Here’s a question I’ve started asking about every big company that comes up on my screen: if the country it does business in turned hostile tomorrow, what could it actually take home? Not what’s on the balance sheet. What could it physically pack up and move. For a surprising number of household names the honest answer is nothing, and I’ve come to think that’s the most underpriced risk in the corporate world right now. This month the energy market has been running a live demonstration of why. The multinational corporation, the big global brand with a head office in London or Paris and subsidiaries everywhere else, has a very flattering origin story. The textbook version says it arrives in a poorer country with capital, brings technology and higher standards, trains local people and “improves the investment climate”, a phrase that has done more unpaid overtime than any junior analyst I’ve ever met. There’s a less flattering version, and it goes like this. The investor arrives from the stronger country and explains how sensitive and demanding it is. It wants tax breaks. Protection. Terms fixed for as long as possible. And then the money doesn’t really come. The company borrows locally, uses up local credit, books its profits and sends them home. More than one Western name in Russia was praised for years for everything it had built there and turned out, once you followed the flows, to have put in roughly nothing net.
None of this should shock anyone who works in commodities. Every business wants profit, and the best profit comes from a monopoly. Nobody on a trading desk wants a fair fight either. We want an edge. The pattern is simple enough: come in with privileges, undercut everyone using the cheap funding a global balance sheet gets you, wait for the local producers to go under, then put prices up. It’s like a race between someone who’s been training for ten years and someone just out of hospital, with the organiser insisting it’s fair because both runners follow the same rules. Real competition means equal starting points, not identical rules applied halfway through the race. If you’ve ever bought bunkers in a port with one supplier, you know exactly what that feels like and you’ve probably paid for it.
The oil industry has its own classic example of how this works, and it’s called the production sharing agreement. Russia backed away from PSAs before they did much damage. Kazakhstan wasn’t so lucky, and Kashagan is the story everyone in the business knows. On paper a PSA is perfectly reasonable. The state can’t afford to develop the field, so a foreign consortium does it with its own money, takes its costs back out of production first, and only then does the state start getting paid properly.
The trouble is in what counts as a cost, and what oil price you use when you calculate whether those costs have been recovered. Load everything you can think of into the cost base, fly the crews in business class, set the reference price years ago and never touch it, and the field can run flat out forever without ever quite paying off. In practice the partners make a fortune. On paper they’re still waiting to break even. It’s entirely possible for the reservoir to run dry first.
I find that funny, a bit ruefully, because it’s the same thing as a laytime statement that turns a three-day discharge into eleven days of demurrage. Nothing in it is technically false. The definitions do all the work. It’s the oldest trick in commodities, just done at the scale of a country. Read the price clause, then the cost clause, then the definitions, and only after all that read the nice cover letter about partnership. Keep Kazakhstan in mind, by the way. It turns up again later in this story, somewhere you wouldn’t expect.
The obvious objection is China, which spent decades inviting multinationals in and did very well out of it. But Beijing was running a different deal. It offered a huge, disciplined workforce at almost no cost, and in return it wanted the technology. Build your factory, by all means, but hand over the drawings, and don’t act shocked when a copy of your plant goes up down the road. Companies took the deal because the market was too big to refuse.
