Corporate Ownership & Control / Volume 11, Issue 1, 2013, Continued - 8 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: [email protected] Introduction historically have mainly operated in their home countries, although the evolving trend is that they are National oil companies (NOCs) are defined as those going international. Examples of NOCs include Saudi oil companies that have significant shares owned by Aramco (the largest integrated oil and gas company in their parent government, and whose missions are to the world), Kuwait Petroleum Corporation (KPC), work toward the interest of their country. The Petrobras, Petronas, PetroChina, Sinopec, StatOil, and traditional mission of a NOC has been to allow Malaysian NOC. strategic investors, as co-owners and service Asian state-owned companies of NOCs, most providers, access to its home country’s hydrocarbon prominently from China and India, are at the forefront resources. The governance dictates that NOCs own of strategic cross-border investments as their and manage the supply chain of oil and gas in the governments seek to prepare for long-term energy home country from upstream to downstream. The supply challenges. At the same time, increasing oil primary driving factors of investment between NOCs wealth brought about by rising oil prices has and international oil companies (IOCs) are the encouraged governments as diverse as Russia, provision of access to hydrocarbon resources, Venezuela, Bolivia, and Ecuador to give greater knowledge transfer of leading-edge technology, political and economic leverage to their national engineering expertise, and managerial and project energy champions. This is achieved in their local management skills. In addition, however, as market through revisions to constitutional laws, exemplified in Venezuela and Russia, NOCs may be contracts, tax and royalty structures. Also, the NOCs used to promote both social and political agendas as have begun to enter the international market, well as economic ones. A Chinese NOC’s failure to engaging in strategic investment activities and acquire a U.S. company (UNOCAL) with acquiring full or partial control of foreign companies, international assets sends a signal that NOCs must do in sectors of strategic interest for national greater political due diligence when undertaking development. cross-border mergers and acquisitions (M&A). M&A Within the Gulf Cooperation Council (GCC) has always been a factor in boosting growth in the oil region, there are a number of NOCs that have and gas sector. The Merger Market gives figures of capabilities to expand beyond serving their domestic $423 billion for 2010 and $408 billion for 2011 in the markets. This process is, in part, being hindered by energy sector, out of total global M&A of $2,277 the inadequacy of corporate structures and the lack of billion and $2,237 billion (Mitchel et al., 2012). information in the GCC region. Globally, it is being NOCs come in a variety of forms, but most have hindered by the rise of economic nationalism and the both upscale (exploration and production “E&P”) and debate around economic sovereignty, security, and downscale operations (refining and marketing). NOCs ownership of assets, and the perception in the west 713 Corporate Ownership & Control / Volume 11, Issue 1, 2013, Continued - 8 that NOCs should not seek to acquire IOCs and national leadership. NOCs do, indeed, have many assets. Undoubtedly, political considerations advantages relative to private corporations, most influence and impact the international investment notably the political muscle of their parent policy of NOCs. government. Also, they usually at least have greater The emerging trend driven by the rise of NOCs access to capital and the potential to take greater risks has shifted the balance of control over most of the without fear of "betting the company." world’s hydrocarbon resources. In the 1970s, the Nevertheless, to truly be successful, NOCs NOCs (super majors) controlled less than 10% of the should function with the discipline of a well-managed world’s hydrocarbon resources, while in 2012 they private firm and, wherever possible, segregate their control more than 90%. This shift has enabled NOCs national responsibilities to avoid the potential to increase their ability to access capital, human inefficiencies. If they have larger social objectives, resources and technical services directly, and to build these should be clarified and costed out so that fraud in-house competencies. Further, NOCs have been and abuse are avoided while social objectives are increasing their ability to conduct outsourcing pursued in a cost-effective manner. activities for many operations through the oilfield All this being said, there is indeed a rise in the services companies (OFSCs), thus increasing their NOCs, which are increasingly looking like range of competence. international corporations with the full panoply of Moreover, the shift of the NOCs business resources and with the special asset of carrying the models poses challenges for IOCs and independents imprimatur of their parent nation. by questioning the sustainability of their resource- This paper will review and discuss the NOCs ownership business model. Among these challenges business models, challenges and opportunities, their are the production declines in existing oil fields, the strategies and emerging trends. difficulty of replacing oil and gas reserves in limited or restricted access areas, the rapid depletion of NOCs’ Business Models conventional or easy-to-access oil reserves, increasing production costs of unconventional resources, and the Business models are generally used to capture the decline of their operating profit margins. economic logic for aligning internal decisions in view A number of key trends in NOCs’ activities at of external conditions. They are typically used by the international level are emerging: corporate executives as explanatory, but not With more access to capital and the predictive, tools for sound decisions and effective development of in-house expertise, there has been a management practices. movement from being upstream producers to fully As was noted earlier, most of the world’s oil integrated energy companies; reserves are totally owned by national entities or High oil prices, improved NOC management partially owned by governments that coordinate oil techniques, and access to capital markets mean that exploration, development and extraction of the NOCs now have the financial resources to bid for, and hydrocarbon resources in their countries, and in some complete, major international acquisitions; cases outside their borders. NOCs differ in many While major global oil companies may be respects; there are NOCs of net oil importers and fearful of investing in unstable areas of the world or exporters. They differ in their evolution, relation to where international sanctions have been imposed, their governments, accountability, efficiency, NOCs’ decision making merely has to be compatible international presence, degree of integration, size, etc. with national policy and is unlikely to be hindered by The expansion of scope of business suggests that corporate governance requirements and stakeholder some NOCs be renamed the International-National action; Oil Companies (INOCs) because they may operate NOCs are better able to mitigate overseas across the globe, and certainly beyond their national political risks through government-to-government borders. INOCs also have similar functions to IOCs in relationships and negotiation strategies; terms of structural, financial and operational aspects. NOCs can tolerate international political risk We will use NOC and INOC interchangeably. In because domestic operations are likely to be recent years, INOCs have begun to bridge the gap and unaffected; and catch up with IOCs. This convergence is changing the Consortia exclusively led by NOCs are an landscape of the global oil and gas industry by both emerging trend that will greatly impact the global oil collaboration and competition. and gas sector. NOCs have four key elements for success in the Despite these business and marketplace upstream oil and gas sector: access to capital, access advantages, NOCs are not necessarily disciplined by to technology, breadth of capabilities and the marketplace and, therefore, relative to IOCs,