National oil companies on top of the world
Their domination of global reserves has put NOCs in control of the oil industry. But they must do more to keep their advantage
National oil companies (NOCs) have riches below ground and international oil companies (IOCs) have them above. That used to be the way the world's big, listed oil majors assured themselves that, despite the rise of state-owned firms, their future was secure. They might not own as much oil, but they had brainier employees, more technical nous, greater discipline and knew how to put money to work and get projects done on time.
The past decade has shattered those illusions. From the much-delayed Eni-led Kashagan oilfield to BP's disastrous Macondo well, from the soaring costs of Australia's Chevron-led Gorgon gas project to Shell's Sakhalin-2 and Pearl gas-to-liquids project in Qatar, the reputation of the majors has taken a bruising.
NOCs have suffered some of their own mishaps. Thailand's PTTEP has spilled much oil. Petrobras's pre-salt discoveries have yet to yield the production riches the company promised. Pertamina has been unable to stop the decline of Indonesia's upstream. Nigerian National Petroleum Corporation (NNPC) has presided over a decaying oil sector. The National Iranian Oil Company has been beaten down by sanctions and the politicisation of the country's energy industry. Hugo Chavez sapped the funds and forced out thousands of engineers and geologists at PdV, causing deep damage to the firm. A corruption scandal and depletion have undermined Algeria's Sonatrach. Russia's Gazprom misjudged shale gas.
But many NOCs have thrived. Qatar Petroleum (QP) has created the world's biggest liquefied natural gas (LNG) business, underpinning the emirate's arrival as a global diplomatic force and investor. Saudi Aramco has remained at the top of the world's upstream, finding and producing new oil almost at will. Sonangol has turned Angola into a major exporter (albeit with considerable help from the majors). Ecopetrol has revived Colombia's ailing oil sector. Having wiped out Yukos, Russian president Vladimir Putin has put Rosneft at the top of the world's second-biggest oil-producing country.
Then there is China. Its three NOCs have emerged as decisive and often dominant investors across the world, buying assets from Canada's oil sands to the US shale-gas sector and Australia's gas business to Africa's upstream. Less than a decade ago, their arrival was greeted with fear, exemplified by the US Congress's notorious decision to stop Cnooc from buying Unocal (it was later bought more cheaply by Chevron) in 2005. There's still some fear among governments, as Canada's reluctance over Cnooc's Nexen deal showed. But perceptions are changing. "This is one sophisticated company," a surprised Nexen official said of Cnooc while the deal was still in the balance.
The technological advantage of the IOCs is also being eroded. Statoil and Petrobras are leaders in deep-water exploration. As the Manifa oilfield development shows, Aramco remains one of the great project executors - and has now turned to state-of-the-art downstream projects, too. Thanks to its partnerships with IOCs, QP's LNG prowess is second to none. Where NOCs lack the expertise, they buy or employ it. The rise of oilfield services companies in recent years has helped. Schlumberger is now deploying its own low-water fracking technology on Aramco's behalf to search for shale reserves in Saudi Arabia. The investments of Chinese and Indian firms in the US shale-gas sector is giving them exposure to drilling techniques that should eventually be used closer to home. As Damon Evans, Petroleum Economist's Asia correspondent, writes in this month's survey, PetroChina now invests three times more per net sale than any oil major in research and development (R&D). In 2010 it was the oil world's biggest R&D spender. India and China, research from consultancy Booz & Co shows, have been expanding their R&D spending at a rate that far outpaces any other country's.
Above all, though, the rise of the NOCs has been based on their reserves. In the 1970s, notes consultancy Bain, NOCs controlled just 10% of the world's known oil. Now they own 90%. Exacerbating this is another fact: the barrels that do not belong to the NOCs are getting harder and costlier to extract. Saudi Arabia can produce oil from its mature fields at a cost of less than $4 per barrel, says consultancy Petroleum Policy Intelligence. Production elsewhere in the Middle East is similarly cheap. Yet Bernstein, a bank, reckons oil from marginal-producer places like the Bakken costs more than $100/b to produce. With much of the world's best, easy-oil acreage out of bounds to the majors, they have been forced into the costlier, trickier and riskier plays. IOCs have also found themselves in the wrong part of the world. Asia is the source of energy-demand growth. But the Western IOCs are increasingly boxed into their corner of the rich world. Even when the big openings have offered opportunities, as in Iraq, the IOCs have met competition from consumer-country NOCs that are often more willing to stomach riskier and less profitable plays to secure volume.
All this gives NOCs a monumental advantage. But there are subtle signs of another shift in the balance of power. The high-oil price era that has done so much to sustain the reserves-rich countries gave the signal to private companies elsewhere to find more oil and gas. The trove of North American energy unlocked in recent years by hydraulic fracking and oil-sands development means production from non-Opec countries is far outpacing output growth from the cartel and its NOCs. The availability of more supply means demand for Opec's oil is falling. No wonder the group is preparing a study into the impact of shale oil.
Even the mightiest state-oil firms are feeling some heat. Qatar's inflexible gas-marketing strategy - favouring long-term contracts at premium prices - now seems out-of-date. The US has disappeared as a market for its LNG; and North America and Australia are emerging as supply-side competitors. Sonatrach and NNPC are rapidly losing market share to American light, sweet crude oil. Upstream failures have prompted some NOCs to begin opening up again. Pemex's monopoly on the Mexican upstream seems at last likely to be broken. Thanks to the opening of the unconventional oil sector, the NOCs that can't go it alone will have to be less haughty and offer better terms to their competitors. The UAE's Adnoc is in the process of renewing several concessions with oil majors. But the terms - a few bucks on the barrel - no longer look so attractive, given the opportunities elsewhere.
As our survey shows, moreover, politics and governance problems continue to afflict many NOCs. The murkiness of Russian oil could hurt Rosneft's growth plans. Libya's state firm is losing control of its own oil sector. Iran's is desperate for cash. Since scrapping plans to bring the majors into its gas sector, even Saudi Aramco has struggled to find the gas reserves it wants.
Many of the NOCs are also held back by their own government's policies, especially subsidies that force them to sell oil and gas cheaply at home - a double whammy because it cuts into their potential export revenue while spurring rapid domestic demand growth. That is a problem that afflicts NOCs across the world, from Saudi Arabia to Indonesia and even China. Meanwhile, few of the world's producer NOCs (Aramco, predictably, is an exception) are primed to play a major role in the rapidly growing downstream sector. Rising refining capacity in the next few years, believes the International Energy Agency, will change the oil market, as global petroleum products trading comes to the fore. Integrated IOCs are more prepared for this than producer NOCs.
Fundamentally, shale is changing the geography of oil and the perception of scarcity. As supplies rise outside Opec and fears of shortages ease, the NOCs will have to work harder to keep ahead. With oodles of unconventional oil to be found, IOCs can afford to spend less time fretting over security in Libya or Algeria and more time scraping bitumen in Fort McMurray. It is too soon to call time on the era of NOC domination. But as the rise of the downstream sector will show in the coming years, oil is much more profitable out of the ground than in it.