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Corporate Ownership & Control / Volume 11, Issue 1, 2013, Continued - 8

NATIONAL 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 (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, , Business and Operating Models

* , 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 , , PetroChina, , 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 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, , , 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

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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 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 , 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, have partnerships, and effective domestic engagement. In a tendency to make economically-inefficient recent years, NOCs, relative to IOCs, have made more decisions. They also have the tendency to tolerate progress in innovative technologies. A common underproductive labor and staff bloating or, metric for innovation is a company’s R&D potentially, graft and other abuses on the part of expenditure. Some NOCs also are true innovators.

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Saudi Aramco, Petrobras, Petronas, and the Chinese human resources and technical services directly, and NOCs all have in-house R&D capabilities. PetroChina to build in-house competencies. Further, NOCs have stands out as the top spender in absolute terms on increased the direct outsourcing of many operations R&D in 2012 among all oil and gas companies. Table through their oilfield services companies (OFSCs), 1 shows that IOCs historically have a competitive rather than turning to IOC partners. As a result, IOCs edge over NOCs, but the gap is now shrinking, and in and independents are facing new challenges to remain some respects is reversed. relevant to the NOCs, in the most The emerging trend posed by the rise of NOCs technologically difficult projects. Based on the has shifted the balance of control over most of the growing wealth and expertise of NOCs, IOCs are world’s hydrocarbon resources. In the 1970s, the increasingly focused on larger and more complex NOCs (super majors) controlled less than 10% of the projects, such as Arctic drilling and production in world’s hydrocarbon resources, while today (2012) and gas fields. The larger they control more than 90%. This shift has enabled independents usually follow the same strategic path NOCs to increase their ability to access capital, but with smaller scale projects.

Table 1. Comparison between IOCs and NOCs

IOCs NOCs 1) Access to capital  Publicly floated companies with access  State-backed to liquid stock markets, banks and  Increased access to equity and debt bond buyers in global capital markets 2) Standard  Leaning toward low R&D  Rapid growth of R&D technology technology expenditures that drive down costs in and innovation. complex development environments  Increase of R&D budgets. 3) Breadth of  International focus.  Primarily domestic focus of capabilities and  Partnerships with governments, NOCs, operations (for NOCs with partnerships OFSCs and other IOCs. domestic resources).  Expanding businesses globally.  Partnerships with IOCs, Independents and OFSCs. 4) Effective local  Developing models for local  Operating mostly in their domestic engagement engagement by necessity. market, and globally to access  More diverse international workforce. resources.  Attracting international workforce.

Modified by author from Bain & Company, 2009

Figure 1 illustrates the NOCs’ contract types and contracts in partnership with OFSCs. Examples of this their partners or service providers with respect to type include Saudi Aramco’s agreement with Chevron project complexity and size. The mega-projects are to develop heavy oil fields, Total’s joint venture with characterized by high complexity and very large size. Saudi Aramco to build Al-Jubail refinery to process NOCs partner with IOCs to conduct these production- heavy oil, and ’s deal with ExxonMobil in the sharing contracts (PSCs). These mega-projects can Arctic. also be conducted using unbundled fee-for-service

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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.

Source: Modified by author from Bain and Company.

Moreover, the shift of the INOCs business also include those whose parent countries are rich in model toward aggressive international resources oil resources, even if they do choose to engage in acquisition poses challenges for IOCs and international investments. Table 2 presents the independents by questioning the sustainability of their objectives and characteristics of each type. resource-ownership business model. Among these The major challenge for NOCs when dealing challenges are the declines of production in existing with OFSCs is managing the risk associated with oil fields, the difficulty of replacing oil and gas integrated service contracts (ISCs). OFSCs are reserves in limited or restricted access areas, the rapid developing more end-to-end solutions and improving depletion of conventional or easy-to-access oil their technology competencies to support better reserves, increasing production costs of unconventional and frontier locations. For example, unconventional resources, and the decline in the opened a research center with Saudi operating profit margins. As a result, investors are Aramco in , . This R&D center questioning the IOCs’ ability to maintain their focuses on understanding and developing ownership-business model as their market and net unconventional oil and gas reserves, especially shale asset values decline. In addition, the competitive gas and tight gas. Similar to CNOOC and Sinopec to advantage of IOCs is increasingly threatened by gain new technical capabilities, Saudi Aramco NOCs’ development of internal technological acquired Frac Tech International in late 2011. The capabilities and transformation into international- greatest challenges for OFSCs are setting the optimal national oil companies (INOCs). NOCs are becoming mix of ISCs in their portfolios of operations, and a new competitor with some advantages. In the future investing in technology and building capabilities to there are likely to be three types of major oil address a large and diverse customer base from IOCs companies: IOCs, NOCs, and INOCs, with the INOCs and independents. being defined as primarily those NOCs whose parent countries are oil-resource-poor. But, NOCs would

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Table 2. Types of Emerging Major Oil Companies

IOCs INOCs NOCs Seeking reserves and Primarily NOCs whose parent Continue development of production growth in countries are oil-resource- enormous domestic reserve competition with other poor. More direct competition base; parent countries are IOCs and now INOCs. with IOCs in multiple rich in oil resources. geographies. 1) Access to  Free access to market . State-backed  State-backed. capital capital. . Increasingly free access to capital markets. 2) Standard  Long established, in- . Improving in-house R&D  Partnerships with tech- technology house R&D – looking capabilities. savvy IOCs/ for leadership . Increased R&D INOCs/OFSCs. position. investments. 3) Breadth of  Long history of . Improved partnering  Alliances with best-in- capabilities partnerships in capabilities. class IOCs and OFSCs and multiple . Strategic differentiation as required. partnerships environments. on key capabilities and  Coming to terms with partnerships. new partners. 4) Effective  Long history of . Developing skills in local  Limited need for local societal engagement engagement in diverse overseas local engagement at multiple levels. locations. engagement.

Modified by author from Bain & Company, 2009

Efficiency of NOCs NOCs found to be inefficient are based in less- developed countries and are under pressure to Efficiency can be defined as producing crude oil and maximize the flow of funds to the national treasuries products at the lowest possible cost (including labor or provide energy security to the country. In addition, and materials) relative to the accessibility of the some NOCs may be viewed as inefficient because of resource, within safe and environmentally sound over-staffing, insider sales, and other forms of bad guidelines. It is not easy to develop broad conclusions business practices. about the effectiveness of NOCs in this regard. Wolf Many NOCs appear to produce less petroleum (2009) argues that NOCs in OPEC and outside OPEC output per unit of labor or other costs than do private, should be discussed separately. NOCs of OPEC seem investor-owned corporations. These organizations to be more efficient compared with private companies may restrict current production for several possible due to the quality of their resources. NOCs of non- reasons (Hartley and Medlock 2008): OPEC states are less efficient, in terms of labor and  They withhold more output because they use capital efficiency. Saudi Aramco is regarded as an higher discount rates than competitive firms. efficient NOC not because of its resources but  They do not maximize economic profits because it has had a long time to develop a leadership alone but instead have other political and social model, build a capable and lean staff, and create objectives. sound business relationships, as compared to, say,  They operate less efficiently, incurring PDVSA or Pemex. Wolf also discussed the higher costs in producing expensive oil. fundamental differences in goals, policies and data of Unlike private companies, publically-held NOCs and IOCs that often complicate any meaningful companies frequently do not disclose sufficient comparisons. Despite this important qualification, information about their operations that would allow a some studies have tried to develop general better understanding of their activities. Constrained impressions of the rise of NOCs. by this lack of appropriate data, Eller et al. (2010) It is often challenging to distinguish between compared the ability of government and private government policy and government ownership of a companies to generate hydrocarbon revenues, with petroleum-producing organization and infrastructure. employees, oil reserves and gas reserves as inputs. For example, governments might impose price They applied both statistical and linear programming controls irrespective of whether the resource is approaches to identify each organization’s relative privately or publically owned. Therefore, some efficiency. They concluded that generally NOCs are inefficiencies that might be ascribed to NOCs could technically inefficient because they use more be attributed to government policies rather than solely employees and reserves per dollar of revenue government ownership of the NOC. Many of the generated by the organization. In situations where

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NOCs may be required by government policy to sell  Operating in remote or hostile energy more supplies to subsidized domestic markets, it is domains. unclear whether these lower revenues reveal much This new marketplace environment has allowed about the inefficiency of the NOCs themselves. NOCs to take on greater strategic, political, and legal Unlike IOCs, NOCs are not necessarily risks than in the past. But it has been suggested that disciplined by the marketplace and, therefore, have a NOC executives do not feel they have a good tendency to make economically-inefficient decisions understanding of business risk in today’s or to tolerate underproductive labor and staff bloating. environment, which brings up a new challenge for NOCs do, indeed, have many advantages relative to NOCs to direct their interest toward developing a private corporations, most notably the political more comprehensive risk management framework. “muscle” of their parent government. Also, they As more NOCs begin to access capital markets, usually at least have greater access to capital and the they also must consider adopting international potential to take greater risks without fear of "betting accounting standards. Furthermore, new reporting the company." systems are needed as markets are shifting business For NOCs to truly be successful, they should from already established centers to new financial function with the discipline of a well-managed private centers. Where New York, London and Frankfurt are firm and, wherever possible, segregate their national well established, Dubai, Hong Kong, Singapore and responsibilities to avoid the potential inefficiencies are on the rise, and will soon join noted above. If they have larger social objectives, them. these should be clarified and costed out, so that fraud Corporate governance has been a thorny issue and abuse are avoided while social objectives are for many NOCs. Environment, health, safety, labor, pursued in a cost-effective manner. and trade are essential concerns to the people of the countries where NOCs operate. NOCs should Challenges and Opportunities consider these issues in their investment decisions. NOCs, perhaps so more than IOCs, have explicit and There are several key challenges and opportunities implicit social responsibilities and must expect to be that can be identified for NOCs to secure a held responsible for their decisions in both local and competitive advantage. These challenges include: international operations. NOCs also need to be  Risk management, reporting and governance. cautious about the way their actions impact public  Talent development and retention. sentiment. As NOCs have access to more capital  Partnership with IOCs. markets, the corporate governance requires NOCs to  Financial management in a multinational be more accountable and transparent to all environment. shareholders, not just to their home countries or  Citizenship and social responsibility. ministries.  Climate change and the environment. Talent Development and Retention Risk Management, Reporting, and Governance The need to retain talent is becoming a burning issue for many companies, especially in the upstream With the turmoil and major risk-related events that sector. It was claimed (Economist, Oct 7 2006) that took place in the last few years, the current talent has become the most sought-after resource after environment for doing business requires NOCs to go oil itself but, over recent decades, the U.S. oil industry beyond their traditional roles of exploring, producing alone has laid off over 1 million jobs through M&A. and refining crude oil. For INOCs in oil and gas With the rise of INOCs, there is more stimulated importing countries such as China, the new challenge competition between INOCs and IOCs for the limited requires the development of a global investment talented pool. Simultaneously, this might encourage strategy designed to secure the hydrocarbon sources collaboration or partnership between companies on a global basis. For NOCs in significant oil and gas trying to tap into the same talent resources. In 2002, exporting countries, the medium- and long-term the Algerian NOC collaborated with other companies security of demand is a top priority of concern on to access their engineering expertise necessary to their agenda. NOCs in both importing and exporting improve its operations for exporting liquefied natural countries have recently been involved in negotiations gas (LNG) to Europe. Recently, NOCs in Russia, with their respective governments to address many India, Libya and China have all signed collaborative issues, including: agreements with several IOCs. One of the important  The extent of security of commodity supply success factors requires that NOCs may need to adapt and demand. their internal cultures to accommodate the different  Globalization challenges and international nationalities and generations of the workforce. The collaboration. point is that expertise comes primarily from the West and NOCs tend to be at a disadvantage given where  Physical security of assets and infrastructure they are located and operate. in the supply chain.

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Partnership with IOCs offering (IPO) of shares on the local market that could rise over $7 billion. Some NOCs have a keen interest in expanding and Although oil prices may not have high volatility globalizing their business, so partnering with IOCs is in absolute terms, they have a significant impact on a strategic endeavor to access stronger project, cash flow and outlays. This absolute impact of price management experience, and key global markets. volatility can make cash flow management and Also, IOCs can bring new technologies, critical forecasting more difficult. Therefore, NOCs are expertise and international experience that may not be required to confront this volatility by devising as readily available within some NOCs. As a result, rigorous strategies for cash and risk management. As IOC-NOC relationships can lead to initiating cross- NOCs globalize, international tax planning becomes a investments and building institutional knowledge in key aspect of financial planning. NOCs will key areas of key technical proficiencies. The NOC- inevitably take advantage of international tax IOC partnerships can leverage the upstream sector to planning opportunities, double tax treaties, and promote domestic economic development. NOCs differing taxation rates in countries in which they traditionally favor long-term relationships, but their operate. focus is shifting toward project-based, short-term agreements. For example, Saudi Aramco and Total Citizenship and Social Responsibility established SATORP to develop a greenfield refining and project in Saudi Arabia. In Like the IOCs, NOCs are expected to maintain high addition, Saudi Aramco and Dow formed SADARA standards of corporate social responsibility and to develop the Saudi Aramco-Dow Integrated demonstrate care for the environment, safety and Petrochemical Complex in Jubail, Saudi Arabia. health of labor, and communities throughout the China National Petroleum Corporation (CNPC) made world. Among others, Saudi Aramco, PetroChina a deal in to make investments in power Company Limited, Kuwait Petroleum Corporation, stations, railway lines, and chemical plants. and Oil and Corporation of India have Another emerging trend is that NOCs in announced their commitments and their obligations to hydrocarbon-rich countries such as Saudi Arabia, corporate citizenship involving environment, health, Venezuela, and Russia seem to exert more bargaining safety and community practices. It was pointed out power over IOCs. I.e., they are coming to have fewer that IOCs and OFSCs should have to contribute more opportunities than in the past in countries with large to the socioeconomic development, in partnership reserves. This is because NOCs have improved their with the NOCs, of the countries in which they operate expertise and have become qualified national (Al-Falih, 2011). With the NOCs, they may be operators, making use of OFSCs’ specialized services required to provide jobs, develop national talents, with better deals, acquiring smaller firms to access create national supply chains, invest in infrastructure, technology and skills, and building talent and provide financing, and support the development of expertise through global partnerships. NOCs from new domestic industries. large emerging economy countries with scarce For many countries, NOC-NOC partnerships hydrocarbon resources, like China and India, are seen have become increasingly attractive as exporting to be harder negotiators as well in their relationships NOCs seek long-term demand security. Within OECD with IOCs. countries, the oil and gas markets are largely open and liberalized with IOCs typically controlling the supply Financial Management in a and distribution infrastructure. NOCs seeking to Multinational Environment secure access to demand in such markets need to establish and maintain good relationships with the Over the last decade, the increase and volatility of oil host countries. prices have challenged the financial strategies of NOCs in different ways. For OPEC NOCs, more cash Climate Change and the Environment flow led to the acceleration of their capital spending programs. Also, this made them concentrate on Climate change and the environment have recently developing strategies that could help secure a grown in concern in many countries. NOCs must competitive advantage in investments, both upstream showcase their good stewardship towards the and downstream, and in domestic and global markets. environment both in domestic and international In contrast, importing NOCs have raised their operations, and now they must consider climate financial resources through a diversity of public change as well as they align their environmental market channels, from floating bond issues to selling practices with the demands of the consumer markets. equity. For example, Petroleos de Venezuela S.A. Saudi Arabia, the world’s largest oil exporter, has (PDVSA) issued bonds for many years through U.S. showcased many initiatives that support actions on debt capital markets. In addition, in 2007 PetroChina global warming through conducting research projects Company Limited won approval for an initial public on reducing CO2 emissions. Saudi Aramco, the largest NOC in the world, has established a carbon

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management program and launched a pilot project for economic sovereignty, security and ownership of demonstrating carbon capture and storage (CCS) assets, and the perception that NOCs should not seek technology that could potentially be used for to acquire international oil companies and assets. enhancing oil recovery (EOR). Further, King Undoubtedly, political considerations influence Abdullah Petroleum Studies and Research Center and impact the international investment policy of (KAPSARC) has studied the development of a NOCs. The Kuwait Petroleum Corporation is the framework for a CCS program in Saudi Arabia and its only GCC region NOC that has integrated a scalable implementation strategies. A comprehensive survey downstream operation in the form of the Q8 brand was also conducted in an effort to shape climate name in Europe; Venezuela’s PDVSA acquired change policy in Saudi Arabia. As Abdullah Jum’ah, CITGO in the ; however, the failed bid the former president and CEO of Saudi Aramco, said on the part of China’s CNOOC to acquire UNOCAL “I believe the should actively of the United States in 2005 is a case in point. If an engage in policy debate on climate change as well as INOC is perceived to be more than just a corporate play an active role in developing and implementing entity, then its aggressive growth will be questioned. carbon management technologies to meet future Within the Gulf Cooperation Council (GCC) challenges. National oil companies - like Saudi region, some regional NOCs have displayed strategic Aramco- can make meaningful contributions to those positioning in making international acquisitions. In efforts.” (Hammond, 2006) October 2008, Abu Dhabi’s International Petroleum Investment Company (IPIC) increased its stake in Strategies and Emerging Trends Austria’s OMV, from 17.6% to 19.2%. IPIC has also invested in Spain’s Compania Espanola de The strategies and policies of NOCs will have a Petroleos. Saudi Aramco has experience in investing substantial long-term impact on the pace of resource in refineries and distribution networks abroad as a development in the coming years. Asian and Russian minority Joint Venture partner. NOCs are increasingly competing for strategic In light of these dynamics and emerging trends resources in the Middle East and Eurasia, in some of NOCs, industry players (IOCs, independents and cases replacing Western oil companies in important OFSCs) must reexamine two corporate strategic resource development activities and negotiations. questions: where to play and how to compete Firms such as India’s Oil and Natural Gas successfully with NOCs. The strategic options for Corporation Ltd. (ONGC), IOCs and independents include following a path Ltd. (IOC), China’s Sinopec, China National independent of the NOCs, investing in becoming the Petroleum Corporation (CNPC), and Malaysia’s partner of choice for NOCs to retain production- Petronas have expanded in Africa and Iran, and are sharing rights, and implementing the contract- now pursuing investments throughout the Middle operator service model. This model involves IOCs East. Russia’s is becoming a significant collaborating with integrated service companies in the international player in key regions such as the Middle easy oil fields as a way to gain access to the NOCs’ East and Caspian Basin. Many of these emerging larger and more complex projects. OFSCs will have to NOCs are financed or have operations subsidized by constantly improve the efficacy and delivery of their home governments, with strategic and unbundled services, as this represents the most likely geopolitical goals factored into investment decisions way to procure oilfield services in the immediate rather than being purely commercial considerations. future. The strategic options that OFSCs are applying Strategic investment and trade alliances for emerging to succeed are: advancing and applying cutting-edge NOCs are also being sought on the basis of technology, providing low-end offerings competitive geopolitics rather than economic considerations. with other low-cost service providers, and embracing The interplay between emerging NOCs, major the contract-operator business model. oil-producing countries and Western consumer In summary, a number of key trends are countries will have a large impact on future energy emerging to guide NOCs’ activities at the security and the stability of oil and gas markets, international level: raising many questions. This is an area of research  With more access to capital and the that needs to be explored further. Increasingly, NOCs development of in-house expertise, there has been a are in the process of reevaluating and changing movement from being upstream producers to fully business strategies, with substantial consequences for integrated energy companies. global oil and gas markets.  High oil prices, improved NOC management Within the GCC region, there are a number of techniques, and access to capital markets mean that companies that have capabilities to expand beyond NOCs now have the financial resources to bid for, and serving their domestic market. This process is, in complete, major international acquisitions. part, being hindered by the inadequacy of corporate  While major global oil companies may be structures and the lack of information in the GCC apprehensive about investing in volatile areas of the region. Internationally, it is being hindered by the rise world or where international sanctions have been of economic nationalism and the debate around imposed, NOCs’ decision making merely has to be

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compatible with national policy and is unlikely to be and acquiring and retaining the best intellectual hindered by corporate governance requirements and capital in the most cost-effective ways. stakeholder action. This paper does, however, glide over some of  NOCs are better able to mitigate overseas the advantages and problems that NOCs encounter, political risks through government-to-government including: relationships and negotiation strategies.  Some NOCs might be characterized as using  NOCs can better tolerate political risk the political muscle of their government to yield because domestic operations are likely to be concessions that cannot be gained by IOCs. unaffected.  NOCs can often protect their international  Consortia exclusively led by NOCs are an assets through the political, and sometimes military, emerging trend that will likely continue. influence that their parent government can provide. In short, there is indeed a rise in the NOCs,  NOCs, as arms of their parent governments, which are increasingly looking like international may be constrained by the concerns of other nations. corporations with the full panoply of resources and  NOCs have the potential to be hampered by with the special asset of carrying the imprimatur of inefficiencies and , which the IOCs can their parent nation. avoid by employing best business practices and being exposed to a competitive marketplace. Conclusions This paper also suggests that unconventional energy is a less desirable area to be in relative to This paper reviewed and discussed the evolution of traditional oil fields. This may be the case among the NOCs, including new roles, opportunities, and GCC nations, but the reality is that oil's future is emerging challenges faced in the upstream oil and gas likely to include both unconventional and difficult-to- industry. The business models and characteristics for access (e.g., deep water, Arctic, etc.) sources. The the different oil and gas companies were also IOCs, in developing expertise in these areas, as well discussed in the context of NOCs. It also discussed as acquiring or partnering with firms having this the rise in NOCs’ international activities and the expertise, are diversifying in a wise manner — and consequences for future supply, security, and pricing they're buying into renewable technologies as well to of oil. cover all bets. NOCs will continue to aggressively track new opportunities for growth: in terms of reserves and Acknowledgements revenue stemming from growing access to capital markets, increasing profits, greater participation in The author would like to greatly thank Stephen technology advancements, and increasingly effective Rattien for his invaluable comments and project management and other technical capabilities. comprehensive review of this paper. Many thanks NOCs are now addressing new challenges that require also go to Coby van der Linde, and Leila Bin Ali for a more comprehensive approach to risk than in the their comments. past. The successful rise of NOCs depends on their responses to new challenges that include more References effective corporate governance and transparency, financial risk management, talent development and 1. Aissaoui, A. (Aug. 2011). Shifting Business Models retention, and greater effort to address externalities and Changing Relationship Expectations of IOCs, including climate change. NOCs and OFSCs, Economic Commentary, vol. 6 (8), NOCs are reshaping the playing field by APRICORP Research. globalizing their business portfolios and crossing 2. Al-Falih, K. A. (Apr. 13, 2011). A speech presented at the 2nd IEF NOC-IOC Forum, Paris. national borders, implementing vertical integration in 3. Bain & Company. (Sep. 20, 2009). National Oil the supply chain, and attracting capital from global Companies: Beyond Boundaries, Beyond Borders. markets. The strategic partnerships between NOCs 4. Boscheck, Ralf. (2006). Assessing New Upstream and super majors grant NOCs the lion’s share of Business Models. IMD International, IMD 2006-06. benefits, as NOCs diversify their foreign assets, 5. Deloitte Touche Tohmatsu. (Jan. 2007). National Oil participate in unconventional reserve development, Companies: Emerging Trends in Mergers and access leading-edge technology, and attain skills and Acquisitions. Energy & Resources. expertise. 6. Deloitte Touche Tohmatsu. (Aug. 2009). Seizing To sum up, NOCs are on the rise because they Opportunities: A New Era for National Oil Companies. Energy & Resources. have a number of advantages relative to IOCs. At the 7. Eller, Stacy, Peter Hartley, and Kenneth Medlock. same time, these NOCs can still do better if they can (2010). Empirical Evidence on the Operational learn a variety of practices that the IOCs have Efficiency of National Oil Companies. Empirical perfected, namely in dealing with different Economics, 1-21. international financing and taxing authorities, 8. Hammond, Andrew. (May 23, 2006). Saudi Oil Firm cooperating with one another to utilize their most Aramco Says Backs Greenhouse Gas Cut. . advantageous skills, finding ways to mitigate risks,

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9. Hartley, Peter, and Kenneth B. Medlock. (2008). A Chatham House, The Royal Institute of International Model of the Operation and Development of a National Affairs. Oil Company. Energy Economics, 30(5), 2459-2485. 13. Pirog, Robert. (2007). The Role of National Oil 10. Helman, Christopher. (July 16 2012). The World’s Companies in the International Oil Market, Biggest Oil Companies. Forbes, Accessed Dec. 23 Congressional Research Service, Washington, DC. 2012, http://www.forbes.com/ 14. Wolf, Christian. (2009). Does Ownership Matter? The 11. Leis, Jorge, McCreery, John, and Gay, Juan Carlos. Performance and Efficiency of State Oil vs. Private Oil (Oct. 10, 2012). National Oil Companies Reshape the (1987-2006). , 37(7), 2642-2652. Playing Field. Bain & Company. 12. Mitchell, John, Marcel, Valerie, and Mitchell, Beth. (Oct. 2012). What Next for the Oil and Gas Industry?

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