National Oil Companies, NOCs, are seemingly set to define the future of global crude oil supply (and therefore price) levels. Major International Oil Companies, IOCs, have over the past decade, witnessed an increasing difficulty to profitable reserves growth and most have resorted to a series of staff rationalization and divestment. The recourse to severely challenging prospects such as some in the Gulf of Mexico, is a response to dwindling access to acreages especially in the reserves-rich but unstable or less agreeable regions. Revised regulations arising from the recent explosion on a rig operated by the oil major BP in the Gulf of Mexico, may add to deep offshore production costs.
NOCs, however, with easy access to state funds on terms that are more favorable than for the IOCs, as well the increasing domiciliation of national reserves with them, have shown rising dominance in the global oil and gas industry. For example, according to PFC energy, in the 2009 financial year, NOCs outperformed IOCs, having gained an average of 66% in market value compared with 1% for the six largest IOCs. In addition, a Chinese NOC became the world’s largest energy company by market capitalization.
That said, most of these NOCs face in the main, three, broad challenges, even if in varied degrees:
First is the excessive meddling by their respective states. The recent history of Petróleos de Venezuela S.A., PDVSA, which manages that country’s petroleum resources, is informative. A 2002 strike by the employees of the company, protesting the country’s leadership style resulted in the dismissal of thousands of them (including highly rated professionals) amid reports of torture. The company subsequently became an instrument of president Hugo Chávez’s “21st Century Socialism”. The latter involved nationalization of companies in the petroleum, electricity and communications sectors as well as massive wage hikes and other ambitious projects funded from proceeds of an inappropriately managed petroleum sector. With severely reduced revenues (crude oil accounted for about 90% of export earnings in 2008), a series of crises ― spiraling inflation, successive currency devaluations, acute power and water shortages, political turmoil, etc ― rendered the country nearly dysfunctional.
Prior to the submission in 2008, of a Petroleum Industry Bill to her legislature, transactions in Nigeria’s crises-ridden oil and gas sector were notoriously opaque, seemingly shrouded in cultic secrecy. The bill, which is still pending, is expected to usher in a regime of transparency to the industry and a complete reorganization of the state-owned company, the Nigerian National Petroleum Corporation, NNPC, which largely manages the country’s petroleum resources. However, records of the country’s petroleum proceeds have been the subject of much contention. For example, the Central Bank of Nigeria would render its own account, as would the Ministry of Finance, the Revenue Mobilization and Fiscal Commission and the NNPC, each at variance with the others. Inability of previous regimes to account for significant proportions of these proceeds, as well the accusations of inequitable distribution of wealth have been sources of internal strife, especially recently in the Niger Delta region, where some correlation was seen between oil production breaches and global crude oil prices. With total crude oil proceeds estimated at nearly US$600 billion, about 6 out of 10 people in Nigeria live on less than a dollar a day, only about 4 out of 10 have access to adequate electricity, less than 5 out of 10 have pipe-borne water, infant mortality is high and educational standards are poor.
By contrast, a few NOCs such as Malaysia’s Petronas, Brazil’s Petrobras and the parastatals, Statoil of Norway and Sonangol of Angola have fared much better. For example, at Petronas an internationally respected CEO that put in fifteen years was strident about the company’s autonomy and accounting standards. He is credited with keeping the company’s finances from state incursion and leading the company to global prominence with a significant proportion of its reserves held internationally. The company was successful in various bids in the recently concluded second bidding round for Iraq’s massive fields as was Sonangol.
Second, is the ability to generate the requisite funds for the massively, capital-intensive projects, especially with state revenues dipping in the wake of a global economic slump. Perceived risks associated with a restrictive investment environment, often impede capital inflow. The case with Iran is particularly informative. According to the U.S. Energy Information Administration, EIA, Iran is the world’s fourth highest producer of conventional crude oil and holds the world’s third largest reserves. If the country’s political past has been unfavorable to the influx of international investment, the current regime of international sanctions is asphyxiating both her oil and gas industry and her economy. (For example, Iran has to import 30% to 40% of her domestic gasoline needs.) It is crippling the country’s efforts at a much-touted program for a twenty percent increase in domestic crude oil production – necessary for addressing both the surging domestic energy demand and foreign exchange requirements.
In Russia, licences for the development of the country’s sorely-needed offshore fields have been effectively limited to two companies (and both are NOCs, Gazprom and Rosneft), but the capex capability of these companies may be grossly inadequate for proper development of the fields. The country’s natural resources ministry has made proposals for attracting foreign investment for development of the country’s fields. The minister, according to Platts, recently said, “The amount of money that the two companies (Rosneft and Gazprom) have been investing today in the development and exploration of offshore fields is not enough to develop them within any real time frame”. Development of strategic reserves in Russia has been limited largely to companies in which the Russian stake exceeds 50%, but the grueling experience of the oil major BP with the Russian company TNK remains a source of concern for many a foreign investor.
Nigeria’s NNPC has also had problems fulfilling its cash call obligations in its joint venture with major IOCs, a situation that stalled various production projects.
In contrast, Petronas was able to attract stakes from large U.S. asset managers, despite the company’s involvement with crude oil projects in Sudan, a country widely condemned for grave human rights abuses.
Chinese integrated energy companies however, currently do not share others’ cash flow problems. With an intimidating financial war chest, they have “forcefully invaded” the Atlantic petroleum provinces of Africa, Canada’s tar sands projects, Australia’s mines as well as those of South Africa and parts of South America; in most of these cases, threatening the hitherto dominance of the majors. Such has been China’s influence that a mere report of domestic financial tightening would send currencies and crude oil prices on a downward slide, even if that drive has tempered somewhat.
Finally, there are technological deficits to be addressed. Major IOCs, with decades of activity in the full spectrum of oil and gas operations in just about every part of the globe, have developed efficient and specialized technologies for various exploitation processes. Exploration and production activities, for example, are fast moving to the more (geologically, financially and technologically) challenging, ultra-deep offshore regimes and apart from a few (such as Statoil and Petrobras), NOCs generally lag major IOCs in the requisite technologies. Such gaps however, are set to narrow significantly, and rather quickly too. In collaborative synergies (which were also seen in Iraq’s second oil licensing round), NOCs and IOCs have been forming consortia for exploiting both offshore and onshore oil and gas fields around the world: NOCs generally boast vast domestic reserves as well as lower operating (mainly personnel and materiél) costs while IOCs (really struggling to grow reserves) are happy to provide the requisite technological processes. For example, the recent set of agreements between Chevron and Rosneft, one of Russia’s state-controlled oil companies, integrates Chevron’s vast technological and financial resources with Rosneft’s rights for the development of fields in the Black Sea region of Russia.
Sinopec, the Chinese NOC recently announced its discussions with BP, on the use of the latter’s technology for the exploitation of China’s shale gas reserves, believed to be quite significant. (The fate of BP in the wake of the Gulf of Mexico oil well disaster, however remains uncertain). Sinopec aims for a shale gas exploration breakthrough in three years, and industrial development in five. BP recently acquired stakes in Chesapeake Energy, the US shale gas company. In November 2009, the Chinese NOC PetroChina also signed a contract with Royal Dutch Shell for shale gas exploitation in one of China’s fields.
Late last year in Venezuela, a seemingly repentant president Hugo Chávez in conceding financial and technological constraints to PDVSA’s capacity to exploit perhaps the world’s largest (about 513 billion barrels) reserves in the Orinoco (ultra-heavy oil) Belt, auctioned off two major projects to different consortia. Prior to the auction, Chávez offered the consortia guarantees on the safety of their investment; but some analysts have remained skeptical. In both projects (Carabobo 3 and Carabobo 1), the initial provision was for the host NOC, PDVSA to hold a 60% stake while the investing consortia would hold the balance.
Brazil’s Petrobras on the other hand has been in the vanguard of global, ultra-deep offshore well technologies. The company operates a fleet of rigs some of which have drilled wells deeper than BP’s disaster-stricken, Gulf of Mexico Macondo well.
All said, a quick-stepping cluster of just a few companies leads the march of NOCs but, save for any technological (for example oil from algae) or (access to) acreage breakthroughs, even the reserves-rich stragglers will still be relevant in the global crude oil supplies of the future.