State Participation and the Corporate Value of Natural Resource Economic Rents

Abstract

The asset participation relationship between the state and the corporate entity is an essential determinant of corporate value in the natural resource sector. Natural resources deplete, with the result that oil reserve replacement is an accepted imperative for companies that derive earnings and balance sheet values from global resource assets. Corporate asset values in the sector are underpinned by entitlement to future reserves. Specifically, I show that the global nature of government participation varies and that it matters in which country reserves are held since entitlement structures directly determine how the state and corporate producers share economic rents from resource assets. My global Oil and Gas (O&G) sector study provides market evidence of economic and state variable limits on the value of globalization. Findings revise the low oil price paradigm covered in prior studies and provide evidence that, for O&G producers concerned with reserve replacement, global asset values are directly affected by state entitlement terms. In developed OECD countries, state and corporate agent participation terms are price insensitive, and take the form of concession contracts with royalty or profit taxation terms. By contrast, in emerging NON-OECD countries state agents participate on production sharing terms that are linked to the market price of oil. Relative to comparable OECD oil assets, the value of corporate agent participation in Non-OECD O&G assets is limited by explicit and progressive state agent participation terms that favour sovereign state agent returns.I show that unless price sensitive entitlement clauses are is included in the value of cash flow expectations, state participation terms potentially invert risk return convention under conditions of increasing oil prices. The Fama and French (1993) framework is used to provide market evidence of economic state variable limits on the returns for O&G companies with relatively high asset holdings in Non-OECD countries.