More than a century ago, William Knox D'Arcy made a bargain with the Shah of Persia that helped create the modern oil industry. The deal gave D'Arcy exclusive rights to explore for, produce and sell oil across most of Persia for 60 years. In return, the Persian government received £20,000 in cash, £20,000 in shares and 16% of annual net profits.
At the time, nobody knew how valuable the oil would become.
That uncertainty was central to the early oil concession. Foreign companies supplied capital, technology and the willingness to take exploration risk. Governments possessing the resource supplied access. As the value of oil became clearer, however, that bargain was repeatedly renegotiated.
A century later, a new Venezuelan oil agreement raises the possibility that the concessionary model is entering another phase.
The North American Blue Energy Partners arrangement is striking not simply because of its scale, but because of the unusual roles assigned to the company and the U.S. government.
The agreement covers 17 Venezuelan oil fields and gives NABEP 100-year rights over fields associated with approximately 65 billion barrels of proven reserves. The company plans to invest close to $100 billion and raise production substantially.
But the unusual feature is the role assigned to the United States.
The Pentagon's Office of Strategic Capital has been granted rights to a 35% equity interest in NABEP's corporate parent. The U.S. Department of State has the right to purchase 20% of production at cost, as well as a right of first refusal over the remaining 80%. Washington also has veto power over board appointments, while a majority of the board must be U.S. citizens.
The 35% interest is structured through warrants designed to protect the U.S. position from dilution as the venture raises capital.
The structure has an extraordinary historical echo.
But it also reverses part of the direction in which the oil industry has travelled.
The early concessionary era was not confined to Persia. In Iraq, the Turkish Petroleum Company received a 75-year concession in 1925. The arrangement eventually became a multinational enterprise involving British, French, Dutch and American interests.
In Kuwait, the Kuwait Oil Company was established in 1934 as a joint venture between Anglo-Persian Oil Company and Gulf Oil. Commercial production began after the discovery of the giant Burgan field. Kuwait subsequently nationalised its oil industry.
These cases illustrate the basic pattern of twentieth-century petroleum history. Foreign capital and expertise initially dominated the industry. Resource-rich states subsequently demanded a greater share of the proceeds and, eventually, greater ownership and control.
Saudi Arabia provides perhaps the clearest example.
In 1933, Standard Oil of California received a concession from the Saudi government to explore for oil. Commercial quantities were discovered in 1938. The original arrangement therefore involved genuine geological and financial uncertainty.
As Saudi Arabia's oil wealth became apparent, the bargain changed.
In 1950, Aramco agreed to a 50-50 profit-sharing arrangement, following a model that had already emerged in Venezuela. Over the following decades, Riyadh acquired progressively greater ownership of Aramco, ultimately reaching full ownership in 1980.
The history of Aramco therefore became a history of the transformation of a concession. A foreign company initially supplied capital and expertise. The resource-owning state progressively acquired a larger share of the value and eventually control of the enterprise.
Venezuela's new arrangement begins from a very different position.
The resource is already known. Venezuela possesses the world's largest proven oil reserves, while much of its production infrastructure has deteriorated after years of underinvestment and economic and political turmoil. The central problem is therefore not discovering whether oil exists, but finding the capital, technology, management and markets required to restore production.
This changes the bargaining equation.
It also changes the role of the foreign state.
In the original Aramco arrangement, an American company was the foreign participant. In the Venezuelan arrangement, the U.S. government itself is entering the ownership and governance structure surrounding the enterprise.
That is the striking difference.
Washington is not merely encouraging an American company to invest. It is combining an equity interest with preferential access to production and a role in the governance of the venture.
The direction of travel appears almost reversed.
For much of the twentieth century, the evolution of oil contracts went in one direction: from foreign concession to greater participation by the producing state, and in some cases to nationalisation.
The Venezuelan arrangement suggests a hybrid in which a major foreign power is simultaneously investor, purchaser and strategic participant.
It would be wrong, however, to describe this simply as a return to the old concession system.
Modern oil agreements are generally more complex. Production-sharing contracts, licences, joint ventures and other arrangements have replaced many of the sweeping concessions of the early twentieth century. Questions also remain about the precise legal status of the Venezuelan arrangement and how the announced 100-year rights relate to Venezuela's hydrocarbons legislation.
That ambiguity may itself be significant. The new model does not fit neatly into the old categories.
It combines elements of the concession - extraordinarily long-term resource access - with elements of a joint venture, a production agreement and a strategic supply relationship.
The question is whether this represents a new phase in the political economy of natural resources.
For decades, resource nationalism appeared to have settled the central question of petroleum ownership. Oil-producing countries had learned that control of the resource could be converted into political and economic power. National oil companies became major actors. Foreign companies increasingly operated through partnerships rather than outright concessions.
But the geopolitical environment has changed.
Energy security is once again being treated as an element of national security. Major powers are competing not only for access to oil, but for influence over the capital, technology, infrastructure and markets that determine how resources are developed.
This has particular significance for Asia.
Most of Asia's major economies remain dependent to varying degrees on imported energy. China has built extensive relationships with oil-producing states from the Middle East to Latin America. Japan, South Korea and India have likewise sought to diversify supplies and strengthen the resilience of their energy systems.
The Venezuelan experiment thus matters beyond the Western Hemisphere. If successful, it could demonstrate a new way for a major power to secure access to strategic resources: not simply through long-term contracts or relationships with national oil companies, but through direct participation in the companies developing the resources themselves.
That would represent a significant departure from the logic that dominated the oil industry for much of the last century.
The D'Arcy concession was based on a simple proposition: foreign capital would assume the risk of finding and developing an uncertain resource.
Aramco showed how that relationship could evolve as the value of the resource became clear and the bargaining power of the producing state increased.
NABEP may point to something different.
The foreign state is no longer simply backing a company seeking access to the resource. It is becoming part of the ownership and purchasing structure surrounding it.
Whether this proves to be a one-off response to Venezuela's exceptional circumstances or a model that is replicated elsewhere remains to be seen.
But the history of oil concessions offers a useful lesson. Petroleum contracts are never merely commercial documents. They reflect the distribution of capital, technology, political influence and strategic power at the moment they are signed.
And as that distribution changes, the oil bargain changes with it.
(Milinda Moragoda is a former cabinet minister and diplomat from Sri Lanka and the founder of the Pathfinder Foundation, a strategic affairs think tank)
Disclaimer: These are the personal opinions of the author
