NOCs Look To The Future

 

MEES Mediterranean Editor Bill Farren-Price reports from Algiers.

 

The challenge to National Oil Companies (NOCs) presented by increased global competition and the need for access to technology, capital and enhanced management expertise will shape national oil industries in the years ahead, according to Algerian Energy and Mines Minister Chakib Khelil. In his opening remarks to the first National Oil Companies Forum in Algiers in late April, Mr Khelil said that while NOCs were comparable to the largest international oil companies in terms of hydrocarbon production and reserves, bureaucratic red tape and the absence of effective partnerships and operational synergies continued to limit their growth. Wholesale reform and restructuring alongside an increased partnership between producers and consumers would go some of the way to resolving these problems and unlocking the growth potentials of these companies, he said. “Global markets impose on [NOCs] the search for competitive advantages on a scale going beyond their local markets and sometimes even beyond their continent,” Mr Khelil noted, adding: “With few exceptions, national oil companies are the big absentees in facing these challenges.”

 

Sonatrach Reorganization Moving Ahead

It was appropriate that Algeria should host such a meeting, which drew representatives from NOCs in Norway, Egypt, Kuwait, Iran, Indonesia, Venezuela, Qatar, China, Brazil and Mexico, given the government’s commitment and progress in restructuring the state oil company Sonatrach to allow it to compete more effectively. Turning towards the Algerian program to restructure the energy and mines sector, Mr Khelil noted: “Deep reforms are ongoing in the sectors of mines, electricity and hydrocarbons. All of these reforms provide for competition rules, elimination of monopolies and the separation between the missions of the company and the sovereign role of the state.” In separate comments, Mr Khelil said that the delayed draft Hydrocarbon Law would be presented to parliament after the May 30 legislative elections, since government time was limited in the run up to the polls (MEES, 18 March and 6 May). The draft legislation clarifies the role of the state as a policy-maker and regulator, and defines the competitive environment in which energy companies, including state-owned Sonatrach, will operate.

 

At the heart of the debate over the future role of NOCs lies the question of whether they are efficient at realizing maximum benefits from their alliances with international oil companies (IOCs) and whether the traditional relationship between NOCs and their governments promotes competitive performance by the national companies, according to President and Chief Executive Officer of Petroleum Finance Company (PFC) Vahan Zanoyan. Taken together, these two points underline the central question of whether NOCs should strive to become competitive and performance driven in order to better serve the economic and strategic needs of the shareholder, Mr Zanoyan said in his overview presentation to the Forum.

 

NOC Revenue Focus Overshadowing Strategic Needs Of Exporting Countries, Says PFC

Mr Zanoyan noted that while NOCs have traditionally controlled mostly below ground resources in the form of hydrocarbon reserves, IOCs control most above ground resources, in terms of technology, access to capital, markets and an ability to engage and respond to climate change regulation. The fact that the energy business is now driven by access to above ground resources is the main driver behind the need for a new dynamic between NOCs and IOCs, he said. He argued that the short-term financial interests of major exporting countries – characterized by a focus on short-term revenue needs, the perennial shift between price and market share defense, sporadic campaigns to gain non-OPEC cooperation and the medium-term inconsistency of price targets – did not address the strategic interests of the major exporting countries. “If NOCs just extract hydrocarbons, market them and give the revenues to the finance minister, they will lose relevance in the hydrocarbon world of the future,” Mr Zanoyan warned. He identified the strategic interests of major producers as:

 

·         Securing the present through prolonging the importance of oil as a source of energy and prolonging producers as a source of oil.

·         Securing the future through reducing state dependence on oil revenues and investing in the global energy business of the future.

 

One of the key elements to allow these strategic points to be put in place is the separation of the sovereign, policy-making roles of the state; the operational and commercial activities of the NOC and the requirement for independent regulators. In the upstream sector, Mr Zanoyan identified commercialization as a means of attaining stronger financial results without privatization. This point was echoed by Statoil President Olav Fjell who, in his address, noted that his company’s ability to concentrate on internal competitive management had been a key to attaining commercial financial results. In the natural gas sector, he said, the challenge for NOCs was to develop an indigenous market for the product and thereafter compete in the export markets.

 

The issue of NOCs becoming regional and even international players received a wide array of responses from the NOC representatives. While NOCs like Sonatrach and Statoil are looking to expand their operating horizons outside their home countries, Pemex managing director in Europe Pablo Espresate told delegates that his company considered it could achieve its best rate of return in Mexico. However, the ability of NOCs to respond to a more competitive environment has as much to do with access to technology as capital. “We need to create the technological capacity to compete – not just the operating efficiency, but also people, procedures and infrastructure,” said PDVSA’s Fernando Puie. The NOCs’ ability to reconcile their role as an employer and central feature of producing countries’ economies with the need to rationalize and cut costs was also highlighted by delegates. In response to Statoil’s achievement of cutting 20% of costs and 10% of staff during its 1999-2001 improvement program, Iranian delegates pointed out that such staffing cuts would be politically impossible in Iran.