounds into measured (proved), indicated (probable) and inferred (possible).
that part of the reserve base which could be economically extracted or produced at the time of determination.
measured plus indicated.
assumed continuity of data, estimates not supported by samples or measurements.
undiscovered resources that are similar to known mineral bodies and that may reasonably be expected to exist in the same producing district or region under analogous geologic conditions.
undiscovered resources that may occur either in known types of deposit in favourable geologic settings where mineral discoveries have not been made, or in types of deposit as yet unrecognized for their economic potential.
size, shape, depth and mineral content of the resource are well established.
geologic data not as comprehensive as for measured but still probably good enough to estimate the characteristics of the deposits.
the existence of which are only postulated, comprising deposits that are separate from identified resources.
Demonstrated Resources Hypothetical Resources
Speculative Resources
Inferred Resources
Measured Resources
SU B
EC O
N O
M IC
Indicated Resources
ECONOMIC RESERVES
RESOURCES
Increasing degree of geological assurance (chemical composition, concentration, orientation and extent of deposits, plus constraints)
In cr
e a
si n
g d
e g
re e
o f
e co
n o
m ic
fe a
si b
il it
y (p
ri ce
s, co
st s,
te ch
n o
lo g
y )
Figure 12.10 McKelvey Box framework for resources and reserves
Source: adapted from Turner et al., 1994: Box 16.1
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THE EXTRACTIVE INDUSTRIES 421
a sense overriding all of these considerations, however, is the fact that the ‘limits’ to resources are, essentially, socially and, therefore, politically determined. Choices have to be made, for example, as to how much money should be thrown at finding and extract- ing increasingly difficult resources or over what is the acceptable degree of environ- mental and ecological damage. The disastrous oil leakage in the BP operations in the Gulf of Mexico in 2010 demonstrated the potential scale of environmental damage posed by attempts to extract oil from very difficult locations. It surely will not be the last example. Indeed, the environmental implications of shale oil and gas exploitation are highly controversial, especially in Europe. Ultimately, then, the future shape of the extractive sectors ‘will be determined not by natural limits but by social choice’.57
NOTES
1 Smith (2005) makes this argument in his plea for research on global commodity chains to take the extractive sector more seriously.
2 UNCTAD (2007: 83). 3 See Bridge (2009). 4 Hudson (2001: 301). 5 Bridge (2008b: 413). 6 See, for example, Bridge (2008b), Bunker and Ciccantell (2005), Yergin (1991). 7 Bunker and Ciccantell (2005). 8 Farooki and Kaplinsky (2012). 9 UNCTAD (2007: Table III.1). 10 USGS (2013: 1). 11 Bridge (2008b: 400). 12 International Energy Agency (2012: 1–2). 13 UNCTAD (2007: 88). 14 Farooki and Kaplinsky (2012), The Economist (15 March 2008). 15 The Economist (15 March 2008). 16 UNCTAD (2007: 90–1; emphasis added). 17 UNCTAD (2007: 92). 18 Bridge (2008b: 403). 19 UNCTAD (2007: 92). 20 Smith (2005: 152). 21 Bridge (2008b: 404). 22 Guardian (7 February 2009). 23 Financial Times (11 June 2013). 24 Barham and Coomes (2005). 25 Barham and Coomes (2005: 160). 26 UNCTAD (2007: 99). 27 UNCTAD (2007: 99). 28 Yergin (1991). 29 UNCTAD (2007: 115). 30 Yergin (1991: 523).
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31 Yergin (1991: 588, 613, 633). 32 UNCTAD (2007: 108). 33 UNCTAD (2007: 107–8). 34 Bridge (2004: 407). 35 UNCTAD (2007: 108). 36 Hosman (2009). The following section draws from this analysis. 37 Hosman (2009: 19). 38 Hosman (2009: 19). 39 Hosman (2009: 20). 40 Frynas and Paulo (2006: 229, 238–9). See also Mohan (2013), Mohan and Lampert
(2012), Power et al. (2012). 41 Guardian (24 June 2009). 42 UNCTAD (2007: 115). 43 Financial Times (3 April 2013). 44 International Energy Agency (2012: 10). 45 Bridge (2008b: 408). 46 UNCTAD (2007: 109). 47 Financial Times (8 February 2012). 48 Ericsson (2008: 114–15). 49 UNCTAD (2007: 111). 50 Bridge (2008b: 397–8). See also UNCTAD (2007: 113). 51 Bridge (2008b: 400, 408). 52 UNCTAD (2007: Box IV.3, p. 113). 53 Bridge (2004: 407). 54 See, for example, Clarke (2007), Monbiot (2012), Strahan (2007). 55 Turner et al. (1994: 222, 224). 56 Emel et al. (2002: 383–8). 57 Gavin Bridge, personal communication.
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