New “international” NOCs are set to rewrite the rules of the energy industry.

By Francois Austin and Jad Dib*

Saudi Arabia’s national oil company (NOC) Saudi Aramco last month paid $2bn for 28% of a South Korean oil refining and marketing firm. In May, state-owned Turkish Petroleum said it will buy 10% of Azerbaijan’s Shah Deniz field and the South Caucasus pipeline from Total for $1.5bn. In April, Qatar’s NOC bought a $1bn stake in a Brazilian oilfield from Royal Dutch Shell.

NOCs are forging new energy partnerships with both other NOCs and investor-owned oil and gas firms to attain the global size, industrial scope, and technical expertise required to manage the energy industry’s rising risks. These transnational deals are driven by the fact that drilling for oil and gas is becoming an exponentially higher-cost, hypercompetitive, technology-intensive business. More than 70% of the world’s hydrocarbon supply growth by 2025 will come from complex resources such as deep water shelves, tight oil reservoirs, biofuels, Canadian sands, and potentially the Arctic. The majority of oil exploration will be on projects budgeted at over $5bn, up from a third today.

Demand continues to rise: Asia alone will need to import 40% more oil – an additional 30mn b/d – by 2030 to keep up with rapidly growing demand. That’s one reason why, over the last two years, the region’s national oil companies have announced nearly $40bn in new foreign investments. At the same time, customers are demanding environmentally sound energy, but they don’t want to pay more. The result: oil firms’ profits are being squeezed as never before.


To thrive in this unforgiving environment, NOCs must hedge their bets by developing all-encompassing global footprints in businesses ranging from offshore oil and gas exploration to gasoline stations. This target is achievable. Already, China National Petroleum Corporation is active in 27 countries and has production sharing contracts with Shell to explore, develop, and produce oil and gas both in China and in West Africa.

As the industry reshapes itself, NOCs will be forced to push further in two directions: They will have to spread their requisite tens of billions of dollars in R&D costs over a much wider range of assets, while partnering with investor-owned oil firms to reach the level of efficiency and returns on research to deliver on multibillion dollar projects globally. Today, publicly traded oil firms issue many more patents, our estimates show, even though NOCs invest roughly the same percentage of their revenues on R&D.

Many traditionally slow-moving NOCs will have to overhaul their organizations. For the top players, the goal is to metamorphose into global enterprises that can nimbly respond to local challenges and the demands of managing much more diversified businesses. But to achieve this they must create robust governance structures that can manage the accompanying risks. In order to realize greater value across all of their assets, operations will need to be more globally integrated.

NOCs will also have to apply greater discipline to risk management on individual projects. National operational and safety management systems will have to become global, while risk management systems will cross the silos that presently exist in many organizations. Only then will NOCs pursuing multiple initiatives grasp their level of overall risk.

To reach their lofty ambitions, some NOCs may also have to consider reducing government involvement. Today, investors own 25% or more of only three of the world’s 10 largest NOCs measured in terms of production volume – Gazprom, Rosneft and Brazil’s Petrobras. Managing the myriad of new strategic, operational and organizational risks that will accompany ownership shifts will be difficult. If mismanaged, internal culture clashes could result in bigger problems if employees resist foreign pressure to perform.

NOCs will also be forced to confront external risks out of their control. Brazilian president Dilma Rousseff has been heavily criticized for her role in Petrobras’ purchase of a Texas refinery which critics say was overpriced. Entry barriers imposed by foreign governments, stricter health and safety requirements, potential capital flight from new investors, and protests by countries’ citizens against their new foreign investors could all be concerns.

The first step to getting ahead of these risks and the industry’s fast changing rules of competition is for national oil companies to develop and deliver a compelling corporate goal and financial case for their stakeholders. Before assembling complex investment portfolios, they must define their strengths and weaknesses in terms of both business mix and geography to provide a clear rationale for reinvention.

National energy industry champions must then assess and define new leadership capabilities and a change management strategy. They will need to regularly reassess and redefine their cultures and competencies for a much broader group of constituents. These new stakeholders will range from new in-house communities to new investors, regulators, suppliers, management teams and competitors. To gain an understanding of entirely new sets of customers, many firms will be forced to establish new marketing and trading operations worldwide.

In addition, long-term global workforce plans will be required to ensure that national oil companies have access to the highly skilled personnel necessary to carry out their objectives. A landmark study conducted by our sister company Mercer shows that the majority of oil and gas companies expect to experience a talent gap in petroleum and plant engineers in the next five years.

If national oil companies fail to recognize and address this war for talent, they may be forced to delay major exploration and production initiatives simply because they do not have enough of the right workers. The stakes involved in pulling off each of these transitions are high. But going it alone will only become more expensive.

That’s why a new network of “international” national oil companies is taking hold that will likely rewrite the rules for the energy industry within the next generation. Those companies that embrace the challenge of forging a new form of national oil company may finally close an energy gap that has persisted century after century. But this can only happen if they address the risks involved in attempting a major transformation in a rapidly evolving environment – now.