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Corporate Ownership & Control / Volume 11, Issue 1, 2013, Continued - 8
727
NATIONAL OIL COMPANIES: BUSINESS MODELS,
CHALLENGES, AND EMERGING TRENDS
Saud M. Al-Fattah*
Abstract
This paper provides an assessment and a review of the national oil companies' (NOCs) business
models, challenges and opportunities, their strategies and emerging trends. The role of the national oil
company (NOC) continues to evolve as the global energy landscape changes to reflect variations in
demand, discovery of new ultra-deep water oil deposits, and national and geopolitical developments.
NOCs, traditionally viewed as the custodians of their country's natural resources, have generally
owned and managed the complete national oil and gas supply chain from upstream to downstream
activities. In recent years, NOCs have emerged not only as joint venture partners globally with the
major oil companies, but increasingly as competitors to the International Oil Companies (IOCs). Many
NOCs are now more active in mergers and acquisitions (M&A), thereby increasing the number of
NOCs seeking international upstream and downstream acquisition and asset targets.
Keywords: National Oil Companies, Petroleum, Business and Operating Models
* Saudi Aramco, and King Abdullah Petroleum Studies and Research Center (KAPSARC)
E-mail: saud.fattah@aramco.com
Introduction
National oil companies (NOCs) are defined as those
oil companies that have significant shares owned by
their parent government, and whose missions are to
work toward the interest of their country. The
traditional mission of a NOC has been to allow
strategic investors, as co-owners and service
providers, access to its home country’s hydrocarbon
resources. The governance dictates that NOCs own
and manage the supply chain of oil and gas in the
home country from upstream to downstream. The
primary driving factors of investment between NOCs
and international oil companies (IOCs) are the
provision of access to hydrocarbon resources,
knowledge transfer of leading-edge technology,
engineering expertise, and managerial and project
management skills. In addition, however, as
exemplified in Venezuela and Russia, NOCs may be
used to promote both social and political agendas as
well as economic ones. A Chinese NOC’s failure to
acquire a U.S. company (UNOCAL) with
international assets sends a signal that NOCs must do
greater political due diligence when undertaking
cross-border mergers and acquisitions (M&A). M&A
has always been a factor in boosting growth in the oil
and gas sector. The Merger Market gives figures of
$423 billion for 2010 and $408 billion for 2011 in the
energy sector, out of total global M&A of $2,277
billion and $2,237 billion (Mitchel et al., 2012).
NOCs come in a variety of forms, but most have
both upscale (exploration and production “E&P”) and
downscale operations (refining and marketing). NOCs
historically have mainly operated in their home
countries, although the evolving trend is that they are
going international. Examples of NOCs include Saudi
Aramco (the largest integrated oil and gas company in
the world), Kuwait Petroleum Corporation (KPC),
Petrobras, Petronas, PetroChina, Sinopec, StatOil, and
Malaysian NOC.
Asian state-owned companies of NOCs, most
prominently from China and India, are at the forefront
of strategic cross-border investments as their
governments seek to prepare for long-term energy
supply challenges. At the same time, increasing oil
wealth brought about by rising oil prices has
encouraged governments as diverse as Russia,
Venezuela, Bolivia, and Ecuador to give greater
political and economic leverage to their national
energy champions. This is achieved in their local
market through revisions to constitutional laws,
contracts, tax and royalty structures. Also, the NOCs
have begun to enter the international market,
engaging in strategic investment activities and
acquiring full or partial control of foreign companies,
in sectors of strategic interest for national
development.
Within the Gulf Cooperation Council (GCC)
region, there are a number of NOCs that have
capabilities to expand beyond serving their domestic
markets. This process is, in part, being hindered by
the inadequacy of corporate structures and the lack of
information in the GCC region. Globally, it is being
hindered by the rise of economic nationalism and the
debate around economic sovereignty, security, and
ownership of assets, and the perception in the west
Corporate Ownership & Control / Volume 11, Issue 1, 2013, Continued - 8
728
that NOCs should not seek to acquire IOCs and
assets. Undoubtedly, political considerations
influence and impact the international investment
policy of NOCs.
The emerging trend driven by the rise of NOCs
has shifted the balance of control over most of the
world’s hydrocarbon resources. In the 1970s, the
NOCs (super majors) controlled less than 10% of the
world’s hydrocarbon resources, while in 2012 they
control more than 90%. This shift has enabled NOCs
to increase their ability to access capital, human
resources and technical services directly, and to build
in-house competencies. Further, NOCs have been
increasing their ability to conduct outsourcing
activities for many operations through the oilfield
services companies (OFSCs), thus increasing their
range of competence.
Moreover, the shift of the NOCs business
models poses challenges for IOCs and independents
by questioning the sustainability of their resource-
ownership business model. Among these challenges
are the production declines in existing oil fields, the
difficulty of replacing oil and gas reserves in limited
or restricted access areas, the rapid depletion of
conventional or easy-to-access oil reserves, increasing
production costs of unconventional resources, and the
decline of their operating profit margins.
A number of key trends in NOCs’ activities at
the international level are emerging:
With more access to capital and the
development of in-house expertise, there has been a
movement from being upstream producers to fully
integrated energy companies;
High oil prices, improved NOC management
techniques, and access to capital markets mean that
NOCs now have the financial resources to bid for, and
complete, major international acquisitions;
While major global oil companies may be
fearful of investing in unstable areas of the world or
where international sanctions have been imposed,
NOCs’ decision making merely has to be compatible
with national policy and is unlikely to be hindered by
corporate governance requirements and stakeholder
action;
NOCs are better able to mitigate overseas
political risks through government-to-government
relationships and negotiation strategies;
NOCs can tolerate international political risk
because domestic operations are likely to be
unaffected; and
Consortia exclusively led by NOCs are an
emerging trend that will greatly impact the global oil
and gas sector.
Despite these business and marketplace
advantages, NOCs are not necessarily disciplined by
the marketplace and, therefore, relative to IOCs, have
a tendency to make economically-inefficient
decisions. They also have the tendency to tolerate
underproductive labor and staff bloating or,
potentially, graft and other abuses on the part of
national leadership. NOCs do, indeed, have many
advantages relative to private corporations, most
notably the political muscle of their parent
government. Also, they usually at least have greater
access to capital and the potential to take greater risks
without fear of "betting the company."
Nevertheless, to truly be successful, NOCs
should function with the discipline of a well-managed
private firm and, wherever possible, segregate their
national responsibilities to avoid the potential
inefficiencies. If they have larger social objectives,
these should be clarified and costed out so that fraud
and abuse are avoided while social objectives are
pursued in a cost-effective manner.
All this being said, there is indeed a rise in the
NOCs, which are increasingly looking like
international corporations with the full panoply of
resources and with the special asset of carrying the
imprimatur of their parent nation.
This paper will review and discuss the NOCs
business models, challenges and opportunities, their
strategies and emerging trends.
NOCs’ Business Models
Business models are generally used to capture the
economic logic for aligning internal decisions in view
of external conditions. They are typically used by
corporate executives as explanatory, but not
predictive, tools for sound decisions and effective
management practices.
As was noted earlier, most of the world’s oil
reserves are totally owned by national entities or
partially owned by governments that coordinate oil
exploration, development and extraction of the
hydrocarbon resources in their countries, and in some
cases outside their borders. NOCs differ in many
respects; there are NOCs of net oil importers and
exporters. They differ in their evolution, relation to
their governments, accountability, efficiency,
international presence, degree of integration, size, etc.
The expansion of scope of business suggests that
some NOCs be renamed the International-National
Oil Companies (INOCs) because they may operate
across the globe, and certainly beyond their national
borders. INOCs also have similar functions to IOCs in
terms of structural, financial and operational aspects.
We will use NOC and INOC interchangeably. In
recent years, INOCs have begun to bridge the gap and
catch up with IOCs. This convergence is changing the
landscape of the global oil and gas industry by both
collaboration and competition.
NOCs have four key elements for success in the
upstream oil and gas sector: access to capital, access
to technology, breadth of capabilities and
partnerships, and effective domestic engagement. In
recent years, NOCs, relative to IOCs, have made more
progress in innovative technologies. A common
metric for innovation is a company’s R&D
expenditure. Some NOCs also are true innovators.
Corporate Ownership & Control / Volume 11, Issue 1, 2013, Continued - 8
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Saudi Aramco, Petrobras, Petronas, and the Chinese
NOCs all have in-house R&D capabilities. PetroChina
stands out as the top spender in absolute terms on
R&D in 2012 among all oil and gas companies. Table
1 shows that IOCs historically have a competitive
edge over NOCs, but the gap is now shrinking, and in
some respects is reversed.
The emerging trend posed by the rise of NOCs
has shifted the balance of control over most of the
world’s hydrocarbon resources. In the 1970s, the
NOCs (super majors) controlled less than 10% of the
world’s hydrocarbon resources, while today (2012)
they control more than 90%. This shift has enabled
NOCs to increase their ability to access capital,
human resources and technical services directly, and
to build in-house competencies. Further, NOCs have
increased the direct outsourcing of many operations
through their oilfield services companies (OFSCs),
rather than turning to IOC partners. As a result, IOCs
and independents are facing new challenges to remain
relevant to the NOCs, even in the most
technologically difficult projects. Based on the
growing wealth and expertise of NOCs, IOCs are
increasingly focused on larger and more complex
projects, such as Arctic drilling and production in
unconventional oil and gas fields. The larger
independents usually follow the same strategic path
but with smaller scale projects.
Table 1. Comparison between IOCs and NOCs
IOCs
NOCs
1) Access to capital
Publicly floated companies with access
to liquid stock markets, banks and
bond buyers
State-backed
Increased access to equity and debt
in global capital markets
2) Standard
technology
Leaning toward low R&D
expenditures that drive down costs in
complex development environments
Rapid growth of R&D technology
and innovation.
Increase of R&D budgets.
3) Breadth of
capabilities and
partnerships
International focus.
Partnerships with governments, NOCs,
OFSCs and other IOCs.
Primarily domestic focus of
operations (for NOCs with
domestic resources).
Expanding businesses globally.
Partnerships with IOCs,
Independents and OFSCs.
4) Effective local
engagement
Developing models for local
engagement by necessity.
More diverse international workforce.
Operating mostly in their domestic
market, and globally to access
resources.
Attracting international workforce.
Modified by author from Bain & Company, 2009
Figure 1 illustrates the NOCs’ contract types and
their partners or service providers with respect to
project complexity and size. The mega-projects are
characterized by high complexity and very large size.
NOCs partner with IOCs to conduct these production-
sharing contracts (PSCs). These mega-projects can
also be conducted using unbundled fee-for-service
contracts in partnership with OFSCs. Examples of this
type include Saudi Aramco’s agreement with Chevron
to develop heavy oil fields, Total’s joint venture with
Saudi Aramco to build Al-Jubail refinery to process
heavy oil, and Rosneft’s deal with ExxonMobil in the
Arctic.
Corporate Ownership & Control / Volume 11, Issue 1, 2013, Continued - 8
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Figure 1. A matrix of NOCs’ operating models showing their different contract types and partners or service
providers with respect to project complexity and project size.
Source: Modified by author from Bain and Company.
Moreover, the shift of the INOCs business
model toward aggressive international resources
acquisition poses challenges for IOCs and
independents by questioning the sustainability of their
resource-ownership business model. Among these
challenges are the declines of production in existing
oil fields, the difficulty of replacing oil and gas
reserves in limited or restricted access areas, the rapid
depletion of conventional or easy-to-access oil
reserves, increasing production costs of
unconventional resources, and the decline in the
operating profit margins. As a result, investors are
questioning the IOCs’ ability to maintain their
ownership-business model as their market and net
asset values decline. In addition, the competitive
advantage of IOCs is increasingly threatened by
NOCs’ development of internal technological
capabilities and transformation into international-
national oil companies (INOCs). NOCs are becoming
a new competitor with some advantages. In the future
there are likely to be three types of major oil
companies: IOCs, NOCs, and INOCs, with the INOCs
being defined as primarily those NOCs whose parent
countries are oil-resource-poor. But, NOCs would
also include those whose parent countries are rich in
oil resources, even if they do choose to engage in
international investments. Table 2 presents the
objectives and characteristics of each type.
The major challenge for NOCs when dealing
with OFSCs is managing the risk associated with
integrated service contracts (ISCs). OFSCs are
developing more end-to-end solutions and improving
their technology competencies to support better
unconventional and frontier locations. For example,
Baker Hughes opened a research center with Saudi
Aramco in Dhahran, Saudi Arabia. This R&D center
focuses on understanding and developing
unconventional oil and gas reserves, especially shale
gas and tight gas. Similar to CNOOC and Sinopec to
gain new technical capabilities, Saudi Aramco
acquired Frac Tech International in late 2011. The
greatest challenges for OFSCs are setting the optimal
mix of ISCs in their portfolios of operations, and
investing in technology and building capabilities to
address a large and diverse customer base from IOCs
and independents.
Corporate Ownership & Control / Volume 11, Issue 1, 2013, Continued - 8
731
Table 2. Types of Emerging Major Oil Companies
IOCs
INOCs
NOCs
Seeking reserves and
production growth in
competition with other
IOCs and now INOCs.
Primarily NOCs whose parent
countries are oil-resource-
poor. More direct competition
with IOCs in multiple
geographies.
Continue development of
enormous domestic reserve
base; parent countries are
rich in oil resources.
1) Access to
capital
Free access to market
capital.
State-backed
Increasingly free access to
capital markets.
State-backed.
2) Standard
technology
Long established, in-
house R&D – looking
for leadership
position.
Improving in-house R&D
capabilities.
Increased R&D
investments.
Partnerships with tech-
savvy IOCs/
INOCs/OFSCs.
3) Breadth of
capabilities
and
partnerships
Long history of
partnerships in
multiple
environments.
Coming to terms with
new partners.
Improved partnering
capabilities.
Strategic differentiation
on key capabilities and
partnerships.
Alliances with best-in-
class IOCs and OFSCs
as required.
4) Effective
local
engagement
Long history of
societal engagement
at multiple levels.
Developing skills in local
engagement in diverse
locations.
Limited need for
overseas local
engagement.
Modified by author from Bain & Company, 2009
Efficiency of NOCs
Efficiency can be defined as producing crude oil and
products at the lowest possible cost (including labor
and materials) relative to the accessibility of the
resource, within safe and environmentally sound
guidelines. It is not easy to develop broad conclusions
about the effectiveness of NOCs in this regard. Wolf
(2009) argues that NOCs in OPEC and outside OPEC
should be discussed separately. NOCs of OPEC seem
to be more efficient compared with private companies
due to the quality of their resources. NOCs of non-
OPEC states are less efficient, in terms of labor and
capital efficiency. Saudi Aramco is regarded as an
efficient NOC not because of its resources but
because it has had a long time to develop a leadership
model, build a capable and lean staff, and create
sound business relationships, as compared to, say,
PDVSA or Pemex. Wolf also discussed the
fundamental differences in goals, policies and data of
NOCs and IOCs that often complicate any meaningful
comparisons. Despite this important qualification,
some studies have tried to develop general
impressions of the rise of NOCs.
It is often challenging to distinguish between
government policy and government ownership of a
petroleum-producing organization and infrastructure.
For example, governments might impose price
controls irrespective of whether the resource is
privately or publically owned. Therefore, some
inefficiencies that might be ascribed to NOCs could
be attributed to government policies rather than solely
government ownership of the NOC. Many of the
NOCs found to be inefficient are based in less-
developed countries and are under pressure to
maximize the flow of funds to the national treasuries
or provide energy security to the country. In addition,
some NOCs may be viewed as inefficient because of
over-staffing, insider sales, and other forms of bad
business practices.
Many NOCs appear to produce less petroleum
output per unit of labor or other costs than do private,
investor-owned corporations. These organizations
may restrict current production for several possible
reasons (Hartley and Medlock 2008):
They withhold more output because they use
higher discount rates than competitive firms.
They do not maximize economic profits
alone but instead have other political and social
objectives.
They operate less efficiently, incurring
higher costs in producing expensive oil.
Unlike private companies, publically-held
companies frequently do not disclose sufficient
information about their operations that would allow a
better understanding of their activities. Constrained
by this lack of appropriate data, Eller et al. (2010)
compared the ability of government and private
companies to generate hydrocarbon revenues, with
employees, oil reserves and gas reserves as inputs.
They applied both statistical and linear programming
approaches to identify each organization’s relative
efficiency. They concluded that generally NOCs are
technically inefficient because they use more
employees and reserves per dollar of revenue
generated by the organization. In situations where
Corporate Ownership & Control / Volume 11, Issue 1, 2013, Continued - 8
732
NOCs may be required by government policy to sell
more supplies to subsidized domestic markets, it is
unclear whether these lower revenues reveal much
about the inefficiency of the NOCs themselves.
Unlike IOCs, NOCs are not necessarily
disciplined by the marketplace and, therefore, have a
tendency to make economically-inefficient decisions
or to tolerate underproductive labor and staff bloating.
NOCs do, indeed, have many advantages relative to
private corporations, most notably the political
“muscle” of their parent government. Also, they
usually at least have greater access to capital and the
potential to take greater risks without fear of "betting
the company."
For NOCs to truly be successful, they should
function with the discipline of a well-managed private
firm and, wherever possible, segregate their national
responsibilities to avoid the potential inefficiencies
noted above. If they have larger social objectives,
these should be clarified and costed out, so that fraud
and abuse are avoided while social objectives are
pursued in a cost-effective manner.
Challenges and Opportunities
There are several key challenges and opportunities
that can be identified for NOCs to secure a
competitive advantage. These challenges include:
Risk management, reporting and governance.
Talent development and retention.
Partnership with IOCs.
Financial management in a multinational
environment.
Citizenship and social responsibility.
Climate change and the environment.
Risk Management, Reporting, and
Governance
With the turmoil and major risk-related events that
took place in the last few years, the current
environment for doing business requires NOCs to go
beyond their traditional roles of exploring, producing
and refining crude oil. For INOCs in oil and gas
importing countries such as China, the new challenge
requires the development of a global investment
strategy designed to secure the hydrocarbon sources
on a global basis. For NOCs in significant oil and gas
exporting countries, the medium- and long-term
security of demand is a top priority of concern on
their agenda. NOCs in both importing and exporting
countries have recently been involved in negotiations
with their respective governments to address many
issues, including:
The extent of security of commodity supply
and demand.
Globalization challenges and international
collaboration.
Physical security of assets and infrastructure
in the supply chain.
Operating in remote or hostile energy
domains.
This new marketplace environment has allowed
NOCs to take on greater strategic, political, and legal
risks than in the past. But it has been suggested that
NOC executives do not feel they have a good
understanding of business risk in today’s
environment, which brings up a new challenge for
NOCs to direct their interest toward developing a
more comprehensive risk management framework.
As more NOCs begin to access capital markets,
they also must consider adopting international
accounting standards. Furthermore, new reporting
systems are needed as markets are shifting business
from already established centers to new financial
centers. Where New York, London and Frankfurt are
well established, Dubai, Hong Kong, Singapore and
Shanghai are on the rise, and Riyadh will soon join
them.
Corporate governance has been a thorny issue
for many NOCs. Environment, health, safety, labor,
and trade are essential concerns to the people of the
countries where NOCs operate. NOCs should
consider these issues in their investment decisions.
NOCs, perhaps so more than IOCs, have explicit and
implicit social responsibilities and must expect to be
held responsible for their decisions in both local and
international operations. NOCs also need to be
cautious about the way their actions impact public
sentiment. As NOCs have access to more capital
markets, the corporate governance requires NOCs to
be more accountable and transparent to all
shareholders, not just to their home countries or
ministries.
Talent Development and Retention
The need to retain talent is becoming a burning issue
for many companies, especially in the upstream
sector. It was claimed (Economist, Oct 7 2006) that
talent has become the most sought-after resource after
oil itself but, over recent decades, the U.S. oil industry
alone has laid off over 1 million jobs through M&A.
With the rise of INOCs, there is more stimulated
competition between INOCs and IOCs for the limited
talented pool. Simultaneously, this might encourage
collaboration or partnership between companies
trying to tap into the same talent resources. In 2002,
the Algerian NOC collaborated with other companies
to access their engineering expertise necessary to
improve its operations for exporting liquefied natural
gas (LNG) to Europe. Recently, NOCs in Russia,
India, Libya and China have all signed collaborative
agreements with several IOCs. One of the important
success factors requires that NOCs may need to adapt
their internal cultures to accommodate the different
nationalities and generations of the workforce. The
point is that expertise comes primarily from the West
and NOCs tend to be at a disadvantage given where
they are located and operate.
Corporate Ownership & Control / Volume 11, Issue 1, 2013, Continued - 8
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Partnership with IOCs
Some NOCs have a keen interest in expanding and
globalizing their business, so partnering with IOCs is
a strategic endeavor to access stronger project,
management experience, and key global markets.
Also, IOCs can bring new technologies, critical
expertise and international experience that may not be
as readily available within some NOCs. As a result,
IOC-NOC relationships can lead to initiating cross-
investments and building institutional knowledge in
key areas of key technical proficiencies. The NOC-
IOC partnerships can leverage the upstream sector to
promote domestic economic development. NOCs
traditionally favor long-term relationships, but their
focus is shifting toward project-based, short-term
agreements. For example, Saudi Aramco and Total
established SATORP to develop a greenfield refining
and petrochemical project in Saudi Arabia. In
addition, Saudi Aramco and Dow formed SADARA
to develop the Saudi Aramco-Dow Integrated
Petrochemical Complex in Jubail, Saudi Arabia.
China National Petroleum Corporation (CNPC) made
a deal in Kazakhstan to make investments in power
stations, railway lines, and chemical plants.
Another emerging trend is that NOCs in
hydrocarbon-rich countries such as Saudi Arabia,
Venezuela, and Russia seem to exert more bargaining
power over IOCs. I.e., they are coming to have fewer
opportunities than in the past in countries with large
reserves. This is because NOCs have improved their
expertise and have become qualified national
operators, making use of OFSCs’ specialized services
with better deals, acquiring smaller firms to access
technology and skills, and building talent and
expertise through global partnerships. NOCs from
large emerging economy countries with scarce
hydrocarbon resources, like China and India, are seen
to be harder negotiators as well in their relationships
with IOCs.
Financial Management in a
Multinational Environment
Over the last decade, the increase and volatility of oil
prices have challenged the financial strategies of
NOCs in different ways. For OPEC NOCs, more cash
flow led to the acceleration of their capital spending
programs. Also, this made them concentrate on
developing strategies that could help secure a
competitive advantage in investments, both upstream
and downstream, and in domestic and global markets.
In contrast, importing NOCs have raised their
financial resources through a diversity of public
market channels, from floating bond issues to selling
equity. For example, Petroleos de Venezuela S.A.
(PDVSA) issued bonds for many years through U.S.
debt capital markets. In addition, in 2007 PetroChina
Company Limited won approval for an initial public
offering (IPO) of shares on the local market that could
rise over $7 billion.
Although oil prices may not have high volatility
in absolute terms, they have a significant impact on
cash flow and outlays. This absolute impact of price
volatility can make cash flow management and
forecasting more difficult. Therefore, NOCs are
required to confront this volatility by devising
rigorous strategies for cash and risk management. As
NOCs globalize, international tax planning becomes a
key aspect of financial planning. NOCs will
inevitably take advantage of international tax
planning opportunities, double tax treaties, and
differing taxation rates in countries in which they
operate.
Citizenship and Social Responsibility
Like the IOCs, NOCs are expected to maintain high
standards of corporate social responsibility and
demonstrate care for the environment, safety and
health of labor, and communities throughout the
world. Among others, Saudi Aramco, PetroChina
Company Limited, Kuwait Petroleum Corporation,
and Oil and Natural Gas Corporation of India have
announced their commitments and their obligations to
corporate citizenship involving environment, health,
safety and community practices. It was pointed out
that IOCs and OFSCs should have to contribute more
to the socioeconomic development, in partnership
with the NOCs, of the countries in which they operate
(Al-Falih, 2011). With the NOCs, they may be
required to provide jobs, develop national talents,
create national supply chains, invest in infrastructure,
provide financing, and support the development of
new domestic industries.
For many countries, NOC-NOC partnerships
have become increasingly attractive as exporting
NOCs seek long-term demand security. Within OECD
countries, the oil and gas markets are largely open and
liberalized with IOCs typically controlling the supply
and distribution infrastructure. NOCs seeking to
secure access to demand in such markets need to
establish and maintain good relationships with the
host countries.
Climate Change and the Environment
Climate change and the environment have recently
grown in concern in many countries. NOCs must
showcase their good stewardship towards the
environment both in domestic and international
operations, and now they must consider climate
change as well as they align their environmental
practices with the demands of the consumer markets.
Saudi Arabia, the world’s largest oil exporter, has
showcased many initiatives that support actions on
global warming through conducting research projects
on reducing CO2 emissions. Saudi Aramco, the largest
NOC in the world, has established a carbon
Corporate Ownership & Control / Volume 11, Issue 1, 2013, Continued - 8
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management program and launched a pilot project for
demonstrating carbon capture and storage (CCS)
technology that could potentially be used for
enhancing oil recovery (EOR). Further, King
Abdullah Petroleum Studies and Research Center
(KAPSARC) has studied the development of a
framework for a CCS program in Saudi Arabia and its
implementation strategies. A comprehensive survey
was also conducted in an effort to shape climate
change policy in Saudi Arabia. As Abdullah Jum’ah,
the former president and CEO of Saudi Aramco, said
“I believe the petroleum industry should actively
engage in policy debate on climate change as well as
play an active role in developing and implementing
carbon management technologies to meet future
challenges. National oil companies - like Saudi
Aramco- can make meaningful contributions to those
efforts.” (Hammond, 2006)
Strategies and Emerging Trends
The strategies and policies of NOCs will have a
substantial long-term impact on the pace of resource
development in the coming years. Asian and Russian
NOCs are increasingly competing for strategic
resources in the Middle East and Eurasia, in some
cases replacing Western oil companies in important
resource development activities and negotiations.
Firms such as India’s Oil and Natural Gas
Corporation Ltd. (ONGC), Indian Oil Corporation
Ltd. (IOC), China’s Sinopec, China National
Petroleum Corporation (CNPC), and Malaysia’s
Petronas have expanded in Africa and Iran, and are
now pursuing investments throughout the Middle
East. Russia’s Lukoil is becoming a significant
international player in key regions such as the Middle
East and Caspian Basin. Many of these emerging
NOCs are financed or have operations subsidized by
their home governments, with strategic and
geopolitical goals factored into investment decisions
rather than being purely commercial considerations.
Strategic investment and trade alliances for emerging
NOCs are also being sought on the basis of
geopolitics rather than economic considerations.
The interplay between emerging NOCs, major
oil-producing countries and Western consumer
countries will have a large impact on future energy
security and the stability of oil and gas markets,
raising many questions. This is an area of research
that needs to be explored further. Increasingly, NOCs
are in the process of reevaluating and changing
business strategies, with substantial consequences for
global oil and gas markets.
Within the GCC region, there are a number of
companies that have capabilities to expand beyond
serving their domestic market. This process is, in
part, being hindered by the inadequacy of corporate
structures and the lack of information in the GCC
region. Internationally, it is being hindered by the rise
of economic nationalism and the debate around
economic sovereignty, security and ownership of
assets, and the perception that NOCs should not seek
to acquire international oil companies and assets.
Undoubtedly, political considerations influence
and impact the international investment policy of
NOCs. The Kuwait Petroleum Corporation is the
only GCC region NOC that has integrated a scalable
downstream operation in the form of the Q8 brand
name in Europe; Venezuela’s PDVSA acquired
CITGO in the United States; however, the failed bid
on the part of China’s CNOOC to acquire UNOCAL
of the United States in 2005 is a case in point. If an
INOC is perceived to be more than just a corporate
entity, then its aggressive growth will be questioned.
Within the Gulf Cooperation Council (GCC)
region, some regional NOCs have displayed strategic
positioning in making international acquisitions. In
October 2008, Abu Dhabi’s International Petroleum
Investment Company (IPIC) increased its stake in
Austria’s OMV, from 17.6% to 19.2%. IPIC has also
invested in Spain’s Compania Espanola de
Petroleos. Saudi Aramco has experience in investing
in refineries and distribution networks abroad as a
minority Joint Venture partner.
In light of these dynamics and emerging trends
of NOCs, industry players (IOCs, independents and
OFSCs) must reexamine two corporate strategic
questions: where to play and how to compete
successfully with NOCs. The strategic options for
IOCs and independents include following a path
independent of the NOCs, investing in becoming the
partner of choice for NOCs to retain production-
sharing rights, and implementing the contract-
operator service model. This model involves IOCs
collaborating with integrated service companies in the
easy oil fields as a way to gain access to the NOCs’
larger and more complex projects. OFSCs will have to
constantly improve the efficacy and delivery of
unbundled services, as this represents the most likely
way to procure oilfield services in the immediate
future. The strategic options that OFSCs are applying
to succeed are: advancing and applying cutting-edge
technology, providing low-end offerings competitive
with other low-cost service providers, and embracing
the contract-operator business model.
In summary, a number of key trends are
emerging to guide NOCs’ activities at the
international level:
With more access to capital and the
development of in-house expertise, there has been a
movement from being upstream producers to fully
integrated energy companies.
High oil prices, improved NOC management
techniques, and access to capital markets mean that
NOCs now have the financial resources to bid for, and
complete, major international acquisitions.
While major global oil companies may be
apprehensive about investing in volatile areas of the
world or where international sanctions have been
imposed, NOCs’ decision making merely has to be
Corporate Ownership & Control / Volume 11, Issue 1, 2013, Continued - 8
735
compatible with national policy and is unlikely to be
hindered by corporate governance requirements and
stakeholder action.
NOCs are better able to mitigate overseas
political risks through government-to-government
relationships and negotiation strategies.
NOCs can better tolerate political risk
because domestic operations are likely to be
unaffected.
Consortia exclusively led by NOCs are an
emerging trend that will likely continue.
In short, there is indeed a rise in the NOCs,
which are increasingly looking like international
corporations with the full panoply of resources and
with the special asset of carrying the imprimatur of
their parent nation.
Conclusions
This paper reviewed and discussed the evolution of
NOCs, including new roles, opportunities, and
emerging challenges faced in the upstream oil and gas
industry. The business models and characteristics for
the different oil and gas companies were also
discussed in the context of NOCs. It also discussed
the rise in NOCs’ international activities and the
consequences for future supply, security, and pricing
of oil.
NOCs will continue to aggressively track new
opportunities for growth: in terms of reserves and
revenue stemming from growing access to capital
markets, increasing profits, greater participation in
technology advancements, and increasingly effective
project management and other technical capabilities.
NOCs are now addressing new challenges that require
a more comprehensive approach to risk than in the
past. The successful rise of NOCs depends on their
responses to new challenges that include more
effective corporate governance and transparency,
financial risk management, talent development and
retention, and greater effort to address externalities
including climate change.
NOCs are reshaping the playing field by
globalizing their business portfolios and crossing
national borders, implementing vertical integration in
the supply chain, and attracting capital from global
markets. The strategic partnerships between NOCs
and super majors grant NOCs the lion’s share of
benefits, as NOCs diversify their foreign assets,
participate in unconventional reserve development,
access leading-edge technology, and attain skills and
expertise.
To sum up, NOCs are on the rise because they
have a number of advantages relative to IOCs. At the
same time, these NOCs can still do better if they can
learn a variety of practices that the IOCs have
perfected, namely in dealing with different
international financing and taxing authorities,
cooperating with one another to utilize their most
advantageous skills, finding ways to mitigate risks,
and acquiring and retaining the best intellectual
capital in the most cost-effective ways.
This paper does, however, glide over some of
the advantages and problems that NOCs encounter,
including:
Some NOCs might be characterized as using
the political muscle of their government to yield
concessions that cannot be gained by IOCs.
NOCs can often protect their international
assets through the political, and sometimes military,
influence that their parent government can provide.
NOCs, as arms of their parent governments,
may be constrained by the concerns of other nations.
NOCs have the potential to be hampered by
inefficiencies and corruption, which the IOCs can
avoid by employing best business practices and being
exposed to a competitive marketplace.
This paper also suggests that unconventional
energy is a less desirable area to be in relative to
traditional oil fields. This may be the case among the
GCC nations, but the reality is that oil's future is
likely to include both unconventional and difficult-to-
access (e.g., deep water, Arctic, etc.) sources. The
IOCs, in developing expertise in these areas, as well
as acquiring or partnering with firms having this
expertise, are diversifying in a wise manner — and
they're buying into renewable technologies as well to
cover all bets.
Acknowledgements
The author would like to greatly thank Stephen
Rattien for his invaluable comments and
comprehensive review of this paper. Many thanks
also go to Coby van der Linde, and Leila Bin Ali for
their comments.
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