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National Oil Companies: Business Models, Challenges, and Emerging Trends

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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.
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National Oil Companies: Business Models, Challenges, and Emerging Trends
Saud M. Al-Fattah
P.O. Box 8349, Dhahran 31311, Saudi Arabia; Email: saud.fattah@aramco.com
(January 2013)
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 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.
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 GCC region, there are a number of national oil companies 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 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 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.
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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 decline 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’ decisionmaking 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.
Keywords: National oil companies, Petroleum, Business and operating models
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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. On the other hand, 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).
National oil companies (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. 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.
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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. 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 at a smaller scale of 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 & 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 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
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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.
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.
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 decline 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
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choose to engage in international investments. Table 2 presents the objectives and characteristics of
each type.
However, 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.
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 &
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 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. On the other hand, NOCs of non-OPEC states are less efficient, in terms
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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 staff padding, insider sales, and other forms of corruption or 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, and/or
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 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 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."
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However, 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 in order 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,
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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.
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. In other words, IOCs are
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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 raise 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. On the other hand, 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.
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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 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,
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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. On the other hand, 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’ decisionmaking
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 better tolerate political risk because domestic operations are likely to be
unaffected; and
13
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 being 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 reserves 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 do still 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, namely:
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, but
NOCs, as arms of their parent governments, may be constrained by the concerns of other
nations, and
14
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.
FUTURE WORK
There are different issues relating to NOCs in the Arabian Gulf Countries of Cooperation (GCC)
region that should be considered for future research. In particular, the key strengths and
technologies of other global NOCs need to be identified and mapped for strategic partnership
opportunities. For example, Petrobras has expertise in deep offshore drilling, and this needs to be
evaluated relative to that of IOCs. Similarly, CNPC is reputed to be strong in enhanced oil recovery,
and China National Offshore Oil Corporation (CNOOC) is experienced in heavy oil E&P. Another
prospective area of research is to identify the potential NOC acquisition target markets
geographically, the technology sectors, and the key strategic acquisitions for future consideration by
NOCs in the GCC region. It is also important to examine how NOCs will evolve to pursue reserves
replacement.
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.
FURTHER READING
Aissaoui, A. (Aug. 2011). Shifting Business Models and Changing Relationship Expectations of IOCs, NOCs
and OFSCs, Economic Commentary, vol. 6 (8), APRICORP Research.
Al-Falih, K. A. (Apr. 13, 2011). A speech presented at the 2
nd
IEF NOC-IOC Forum, Paris.
Bain & Company. (Sep. 20, 2009). National Oil Companies: Beyond Boundaries, Beyond Borders.
Boscheck, Ralf. (2006). Assessing New Upstream Business Models. IMD International, IMD 2006-06.
Deloitte Touche Tohmatsu. (Jan. 2007). National Oil Companies: Emerging Trends in Mergers and
Acquisitions. Energy & Resources.
Deloitte Touche Tohmatsu. (Aug. 2009). Seizing Opportunities: A New Era for National Oil Companies.
Energy & Resources.
15
Eller, Stacy, Peter Hartley, and Kenneth Medlock. (2010). Empirical Evidence on the Operational Efficiency
of National Oil Companies. Empirical Economics, 1-21.
Hammond, Andrew. (May 23, 2006). Saudi Oil Firm Aramco Says Backs Greenhouse Gas Cut. Reuters.
Hartley, Peter, and Kenneth B. Medlock. (2008). A Model of the Operation and Development of a National
Oil Company. Energy Economics, 30(5), 2459-2485.
Helman, Christopher. (July 16 2012). The World’s Biggest Oil Companies. Forbes, Accessed Dec. 23
2012, http://www.forbes.com/
Leis, Jorge, McCreery, John, and Gay, Juan Carlos. (Oct. 10, 2012). National Oil Companies Reshape the
Playing Field. Bain & Company.
Mitchell, John, Marcel, Valerie, and Mitchell, Beth. (Oct. 2012). What Next for the Oil and Gas Industry?
Chatham House, The Royal Institute of International Affairs.
Pirog, Robert. (2007). The Role of National Oil Companies in the International Oil Market, Congressional
Research Service, Washington, DC.
Wolf, Christian. (2009). Does Ownership Matter? The Performance and Efficiency of State Oil vs. Private Oil
(1987-2006). Energy Policy, 37(7), 2642-2652.
... These oil majors (also referred to as the supermajors or "Big Oil") formed between the late 19th and early 20th centuries and are considered today to comprise the following companies: American based ExxonMobil and Chevron, European based bp (United Kingdom), Royal Dutch Shell (the United Kingdom and the Netherlands), TotalEnergies (France) and Eni (Italy) [37]. From 1960, the rise of state-owned National Oil Companies (NOCs) has changed the balance of control over most of the world's oil and gas reserves [37,38]. Some NOCs such as Saudi Aramco and the National Iranian Oil Company (NIOC) were created in the mid-20th century through nationalisation of the countries' oil reserves that had been previously controlled by IOCs, whereas others, e.g. ...
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