1.

INTRODUCTION TO THE PETROLEUM INDUSTRY

1.1 Definition of Petroleum

Under Section 5 of the Petroleum Act 2012 (South Sudan) Petroleum is defined as:
“petroleum” means any naturally occurring:
(a) hydrocarbon;
(b) mixture of hydrocarbons; or
(c) mixture of one or more hydrocarbons and any other substance,
whether in gaseous, liquid or solid form, and includes petroleum which has been returned to a natural
reservoir and coal-bed methane;

In simple layman terms, Petroleum is defined as a naturally occurring black yellowish fluid found
beneath the earth surface.

Both the definition under the Petroleum Act 2012 and the simplified layman definition refers to
Petroleum as naturally occurring, hence two key questions arise: firstly, where is petroleum found? and
secondly, how is petroleum formed?

1.2 Where is Petroleum Found

Whether on land or on sea, petroleum is found beneath the earth’s surface. This basically means
that Petroleum can be found beneath the earth’s surface on land or beneath the seabed at sea/ocean.
Petroleum fields found on land are On Shore fields, while petroleum fields found at sea/ocean are
off-shore. As such operations on land with respect to petroleum will be referred to onshore operations
while on sea will be known as offshore operations.

1.3 How is Petroleum Formed

The word ‘petroleum’ comes from the Latin word ‘petra’ which means rock, and ‘oleum’ meaning
oil.
Petroleum is considered as fossil fuel, which are formed from plants and animals that died millions
of years, accumulated in large quantities and were covered by sediments to the extent that there was
no oxygen. As they were buried deeper, they were subjected to bacterial decomposition hence
forming an organic matter known as kerogen. Noting that they were buried underneath, where
temperature and pressure was high, kerogen, upon subjection to heat generated petroleum (oil
and gas). The fact that petroleum comes from fossils (remains of dead organisms) is what has led it be
categorized as on o the Fossil Fuel.

It is also noteworthy that the physical conditions chemically transformed organic material into
hydrocarbons (organic compounds consisting of hydrogen and carbon), hence the reason
petroleum is called a hydrocarbon.

1.4 Locating Petroleum

The place where this petroleum was trapped beneath the earth is known as the Source Rock, being the
source of the petroleum. The oil and gas that is formed at the Source Rock seep out of the Source Rock
since petroleum (being a hydrocarbon) is lighter that water, hence it migrates upwards in a porous
 2

water bearing rock known as the Reservoir Rock, this migration is a process that takes thousands of
years.
The upward migration goes upwards through the Reservoir Rock until it is stopped by impermeable
layers of rock known as the Cap Rock or until the oil and gas leaks out into to the sea or land.
Once Petroleum is found, the point from which it flows form is known as the Hydrocarbon
Reservoir.

The speed at which the pressure in a reservoir forces the petroleum upwards is known as the flow rate.
This rate depends on the properties of the reservoir rock, the reservoir pressure, and, in the case of
crude oil, the viscosity of the material—in short, the reservoir’s characteristics.

1.5 Grade of Oil and Gas

Oil and Gas comes in different grades or qualities which are often classified by the location or
origin, as well as by sweetness and heaviness.
The sweetness of oil refers to the amount of Sulphur in oil, the less the Sulphur the ‘sweeter’ the oil,
the more the Sulphur, the ‘sour’ the oil.
The heaviness of oil refers to its density. Lighter crude oil can be refined into higher value products,
while heavier crude oil flows more slowly and has more unwanted chemicals that must be refined out.
 3

1.6 The Petroleum Value Chain

Once Petroleum is formed, it is then subjected to the Petroleum Value Chain. The Petroleum Value
Chain consists of:
Upstream;
Midstream; and
Downstream

1.6.1 Upstream
The hydrocarbon upstream segment is characterized by high risk, high capital intensity, captive
investment, and longtime spans for projects.
Upstream consists of a number of operations as listed below:
 exploration,
 appraisal,
 determination of commerciality or relinquishment
 development
 production stages
 decommissioning

1.6.1.1 Exploration – Section 5 of the Petroleum Act 2012 defines exploration as “the search for
petroleum by geological, geophysical and any other means, and drilling of exploration
wells, including appraisal wells, and any other activities in relation to the search for
petroleum”. Simply put, exploration is the search for petroleum. The identification of
where to find petroleum is what sets off the petroleum value chain. Exploration is done
through the use of aerial and satellite photography as well as magnetic surveys. When
the photography indicates the presence of oil, the next step is the conducting of seismic
surveys. Seismic surveys involve complex computer analysis, the data are interpreted to
create an image of geological structures below the earth’s surface that may contain
deposits of hydrocarbons. If a suitable geological structure is identified, the only way to
find out whether hydrocarbons are indeed present is by drilling an exploration well using
drilling rigs suitable for the type of area concerned: land, shallow water, or deep water as a
result of the geographical formation, it is considered a discovery.
 4

1.6.1.2 Appraisal – appraisal follows exploration. It is aimed at understanding the potential of a

hydrocarbon reservoir for purposes of confirming whether or not the discovery is
commercially viable. If exploration demonstrates the presence of petroleum in sufficient
quantities, the process continues with the drilling of one or several appraisal wells to
better assess the size and quality of the reservoir.

1.6.1.3 Declaration of Commerciality/Relinquishment – If the quantity of petroleum found in

the reservoir is considered sufficient enough for the investor to make profits in the long
term, then the reservoir is declared commercial and process proceeds to the development
stage. However, if the petroleum reservoir is not commercially viable, then the investor
relinquishes the area. Relinquishment is surrendering the area back to the Government.

1.6.1.4 Development – when the discovery is considered commercially viable, then development
phase commences. The development phase involves the building/setting up of facilities
for full-scale production and infrastructure to connect the petroleum wells to local
processing facilities or to oil or gas evacuation routes. Onshore infrastructure tends to be
less complex and much cheaper than offshore infrastructure.

1.6.1.5 Production - It is the process of extracting the petroleum from the reservoir through
the production well. Production can be accomplished through three methods:
 Primary recovery – oil flows to the surface under its own pressure;
 Secondary recovery – after pressure diminishes, water or gas may be injected to
reservoir to increase pressure and lift oil.
 Tertiary or enhanced removal (EOR) – involves use of various techniques for
increasing the amount of crude oil that can be extracted and involves three primary
techniques – thermal recovery, gas injection and chemical injection.

1.6.1.6 Decommissioning – means the shutting down of petroleum activities and continued use or
removal of facilities relating to petroleum. This happens when oil wells have reached the
end of their productive lives.

1.6.2 Midstream
This is the stage that links oil production and processing facilities. It involves the movement of
petroleum retrieved in the upstream sector from production sites to storage facilities. This parts
of the value chain referred to as “midstream” concern transportation and encompass infrastructure,
such as pipelines and access to roads, rail, ports, and storage. Transportation is critical at various
stages in the value chain; it provides the links between the production and processing facilities as well
as between the processing facilities and the final customer.

1.6.3 Downstream
Refining and marketing compose the “downstream” oil segment. Oil refining turns the extracted
crude oil into usable products. As noted above, a specific crude oil’s composition and properties
determine the mix of products that can be obtained by refining it, as well as the complexity and cost of
the refining process.
 5

Those crude oils that yield a large proportion of more valuable products or that can be treated in most
of the world’s refineries command a premium over those used for lower-value products and those that
can be processed in only a small number of dedicated refineries.
Following the refining, the processed products are marketed and distributed to wholesale, retail, or
industrial clients.

3. INSTITUTIONAL FRAMEWORK OF THE PETROLEUM SECTOR IN SOUTH SUDAN

The Principal Institutions in the Petroleum Sector are:
 The National Petroleum and Gas Commission;
 The Ministry in charge of petroleum; and
 The National Petroleum and Gas Corporation.

3.1 The National Petroleum and Gas Commission (“Commission”)

As stated under the Legislative Framework, the Commission is established as the policy making body
with respect to petroleum and gas resources.1

Noting the above, the powers and functions of the Commission as provided under the Petroleum Act
are as follows:
 provide general policy direction with respect to petroleum resources;
 act as a supervisory body in matters relating to petroleum resource management;
 approve all petroleum agreements on behalf of the government and ensure that they are
consistent with the Petroleum Act;
 ensure coordination among all levels of Government and states to promote cooperation
among the private sector, non-governmental organizations and other persons, institutions
and organizations interested in Petroleum Activities;2
 approve the extension of a Petroleum Agreement if production from a field is projected to
extend beyond the original term of the Petroleum Agreement, and the contractor has fulfilled
all its obligations under the agreement;3
 approve the termination of a Petroleum Agreement by the Ministry of Petroleum if a
contractor fails to fulfil the work obligations within the time period stipulated in the Petroleum
Agreement;4
 make a report, to the Council of Ministers, of the Strategic Environmental Assessment together
with the views of interested persons to enable the Council of Ministers determine whether or
not to open the relevant area for Petroleum Activities and determine the environmental and
social conditions under which to carry out the Petroleum Activities;5 and
 perform any other functions provided by law.

The Constitution has also expanded the powers and functions of the Commission to include:
 playing a key role in processing oil contracts;6
 awarding oil concessions in accordance with the provisions of the revised Petroleum
Legislation;7 and

1
Article 174(1), Constitution and Section 9(2), Petroleum Act
2
Section 11, Petroleum Act.
3
Section 25(2), Petroleum Act.
4
Section 26(5), Petroleum Act.
5
Section 59(6), Petroleum Act.
6
Article 174(6), Constitution.
7
Article 174(7), Constitution.
 6

 overseeing negotiations with oil companies as well as the award of concessions and licenses.
8

It is noteworthy that while the powers and functions of the Commission have been expanded under the
Constitution, the wording in this regard is general in nature. This therefore requires that the powers and
functions provided in the Constitution should be expressed more specifically in the petroleum
legislation. Examples of such general wording are with respect to the functions of the Commission in
playing “a key role in processing oil contracts” and “overseeing negotiations with oil companies”.
Noting that the Commission currently approves Petroleum Agreements, the question that begs to be
answered is what will playing “a key role in processing oil contracts” and “overseeing negotiations
with oil companies” entail. Will the Commission take part in the process of awarding oil contracts as
part of its key role in processing oil contracts? What role will the Commission play in overseeing
negotiations with oil companies? While such concerns are key, it is noteworthy that the amendment to
the Constitution, in light of the Revitalized Agreement, gives room to revisit the role and mandate of
the Commission. This will thus enable legislative drafters to come up with a variety of options that will
broaden the mandate and overall supervisory authority of the Commission in the petroleum sector.

3.2 The Ministry of Petroleum

Currently, the Ministry of Petroleum (MoP) is the ministry in charge of petroleum and gas in South
Sudan. It is thus noteworthy that as per the Constitution, the Ministry in charge of petroleum and gas is
the policy implementing body of the Government with respect to petroleum affairs. 9 This therefore
makes the MoP the regulator of the petroleum and gas sector in South Sudan.

In light of the above Constitutional mandate of the MoP, the Petroleum Act provides that the MoP is
responsible for the management of the petroleum sector in accordance with the provisions of the
Constitution and the Petroleum Act.10 The Petroleum Act further provides that the MoP shall
implement the policies established by the Commission respecting the management and development of
the petroleum sector11 and in this regard, the MoP shall:
 formulate strategies, plans and programmes for the development and management of the
petroleum sector;
 negotiate Petroleum Agreements in accordance with the Petroleum Act;
 sign, manage and, if applicable, terminate the Petroleum Agreements on behalf of the
Government after approval by the Commission;
 manage petroleum resources on behalf of the Government;
 manage the relations of the Government with petroleum companies operating in South Sudan;
 develop the necessary technical capacity and competence of personnel involved in Petroleum
Activities;
 provide technical expertise and support to the Commission;12
8
Article 174(8)(a), Constitution. It is noteworthy that while Article 174(7) empowers the Commission to award oil
concessions, Article 174(8) indicates that the Commission shall oversee negotiations with oil companies as well as the
award of concessions. This hence raises the question as to whether the Commission awards or oversees the award of
concessions. To address this, reference is made to Article 4.8.1.14.5 of the Revitalized Agreement which requires the
empowerment of “the National Petroleum and Gas Commission to oversee negotiations with oil companies as well as the
award of concessions and licenses”. Based on this provision of the Revitalized Agreement, the intention was not to have the
Commission award Concessions but instead to oversee the award of Concessions.
9
Article 175 (1), Constitution.
10
Section 12 (1), Petroleum Act.
11
Section 12 (3), Petroleum Act.
12
The Commission is mandated to come up with policies that are to be implemented by the MoP, and yet the MoP provides
the technical expertise and support to the Commission. This weakens the independence of the Commission since where the
Commission needs technical expertise to come up with policies for implementation by the MoP, it relies on the MoP to
 7

 in consultation with affected communities, ensure that all petroleum projects are subject to
environmental and social impact assessments;
 make public and disclose documents and information as required under the Petroleum Act;13
 initiate legislation and make rules and regulations respecting the development and management
of the petroleum sector pursuant to Petroleum Act;14
 provide for the transportation, processing, refining and distribution, including the relevant
infrastructure relating to these activities and provide for the marketing and selling of
Government entitlement of crude oil and its derivatives; and
 perform any other functions as prescribed by law.

As stated above, one of the functions of the MoP, through the Minister of Petroleum, is the making of
rules and regulations. Regulations are made so as to ensure the efficient and effective implementation
of the provisions of the Petroleum Act. It is thus needful to highlight the areas that the Minister of
Petroleum is empowered to issue regulations on, which are as follows:
 incorporation and organizational requirements of the Contractor, including requirements
respecting the Contractor’s capitalization and management and participation of the National
Petroleum and Gas Corporation;
 graticulation;
 reconnaissance licences, including their form and content;
 requirements relating to the exploration period, including work and expenditure obligations;
 requirements relating to the relinquishment of the Contract Area;
 petroleum measurement, including calibration, testing and compensation in cases of
mismeasurement;
 production permits, including their form and content;
 licences to install and operate transportation systems;
 third party access to facilities for the transportation, treatment and storage of petroleum,
including the terms upon which the access is granted;
 matters relating to decommissioning, including the establishment of and criteria relating to a
decommissioning fund;
 the content and conduct of surveys relating to plugging and abandonment of wells;
 the acquisition of rights to land or surface for conducting of Petroleum Activities, including the
requirements for consultation and notification;
 all matters relating to safety, environmental and waste management and prevention, including
the establishment of safety zones and any other measures to enforce safety zones, emergency
preparedness and related emergency measures and the form, content and other requirements
relating to environmental and social impact assessments;
 local content plans;
 management system requirements;
 training and qualification, competency and nationality requirements regarding the Board of
Directors, management, employees and subcontractors of persons engaged in providing goods
and services and training of public servants by these persons and exemptions from these
requirements;
 surface rental fees and other fees, bonuses and royalties, including prescribing the amounts or
criteria for their calculation, their collection and the classification of persons subject to such
fees, bonuses and royalties;
 records, reports and information, including requirements as to their content, submission and
retention;

provide the expertise.

13
Section 78 and 79 of the Petroleum Act expressly sets out the disclosures and publications expected of the MoP.
14
Section 99 of the Petroleum Act sets out the areas requiring the Minister of Petroleum to issue regulations on.
 8

 public disclosure and verification of any records, reports or information submitted to the MoP,
including the form, content and timing of the disclosure and requirements by administrative
agencies to provide information relating to payments and revenues;
 the petroleum registry, including the amount or manner of calculation of fees that may be
levied;
 insurance requirements, including the type and amount of coverage and criteria related to its
adequacy;
 requirements governing arbitration proceedings;
 exemptions and the criteria for such exemptions from any requirements under the Regulations;
and
 any other matter that the MoP deems necessary or appropriate to give effect to the provisions of
the Petroleum Act.

It is also noteworthy that the Petroleum Act permits the MoP to establish a body known as the
Petroleum Exploration and Production Authority (“Authority”). The Authority is mandated to oversee
petroleum operations and advise the MoP on the same.15 The Authority is established and currently
operational.

3.3 The National Petroleum and Gas Corporation

The National Petroleum and Gas Corporation (NPGC) is established to participate in the upstream,
midstream and downstream activities of exploring and prospecting for, working, winning or otherwise
acquiring, possessing and disposing petroleum. The NPGC thus acts on behalf of the Government, as
the Government’s commercial entity in the petroleum sector so as to safeguard national interests in
Petroleum Activities. In consideration of the above, the functions of the NPGC as provided in the
NPGC Act are as follows:16
 refining, treating, processing and generally engaging in the handling of petroleum for the
manufacture and production of petroleum products and its derivatives;
 purchasing and marketing petroleum, its products and by products;
 providing and operating pipelines, tanker-ships or other facilities for the carriage or
conveyance of crude oil, natural gas and their products and derivatives, water and any other
liquids or other commodities related to the NPGCs operations;
 constructing, equipping and maintaining tank farms and other facilities for the handling and
treatment of petroleum and its products and its derivatives;
 carrying out research in connection with petroleum or anything derived from it and promoting
activities for the purpose of taking into account the results of such research;
 doing anything required for the purposes of giving effect to agreements entered into by
Government with a view to securing participation by the Government or the NPGC in activities
connected with petroleum;
 generally engaging in activities that would enhance the petroleum industry in the overall
interest of South Sudan;
 represent the Government in all consortium conducting petroleum and gas activities in South
Sudan and any other activities that are deemed necessary for the corporation to fulfill its
functions under the NPGC Act or any other law; and
 Undertake such other activities as are necessary or expedient for giving full effect of the
provisions of the NPGC Act.17
15
Section 12 (2), Petroleum Act.
16
Section 7, NPGC Act 2019.
17
Section 7(9) and 7(10) of the NPGC Act provides other functions of the NPGC as to “Ensure that the public officials and
employees of the Corporation shall not be appointed to serve in the commission or Ministry” and “Ensure that the public
 9

It is noteworthy that the NPGC enjoys certain preferential rights in the petroleum and gas agreements
including cost carry in the exploration phase. 18 It is also noteworthy that on the approval of the Board
of the NPGC, the NPGC can form affiliate or subsidiary companies.19

2 PROFESSIONS INVOLVED IN THE PETROLEUM INDUSTRY

The professions that are common in the upstream petroleum industry are as listed below:
2.1 Petroleum Engineers
They are involved all through the upstream stages. They are mainly involved in drilling and
monitoring operations. They design and develop methods for extracting petroleum from the reservoir
and in this respect design and set up necessary oil field equipment, drill, operate and maintain them.
2.2 Petroleum geophysicist /geologists
They examine the structural and sedimentary details of rock to identify possible petroleum reserves
and decide where to drill. They are responsible for aerial photography and evaluate geophysical
surveys and seismic data. Even after petroleum is found, they (geologists) are maintained to continue
monitoring the reservoir and rock so as to get as much petroleum out of existing fields and identify
risks or faults in order to prevent injuries and accident.
2.3 Petroleum Economists
They mainly determine and calculate economic inputs, evaluate investments, quantify risk and
generate feasible portfolios. In short, they guide on making decisions as to whether an investment in
the petroleum sector is economically viable.
2.4 Petroleum Lawyer
Petroleum projects have a number of legal needs which are mainly addressed by contracts. The
lawyer’s role is to draft and review contracts (the lawyer’s role is thus mainly transactional). The
lawyers also review other legal documents, advise on legal matters and take part in dispute resolution.
2.5 Environment specialist and scientists
They advise on the impact petroleum activities have on the environment using their knowledge of
natural science. They also advice on ways to protect the environment and human health and develop
plans to prevent, control, and fix environmental problems. They also give guidance on possible
environmental hazards and health risks.

officials and the employees of the Corporation shall not be partisan”. While these are captured as functions, preference
would be to have them under a provision that addresses the Staff of the NPGC and not as a function.
18
Section 7(11), NPGC Act.
19
Section 19(8) of the NPGC Act.
 10

Energy Policy ] (]]]]) ]]]–]]]

Contents lists available

ScienceDire

Energy Policy

journal www.elsevier.com/locate/
l

Exporting the ‘‘Norwegian Model’’: The effect of administrative design on oil sector
performance
Mark C. Thurber a,2021, David R. Hults a, Patrick R.P. Heller b
a Program on Energy and Sustainable Development, Stanford University, Stanford, CA 94305, USA b Revenue
Watch Institute, New York, NY 10019, USA

articleinfo abstract

Article history: Norway has administered its petroleum resources using three distinct government bodies: a national oil company engaged in
Received 29 December 2010 commercial hydrocarbon operations; a government ministry to direct policy; and a regulatory body to provide oversight and
Accepted 16 May 2011 technical expertise. Norway’s relative success in managing its hydrocarbons has prompted development institutions to
consider whether this ‘‘Norwegian Model’’ of separated government functions should be recommended to other oil-
producing countries. By studying ten countries that have used widely different approaches in administering their
Keywords: hydrocarbon sectors, we conclude that separation of functions is not a prerequisite to successful oil sector development.
Oil sector governance Countries where separation of functions has worked are characterized by the combination of high institutional capacity and
Norwegian Model robust political competition. Unchallenged leaders often appear able to adequately discharge commercial and
National oil company
policy/regulatory functions using the same entity, although this approach may not be robust against political changes. Where
institutional capacity is lacking, better outcomes may result from consolidating commercial, policy, and regulatory functions
until such capacity has further developed. Countries with vibrant political competition but limited institutional capacity pose
the most significant challenge for oil sector reform: Unitary control over the sector is impossible but separation of functions
is often difficult to implement.
& 2011 Elsevier Ltd. All rights reserved.

1. Introduction national oil company (NOC) only carry out

commercial activities, has inspired admiration and
Since 1972, Norway has separated policy, regulatory, imitation as the canonical model of good
and commercial functions in the government’s bureaucratic design for the hydrocarbons sector.
administration of petroleum development. This Development institutions have explored whether oil-
approach, particularly its requirement that the
20
Corresponding author. Tel.: þ1 650 724 9709.
E-mail address: [email protected] (M.C. Thurber). 1 See, for example, Velculescu (2008) and Skancke (2003).

21
-4215/$ - see front matter & 2011 Elsevier Ltd. All rights reserved.
doi:10.1016/j.enpol.2011.05.027
 11

exporting countries should adopt this so-called reformers would be well-advised to carefully
‘‘Norwegian Model’’ of administrative design as a consider the attributes of a specific oil sector context
route to both better performance and enhanced before encouraging the use of a particular ‘‘best
transparency in their hydrocarbon activities (Collins, practice’’ like the Norwegian Model.
2003; Al-Kasim, 2006b; Nore, 2009). (The
Our current work is motivated by this very practical
‘‘Norwegian Model’’ of revenue management
question of where and when policymakers and
through a savings and stabilization fund has been
reformers should promote the administrative design
examined by other researchers1 and is not a subject
of separated functions. To derive recommendations
of this study; hereafter, we use the term Norwegian
in this area that are supported by real-world data
Model to refer specifically to an administrative
across a variety of oil sector contexts, we ask two
design that separates commercial from policy and
specific research questions. First, is implementation
regulatory functions in hydrocarbons.)
of the Norwegian Model a universal prerequisite for
Among the countries in which the Norwegian good oil sector performance? Second, what are the
template has been promoted are several whose conditions under which the separated functions
political and institutional dynamics vary significantly approach is likely to offer the most benefit? Our
from those prevailing in Norway. In Nigeria, where ultimate goal is a heuristic that can help policymakers
the oil industry has been beset for decades by and development agencies assess what kind of oil
inefficiency and corruption, legislation is being sector administrative strategy is likely to prove most
considered that would create a separation of effective in improving oil sector performance in a
institutional roles strikingly parallel to that of particular country at a particular stage of its
Norway, with a National Petroleum Directorate development.
setting policy (in the manner of Norway’s Ministry of
To answer these research questions, we draw
Petroleum and Energy), an independent commercial
substantial case study data from a new study from
NOC analogous to Norway’s Statoil, and an
Stanford University that examines a number of the
autonomous regulator in the mold of the Norwegian
most important national oil companies around the
Petroleum Directorate (NPD). In new petroleum
world (Victor et al., forthcoming). The Stanford
frontiers across Asia and Africa, governments are
project’s focus on government-NOC relations
examining the Norwegian Model as a means of
facilitates detailed comparison of how commercial,
promoting dynamism and good governance amidst
policy, and regulatory responsibilities have been
heavy exploration and nascent production. In Latin
allocated in different countries and the role of these
American countries such as Brazil and Colombia,
administrative choices in shaping outcomes. We
policy makers have parceled out regulatory functions
selected a sample of 10 countries from the larger
to autonomous agencies after decades of operation
study that offers substantial variation in institutional
in which NOCs largely filled those roles. And in
capability, political system, and whether the
research and technical assistance projects
Norwegian Model has been tried. Our sample
throughout the world, advisors from international
consists of the following countries: Algeria, Angola,
institutions and donor governments – including
Brazil, Malaysia, Mexico, Nigeria, Norway, Russia,
Norway itself – treat a strict separation of functions
Saudi Arabia, and Venezuela.
as something of a sine qua non of effective oil sector
governance.22 In the remainder of this study we proceed as follows.
First, we consult relevant literature to articulate the
At the same time, a noteworthy strand of the
theory that animates both research questions: theory
development literature cautions in a general sense
on how application of the Norwegian Model might be
that governance strategies that work well in
expected to benefit oil sector performance, and how
countries with mature institutions may be illsuited to
institutional and political variables might mediate the
countries lacking certain institutional endowments
functioning of the Norwegian Model. Second, we
(Grindle, 2004, 2007; Moore and Putzel, 1999;
explain our research method, laying out the specific
Rodrik, 2008). To the extent that this is true,
22
One of the strongest explicit endorsements of separating commercial and regulatory responsibilities was found in the 2009 version of the Natural Resource
 12

hypotheses we will test, the important characteristics compiles data on all hydrocarbon activities on the
of our sample of countries, and our approach for Norwegian Continental Shelf (NCS),23 collects fees
testing the hypotheses with case study data. Third, from oil operators, advises the Ministry on
we summarize our data in the form of capsule case technical matters, and sets hydrocarbon
descriptions that touch on the relevant aspects of regulations related to resource management. This
administrative separation of roles and responsibilities between
commercial, policy, and regulatory bodies became
design, oil sector performance, and how institutional
known as the ‘‘Norwegian Model’’ of oil sector
and political factors may have conditioned the
governance (Al-Kasim, 2006a). For the purposes of
relationship between the two historically. Fourth, we
this paper, the most salient separation is between
present our results for both research questions. Fifth,
distinct bodies performing commercial and
we discuss these results and speculate about what
policy/regulatory functions.24 (The question of how
they may suggest about the broader relationships
best to divide policy and regulatory roles among
between administrative design, institutions, politics,
different government agencies is important but
and oil sector performance. Sixth, we conclude by
beyond the scope of this paper.25) We focus
offering practical guidance for policymakers and
principally on policy and regulatory functions
reformers based on this research.
related to licensing and revenue collection, as
these most directly affect the commercial
(footnote continued) prospects of oil operators including NOCs.
Charter (2009), a collective effort by a respected group of academics and practitioners to
help countries wisely manage their natural resource endowments. Precept 5 of the 2009
version of the Natural Resource Charter stated that ‘‘National resource companies should 2.1. Theory of how the Norwegian Model
be competitive and commercial operations. They should avoid conducting regulatory
functions or other activities.’’ (Natural Resource Charter, 2009, p12) Interestingly, the works
more recent version of the charter (Natural Resource Charter, 2010) appears to have
eliminated this language, perhaps in part reflecting the results of studies such as the
current one that show a more ambiguous relationship between a particular administrative
Several authors have considered the possible
model and oil sector outcomes. benefits of separation of functions and related
2. Background and theory approaches to oil sector governance. Al-Kasim
(2006a, 2006b) drew on his own deep involvement
Norway is well known for an administrative system in Norway’s oil sector to describe the detailed
in which it assigns oil sector functions to three elements that contributed to that country’s
state-controlled institutions, each with its own positive experience and assess their applicability in
distinct role. First, there is the commercial entity, a developing country context. Espinasa (2008)
NOC Statoil, which today carries out extensive oil studied six Latin American countries with NOCs,
operations both in Norway and abroad. Second, three of which put in place government bodies to
there is the policymaking body, the Ministry of administer hydrocarbon resources and three of
Petroleum and Energy. The Ministry works with which did not. He observed in his sample that the
(and has at various points guided) the country’s creation of government agencies with regulatory
political leadership in setting goals for the sector, and policy authority generally had a positive effect
makes plans to achieve these goals, and oversees on a country’s hydrocarbon performance. Without
the crucial licensing process. Third, there is the prescribing which functions should or should not
regulatory and technical advisory agency, the belong to an NOC, Lahn et al. (2007) define general
Norwegian Petroleum Directorate (NPD), which principles of good governance in the petroleum
23
The Norwegian Continental Shelf (NCS) constitutes the entire offshore region over which Norway has resource sovereignty. It includes parts of the North Sea, Norwegian Sea, and
Barents Sea.
24
The reality is that even in Norway itself, the formal separation between policy and regulatory functions has actually been somewhat fluid. For example, the technical/regulatory
body, the Norwegian Petroleum Directorate (NPD), reports directly to the Ministry of Petroleum and Energy; originally the NPD had a separate board but this was deemed unnecessary
and abolished in 1991.
25
Norway’s allocation of specific policy and regulatory responsibilities among different government bodies has shifted over the years. The Norwegian Petroleum Directorate was
responsible for regulation of resource management as well as health, safety, and environmental issues until the Petroleum Safety Authority was established in 2003–2004 to oversee the
latter areas. The issue of whether revenue collection and licensing responsibilities should be combined with safety and environmental ones has received significant attention in the United
States in the wake of the 2010 Deepwater Horizon oil spill in the Gulf of Mexico. After the incident, the U.S. Minerals Management Service, which had been responsible for regulating
safety and environmental protection in addition to licensing and revenue collection, was reorganized. Multiple divisions were created in its place with separate jurisdiction over safety and
environmental regulation on the one hand and licensing and revenue collection on the other. See the official report on the incident ( National Commission on the BP Deepwater Horizon
Oil Spill and Offshore Drilling, 2011) for discussion.
 13

sector, which include ‘‘clarity of goals, roles and Given that much of the theory of Section 2.1 is
responsibilities’’ among government bodies. derived from observations of Norway’s experience,
Boscheck (2007) notes that lack of clarity around we ask how well it will extrapolate to countries with
regulatory responsibilities indeed has contributed substantially different bureaucratic and political
to the problems in Nigeria’s oil sector. At the same institutions. The general idea that ‘‘best practices’’
time, Boscheck dissents from the view that the applicable under certain institutional conditions can
checks and balances associated with formal be ineffective or harmful when institutional
separation of functions represent the only feasible prerequisites are absent is wellsummarized by Rodrik
way to regulate an NOC. He uses a framework (2008). In an effort to understand how anti-poverty
derived from institutional economics to suggest policies might need to be tailored to country-specific
that modes of control ranging from regulation by conditions, Moore and Putzel (1999) offer a typology
an independent agency to direct supervision of the of states, which is further elaborated by Grindle
NOC by its political masters could be appropriate (2007). Notably, their typology suggests that
depending on the particular context. institutionalization (‘‘rule through stable and
legitimate organizations and procedures’’27) and
The theory of how the separation of functions model
degree of political competition are two important
might improve oil sector performance is built on
variables affecting which states are susceptible of
several claims, which are supported in part by
particular types of reform. Though the particular
observations of how the model has worked in
policy context is different, this previous work can
Norway. First, the NOC may be able to, and perhaps
offer a starting point for the current investigation of
be forced to, focus more exclusively on its
how the Norwegian Model transfers to other
commercial activities, enhancing its operational
countries. There is also significant research specific
performance and increasing the shortor long-term
to the oil sector on the way that institutions can
financial return to the state (Espinasa, 2008; Al-
drive or mediate outcomes. While the original
Kasim, 2006a). Second, the creation of autonomous
‘‘resource curse’’ theory posited a direct linkage
policy and regulatory bodies may improve the ability
between resource dependence and stunted
of the government to monitor and benchmark both
economic growth, recent contributions have pointed
the NOC and other players in the sector, thereby
to institutions as a crucial intervening variable
improving performance (Thurber and Istad, 2010).
(Atkinson and Hamilton, 2003; Jones Luong et al.,
Third, conflicts of interest – in which, for example,
2010; Stevens, 2003) or even the principal causal
the NOC could use its regulatory or policy powers to
variable (Brunnschweiler and Bulte, 2008) behind
privilege itself against competitors, or to privilege its
apparent instances of the ‘‘resource curse’’ or its
(or its partners’) commercial interests over the
absence.
revenue-generation goals of the state – are
potentially reduced (Al-Kasim, 2006a; Thurber and There are several plausible mechanisms through
Istad, 2010).26Fourth, the state’s assertion of which institutional quality could interact with
independent control over hydrocarbon policy and administrative design to shape oil sector outcomes.
regulations may put it in a stronger position to As was the case throughout the development of
prevent an NOC from capturing other state Norway’s oil sector, a capable bureaucracy can offer
institutions (including political ones) and thus keep it the kind of regulatory and policy check on the
from becoming a distorting and destabilizing ‘‘state activities of the NOC that is fundamental to how the
within a state’’ (Noreng, 1980). Norwegian Model is intended to work—making sure,
for example, that government revenue goals are
2.2. Theory of how bureaucratic and political pursued appropriately. Where such civil service
institutions might play an intervening institutions are strong and capable, they can
role continue to play this role even in the face of changes
in political leadership. The presence of ample human
26
In addition to helping ensure that the state’s interests are faithfully pursued, the elimination of such conflicts of interest can help maintain the attractiveness of the sector to private
players.
27
Compare this definition of institutionalization from Moore and Putzel (1999) to the degree of rule of law within a country (Hults, forthcoming a).
 14

capital and experience in public administration can Hypothesis #1. Where a country has an NOC,
allow countries to spread talent across various implementation of the Norwegian Model – defined
government bodies to create multiple checks and as the separation of commercial from policy and
balances. In countries that lack such institutional regulatory functions of government – is strongly
endowments, a formal regulator or policymaker may correlated with the performance of the oil sector.
be powerless in practice and vulnerable to NOC
To test this hypothesis, we need to characterize for
political lobbying and other forms of agency capture.
each country whether separation of functions has
In such cases, the country may be better served by
been tried, whether the implementation was
concentrating its limited pool of technocrats and
durable, and how the oil sector performs.
capable administrators in one body.
Because the case studies for each country consider
Political competition can be expected to factor in
the evolution of the oil sector over time, we are able
because the mediating role of institutions matters
to examine not only current day relationships but
most where competition for power is strong. In
also the possible correlation between separation of
politically vibrant states, the existence of a separate
functions and performance at particular times in the
policymaking institution may enhance oil sector
past. We are also able to evaluate whether there
performance by shielding an NOC from the
seems to be a causal link between implementation of
competing demands of different political actors and
separation of functions and improved performance.
by synthesizing those demands into a coherent policy
for the NOC to follow. When a leader faces few Based on the capsule case study data in the following
political constraints, by contrast, decision-making section, we perform a binary, yes–no
becomes more unitary, and the introduction of characterization of whether a country has at any
multiple institutional players into oil sector point in its history credibly separated commercial
management may be futile, wasteful, or even and policy/regulatory functions in the oil sector or
counterproductive.28 Moreover, entrenched leaders whether it has always adopted a more integrated
may have longer time horizons and therefore share approach. This binary characterization maps to
the long-term profit maximization goals of an NOC government policy choices in a relatively
(though exceptions exist), reducing the need for straightforward way. The only challenge in several
separate policymaking and regulatory agencies to cases is to distinguish serious efforts to reform oil
bend the NOC’s actions to the will of the sector performance through the creation of
government. Also, in environments of low political autonomous policy or regulatory bodies from strictly
competition it is more likely that government leaders formal delineations of policy or regulatory agencies
and NOC senior managers will come from the same that do not provide genuine oversight. One indicator
group of elites and thus perceive their fortunes as of which category a reform effort falls into is whether
rising or falling together. In countries where there is a policymaking or regulatory entity is ever able to
frequent movement between NOC and government produce an outcome to which the NOC is averse.
top posts, these senior officials may even be the
To measure performance, we consider the
same people.
effectiveness of the upstream oil sector29 as a tool for
reliably generating revenue to satisfy the short- and
3. Research method long-term objectives of the government.30Oil sector
performance could also be judged on various
3.1. Hypotheses and methods for testing them
nonrevenue dimensions, including the degree to
Based on the theory discussed above, we seek to test which positive linkages are established to the
two hypotheses about the Norwegian Model, starting broader economy, oil revenues contribute to broad-
with the following: based development or poverty reduction, and
28
See Whitford (2005) and Hults (forthcoming a) for further discussion. We acknowledge that this discussion may have an element of circularity in implying that countries cannot
develop institutional checks and balances unless they already exist. Generating the momentum necessary for dramatic institutional change is difficult in any context, but we would argue that
in attempting to constitute a system or culture of internal institutional checks where none currently exists, the oil sector – usually characterized by massive revenue flows inexorably linked to
the levers of state power – represents a particularly challenging place to start.
29
We focus on upstream oil operations (i.e., exploration and production) because the upstream is the main driver of government oil revenue in most exporting countries.
 15

desired safety and environmental metrics are met.31 distinct dimensions,14 but we believe this narrower
However, we focus narrowly on revenue definition of institutional quality as a measure of
optimization in the interests of parsimony and ease bureaucratic capability is more parsimonious and
of comparison between countries, and because this instructive for the purposes
is typically a fundamental sectoral goal that supports
of the current investigation.)
the non-revenue objectives of oil-exporting
governments. We recognize that even this narrow We define political competition as the possibility
notion of oil sector performance is somewhat that an executive and his or her political faction
subjective and difficult to quantify. We therefore rely will lose power. It was more difficult to find a
again on a broad two-category approach rather than suitable representation of political competition
a finergrained, but possibly misleading, assessment: than it was for institutional quality. The Polity IV
Oil sector performance is characterized as either dataset offers a composite measure of political
good, on the one hand, or fair/ poor, on the other. competition (POLCOMP15); however, this index
provides a typology of how political leaders are
The theory laid out in Section 2.2 suggests that
selected rather than the simpler assessment we
characteristics of institutions, both bureaucratic and
seek of how vulnerable the political leaders in a
political, can be a critical factor mediating any
country are to being replaced. In this spirit, we use
possible relationship between implementation of
a much simpler measure of political competition:
separation of functions and oil sector performance.
the time since the last transition in the
Specifically, we hypothesize effects of institutional
faction/party in power, with a breakpoint of 15
quality and political competition as follows:
years ago16 to denote ‘‘low’’ versus ‘‘high’’ political
competition.17 This is clearly a crude measure –
Hypothesis #2. Higher levels of institutional quality among other shortcomings, its value will shift
and political competition increase the likelihood that suddenly when transitions occur – but we find it
the separation of functions model will be effective in captures threats to power better than more
boosting oil sector performance. complicated codings with which we are
If Hypothesis #2 holds, we may find that sequencing
familiar.18
of reforms is important, because separation of
Clearly a number of factors in addition to
functions may not be effective in improving oil sector
administrative design and its interaction with
performance in a country until after a certain amount
institutional quality and political competition affect
of institutional or political development has
the success of hydrocarbons development in
occurred.
different countries. One of the most obvious omitted
In accordance with the theory discussed variables in our analysis is the nature of a country’s
previously, we define institutional quality as a hydrocarbon resources: how much total potential
country’s endowment of bureaucratic capability32 exists, how easy it is to exploit the country’s
to deliver effective policies and services in a geological endowments, and how significant the
durable way, providing continuity even in the face associated revenue would be in comparison with the
of changes in political leadership. To characterize size of the economy. However, this variable is
institutional quality, we use the World Bank’s extremely difficult to quantify,33 and we judged on
Government Effectiveness index13 (World Bank, balance that any attempt to do so would add
2010; Kaufmann et al., 2009), which conforms significant complexity with little payoff in enhanced
closely to this definition and is also employed by insight. Our goal in this work, after all, is not to
Brunnschweiler and Bulte (2008) in evaluating the develop a definitive theory of oil sector performance
effect of institutional factors on oil sector but rather to provide insight to policymakers about
outcomes. (Some indices of institutional capacity whether a particular country is likely to be wellsuited
from the ‘‘resource curse’’ literature have lumped to separation of functions reforms.
together characterizations along a number of
30
We anticipate that a government usually has the objective of collecting as high a government take as possible without unduly deterring investment, except, perhaps, where the
 16

3.2.Sample selection practical control over all important decisions.34

Nigeria and Algeria have tried but been unable thus
Drawing from a larger research project at Stanford far to create durable and effective separation of
University that includes case studies of important functions; as previously mentioned, Nigeria’s current
global NOCs (Victor et al., forthcoming), we selected reform push represents another attempt to achieve
a sample of ten countries to examine: Algeria, this goal.
Angola, Brazil, Malaysia, Mexico, Nigeria, Norway,
Russia, Saudi Arabia, and Venezuela. Sample Second, we sought variation in geography and
selection was based on several criteria. First, we importance to the global oil market. We limited
sought an even split as to whether the Norwegian ourselves to countries that currently are or have
Model has been tried. Five of the ten countries prospects for becoming net hydrocarbon exporters,
(Algeria, Brazil, Mexico, Nigeria, and Norway) have at on the theory that these are the countries for which
some point attempted to empower an autonomous administrative design in the upstream hydrocarbons
body or bodies within government with sector is most consequential. We explicitly chose to
responsibility for policy and regulation; the other five include the most significant players in oil (Saudi
(Angola, Malaysia, Russia, Saudi Arabia, and Arabia) and natural gas (Russia).
Venezuela) have either made no such attempt or
Third, to facilitate robust testing of Hypothesis #2,
have vested would-be policy or regulatory bodies
we included countries that vary widely in
with so little actual power that the NOC retains
institutional quality and extent of political
competition. Fig. 1 illustrates where the countries in
our sample fall on our simple measures of
institutional quality and political competition,
delineating four quadrants with particular
combinations of these attributes. Quadrant IV, of
which Norway is the strongest example, features
countries with high institutional quality and
entrenched political competition. Quadrant III
contains countries with high institutional quality but
low political competition, with Malaysia as an
archetype. Quadrant II indicates high political
competition but limited institutional capacity –
Nigeria is characteristic – and Quadrant I denotes
low levels of both institutional capacity and political
competition, with Angola being typical. Where not
otherwise indicated, we represent each country’s
levels of institutional capacity and political
competition with data from 2008. For the cases of
Mexico, Venezuela, and Brazil, we also
 17

Institutional Quality (WB Government consolidate power since his original election in 1998,
and the quality of government services has declined
2.00
Norway over the same period. Malaysia has been governed
III IV by the same political party since independence in
Effectiveness) Malaysia
1957, but power has become appreciably more
Mexico 1998
Mexico 2008
contested since the departure of long-serving Prime
0.00 Saudi Arabia Brazil 2008
Brazil 1985 Russia Venezuela 1998
Minister Mahathir bin Mohamad in 2003.
Algeria
Venezuela 2008
Angola Nigeria
4. Data
I II
-2.00
Low: > 15 years since
The data used to test both of our hypotheses consists
High: 15 years or less of qualitative observations: of hydrocarbon sector
change since change in
in faction/party in power faction/party in power
performance, of how different countries have chosen
Political Competition
to administer their sectors at different points in time,
and of the role of institutional quality and political
Fig. 1. Classification of countries in our sample on axes of institutional quality
(‘‘Government Effectiveness’’ from the World Bank’s Worldwide Governance Indicators) competition in mediating the effect of administrative
and political competition (time since last transition in power). Data is for 2008 except
where noted. There is no data for Government Effectiveness before 1996, so we crudely
design on performance. We begin with a tabular
estimate Brazil’s 1985 value as its 1996 value plus or minus an error bar equal to double assessment of performance (Section 4.1) and then
the change in the index for Brazil between 1996 and 2008. Source: World Bank (2010) for
Government Effectiveness; various sources for date of last transition in power. present our observations about how administrative
design has affected the hydrocarbon development of
different countries (Section 4.2). We use a
consider contrasts with earlier time periods. While
comparative, discussion-based approach in the
Fig. 1 will prove useful in structuring our discussion
interests of readability and efficiency.
about the applicability of the separation of functions
model, it clearly has limited ability to resolve finer 4.1.Characterization of performance
details of institutional quality and, especially, political
competition. Notably, Venezuela, Malaysia, and As described in Section 3.1, we qualitatively group oil
Russia have all experienced important recent shifts in sector performance into two categories according to
the political environment that are not reflected in the how effectively a country has been able to develop
crude proxy of faction/party changes of power in the its upstream oil sector to serve the revenue needs of
last 15 years. For example, while political its government. Factors affecting short- and long-
competition arguably remains salient in Venezuela, term revenue generation capacity, and thus the
President Hugo Cha´vez has taken significant steps to overall
Table 1
Summary of oil sector performance for countries in our sample.

Country Oil sector Justification

performance

Algeria Fair/Poor NOC-led sector tends to perform well enough to meet government needs in high price periods but poorly in low-price ones,
leading to cycles of opening and closing to international companies Little positive change over time

Angola Good
Smooth functioning of internationally-operated projects
High government take from oil

Brazil Good
Major recent oil and gas discoveries and increasing production that have transformed Brazil from net importer to exporter
NOC is technological leader in deepwater activities

Malaysia Good
Successful development of domestic resources
High-functioning NOC built on indigenous talent, with some successful international operations

Mexico Fair/Poor Declining production streams, putting government budgets at serious risk
 18

Historical underinvestment in exploration

Paucity of domestic technical capability

Nigeria Fair/Poor
Frequent disruptions to production
Limited development of domestic companies with operational capacities
Red tape imposes additional costs, with significant negative impact on total revenue Failure to
develop natural gas resources to potential

Norway Good
Successful development of oil and gas as a driver of Norwegian economic growth and savings for future
Development of technology-leading NOC and Norwegian oil services industry

Russia Fair/Poor Declines in major gas fields; oil production stable for now
Though currently the world’s largest gas producer, future revenues are uncertain because capital and technology constraints are
impeding development of new fields
Gas transport infrastructure is deteriorating
Government focused on reconsolidating control over oil
Saudi Arabia Good
Has maintained status as world’s most important oil exporter for decades
Ensures future revenue streams by having an NOC that reliably meets project targets

Venezuela Fair/Poor Major declines in production since 2003 strike and evisceration of NOC by President Cha´vez in response
Domestic technical capacity will be challenged by heavy oil

ranking of sector performance, include the ability of a activities in the mid-1960s, Norway had a high overall
government to find, develop, and produce oil and gas in level of bureaucratic capacity and a long tradition of
a timely manner (whether through the NOC or another democratic competition and intra-governmental checks
agent); to minimize disruptions to hydrocarbon and balances. Through the Ministry of Industry (which
operations; to maximize government take without later became the Ministry of Petroleum and Energy),
deterring investment; to exert control over its Norway’s strong and competent bureaucracy asserted
hydrocarbons sector to ensure that revenue is control over hydrocarbon policy and licensing on the
Norwegian Continental Shelf (NCS) as soon as the
produced in accordance with government objectives;
possibility of substantial oil resources became evident
and where possible to enhance indigenous
in the mid-1960s.22 Majority private firms, mostly
technological capacity over time to increase the positive
foreign, controlled all exploration and production
impact of oil activities on the local economy and
activities until Statoil was formed in 1972 as the
thereby government revenue. We assess these factors
government’s commercial arm in petroleum. The
based on the case studies in the Stanford project as Norwegian Petroleum Directorate (NPD) was created
well as the work of other researchers. The hydrocarbon concurrently with Statoil to concentrate government
sector performance rankings that result are provided in competence in technical and regulatory matters, thus
Table 1, along with capsule explanations of the forming the third leg of the ‘‘Norwegian Model.’’ Partly
rationales for our rankings. as a result of these administrative arrangements, Statoil
was able to focus on developing its commercial
4.2. Country experiences with separation of functions capabilities to a greater extent than many NOCs. The
model or integrated approach to oil sector administration Ministry was careful to involve international oil
companies as well as Statoil’s domestic competitors like
Norway separated policy, regulatory, and
Norsk Hydro in license groups to facilitate
commercial functions from the time of NOC Statoil’s
benchmarking of and leverage over Statoil’s
formation in 1972.21 Though it lacked expertise on the
performance.23 And when Statoil inevitably did try to
oil industry at the outset of hydrocarbon
leverage its growing political

21 22
It should be noted that Norway’s particular sensitivity to separating the government’s This paragraph follows Thurber and Istad (2010). 23
commercial ventures from its policy and regulatory functions stemmed in part from a 1962 Involvement of carefully selected IOCs was also intended to facilitate efficient resource
mining accident on the Arctic island of Spitsbergen that killed 21 employees of a state-owned development as well as opportunities for Norwegian players to learn from the strongest
mining company. international operators.

clout for commercial advantage, the Ministry and On the whole, Norway’s story of petroleum
NPD were able to play at least a partial development has been a positive one: the country
counterbalancing role. developed its oil successfully and at a pace that was
 19

set at least somewhat deliberately by government; had improved and more checks and balances had
Statoil developed technological capabilities that been incorporated into the political system.
helped kick start a broader domestic oil services
The other two Latin American countries in our
industry; the government mostly kept Statoil’s power
sample, Mexico and Venezuela, rely on monopolistic
in check; and the state collected and continues to
NOCs that directly execute petroleum policy on
collect significant revenues which were prudently
behalf of the state (Espinasa, 2008; Stojanovski,
deposited in a fund for both savings and stabilization
2008; Hults, forthcoming b). Both Mexico and
purposes. Norway’s success stemmed from many
Venezuela have struggled in recent years with falling
factors, but the separation of functions approach
production and underutilization of available
was certainly one element of the country’s positive
resources due to insufficient NOC technical capability
experience.
and effort in exploration and development; however,
Latin America offers several examples of oil sectors Mexico’s Pemex was capable through at least the
in which government agencies were created as 1970s and Venezuela’s PDVSA in the 1990s was
stewards of the nation’s petroleum resources after considered to be among the highest-performing
NOCs had already been in place for some time. As NOCs in the world (Stojanovski, 2008; Hults,
described in detail by Espinasa (2008), Brazil, forthcoming b). The causes of their declines are
Colombia, and Peru all created government policy complex. In Mexico, despite a generally competitive
and/or regulatory agencies in recent years. While political system, Pemex retains a legal monopoly on
acknowledging the many factors in play and the all oil projects, and the company has been unable to
various differences between these countries, invest successfully in the maintenance and
Espinasa suggests that the creation of such agencies development of the country’s fields. (Mexico’s
generally had a salutary effect by creating a more energy reform in late 2008 did attempt to increase
level playing field and allowing or forcing each NOC regulatory oversight, including
to become more commercial in its approach. Brazil
through the creation of a technical regulator, the
saw production, wells, and reserves all increase
National Hydrocarbons Commission, but it is still too
appreciably following the creation of the Agˆencia
early to fully assess the results.) In the case of
Nacional do Petro´leo, Ga´s Natural e Biocombustı
PDVSA, President Hugo Cha´vez sacked 30–40% of its
´veis (ANP) in 1997 (Espinasa, 2008); already strong
workforce after the company launched strikes
NOC Petrobras was partially privatized in 2000 and
against him in 2002 and 2003, amidst a broader
has become an even more efficient player since, with
effort to tighten executive control of the economy
major recent exploration successes (de Oliveira,
and society. The strikes against Cha´vez reflected
forthcoming). Petrobras has continued to develop
PDVSA’s status as a ‘‘state within a state’’ of sorts, a
and prosper under the more formalized checks and
situation which has reversed itself as the weakened
balances put in place with the creation of the ANP,
company now acquiesces to direction from the
but it is difficult to conclusively link the development
president (Hults, forthcoming b).
of the company to the separation of powers.
Petrobras first came into its own as a competitive Russia’s recent experience in oil and, especially,
and technologically advanced player between 1965 natural gas in some ways parallels Venezuela’s. In
and 1985, when Brazil’s overall administrative both countries, leaders have consolidated power
competence was relatively low and political politically – Cha´vez in Venezuela, Vladimir Putin in
competition was stifled by military rule (de Oliveira, Russia – and taken command over previously
forthcoming). During this period, Petrobras occupied independent NOCs. Both countries also suffer from
a privileged position within the Brazilian oil industry relatively weak institutions. Illustrating this
and played a strong quasi-regulatory role with few weakness, Russia’s Federal Tariff Service is a de jure
formalized checks and balances in oil governance. regulator of the country’s most important NOC,
The successful move to a separationof-powers model Gazprom, but in practice is a clear example of agency
was made only after institutional competence – in
the oil sector particularly, but also more generally –
 20

capture by the NOC (Victor and Sayfer, forthcoming).35 And in both countries, overall
hydrocarbons performance has lagged in part as a
result of poor NOC performance in recent years.
Despite being the world’s largest natural gas
producer by far, Gazprom has struggled to update its
aging infrastructure and remains saddled by
expensive political obligations, including below-
market-price sales to the domestic market and
significant involvement in poor-performing non-core
activities (Victor and Sayfer, forthcoming). The
similarities between Gazprom and PDVSA should not
be overstated, however. Unlike PDVSA, Gazprom
competes for minority equity investors on the stock
exchange. It also competes, at least on paper, for
exploration projects with private companies
operating in the Russia oil sector (Victor and Sayfer,
forthcoming). But competition has brought only
limited benefits. Indeed, Russia’s performance in oil
and gas is vulnerable in part because, as in
Venezuela, the political leadership has exploited
short-term gains from the hydrocarbons sector at the
 21

cost of its long-term health.36 in 1999.37 However, even in periods of formal

In contrast to Russia or Venezuela, several other regulatory oversight (including the present one), the
countries we consider tried to separate regulatory regulator has been unable to procure sufficient
and commercial functions in oil but were unable to resources to effectively oversee and control the oil
robustly establish such a separation in anything other industry. The principal reason is that Nigeria’s
than a strictly formal sense. Nigeria, for example, political system is built on a patronage network
started its oil industry with formal organizational fueled by oil revenue, and those in power have been
relationships surprisingly similar to, and in fact pre- disinclined to support the development of a truly
dating, those of Norway. Prior to Nigerian autonomous regulator that could constrain their
government direct participation in oil, the Ministry of ability to distribute spoils to kin and associates
Mines and Power had the task of managing the (Thurber et al., 2010). The reform bill that is currently
concessions given to foreign operators to extract the facing an uncertain fate in the Nigerian legislature
country’s oil. In 1970, those working on once again attempts to construct a strong regulatory
hydrocarbons within the Ministry were split off as agency; it also seeks to turn NNPC into a more
the Department of Petroleum Resources (DPR) to commercial company by removing its regulatory
handle the growing regulatory demands (Nwokeji, functions and giving it control over its own cash flow.
2007). With the creation in 1971 of Nigeria’s original
Algeria, another country with little traditional
NOC, the Nigerian National Oil Company (NNOC), the
separation between the government’s commercial
Ministry, DPR, and NNOC formed a triumvirate quite
and policy functions in oil (Marcel, 2005), attempted
similar in formal relationship to what Norway would
a similar reform. Algeria’s 2005 Hydrocarbons Law
create a year later with the Ministry of Industry, NPD,
aimed to transfer regulatory responsibility from NOC
and Statoil.
Sonatrach to new government regulatory agencies,
Whereas in the Norwegian case all three government with the idea that this would create a level playing
bodies were able to hold their own and balance the field for competition and in the process help the NOC
others (although the NPD took some time to to sharpen its commercial capabilities (Entelis,
establish its niche), Nigeria’s triad rapidly forthcoming). The 2005 law did lead to the creation
deteriorated in the face of a domineering permanent of two new formal agencies with policy and
secretary at the Ministry who was able to subdue regulatory functions: the Agence Nationale pour la
and eviscerate both NNOC and the civil servants at Valorisation des Resources en Hydrocarbures
DPR (Nwokeji, 2007). In response to the disastrous (ALNAFT), charged with collecting taxes and royalties,
management of Nigeria’s oil sector under this granting exploration contracts, and approving
tripartite arrangement in the 1970s, and with the development plans; and the Autorite´ de Re´gulation
logic that it would be better to consolidate Nigeria’s des Hydrocarbures (ARH), designated as the regulator
limited human talent in petroleum, NNOC and DPR of midstream and downstream activities (Entelis,
were combined to form the Nigerian National forthcoming). However, as in the Nigerian case,
Petroleum Corporation (NNPC) in 1977. Formal political actors benefiting from oil patronage
regulatory independence was re-established in the (including, as in Nigeria, a formerly supportive
1980s, eliminated in 1998, and re-established again president27) have acted forcefully to head off real
change. Amendments to the hydrocarbons law in
2006 restored Sonatrach’s highly preferential
position in licensing, with continued closeness among
the heads of government agencies and Sonatrach
executives casting further doubt on the genuineness
of regulatory and commercial separation (Entelis,
forthcoming).

The same patronage dynamic that has undermined

efforts to create true regulatory and policy bodies in
Nigeria and Algeria also causes oil sector
 22

performance more generally to fall short of potential operator all rolled into one.38 Flying in the face of
in both of these countries. Inefficiencies in revenue the canonical Norwegian Model, the country has
collection arise as officials channel resources to managed to build a highly productive petroleum
associates. Short time horizons of competing elites sector by means of this single multipurpose agent,
lead to policies geared more toward creating niches achieving steady growth in production and
for middlemen than establishing a favorable long- reserves over the last several decades. Although
term investment climate. (In both countries, corruption is rife in larger society, bureaucratic
incentives for foreign investment tend to be put in capacity is extremely low, and much of the
place on an ad hoc basis in response to crises in population remains in severe poverty, the oil
revenue generation, due for example to declines in sector itself runs reasonably efficiently and
oil price.) This generally short-term outlook is also provides reliable revenue to the government. The
not compatible with the sustained focus on government managed to maintain a stable
institutional and human capacity development that environment for foreign investment in the oil
would support development of either regulatory and sector even in the face of a civil war that ran from
monitoring capacity within government or domestic 1975 through 2002. Foreign oil companies still
technological capability. perform almost all of the work of oil extraction,
but the government in recent years has been able
to build up Angolan know-how, both in regulation
Another group of countries is composed of those of foreign companies and in oil operations and
which have never seriously attempted to separate related activities. Sonangol and its subsidiaries are
commercial from regulatory and policy functions playing an ever-growing role in the operations of
and yet whose oil sectors run reasonably well. In the sector and the Angolan economy generally.
Angola, there is no independent regulatory
institution, and while the law does formally vest Angola’s historical lack of political competition
certain oversight powers in the Ministry of helps to explain the fundamentally different
Petroleum, in practice the national oil company dynamics of its oil sector compared with Nigeria or
Sonangol is sector manager, regulator, and Algeria. (Obviously, there was direct military
competition between different groups during the
civil war, but the Popular Movement for the
Liberation of Angola, or MPLA, maintained control
over the machinery of government and the oil
industry throughout.) In contrast to fractious
Nigeria or Algeria, members of the ruling MPLA in
Angola all came from a small and homogeneous
elite group, which was made even more tight-knit
and pragmatic by the need to fund a protracted
civil war. The government became a unitary entity,
or ‘‘principal,’’29 ensconced in power for decades.
Partly because of this dynamic, the Angolan
government gave coherent, long-run direction to a
single agent, Sonangol, whose leaders were closely
tied to those of the country (Heller, forthcoming).
Angola thus succeeded in the absence of the
checks and balances that would be provided by
distinct commercial, regulatory, and policy
institutions. It will be interesting to observe how
the Angolan model evolves as the civil war fades
further into the past—in particular whether it
proves robust against either a significant drop in oil
 23

price or the advent of more political contestation. Saudi Arabia is perhaps the most iconic example of
The Angolan government has made recent public a unitarystyle government managing its NOC. Saudi
statements that it is considering ceding some of Arabia’s royal family, Al Saud, has ruled since the
Sonangol’s regulatory responsibilities back to a modern state’s founding and wielded
government agency, perhaps the Ministry of
Petroleum (Heller, forthcoming).

political influence in the region for centuries. Partly as a consequence, the country has adopted an oil policy
almost unique in its degree of stability.30 Unlike nearly all of its counterparts, the

experience. 27 The trajectories of Algeria’s 2005 reform effort and Nigeria’s current one have been astonishingly similar in many ways, including in the following respects: (1) thrusts of the
attempted reform effort include giving the NOC control over its revenues and creating an independent regulator; (2) the NOC’s central function as a tool of patronage causes entrenched
interests to block reform; and (3) reform was led by a highly-competent, former high-level OPEC official (Rilwanu Lukman for Nigeria, Chakib Khelil for Algeria) who was at least partially
betrayed in the effort by a President (Obasanjo in Nigeria, Bouteflika in Algeria) who seemed interested in reform in theory but did not want it to negatively affect his own ability to deliver
spoils and stay in power. In the Nigerian case, the Oil and Gas Reform Implementation Committee (OGIC) recommendations that were ignored by President Obasanjo did go on to become
the core of the Petroleum Industry Bill (PIB) under his successor Umaru Yar’Adua, although as mentioned Yar’Adua’s regime did not push the Bill into law, and the fate of the PIB under
President Goodluck Jonathan remains highly uncertain at the time of this writing.

government nationalized operations with little little financial data is publicly disclosed,39 Saudi
acrimony, maintained close ties with international oil Aramco has for years been the world’s largest oil
interests previously operating in the country, and producer and managed the largest proven reserves
allowed the private-sector orientation to carry over of conventional oil. The company also carries out
to its NOC, Saudi Aramco (Stevens, forthcoming). significant research and development (particularly
Today, the government and Saudi Aramco’s goals of through its upstream-focused Exploration and
steady, long-run oil development are deeply Petroleum Engineering Center) and reliably
intertwined. The government sets the company’s completes major new oil development projects
broad strategic goals and approves its five-year (Stevens, forthcoming). As a consequence, Saudi
operating and investment plans but leaves most Aramco has provided, and will continue to provide,
operational decisions to the company. In this massive revenues to the Saudi state for the
environment, Saudi Aramco has flourished. Though foreseeable future.

Note that Saudi Aramco has thrived despite minimal

institutional oversight. Saudi Arabia’s primary
institution regulating the oil sector – the Supreme
Council on Petroleum and Mineral Affairs (SCPMA) –
is relatively capable. But SCPMA typically exerts only
a light supervisory role, perhaps because the ruling
family and NOC leadership share much the same
goals (Stevens, forthcoming).32 Another government
entity, the Ministry of Petroleum and Natural
Resources, is so tightly linked to Saudi Aramco
through shared goals and constant exchanges of
personnel that it cannot meaningfully be considered
to be an independent policymaking or regulatory
body (Stevens, forthcoming).

Malaysia presents the clearest case in our sample of

capable institutions coupled with minimal political
competition, at least until recently. Malaysia
established a multipurpose NOC, Petronas, with very
close links to the country’s leader, especially during
the 1981–2003 government of Prime Minister
 24

Mahathir bin Mohamad. Mahathir consolidated of separated functions (Malaysia, Saudi Arabia, and
power and brooked little opposition; as in the cases Angola). Other countries have tried separation of
of Angola since 1975 or Brazil under military rule functions as a reform strategy but found it not to be
from 1965–1985, the country’s leadership was implementable so far (Nigeria and Algeria). Mexico is
centralized, and the NOC was effective even as it in the midst of a serious attempt to follow the
played commercial, policy, and regulatory roles. Norwegian lead, with ultimate results that have yet
Petronas has leveraged its regulatory role in to be determined. An important message from our
particular both to increase the government’s take of ensemble of cases is that reformers should focus at
oil revenues and to gain commercial advantage for least as much on whether separation of functions can
itself, for example by mandating a high participation realistically be implemented as on what positive
share for itself in production sharing contracts with effects it could hypothetically bring to a given oil
IOCs (Lopez, forthcoming). These partnerships have sector.
given it expanded cash flow (unlike many NOCs,
Our case study data broadly supports Hypothesis #2,
Petronas retains its earnings, paying royalties and
although the ways in which political competition and
taxes like international companies) and enhanced
institutional capacity mediate the functioning of the
opportunities for technology learning. The
Norwegian Model appear to be complex and
robustness of Malaysia’s multifunctional NOC model
nuanced. Our sample of ten countries suggests the
in the face of a less unitary government is being put
following insights about how political competition
to the test now. Mahathir’s successor, Abdullah
and institutional quality affect both the potential
Admah Badawi (2003–09), largely left the company
value of the separation of functions approach and
alone, but fissures have emerged between new
the chances that it will be successfully implemented.
Prime Minister Najib Razak and company
management (Lopez, forthcoming), possibly First, serious efforts to create separation of functions
contributing to the recent departure of Petronas CEO rarely seem to be undertaken where political
Hassan Marican, who had been at the helm of the competition is low. Although two countries in our
company since 1995. sample with low political competition, Saudi Arabia
and Russia, do have regulatory bodies with formal
5. Results and discussion responsibility for overseeing their respective NOCs,
neither regulator has been genuinely independent of
The above case studies present a complex picture of the NOC (Stevens, forthcoming; Victor and Sayfer,
the relationship between separation of functions and forthcoming). Several explanations might be possible
successful oil administration. We address in turn the for the correlation in our sample between political
hypotheses of a direct effect (Hypothesis #1) and of a competition and attempts to implement separation
relationship mediated by institutions and politics of functions. Where political control is contested,
(Hypothesis #2). there may be more risk of a damaging political
schism between government and NOC in the absence
As emphasized by the summary in Table 2, we find
of institutional checks and balances in the sector. In
only limited correlation between attempts to
an environment without competing power bases, by
implement the Norwegian Model of separation of
contrast, there may be no perceived need to create
functions and overall results in the oil sector. The two
institutional checks and balances to mediate power.
countries in our sample that have robustly
NOC management may naturally align with a
implemented separation of functions, Norway and
country’s leadership out of mutual interest, as in
Brazil, are indeed strong performers. There is
Saudi Arabia, Angola, and Malaysia in the Mahathir
reasonable qualitative support for the contention
era. An alternative explanation could be that
that implementation of separation of functions had a
uncontested regimes simply have little inclination to
salutary effect on performance in both cases,
allow a government agency to develop independent
although it was but one of a constellation of factors
regulatory authority.
that contributed to good results. At the same time,
some countries have performed well in the absence
 25

Looking beyond our sample, however, we can forthcoming).40 China’s oil sector at present is built
observe countries with limited political competition around three large, vertically integrated,
at the executive level that have nonetheless sought
to create institutional checks and balances within
their oil sectors. China (which as a large petroleum
importer did not meet our sample selection criteria)
is a notable example. China’s oil sector has employed
various administrative designs throughout its
evolution, sometimes with policymaking, regulatory,
and commercial functions mostly consolidated and at
other times with them distributed among multiple
government entities (Lewis, 2007; Xu, 2007; Jiang,

and relatively corporatized NOCs that are subject to management

mance because no other oil companies operate independently in the country. 32

One prominent exception was during SCPMA’s aborted attempt to spur domestic competition in
the gas sector (Stevens, forthcoming).

Table 2
Summary table for our sample of countries. Assessments are for 2008 unless noted otherwise. Using the values for the World Bank’s Government Effectiveness (‘‘GE’’) index as shown in
Fig. 1, institutional quality is grouped into ‘‘High’’ (GE40.3), ‘‘Middle’’ (0.3rGEr0.3), and ‘‘Low’’ (GEo0.3) categories. As discussed in the text, the binary grouping into ‘‘High’’ and ‘‘Low’’
political competition ignores nuances of the political environments in these countries, notably in the cases of Malaysia, Venezuela, and Russia. The ordering of countries in the table is
designed to highlight the principal results discussed in Section 5.

Country Effective separation of Good performance Institutional quality Political competition

Tried separating commercial functions currently in currently? (see Table (see (see Fig. 1)
from policy/regulatory place? 1) Fig. 1)
functions?

Norway | | | High High

Brazil | | | Middle High (Low as of early 1980s)

Mexico | a Middle High (Low as of late 1990s)

Nigeria | Low High

Algeria | Low High

Malaysia | High Low

Saudi Arabia | Middle Low

Angola | Low Low

Russia Middle Low (Power being consolidated)

Venezuela Low High (Power being consolidated)

a
As discussed in the text, Mexico’s energy reform in late 2008 attempted to establish regulatory separation. It is too early to definitively assess the effectiveness of this effort,
although initial indications suggest that the reforms have been hindered by Pemex’s monopoly position.
and regulatory oversight from several government bodies (Xu, 2007; Jiang, forthcoming). It would be
worth further exploring why cases like this diverge from the prevailing pattern in our sample that
attempts to separate administrative functions are seen primarily where political competition exists. One
possible explanation is that our crude measure of institutionalized political competition does not capture
the non-electoral, but nonetheless very robust and multi-tiered, political competition that occurs in a
large and complex country like China.

Second, a country’s ability to implement separation of functions in a meaningful way is heavily

dependent on its level of institutional development at a particular juncture. Norway and Nigeria both
created tripartite divisions of commercial, policy, and regulatory functions in the formal sense at the
time they established NOCs. Norway’s more competent and established bureaucracy, however, enabled
its policy and regulatory bodies to grow into informed, moderating forces in the sector where Nigeria’s
equivalents did not. Norway’s bureaucracy was quite well developed by the time oil was discovered in
the North Sea in the late 1960s; it had experience regulating other resource sectors like mining and
water, and it embarked on a highly focused training program for its employees to learn about petroleum
(Thurber and Istad, 2010). Nigeria’s indigenous civil service, by contrast, had only come into existence a
decade earlier when the country gained its independence. Oil was not discovered in Nigeria until 1956,
and its bureaucracy never had the advantage of sufficient institutional stability and training to develop
capability amid the political turmoil of the newly independent republic in the 1960s (Thurber et al.,
2010). Perhaps partly as a result, Nigerian oil sector regulators acted as either pernicious micromanagers
(as with the Nigerian Ministry of Mines and Power in the early 1970s) or mostly passive rubber stamps
(as with the Nigerian Department of Petroleum Resources in recent
years) or both.41
The case of Brazil illustrates how the sequencing of institutional reforms can be important. Unlike
Norway or Nigeria, Brazil did not separate functions at the time it established its NOC. Instead, Brazil
built human and institutional capacity in oil first and then successfully implemented a separation-of-
functions model once these prerequisites were in place. By the time the ANP was established as the
government’s steward of petroleum resources in 1997, the NOC was already a strong performer, and the
country’s governing institutions had matured to the point where competent independent bureaucratic
oversight was both possible and salutary for the company’s performance.42
Third, countries lacking deep institutional capacity (both in oil institutions and in government more
generally) early in the development of their oil sectors may benefit from not establishing the
separation of functions model initially. Like Nigeria, Angola lacked an established civil service at the
outset of oil development (and in fact its bureaucracy may have been in an even worse position
because of the debilitating effects of civil war). Unlike Nigeria, however, Angola chose to consolidate
domestic talent in the oil sector, consciously vesting commercial, policymaking, and regulatory powers
in Sonangol and then devoting substantial training resources to its development. This approach
enabled Angola’s unitary government to act with one voice in its management of the sector and
minimize the number of bureaucratic points of engagement (and potential corruption) that foreign
operators had to face. This facilitated government efforts both to ensure fluid functioning of oil
operations and to capture a strong share of revenues. Over time, as the company has developed a
class of skilled technocrats and managers, its ability to manage both its regulatory and commercial
functions has grown. Over the past three decades, Sonangol has developed as an expanding island of
competence in the midst of massive shortcomings in the rest of the Angolan bureaucracy and private
sector. The solitary focus on the development of Sonangol as the steward of Angola’s most valuable
resource may have negatively impacted other aspects of the country’s institutional development. But
it has certainly helped the government achieve its goals in the oil sector, and it may provide a stable
launching pad for broader commercial and administrative development.

Brazil and Malaysia also seemed to benefit from not separating functions of oil administration early in
the development of their national oil sectors. In Brazil, the monopolistic position of Petrobras and its
insulation from public oversight or regulatory intervention during the long period of military rule from
1965 to 1985 allowed it to make decisions that were politically unpopular but ultimately successful—for
example to gain operational experience overseas, and, most importantly, to explore offshore in Brazil
(de Oliveira, forthcoming). The relative insulation from politics of Malaysia’s NOC Petronas under
Mahathir also seemed conducive to its development and to that of the country’s oil sector (Lopez,
forthcoming).

Fourth, the existence of a robust system of checks and balances may provide crucial stability and
resilience against political or economic shocks even if separation of functions does not appear to be
needed while political competition remains low. Our conclusions in this respect are highly provisional,
but to the extent that this conclusion is borne out by further study, it suggests that countries with the
requisite institutional capacity would be wise to preemptively build up the checks and balances that
separation of functions provides. Though a cause-and-effect relationship is difficult to establish, changes
in political alignment in several countries lacking such institutional checks and balances have had
particularly damaging effects on oil sector governance. For all the talent of Venezuela’s PDVSA in the
1990s, its political confrontation with Cha´vez proved disastrous for the company and for the
Venezuelan oil sector. The difficulties in government– NOC relations in post-Mahathir Malaysia and the
fractures that emerged in Abu Dhabi after visionary Sheik Zayed died and left the leadership of the
emirate to his feuding sons (see Rai and Victor, forthcoming) also illustrate this risk. Angola may
ultimately prove to be particularly susceptible if the political status quo that has dominated the
country’s leadership for decades should shift, combining a deterioration of the informal control that has
driven Sonangol for decades with the continuing absence of formal institutional oversight.
 Fifth, attempts to implement separation of functions in countries where institutional prerequisites are
absent can be highly counterproductive. Nigeria has repeatedly seen efforts to create an independent
regulator fall short on substance, and Algeria’s 2005 reform drive ran aground in the face of similar
pushback from entrenched interests. Such reforms can be worse than useless and actually do harm, for
example in the following ways. First, overly sweeping and unworkable reform initiatives may crowd out
more incremental reform efforts that could actually be substantive and sustainable, implicitly serving
the interests of those who benefit from the status quo. Second, reform efforts focused on creating new
government bodies can further diffuse limited financial and human resources, as Nigeria’s early
experience demonstrates. Third, such approaches can increase corruption opportunities by multiplying
the points of engagement with government officials. (Sonangol provides a good example of how
concentration of government functions can help sidestep or at

least centralize corruption problems in a country rife with them.) Fourth, repeated failed efforts to
reshuffle the deck chairs via a proliferation of institutions create cynicism and built-in excuses for people
not to believe in the possibility of reform, which can actively impede positive developments.

6. Conclusions: different models for different institutional and political environments

government has the desire to contain the impact of oil revenues on the country’s broader economy and industrial structure, to cartelize the oil industry, or to preserve oil supply as
part of a ‘‘depletion strategy’’ to optimize the country’s revenues over the longer term.
31
We expect, but do not test here, that revenue streams over time are linked to some, but not all, of these other performance dimensions.
32
Stevens (2003) notes the existence of effective bureaucracies in several oilproducing countries that appear to have avoided the ‘‘resource curse.’’ 13 The Government
Effectiveness index measures ‘‘perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the
quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies’’ (Kaufmann et al., 2009). This represents the overall
quality of public government effectiveness, which in some countries may not reflect islands of competence built within the public bodies specifically responsible for oil. In
countries like Brazil and Angola, the level of competence in the oil sector significantly exceeds the average government capacity. 14
The institutional quality index used by Sachs and Warner (1997) and in modified form by Atkinson and Hamilton (2003) groups together measures of rule of law,
bureaucratic quality, corruption in government, risk of expropriation, and government repudiation of contracts. Eifert et al. (2003) create a stylized classification of political
economies – mature democracy, factional democracy, paternalistic autocracy, reformist autocracy, and predatory autocracy – that describes characteristic political, legal, and
bureaucratic institutions for each type. 15 Political Competition (POLCOMP) is a composite of variables in Polity IV measuring ‘‘regulation of participation’’ and
‘‘competitiveness of participation’’ in the political arena (Marshall et al., 2010). 16 We choose 15 years to partially account for multi-term leadership, political dynasties, and
other phenomena that occur even in politically competitive states. 17 Even this simple measure is not always as straightforward as it seems. For example, the succession of King
Fahd by Crown Prince Abdullah in Saudi Arabia was orderly and clearly represented continuity of the Al Saud ruling family—hence our classification of Saudi Arabia as
having low political competition by the metric described. At the same time, the elevation of Abdullah, a halfbrother to Fahd, was strongly resisted by the Sudairi faction of full
brothers to Fahd (Henderson, 2009). 18
As noted, we acknowledge that this measure of political competition is fairly narrow. Some countries may be politically competitive even though no change in
leadership occurs at the executive level. Political competition may threaten the leader’s hold on power (even if the leader staves off those threats) or result in changes in the
legislative and/or subnational levels. In most such cases, however, we would argue that the degree of political competition is relatively muted. We therefore adopt the broad,
but indicative, measure of a faction/party’s time in office as our proxy for political competition.
33
See Nolan and Thurber (2010) for one attempt to develop variables expressing geological risk. While their methods were useful for testing a theory about how risk
affects state hydrocarbon choices, there were clear limits to how well they were able to characterize geological endowments.
34
Venezuela presents a special case. Until the early 1990s, the holding company for Venezuela’s NOC, PDVSA, discharged policy and regulatory roles whereas the NOC
operating companies fulfilled commercial roles (Hults, forthcoming b). This division of responsibilities in some ways resembles the separation of functions approach, though
both functions occurred within the NOC.
We discuss the Venezuelan experience more fully below.
35
The Federal Tariff Service sets domestic gas prices but only after consulting with Gazprom (Victor and Sayfer forthcoming).
36
In accord with our conception of the dependent variable, we acknowledge that governments may make different choices about their short-term and longterm needs from the
oil sector. Our argument is that Russia and Venezuela have prioritized short-term political needs to such an extent that the oil sector cannot meet the revenue goals of the state in
the future.
37
See Nwokeji (2007) for detailed discussion of the Nigerian regulatory
38
This paragraph’s discussion of Angola draws from a more extensive analysis in Heller (forthcoming). 29 A principal refers to an entity that directs another entity, an agent, to
do its bidding. Principal–agent relationships arise in politics, employment, and a wide range of other contexts. Some states have multiple principals exercising independent control
over government generally but few such principals in the oil sector specifically because of institutional agreements delegating autonomy to that sector. For more of principal-agent
theory in the NOC context, see Hults (forthcoming a) and Stevens (2008). For general discussion of the principal-agent relationship, see Spence and Zeckhauser (1971), Ross
(1973), and Jensen (1983). 30 Other factors help explain the durability of Saudi policy: Saudi Arabia has a long history of oil production and has been the world’s most important oil
producer and holder of oil reserves over a sustained period.
perfor-
40
We thank an anonymous reviewer for making this point.
41
A characteristic feature of Nigerian oil administration today is that bureaucratic procedures and micromanagement are rife, and yet government bodies exert no truly
effective authority over the activities of the international companies that extract the country’s oil (Thurber et al., 2010).
42
Our limited sample provides no clear cases of bureaucratic improvements following development of a large oil export industry, though Angola may ultimately turn out
to be such a case. Though we do not test for this relationship here, one possible implication – and subject for further research – is that it might actually be more difficult to
develop robust institutions after substantial oil rents are flowing to the government. Djankov et al. (2008), for example, analyze the effect of oil rents on political institutions.
Ross (2001) also considers the effect of oil sector performance on political competition. Such studies implicitly raise the question of endogeneity in our research design,
although we believe that any feedback from our dependent variable to our independent ones is relatively insignificant in the cases we consider.
The foregoing discussion illustrates the dangers of trying to apply the separation of functions model
without regard for institutional and political context. Although the model is, as suggested by the Natural
Resource Charter (2009), a ‘best practice’ of sorts, it is not the right prescription for every ailing oil
sector around the world. As Rodrik (2008) argues in a more general sense about institution building,
countries lacking conditions supportive of best practices are better off pursuing ‘‘second-best
institutions.’’ Reformers in oil need context-specific guidance as to when the Norwegian Model is or is
not a good idea.43
Fig. 2 revisits the quadrants introduced in Fig. 1, and provides a framework for thinking about which
strategies for administering the oil sector may be effective in states with different degrees of political
competition and institutional capacity. We do not claim that institutional quality and political
competition are the only relevant variables affecting the success of reforms in oil sector administration.
Moreover, as we indicated in the previous section, further research is needed to refine the definitions
and best indicators for both of these variables. Our measure of political competition is particularly
primitive and can be misleading when applied to certain countries. Nonetheless, the results of this study
clearly suggest that institutional quality and political competition matter, and that even relatively crude
assessments of these variables for different countries can provide useful guidance for planning oil sector
reform strategy. In the remainder of this section, we map out how the findings of this study might
translate into concrete policy guidance.

The countries of Quadrant IV, with strong institutional capacity and competitive political systems,
present the best environment for formally separating policy and regulatory functions from commercial
ones. Norway and Brazil are the outstanding cases in which this approach has been used successfully. As
another country with political competition and relatively well-developed institutions, Mexico is also a
plausible candidate for separationof-functions reform; indeed, the country’s reform law at the end of
2008 created a new technical regulator, the National Hydrocarbons Commission, and also attempted to
strengthen the existing Energy Regulatory Commission.44 (However, resistance in Mexico to foreign
participation in the oil sector may limit the effectiveness of such separation-of-functions reform by
preventing the emergence of any real competitors to, and thus leverage over, Pemex.) Countries with
well-developed institutional capacity that are in transition from unitary to more pluralistic government
might also benefit from moves to separate functions in the oil sector.

In Quadrant I, where power is not meaningfully contested and human and institutional capacity are
limited, there is a strong case for the consolidation of functions. Because political competition is low,
executive time horizons are long and one institution can successfully fulfill many functions on behalf of a
country’s leadership. Because institutional capacity is low, it may be more effective to create one all-
purpose administrative tool rather than to invite the infighting that can result from creating multiple
bodies.45 Reformers faced with conditions of low human capacity

43
We note that changes in operator and policymaker responsibilities are not the only avenue for oil sector reform. Other potential options include establishing multiple NOCs
(as China has done), opening the sector to private sector competition (as was done in Norway, Brazil, and several other countries), or privatizing NOCs (as Argentina did in the
1990s). Evaluation of the effectiveness of these measures is beyond the scope of this paper.
44
The National Hydrocarbons Commission has arguably shown some initial value by offering a much-needed second opinion on Pemex’s controversial plan to invest heavily
in the Chicontepec field (Olsen, 2010).
45
The decision to consolidate regulatory and commercial powers when forming NNPC in Nigeria in 1977 followed at least in part from this logic. Although an NOC was the
administrative tool of choice for the countries in our sample, it may be that creating a strong regulator/policymaker can be a better choice in some cases, with commercial elements
incorporated later or not at all. (In a sense this was the administrative path Norway followed between the first realization among the civil service of oil’s potential in the early
1960s and the establishment of Statoil in 1972.) We also note the importance of distinguishing infighting among institutions for regulatory responsibilities – which is often harmful
in states with
 Low Political Competition High Political Competition

Quadrant III Quadrant IV

Suggest: Suggest:

- Consolidate functions initially - Separate functions

High Institutional Capacity
- Consider separating functions
upon signs that politics is
becoming more pluralistic
Examples: Examples:
MALAYSIA (under Mahathir) NORWAY, BRAZIL, MEXICO
Quadrant I Quadrant II
Suggest: Suggest:

- Consolidate functions - Develop technical and

Low Institutional Capacity institutional capacity

Examples: Examples:

ANGOLA NIGERIA
Fig. 2. Suggested approaches for oil administration in different types of oil-exporting states.

should be very wary of proposing a separation of functions model until institutions and talent appear to
be in place to support it. A positive outcome will still depend on farsighted decisions by a country’s
leaders, in particular in appointing skillful managers of their NOCs and then leaving them alone; Angola
and Brazil under military rule both did this to a large extent.

It is more difficult to present generalizable recommendations for the countries of Quadrants II and III. In
Quadrant III, where institutional capacity is relatively advanced but there is no political competition or
entrenched practice of intra-governmental checks and balances, formally separating functions may
reduce efficiency without meaningfully impacting the behavior of government or company officials. But
as Malaysia has experienced in the aftermath of Mahathir’s resignation, a unitary system of oilsector
management can fall quickly out of step with a society that is becoming more pluralistic. Thus our
tentative advice for countries in this quadrant is to keep functions consolidated (embedding strong rules
for public disclosure of information) while political power remains strongly unitary, but to mirror the
evolution of the political system as a whole and promote specialization and separation of functions as
the state begins to become more pluralistic.

The minimally institutionalized states of Quadrant II – both politically contested and lacking in durable
and effective institutions to provide continuity and a moderating influence – present the most
nettlesome challenges to reformers. Suggesting that a leader consolidate personal power as a route to
better performance in oil is usually unrealistic, not to mention anathema to supporters of democracy
and human rights. For example, Nigeria’s extreme diversity and free-wheeling political system will
probably prevent the country from ever becoming an Angola.

At the same time, the pursuit of the Norwegian Model is also likely to be fruitless in a country of low
institutional capability and vigorous competition for the spoils of oil. Any policy or regulatory bodies that
are created will promptly be either neutered or captured by powerful interests who do not want to
(footnote continued)
limited institutional capacity – from competition among institutions for commercial gains. China, among other countries, implemented the latter approach by establishing three
major NOCs: CNPC, Sinopec, and CNOOC (Lewis, 2007, Andrews-Speed, 2004). We do not assess the effectiveness of internal competition among NOCs here.

see their own control over oil revenues challenged. The unsatisfying conclusion (as previously
remarked upon by Moore and Putzel (1999), Grindle (2007), Rodrik (2008), and others) is that
ambitious institutional reforms are more likely to work in settings in which basic institutional capacity
already exists. Where it does not, more narrow and targeted reforms focusing on technical and
institutional capability may offer the best chance of yielding concrete, though more limited, results.

There exists a larger debate on the merits of such a gradual approach to improvement relative to a
‘‘grand bargain’’ strategy that re-configures many institutional interactions at once. The latter
approach, for example, might allow better coordination of reforms and associated political horse-
trading, and might also provide more rapid payoffs to provide credibility and sustain the momentum
of reform (see, for example, Feltenstein and Nsouli, 1998). However, this kind of grand bargain is
complicated in the absence of durable institutions that can credibly negotiate and commit to political
tradeoffs. In countries like Nigeria and Algeria, such credible institutions simply do not exist,
irrespective of any organizational definitions on paper.

It is discouraging that even the best-conceived institutional blueprint cannot turn Nigeria’s oil sector
into Norway’s, or even Angola’s, in one fell swoop. However, recognizing the context dependence of
oil reform will help countries make reform choices that are realistic and that yield measurable and
sustainable progress rather than a dispiriting trail of dashed hopes.

References
Al-Kasim, F., 2006a. Managing Petroleum Resources: The ‘Norwegian Model’ in a Broad Perspective. Oxford Institute for Energy Studies, Oxford, UK.

Al-Kasim, F., 2006b. The relevance of the Norwegian model to developing countries. Presentation at Norad Seminar, Jan, 26, available at /http://
siteresources.worldbank.org/EXTNTFPSI/Resources/606764-1150299531473/ FaroukAl-Kasim.pdfS.
Andrews-Speed, P., 2004. Energy Policy and Regulation in the People’s Republic of China. Kluwer Law International, The Hague.

Atkinson, G., Hamilton, K., 2003. Savings, Growth and the Resource Curse Hypothesis. World Development 31 (11), 1793–1807.

Boscheck, R., 2007. The governance of oil supply: an institutional perspective on NOC control and the questions it poses. International Journal of Energy Sector Management
1 (4), 366–389.

Brunnschweiler, C.N., Bulte, E.H., 2008. The resource curse revisited and revised: a tale of paradoxes and red herrings. Journal of Environmental Economics and Management
55, 248–264.

Collins, T., 2003. NOC Reform: Restructuring, Commercialization and Privatization. World Bank National Oil Companies Workshop, Current Roles and Future Prospects, May
27, available at /http://siteresources.worldbank.org/ INTOGMC/Resources/NOCReformCollins.pdfS.

de Oliveira, A., forthcoming. Petrobras: strategy and performance. Oil and Governance: State-owned Enterprises and the World Energy Supply, Cambridge University Press,
ISBN: 9781107004429.

Djankov, S., Montalvo, J.G., Reynal-Querol, M., 2008. The curse of aid. Journal of Economic Growth 13, 169–194.

Eifert, B., Gelb, A., Tallroth, N.B., 2003. The Political Economy of Fiscal Policy and Economic Management in Oil-Exporting Countries. In: Davis, J.M., Ossowski, R., Fedelino, A.
(Eds.), Fiscal Policy Formulation in Oil-Production Countries. International Monetary Fund, Washington, D.C..

Entelis, J., forthcoming. Sonatrach: the political economy of an Algerian state institution. Oil and Governance: State-owned Enterprises and the World Energy Supply,
Cambridge University Press, ISBN: 9781107004429.

Espinasa, R., 2008. Marco Institucional y el Desempen˜o de las Empresas Estatales Productoras de Petro´leo. In: presented at OAS Conference in Washington, DC on March
22, 2008.

Feltenstein, A., Nsouli, S.M., 1998. ‘Big Bang’ Versus Gradualism in Economic Reforms: An Intertemporal Analysis with an Application to China. IMF Working Paper WP/01/98.
 Grindle, M.S., 2004. Good enough governance: poverty reduction and reform in developing countries. Governance 17 (4), 525–548.

Grindle, M.S., 2007. Good enough governance revisited. Development Policy Review 25 (5), 553–574.

Heller, P.R.P., forthcoming. Angola’s Sonangol: dexterous right hand of the state. Oil and Governance: State-owned Enterprises and the World Energy Supply, Cambridge
University Press, ISBN: 9781107004429.

Henderson, S., 2009. After King Abdullah: Succession in Saudi Arabia. The Washington Institute for Near East Policy, Policy Focus #96, August, available at:
/http://www.washingtoninstitute.org/pubPDFs/PolicyFocus96.pdfS.

Hults, D.R., forthcoming a. Hybrid governance: State Management of National Oil Companies. Oil and Governance: State-owned Enterprises and the World Energy Supply,
Cambridge University Press, ISBN: 9781107004429.

Hults, D.R., forthcoming b. Petro´leos de Venezuela, S.A.: from independence to subservience. Oil and Governance: State-owned Enterprises and the World Energy Supply,
Cambridge University Press, ISBN: 9781107004429.

Jiang, B., forthcoming. China National Petroleum Corporation (CNPC): a balancing act between enterprise and government. Oil and Governance: State-owned Enterprises and
the World Energy Supply, Cambridge University Press, ISBN: 9781107004429.

Jensen, M.C., 1983. Organization theory and methodology. Accounting Review 8 (Apr), 319–337.

Jones Luong, P., Weinthal, E., 2010. Oil Is Not a Curse: Ownership Structure and Institutions in Soviet Successor States. Cambridge University Press, Cambridge, UK.

Kaufmann, D., Kraay, A., Mastruzzi, M., 2009. Governance Matters VIII: Aggregate and Individual Governance Indicators, 1996–2008. World Bank Policy Research Working
Paper No. 4978.

Lahn, G., Marcel, V., Mitchell, J., Myers, K., Stevens, P., 2007. Good Governance of the National Petroleum Sector: The Chatham House Document, available at
/http://www.chathamhouse.org.uk/files/9761_ggdoc0407.pdfS.

Lewis, S.W., 2007. Chinese NOCs and World Energy Markets: CNPC, SINOPEC, and CNOOC. Policy Report on the Changing Role of National Oil Companies in International
Energy Markets. Rice University, James A. Baker III Institute for Public Policy, Houston, TX.

Lopez, L., forthcoming. Petronas: Reconciling Tensions between Company and State. Oil and Governance: State-owned Enterprises and the World Energy Supply, Cambridge
University Press, ISBN: 9781107004429.

Marcel, V., 2005. Oil Titans: National Oil Companies in the Middle East, London. Chatham House.

Marshall, M.G., Gurr, T.R., ,Jaggers, K., 2010. Polity IV Project: Political Regime Characteristics and Transitions, 1800–2009, Dataset Users’ Manual. Center for Systemic Peace,
available at /http://www.systemicpeace.org/polity/polity4. htmS (accessed 14 December 2010).

Moore, M., Putzel, J., 1999. Thinking Strategically about Politics and Poverty IDS Working Paper 101, available at /http://www.ids.ac.uk/index.cfm?objectID= FA0755E3-5056-
8171-7B8A757CBE2523D4&pgno_pub=5S.

National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, 2011. Deep Water: The Gulf Oil Disaster and the Future of Offshore Drilling, available at
/http://www.oilspillcommission.gov/final-reportS.

Natural Resource Charter, 2009. Draft for Consultation, November 2009.

Natural Resource Charter, 2010. November 2010, available at /http://www. naturalresourcecharter.orgS.

Nolan, P.A., Thurber, M.C., 2010. On the State’s Choice of Oil Company: Risk Management and the Frontier of the Petroleum Industry. Program on Energy and Sustainable
Development Working Paper 99, December, available at

/http://pesd.stanford.edu/publications/on_the_states_choice_of_oil_company_ risk_management_and_the_frontier_of_the_petroleum_industryS (accessed 2 June 2011).

Nore, P., 2009. Oil for Development – OfD. Presentation to the World Bank, Mar. 3, available at /http://siteresources.worldbank.org/EXTOGMC/Resources/ 336929-
1237387264558/5930373-1237387327980/nore_eitiþþ.pdfS.

Noreng, Ø., 1980. The Oil Industry and Government Strategy in the North Sea. Croon Helm, London.

Nwokeji, G.U., 2007. The Nigerian National Petroleum Corporation and the Development of the Nigerian Oil and Gas Industry: History, Strategies and Current Directions Policy
Report on the Changing Role of National Oil Companies in International Energy Markets. Houston, TX: Rice University, James A. Baker III Institute for Public Policy.

Olsen, R., 2010. Back to square one for Pemex’s challenging Chicontepec oil project. Petroleum Economist.

Rai, V., Victor, D.G., forthcoming. Awakening Giant: Strategy and Performance of the Abu Dhabi National Oil Company (ADNOC). Oil and Governance: Stateowned Enterprises
and the World Energy Supply, Cambridge University Press, ISBN: 9781107004429.

Rodrik, D., 2008. Second-best institutions. American Economic Review: Papers & Proceedings 2008 98 (2), 100–104.

Ross, S.A., 1973. The economic theory of agency: the principal’s problem. American Economic Review 12 (May), 134–139.

Ross, M.L., 2001. Does oil hinder democracy? World Politics 53, 325–361.

Sachs, J.D., Warner, A.M., 1997. Sources of slow growth in African economies. Journal of African Economies 6 (3), 335–376.
Skancke, M., 2003. Fiscal Policy and Petroleum Fund Management in Norway. In: Davis, J.M., Ossowski, R., Fedelino, A. (Eds.), Fiscal Policy Formulation and Implementation in
Oil-Producing Countries. International Monetary Fund, Washington, DC.

Spence, M., Zeckhauser, R., 1971. Insurance, information, and individual action. American Economic Review 61 (May), 380–387.

Stevens, P., 2003. Resource Impact: A Curse or a Blessing? Working Paper, University of Dundee Center for Energy, Mineral Law and Policy, available at
/http://www.dundee.ac.uk/cepmlp/journal/html/Vol14/Vol14_1.pdfS (accessed 15 December 2010).

Stevens, P., 2008. National Oil Companies and International Oil Companies in the Middle East: under the shadow of government and the resource nationalism cycle. Journal of
World Energy Law & Business 1 (1), 5–29.

Stevens, P., forthcoming. Saudi Aramco: A Giant amongst Giants. Oil and Governance: State-owned Enterprises and the World Energy Supply, Cambridge University Press, ISBN:
9781107004429.

Stojanovski, O., 2008. The Void of Governance: An Assessment of Pemex’s Performance and Strategy. Program on Energy and Sustainable Development Working Paper #73,
April, available at /http://pesd.stanford.edu/publications/ the_void_of_governance_an_assessment_of_pemexs_performance_and_strat egyS (accessed 15 December
2010).

Thurber, M.C., Istad, B.T., 2010. Norway’s Evolving Champion: Statoil and the Politics of State Enterprise. Program on Energy and Sustainable Development Working Paper 92,
May, available at /http://pesd.stanford.edu/publications/ norways_evolving_champion_statoil_and_the_politics_of_state_enterpriseS (accessed 15 December 2010).

Thurber, M.C., Emelife, I.M., Heller, P.R.P., 2010. NNPC and Nigeria’s Oil Patronage Ecosystem. Program on Energy and Sustainable Development Working Paper 95, September,
available at /http://pesd.stanford.edu/publications/nnpc_and_ nigerias_oil_patronage_ecosystemS (accessed 15 December 2010).

Velculescu, D., 2008. Norway’s Oil Fund Shows the Way for Wealth Funds. IMF Survey, July 9.

Victor, D.G., Hults, D.R., Thurber, M.C., forthcoming. Oil and Governance: Stateowned Enterprises and the World Energy Supply, Cambridge University Press, ISBN:
9781107004429.

Victor, N., Sayfer, I., forthcoming. Gazprom: The Struggle for Power. Oil and Governance: State-owned Enterprises and the World Energy Supply, Cambridge University Press,
ISBN: 9781107004429.

Whitford, A.B., 2005. The pursuit of political control by multiple principals. The Journal of Politics 67 (1), 29–49 Feb..

World Bank, 2010. Worldwide Governance Indicators, available at /http://www. govindicators.orgS (last accessed 15 December 2010).

Xu, X., 2007. Chinese NOCs’ Overseas Strategies: Background, Comparison and Remarks. Policy Report on the Changing Role of National Oil Companies in International Energy
Markets Houston, TX: Rice University, James A. Baker III Institute for Public Policy.