Syriana

Upon winning a Best Supporting Actor Oscar for his role in Syriana, George Clooney said:

“We are a little bit out-of-touch in Hollywood…I think that’s probably a good thing.”

Syriana is a film largely about the workings of the oil and gas industry, in particular the Middle East oil and gas industry, and as I know a thing or two about this subject, I was interested in watching it.  Having now done so, I think Clooney was understating the fact.

The points of contention are as follows.

1.  The merger between Connex and Killen will use economies of scale, and result in cheaper products for consumers.

I think they’ve whipped this line from the automotive industry or somewhere, where buying raw materials in bulk and mass producing the same item on identical production lines can result in a reduction in cost per unit built, and hence increase the margin per unit.  Unfortunately, the oil and gas industry doesn’t work like this. 

Firstly, the selling price of a barrel of oil is not set by the producer, but by the market.  The market rate is largely determined by production (or production expectations) and consumption, the former of which is heavily influenced by OPEC.  Hence it is OPEC which plays the major role in determining the price of oil, although their control is limited to a reasonable extent.  And last time I looked, no large American oil company was a member of OPEC. 

Secondly, producing a barrel of oil does not require materials to be bought in bulk (once the production equipment is in place that is), hence there is no saving to be made on the input side.  And the cost of extracting a barrel of oil is largely dependent on the location and characteristics of the reservoir, and is not hugely affected by the size of the company doing the extraction.  However, to the point that it is affected, the relationship is as follows.  A larger company will have greater overheads, usually through having complex technology centres and management systems, so the larger companies tend to look for a greater margin per barrel, and hence favour the fields where cheaper extraction is possible.  Witness the withdrawal of the supermajors from the declining North Sea fields, leaving the way open for the smaller companies to come in and make a greater margin per barrel than their larger competitors could.  In the fields where extraction costs are low (West Africa, for example), the supermajors dominate and the smaller operators are almost non-existent.  So were two oil companies to merge, there would not be any economy of scale which would result in reduced production costs, and in all likelihood the company would require greater margins per barrel of oil to keep the same financial performance.

Therefore, the idea that a merged oil company would be able to provide cheaper products to its customers is nonsense, as they cannot influence the selling price of its products, and at best the production costs would stay the same.

2.  The merger of the two companies led to a low-paid immigrant worker being laid off.

Fortunately, knowing quite a bit about employees on Middle East oil facilities (dammit, I’ve walked around enough of them!), I was able to determine what kind of employee the chap who got laid off was.  Judging by the work he was doing before he got laid off, the clothes he was wearing, and the way his redundancy was dealt with, he was almost certainly a basic maintenance worker on a one or two year contract (we know he was from Pakistan).  He was not a permanent employee, as nobody who does that kind of work in a subordinate position is:  they are all contractors.  If there is any oil company in the Middle East who takes on a vessel painter from Pakistan as staff, I have yet to know about it.

Now, when two oil companies merge, there will inevitably be many overlapping positions in the resulting organisation, which will lead to redundancies.  These are almost all at the admistrative or managerial level, not at the operational level, and certainly not at the site level.  A company which has just taken on a smaller rival still needs to have its facilities maintained, and cannot simply lay off its maintenance crew as a result of the merger.  For starters, the facility looked pretty old, probably between 15-20 years.  If the maintenance crew were doing some painting work, chances are it was necessary.  So it would not be in Connex’s interests to sack its maintenance crew, and to do so in the context of a merger is laughable. 

It may have been slightly more believable had it been the Killen crew that were laid off, in order to make room for a maintenance contractor incumbent with Connex.  But even then, it would take years following a merger to change the maintenance regime in an existing facility, yet we are expected to believe this happened in the days following the announcement to the stock market.  Any maintenance contractor (who would certainly be a Middle Eastern company with powerful connections, and not likely to be pushed around by Americans) faced with losing the contract would simply see out the remainder of the contract period and move onto the next job.

And finally, it may have escaped the attention of the film makers, but the major problem facing every oil company in the Middle East is getting enough personnel into the country to carry out the mind-boggling amount of work there is to be done.  With most facilities getting towards the end of their design life, there are dozens of enormous maintenance and upgrade projects underway, and there are dozens more billion-dollar plus new facilities under construction.  There is more work in the Middle East for your average maintenance man than you could shake a stick at, and there is not a chance in hell that a maintenance contractor would be sending somebody home early for whom they paid a flight and immigration charges, especially if that chap was keen to stay and work.  He’d be off one job and onto the next before you could relieve him of his Connex hard hat.

And I’m not even going to bother addressing the film director’s attempt to make me believe that an immigrant worker on a one or two year contract would be so angry about his termination that he’d turn into a suicide bomber.  If this were the case, Kuwait would be a much more interesting place than it is.

3.  A large US oil company operating in the Middle East has its logo plastered all over its facility.

The makers of this film have clearly not done much research into how things work out here.  To my knowledge, no Western oil company owns or operates a facility in the Gulf, especially not one the size of that portrayed in the film.  All facilities in the Middle East are owned by national oil companies, and operated either by national oil companies or consortia in which a national oil company is the major shareholder.  Foreign oil companies at best have to make do with being the junior half of a partnership, and it is most definitely the senior partner, i.e. the national oil company, which makes the rules and calls the shots.  For this reason alone, the film doesn’t make a lot of sense, and the facility portrayed in the film is, literally, the stuff of Hollwood.   

4.  Executives of an oil company, presumably who are not on work experience from school, make the shocking discovery that a large Kazakh oil deal may have involved somebody being paid off and – shock! – an inside informer!

The footage of them making the further discovery that the sky is blue ended up on the cutting room floor. 

5.  A Chinese company outbid at least one giant American company in a competitive tender.

What?  Eh?  Are there two Chinas, or something?  The chaps making this film have obviously never gone up against a Chinese company in a competitive tender.  Wait until they do, and see how much they praise Chinese business ethics.

6.  An American oil company is bullying the Emir of a Middle East nation into cancelling a contract with a Chinese company.

Recall what I said in No. 3: Foreign oil companies at best have to make do with being the junior half of a partnership, and it is most definitely the senior partner, i.e. the national oil company, which makes the rules and calls the shots.  The idea that a foreign oil company could bully a Middle East national oil company is pretty fanciful.  The notion that a foreign oil company could bully an Emir is preposterous.  I’m sure this view is fashionable amongst sections of the Western left, but to anyone who actually works within the Middle East oil industry, it is laughable.  It simply is not true.  American companies lose out in tenders to Chinese, Japanese, and Korean companies all the time, and I have never, ever, heard of a contract being withdrawn after award because an American company exerted pressure on the client company. 

7.  An executive in an American oil company says he is proud to have restriced the amount of oil getting to China.

Presumably the film’s makers think that if a Chinese company wins an oil contract ahead of a US company, China gets oil that would otherwise have gone to the US.  This view – popular amongst those who think Iraqi oil flows to the US now it is under US occupation – is wholly incorrect.  There is one global oil market, into which all oil produced effectively flows.  Customers then purchase oil from this market.  The origin of the actual oil is not important to the end user, outside of commonsensical transportation arrangements.  The amount of oil a customer gets from the market is dependent on how much the customer can afford to buy at the prevailing market rate.  If one customer decides it wants much more, as is the case with China in today’s real world, then the market rate increases accordingly in reaction to the increased demand.  The nationality of the foreign company being awarded Middle Eastern oil contracts has no bearing whatsoever on the final destination of a single drop of oil.

8.  The US government, presumably at the behest of a US oil company, assasinates a Middle Eastern royal because he wants to modernise his country and open it up to market forces.

Presumably the film’s makers think American oil companies prefer corrupt dictatorships to progressive countries which undergo radical reforms, ushering in free market enterprise.  Which is odd, because Hollywood’s great and good – one of whom stars in this film – regularly lambasts the US for removing a corrupt dictator in order to reform a Middle East country and open it up to free market enterprise for the benefit of US oil companies.

In short, the film is awful.  Evil oilmen, CIA assasinations, corrupt Arabs, noble reformists, desperate suicide bombers.  They couldn’t have crammed more ignorant stereotypes into this film if they tried.

There are some other minor errors in the film, which are neither here nor there, but I though I’d point them out just for fun. 

1.  An Arab listened to his guest’s business proposition whilst standing up in a corridor.

Not. A. Chance.

2.  Having been laid off, am immigrant maintenance worker is free to roam the country looking for work. 

Not likely.  An employer sponsors somebody to come to the Middle East from, say Pakistan.  The employer pays the flight and immigration fees, and is responsible for that employee until his work permit is cancelled and he has left the country.  It is illegal for that person to work for anyone else, and it is illegal to transfer a work permit on the fly, so the unemployed chap would not be able to search for another job on his own.  What is almost certain is that he would be escorted to the airport with his passport, and plonked on an aeroplane as soon as his contract was terminated. 

3.  An Arab, who judging by his dress is clearly in a managerial position, has had two of his wife’s kids deported from Dubai because of lack of work.

WTF??!!

4.  To get work in Dubai, you need to speak Arabic.

Erm, no you don’t.  All the Arabs are well educated, and speak English pretty well.  The only people who don’t speak good English are the cheap immigrant labour from the Indian subcontinent.  In fact, our intrepid hero’s Urdu would enable him to get by on any oil facility in the Middle East.

5.  Matt Damon calls his wife from what looks like the Shangri-La Hotel in Dubai, and says all the women dress in black.

Except for the Westerners in jeans and strappy vests, the Indians in saris, the Russians in white jeans and 80s style tops, the Chinese in all manner of clothing, and the Filipinos in not much at all.

6.  A royal motorcade is stopped by a man herding goats.

When the royals travel in the Middle East, the roads get cleared, and closed.  For hours.  Police outriders travel a mile or so ahead, and get anyone – and any goats – well out of the way.

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12 Responses to Syriana

  1. Pingback: Tim Worstall

  2. George Hargraves says:

    Very educational. Full of fascinating insights.

  3. why Tim cries like Thatcher says:

    (A larger company will have greater overheads, usually through having []complex where cheaper extraction is possible. Witness the withdrawal of the supermajors from the declining North Sea fields,)

    Bull S dude, the issue here is the dry well phenomena. Thats way big guys are invading countries like Iraq to bottleneck and bulk produce before the peck-oil hits hard.

    [A Chinese company outbid at least one giant American company in a competitive tender]

    Yes there are more than two major Chinese Oil companies, which shows you are flat ignorant.

    [The idea that a foreign oil company could bully a Middle East national oil company is pretty fanciful. ]

    I must agree on this one. The US simply change the Emir and install the proper one before negotiating like in Qatar

    [This view - popular amongst those who think Iraqi oil flows to the US now it is under US occupation - is wholly incorrect.]

    Smart arse, the US simians like you have removed the discharge meter on those Iraqi pipes. Most Iraqi oil is still going through bureaucratic hoses to pay off debts related to war loots and current fuck ups

    [The US government, presumably at the behest of a US oil company, assassinates a Middle Eastern royal]

    King Fasil was assassinated by the US for the Oil embargo of 1973, but hey, you were in your simian diapers

    [To get work in Dubai, you need to speak Arabic].

    You do for many jobs. But then how do you know if you live in your wasp cave.

    I guess that big Monica’s Cigar fits your face pretty well!!

  4. Publius says:

    Tim, the problem you have is what historians have when they see “historical” movies, or psychologists when they see “psychological” thrillers: you’re too close.

    The movie is a cautionary tale intended to educate Americans that there is a big, bad world out there and that the U.S. doesn’t always follow its ideals. This may be blazingly obvious to anyone who isn’t an American, but honestly it’s utterly a shock to the vast majority of Americans, who believe their country always operates only from the highest of motives.

    As for the assassination/removal thing… What the Americans object to is change in Emira. Not _what_ the change is, but the very fact that the status would no longer be quo. If you look at the behavior of the U.S. in the Middle East since 1945, or the U.K. before and after that (when it was still a global player), you’ll see that this, too, is all too real.

    Oh, and Tim? It’s a movie. Just a movie. Movies always lie, but sometimes they tell just a little bit of the truth. This movie does just that.

  5. BuJ says:

    “5. Matt Damon calls his wife from what looks like the Shangri-La Hotel in Dubai, and says all the women dress in black.”

    very interesting to read.. i agree with most things.. but just want to point out that your comment above is probably not true, because it seemed to me that Matt Damon was being sarcastic, maybe because he was talking to his wife and wanted to compare the american wife to the arabian wife.. I don’t know.. but I don’t think we need to take it literally..

    mind you it’s Matt Damon.. so not exactly Nobel prize winning material.

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  7. Bruno Mota says:

    Although the movies economics & politics have little to do with the real oil business & the middle east, they do resemble the antics of (frex) the American Fruit Co. in central america circa 1950 (whence the term banana republic). The film does make some valid points, especially about the law of unintended consequences, but its authors seem to be stuck in a 60s time loop (or are just too lazy to do some research)

  8. theo says:

    Interesting inside dope and cultural information, thanks. You definitely enriched my impression of the movie.

    However I think you completely misfired on a few points.

    6. An American oil company is bullying the Emir of a Middle East nation into cancelling a contract with a Chinese company.

    Remember the scene where the Emir talks about how the US arm-twisted him into solving economic problems in Kansas, Oklahoma and Washington State by buying US goods? It’s obviously the same deal here — IT’S NOT THE OIL COMPANY, IT’S THE US GOVERNMENT ON THEIR BEHALF! I am puzzled as to how you managed to miss the point of this one…

    7. An executive in an American oil company says he is proud to have restriced the amount of oil getting to China.

    You’re assuming business as usual. In event of major social or political disruptions in the Mideast, control of oil at the source becomes increasingly important, if only to guarantee that your refineries can run. (But this line would probably have been better coming from a government, or quasi-governmental, figure).

    8. You missed the point again, the Republicans and oil industry obviously prefer the status quo and their “friends” in Saudi Arabia. Iraq was entirely different, as Hussein hated the US and wouldn’t deal, so he had to be removed. Publius’s comment is spot on.

  9. Saphia says:

    Very interesting review…although I did enjoy the movie, and am interested in reading Baer’s books now. Have you read them? (See no Evil & another one about the oil industry)

    My favorite in your review was the following:

    4. Executives of an oil company, presumably who are not on work experience from school, make the shocking discovery that a large Kazakh oil deal may have involved somebody being paid off and – shock! – an inside informer!
    The footage of them making the further discovery that the sky is blue ended up on the cutting room floor.

    :-)

  10. Tim Newman says:

    Saphia,

    No I’ve not read any of Baer’s books. From what I’ve heard, as is usually the case, they are much better than the film.

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