Academic journal article
By Gaille, S. Scott
Energy Law Journal , Vol. 31, No. 1
National Oil Companies (NOCs) are petroleum companies that are all or mostly owned by a government. NOCs, particularly those of China and India, are increasingly acquiring assets outside their own national borders, sometimes with preferential treatment from the host nation's regulatory regime. These transactions have led to concern about whether NOCs are less efficient than privately-owned companies and therefore, whether increased NOC participation might lead to decreased global oil supply. The Coase Theorem posits that if transaction costs are low enough, it does not matter who is initially allocated licenses in a regulatory process - because the secondary market will reallocate the licenses (if necessary) to companies that can efficiently develop the underlying resources. This article analyzes, both theoretically and empirically, NOC acquisitions through the prism of the Coase Theorem and concludes that, on balance, transaction costs in the petroleum license market are not impeding the reallocation of petroleum resources and that global oil supply is unlikely to be adversely impacted by regulatory failures that might occur in the license allocation process.
NOCs are petroleum companies owned all or mostly by a government. NOCs have been acquiring large numbers of petroleum licenses outside of their own national borders, sometimes assisted by preferential treatment in which the usual regulatory processes or standards for allocating petroleum rights are not followed.1 This has raised concerns about whether NOCs are as efficient as privately-owned companies (the IOCs), and if not, whether allocations of petroleum rights to NOCs may "stand in the way of timely resource development" and, potentially, impact global petroleum supply.
This article puts aside the question of whether NOCs, in general, or some in particular, are more or less efficient than IOCs. Instead it focuses on what happens after a regulatory regime has awarded petroleum licenses to less efficient companies. If we assume that the regulatory process for allocating petroleum licenses has failed in this manner, what happens next? Does the "wrong" or less efficient company get to keep the right indefinitely? Or, does the right get reallocated to a company better able to exploit the underlying resources?
Nobel Prize-winning University of Chicago Law School Professor Ronald H. Coase addressed a similar problem in his analysis of the Federal Communication Commission's allocation of frequency licenses in the 1960s.3 What happens if the government's regulatory process initially gives the licenses to companies who are unable to exploit their maximum value? Coase argued that "whatever the initial distribution of the legal right to use these frequencies, the competitive system would, in the absence of transaction costs, bring about an optimal distribution of these rights - provided the rights were well defined and transferable."4 Stated another way, where the value of the government license is high enough - which is often the case with communications spectrum and petroleum rights - the value achieved from transferring a license to a new, more efficient owner is more likely to exceed the transactions costs of the transfer and thereby enable the secondary market to overcome regulatory failures in the initial allocation. Professor Coase's 1960 article, The Problem of Social Cost, further developed these principles, which became known as the Coase Theorem.5
The Coase Theorem's assumptions seem to operate reasonably well in the petroleum license market. The secondary market for petroleum rights is a robust one, with 195 M&A transactions of at least $100 million each taking place between 2001 and 2006.6 Many of these transactions involved assignments of multiple petroleum licenses. Outside of North America, more than 3,000 interests in petroleum licenses changed owners from 2000-2009.7 While NOCs are usually thought of as buyers, NOCs have divested licenses, as well. …