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How far will this trend?
9

How far will this trend?

How far will this trend?

(OP)

see link:

http://www.guardian.co.uk/russia/article/0,,1970064,00.html

With the context that this article provides, I assume things:

1.  International Law doesn't address this sort of action.
2.  Lack of pollution controls, wage differences, and tax shelters all become opportunties of leverage for parent nations to steal assets from host corporations.
3.  China could do this to US manufacturing interests with no challenge.

Your thoughts are appreciated...

RE: How far will this trend?

Venzuela has been more blatant than Russia in nationalizing the oil companies facilities and deigns not to care about their international reputation.  A full embargo would not work because some country will always break it to get energy products.

RE: How far will this trend?

It's just part of the geopolitical risk that's factored into a decision to invest in a particular project in the oil industry.

You do the economics, calculate the NPV and stuff, and then start looking at the risks: technical risks (is the oil really there?) market risks (who can we sell it to? At what price?) and then the geopolitical risks (how stable is the country? Will we have to evacuate our staff because of local unreat?  Will the taxes suddenly go up?  Will everything be nationalised if the government changes?).

I think things in Russia will settle down once all teh big deals that were signed with the Yeltsin government have been undone: then with Yukos or Gazprom or Sibneft as the major partner in any future JVs or PSAs, everyone's happy.

I doubt if China could do this type of thing to US manufacturing though: after all, I think most of the manufacturing in China is Chinees companies making stuff to sell to US corporations rather than manufacturing done by US corporations in China.  And If China nationalised, say, Nike factories in China, they wouldn't be able to sell the stuff as Nike shoes... trademarks and so on.

RE: How far will this trend?

I'm not sure how the parent nation is stealing the assests from host corporations as the gas is the asset of that land that belongs to Russia. International law doesn't come into a nations assets as they belong to the nation, surely. If the US has corporations in China that is using their assets then I can't see why China can't decide to use those assets themselves. Shell has been recompensed for the reduction in what they can take so it seems a fair deal. If Venezuela nationalises their oil then they obviously prefer the profits to go the country rather then a corporation. Seems reasonable to me.

corus

RE: How far will this trend?

2
Corus,

The oil & gas is there.  It is owned by some entity within that country.  Nothing in the agreements between companies and resources-owners changes that.  The agreement to develop will provide a portion of the resources that are made marketable to the company that takes the risks to get it to surface.  The agreements typically take many years to recover the capital and to say that "Shell has been recompensed for the reduction in what they can take so it seems a fair deal" is just outrageous.

It cost a lot of money to turn that resource into a marketable commodity.  In the case above, Shell entered into a contract to provide considerable expertise and capital to supply the infrastructure to make that resource marketable.  The proposed nationalization does nothing to the ownership of the natural resources, it just steals Shell's contribution.

David

RE: How far will this trend?

Quote:

And If China nationalised, say, Nike factories in China, they wouldn't be able to sell the stuff as Nike shoes... trademarks and so on.

Sure they could...and do. The Chinese courts are notoriously corrupt and have several times refused to enforce blatant trademark violations.

The Chinese government isn't going to nationalize manufacturing assets because the Chinese partners are already getting rich and the government officials are getting their cut.

--------------------
How much do YOU owe?
http://www.brillig.com/debt_clock/
--------------------

RE: How far will this trend?

3
Come on Corus, it's the other way around. Shell is not seizing Russia's gas. Russia is seizing Shell's investments.

In other words Russie confirms that it is not as politically and legally stable as some people have started to think. This is a pretty neat move to deter further foreign investment and to force the standard of living to remain at sub-1st world country level. You can imagine the Russian people will be thankful to their government for this brilliant move.

RE: How far will this trend?

PS the Chinese have too much business sense to make this kind of blunders.

RE: How far will this trend?

Zdas04,

I have thought this was a real possibility since Russia became "capitolist."  Growing up, I recall being told that the Soviet Union was very good at producing the goods it needed but was unable to get the products to market in a timely manner.  I figured the solution was a substantial investment in their transportation system; vehicles and infrastructure.  But the fear is after it is built the Russians decide to nationalize it.  I think we will see much more nationalizing over there.  I regret it looks like they are going back to their old ways, and I fear much further back.

Corus

RE: How far will this trend?

(OP)
China holds little regard for intellectual property and formal trade agreements.  My fear is seeing a big weakness in current US manfacturing strategy /trade policy that is not being acknowledged, much less addressed formally.

I don't know who is "wrong" and who is "right" between Shell, BP, and the "nation" of Russia.  But it reeks of thievery, corruption, and a bunch of elitists laying claim to something not theirs...  and that unfortunately is not an exclusive trait to only this relationship.

RE: How far will this trend?

Sounds like a page right out of Atlas Shrugged.

RE: How far will this trend?

Oh guys come oooooooooon!! smile

My neighbour has 25 cherry trees. Unfortunately the guy is 80 years old and he can't pick and sell them.

I happen to be 20 and I have a ladder. So I propose a deal: what if I come out to your garden with my ladder, pick your cherries, we'll sell them on the market and we'll share 50/50.

Great deal, neighbour seems happy. I put the ladder against the first tree and wait for the cherries to turn red.

Next day I come back. Ladder's gone. I go to see my neighbour and he goes: "Got you! The ladder's now mine and you can forget about the cherries!"

Just because Shell, BP, EM are big rich companies that doesn't mean that you can just steal from them, do your usual Castro speech and get away with it.

RE: How far will this trend?

Bill,
As the Wikipedia article says, "bp" hasn't stood for British Petroleum since 1998.  Now it just stands for "bp".

David

RE: How far will this trend?

zdas04, your points accepted, no problem.
BP and Shell are, effectively, multinationals in every sense, so why would a US citizen be bothered by these issues?

I grant that the references to obesity and buffoons were a little sharp but that may be the picture from where Corus is standing. I can't say thay GWB impresses me, either.

Bill

RE: How far will this trend?

(OP)
This sets a dangerous precendent for other countries to follow.  I know this example isn't the first time a scenario like this has happened, but it is no less shocking.  Especially when applied to other vulnerable assumptions of US economic policy.

RE: How far will this trend?

WGJ:

BP and Shell employ a lot of Americans, and supply and refine a huge amount of gasoline in the US, not to mention the implications for US companies operating in both Russia and around the world.

Why wouldn't a US citizen be bothered?

-The future's so bright I gotta wear shades!

RE: How far will this trend?

The Tick:

Who is John Galt?

RE: How far will this trend?

Ayn Rand vs. Ceasar Chavez.  Ownership by the state for the benefit of the rulers vs. control by the multinationals for the benefit of the shareholders, (of which I am a micro-minority owner).

RE: How far will this trend?

Hey Tick, have you noticed how many products are being made with Soy Beans these days?  We can't be far from John Galt's speech.

David

RE: How far will this trend?

2
epoisses:  let's take your analogy and make it a little closer to the Venezuelan experience, shall we?

The "old guy" who owns the cherry trees is actually a collection of families who have no other source of income, and not enough capital to buy a ladder themselves.  They're already picking and selling everything they can reach from the ground.  So they elect an "agent" to negotiate with various "young guys with ladders"- all of them "foreigners" from the big city.  Turns out, the guys with ladders aren't interested in merely selling or renting ladders- they want a cut of the cherries- forever.  They bribe the "agent" and sign a sweetheart deal, so that they get 90% of the cherries.  That 90% of the revenue from the cherry sales doesn't circulate in the local villiage economy- it's taken to the "big city".

The families get wind of this, and elect a new "agent"- a bully this time, who fires the old agent and his cronies, kicks the ladder-merchants off the property and steals their ladders.  (oh yeah- and anybody who signs a petition objecting to the theft, gets the sack- as 20,000 or so of the former employees of PDVSA (the Venezuelan state oil company) can attest).  Any ladder-salesmen who want back in are free to sign a new deal with the untrustworthy bully.

Both sides are in the wrong.  There's plenty of blame to go around.

Businesses are algorithms that maximize profit and retained earnings.  They will use force or fraud to get what they want, if they calculate that it's in their business interest to do so (that's where Ayn Rand fell down in her assumption that selfishness was a virtue).  Without government regulation and taxation, they'd have us all in chains- and renting the chains to us!  

The same goes for "socialist" politicians:  they do what maximizes their "political capital" with the poor people who put them in power.  If they can get more of that in return for stealing some private capital, especially from a "faceless" multinational corporation, then they'll do it in whatever way they calculate can be gotten away with.  Without a functioning market economy, though, their people starve.  A market economy only functions if investors and their corporations have defensible property rights!

RE: How far will this trend?

I'm actually quite interested in ownership of natural resources and different liscening systems (hey, it gets boring offshore OK?) and the US is unique in the fact that oil and mineral resources are owned by the particular landowner. The landonwer can sell some or all of the mineral rights to an oil company (or set up their own oil company).

Everywhere else these resources are owned by the state.  There are then various way that the resources can be exploited:
1. The state may then give (or sell) a licence for a particular area to an oil company, who then owns  the natural resources for the duration of the licence outright. This is the situation in the UK, Norway and Canada amongst others. The oil company pays corporation taxes and royalties on the produced oil.  The tax and royalty rates can change: Gordon Brown, the UK Treasury Secretary has increased taxes on UK oil operators three times in the last few years for example.
2. The state may keep ownership of the oil and the exploitation is done by a National Oil Company, that is effectively part of the government.  This is the situation in Saudi, Kuwait and Iran.  This was the situation in Venuzuala and Brazil too, but they then moved to PSAs (see below).
4. The state may keep ownership of the oil and the exploitation is done by an oil company who is paid for their services.  This isn't popular with oil companies who can't book the oil reserves as their assets.  This is the situation in Iran.
3. The state signs Production Sharing Agreements with an oil company. These are a fudge: the state keeps ownership of the oil but the oil company "owns" it too (and can book the oil reserves on their asset sheets).  The oil company is usually the junior partner with a National Oil Company, and is often the operator.  The oil company's capital and operating costs are paid out of the oil produced ('cost oil', it's called, and so the infrastructure isn't theirs) and takes a share of the remaining 'profit' oil.  The oil company also pays any taxes and royalties on their oil.  These tax, and royalty rates may change: that is what has just happened in Venuzuala: the oil companies were told that their royalty rates would increase to 50%, and that corporation tax would also increase)

The Putin govenment feels that the PSA signed for Sakhalin I & II were weighted against the interests of the Russian government and has been putting pressure on Shell to allow Gazprom to enter the PSA.  This pressure has included environmental complaints, and accusations of incompetance regarding the cost escalation. Shell will be reimbursed it's costs to date for reducing it's interests in Sakhalin II, (just as the US oil companies in Aramco were reimbursed when the Saudi's bought it to create Saudi Armaco, the Saudi National Oil Company) but that's not really a consolation for all the lost future production and reserves, or the loss of control at becoming the junior partner (and maybe losing the operatorship?).

Another issue involved with Russian oil is that the privatisation by Yeltsin of the Russian oil industry in the 1990's was massively corrupt: no-one like Abramovitch or Khodorkovsky paid anything like market prices for Yukos or Sibneft, but they were well placed pals of the old regime, and became billionares overnight.  Putin is trying to wrest back what he (and a lot of the Russian people) think was stolen from them.  His tactics involve false and trumped up charges and other pretty nasty things, though.

Apart from outright appropriation of an oil company's assets (which has happened in a couple of countries in the past) any government is perfectly allowed to change tax and production royalty rates- that is, after all, what governments are there for!!! International law doesn't come into it. An oil company looks at how stable the fiscal regime is when it decides to invest in a country- for example, there are rumbles that the UK is becoming a fiscally unstable place- along with the geological risks and the technical risks.

As for Russia, I don't think there will be anything like this from now on: future PSAs will obvously be signed on less favourable terms to the oil companies, who will base their economic models on different numbers before deciding to go ahead with any projects in Russia.

RE: How far will this trend?

Also, in reply to Beggar and Rhodies's comments about the lack of protection of intellectual property in China, I'm well aware of that (my last company refused to put a manfacturing and service base for their tools in China for that reason), but my point was that if the Chineese government decided to appropriate a Nike factory, any of the trainers made at that factory couldn't be sold as Nike trainers in any Foot Locker or JJB Sports shop etc in the west, as Nike would sue the retailers for selling counterfeit goods (and would win very easily).

However, there's nothing to stop the Chineese govenment from increasing export duty, or introducing a special factory tax or increasing Nike's costs by introducing something like a minimum wage or whatever, which is something Nike will have considered before they decided to build factories in China.

RE: How far will this trend?

All nations with oil resources tend to use them as a political weapon. After Russian degradation, cold war becomes a bluff, and the world has become maybe more dangerous. In one side we have the US still very much oil dependent trying to have the control of the nations with the bigger oil resources, in the other side we have Russia who is rebuilding his power, and we have China challenging world economy with growing of 10 to 15%. China is doing great investments in transportation, in electrical water ponds, in communications, and in chemicals. Because of globalisation, China has dismantled western world textile industry originating mass dislocations of these industries to Asia countries with the cheapest manpower. Much of the Western Europe unemployment is due to China and in a similar way can also be attributed to the start of India development.    

When China and India workers start to request better salaries those countries will be in trouble and maybe great social convulsions will take place menacing world equilibrium.

The fight against pollution will somewhat put restrictions to both Western Europe and US development, still very much dependents on oil resources.

We live nowadays in a pure capitalist world and the big oil companies have no Flag, they have more power than most of the big countries.

I don“t know how far will this trend.

Regards

Luis

RE: How far will this trend?

In what way does Australia use its oil as a political weapon?

Cheers

Greg Locock

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