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NOCs 1 – IOCs 0

State-owned energy companies have oil and gas reserves and, increasingly, their own technology and funds for producing them. What does big oil have? Tom Nicholls writes

Whoever coined the term supermajor should have kept some superlatives in reserve. Certainly, following a highly profitable period, oil companies rank as some of the biggest private-sector corporations. The world's largest oil firm, ExxonMobil, recently leapfrogged General Electric to become the US' biggest company by market value. BP, the second-largest oil company in the world, is the UK's biggest stock by market capitalisation. Together, they are valued at over $0.6 trillion.

Yet when it comes to oil reserves – the lifeblood of an oil company – these industrial giants are dwarfed by the heavyweight national oil companies (NOCs). Saudi Aramco towers above all comers (see Figure 1). It is followed by Iraq National Oil Company (INOC) and Kuwait Petroleum Corporation (KPC). ExxonMobil and BP trail in 12th and 18th place respectively, their reserves registering as barely more than blips on the chart. The situation is similar in gas.

Who needs a catchy slogan?

Where BP once toyed with the idea of referring to itself as Beyond Petroleum – a marketing ploy to publicise its involvement in activities outside the oil sector – the names of most of the NOCs are tellingly unimaginative. Petróleos de Venezuela (PdV), National Iranian Oil Company (NIOC), Libya's National Oil Corporation (NOC), Petróleo Brasileiro (Petrobras), Petróleos Mexicanos (Pemex) – none needs a catchy slogan or an image make-over because they have what everyone wants and cannot easily get: oil reserves.

Half of the biggest 50 oil companies are fully or majority state-owned. Ranked by oil reserves, nine out of the top 10 are NOCs. It is eight in the case of gas reserves. Five of the world's biggest 10 oil producers are state-controlled corporations.

For international oil companies (IOCs), there is not much chance of the situation improving. Undeveloped reserves to which they have full access make up a mere 7% of the world total, while two-thirds of the world's reserves are off-limits to IOCs, according to ConocoPhillips.

That NOCs are the custodians of the vast bulk of the world's oil is nothing new, but this has become more relevant as the problem of reserves replenishment has turned into a crisis for big oil. Until a few years ago, there were sufficient resources in regions fully open to private investment to keep the majors busy and growing. Mature areas such as the US onshore and the UK North Sea still offer viable growth opportunities for small and medium-sized companies, but they are of limited use to the largest firms. ExxonMobil pumped 1.6bn barrels of oil equivalent (boe) out of the ground last year and needs to fry bigger fish to maintain the growth the stock market demands.

In any case, it hardly used to matter that the NOCs owned the oil. They had little else to offer and needed the IOCs' financial muscle, technical capabilities and market savvy – what Vahan Zanoyan, chief executive of Washington-based consultancy PFC Energy, refers to as "above-ground resources". But that advantage has been eroded. NOCs have narrowed the gap on their illustrious private-sector counterparts in operational terms (often, ironically, because of long experience working alongside IOCs).

"Several NOCs have spent enormous amounts of money in the last few years developing above-ground resources, mostly in the crude oil upstream sector," says Zanoyan. "IOCs no longer monopolise above-ground resources."

Petrobras, for example, can lay reasonable claim to being the most successful developer of deep-water oil-production technology in the world. Its generous, $200m annual research and development (R&D) budget signals its intention to remain at the forefront of innovation. Malaysia's Petronas and Norway's Statoil debunk the obsolete perception that a state-run company must be inefficient. Few companies – if any – can match Saudi Aramco's technical capabilities in the management of complex onshore oil projects.

Catching up

Even NOCs that have, so far, failed to modernise, will be able to catch up. "It's not difficult for a company with the most important part of the business chain – oil reserves – to enter other parts of the chain," says Claudio Castejon, an executive manager in Petrobras' international division. "You don't need any special technology to sell gasoline."

NOCs are no longer financial weaklings. High oil prices mean that every oil producer is swimming in cash and can afford to develop above-ground capabilities. If they no longer need foreign capital, if they can produce their own technology, manage their own operations and market their own products then, wonders Zanoyan, "why do they need IOCs at all?"

Peter Roberts, a partner specialising in oil and gas at the Jones Day law firm, agrees: "You are going to see the ascendancy of the well-organised NOC and it's going to change the shape of the industry going forward. They are going to want to see a bigger slice of a finite pie."

Access to reserves is being made more problematic for IOCs by another trend – the expansion of NOCs outside their home markets. Usually with the fallback of a virtual monopoly on oil reserves in their home market, cash-rich NOCs are providing stiff competition for IOCs in a growing number of licensing opportunities and energy projects around the world – although, for now, they remain a long way behind (see Figure 3).

"NOCs woke up to the fact that they were making so much money from oil and gas, even after pumping loads into national infrastructure, that they could go out and behave like an IOC," says Roberts, who has worked closely with Petronas and CNOOC.

Unfettered by shareholder pressure to deliver large profits and dividends, NOCs are prepared to accept lower rates of return than IOC shareholders will tolerate. "[China's] Sinopec is not in it for its share price next quarter," says Zanoyan. "This is their strongest competitive position against IOCs. The chief executive of an IOC can't stand up and say a 6% return is acceptable."

Shareholder pressures

In addition, IOCs are subject to other shareholder pressures that generally do not bother governments and their NOCs. Canada's Talisman Energy eventually pulled out of Sudan because of the unrelenting backlash from human-rights groups. India's Oil and Natural Gas Corporation (ONGC) quickly filled the gap.

The Chinese state-owned oil companies have been particularly active internationally in recent years, racking up an estimated $40bn of acquisitions outside China (PE 3/05 p9). ONGC, a late starter, is said to have spent $3.5bn abroad, but its overseas drive seems to be accelerating. And while CNPC, Sinopec, CNOOC and ONGC do not possess large indigenous reserves, they have something else of enormous value – they are the gatekeepers of the fastest-growing and, by some measures, the biggest markets on earth.

That has proved an extremely effective bargaining chip for CNOOC, which has acquired upstream stakes in Australia's North West Shelf liquefied natural gas (LNG) venture and in Indonesia's Tangguh LNG project in exchange for access to the LNG-import terminals it is building at Guangdong and Fujian, on the Chinese coast.

NOCs build international businesses for different reasons. The Chinese and Indian companies are predominantly interested in securing access to oil supplies because domestic production is rapidly falling behind the needs of their fast-expanding economies. As a result, commercial considerations are often of secondary importance. (Governments are not always a soft touch on commercial matters, though. Japan National Oil Corporation was dismantled because it had precious little to show after spending trillions of yen on upstream projects outside Japan.)

Petrobras, by contrast, is driven by the need to grow, to satisfy its shareholders, and to diversify its portfolio, reducing financing costs and increasing access to hard currency. Record profits, a rising share price and a credit rating higher than the sovereign rating are marks of success.

Whatever the motivation, however, the trend of internationalisation is a sign of the growing sophistication and ambition of the NOCs and of the competitive threat they pose to IOCs. In what would constitute the boldest move yet, CNOOC is even said to be considering trying to buy the US' Unocal. "If you're an IOC, you are no longer looking over your shoulder at IOCs. It's the NOCs you need to worry about," says Roberts.

NOCs are also working together more closely. There is increased dialogue between, for example, Russia's state-owned oil companies and government agencies, and their Chinese and Indian counterparts.

"NOCs have a great deal in common through their background," says Peter Mellbye, executive vice-president and head of international E&P at Statoil. "This, in itself, simplifies contact and provides an open atmosphere for discussion."

Commercial relationships between NOCs are enhanced by good relations at the government level (and, conversely, successful collaboration between NOCs can result in improved relations between governments). Caracas is reported to be giving China discounts on crude and fuel oil purchases, while CNPC has formed a joint venture with PdV to develop Venezuelan oilfields.

An inevitable side-effect of greater co-operation between NOCs is that there is less of a role for IOCs. And there is a compelling case for more NOC collaboration. Each NOC tends to have expertise in different fields. For instance, Petrobras is proficient in deep-water production and running a large downstream business. Petronas and Algeria's Sonatrach are world leaders in LNG supply.

The semi-sovereign card

As government representatives, NOCs have another advantage, says Roberts. Whereas IOCs may sometimes be at risk from problems such as expropriation of assets or changes in the law, host governments are less likely to cause problems if the counterparty is an NOC. "They can play the semi-sovereign card," he says.

But while the long-term future is bright for many NOCs because of their reserves, the successful development of above-ground resources remains limited to a handful of companies. Aramco, Petrobras, Petronas and Statoil (see profiles p7-9) can consider themselves modern, sophisticated oil companies, capable of operating energy projects to the standards of an IOC. But the same cannot be said of many other NOCs.

CNPC, CNOOC and Sinopec have expanded at an astonishing rate overseas, but are still adrift of this elite group because, while rich in ambition and cash, they lack project experience and technology.

Russia's Gazprom is also catching up with the leading NOCs. It is in the enviable position of having straightforward access to a lucrative market (the European Union) and owning prodigious reserves (its gas resources are as awesome as Saudi Arabia's oil). It has made no secret of its international ambitions and its influence outside Russia will grow rapidly in the coming years as it brings North American and east Asian markets into its orbit.

Playing from the strength of huge indigenous gas reserves, pipeline links to southern Europe and large, well established LNG business, the international standing of Sonatrach will also strengthen in the next few years. It is setting its sights on the US LNG market, tightening its grip on gas supply to Europe and accelerating investment in overseas upstream markets.

An impregnable position

Libya's NOC is a step behind Sonatrach, but is capable of catching up quickly. It has huge underdeveloped oil and gas resources and an impregnable position in its home market. Although deficient in technology and capital, NOC will become a more effective operator as oil investment flows into Libya and is likely to take on a greater number of developments itself.

Iraq's INOC has suffered because of sanctions, wars, terrorism, sabotage and the loss of crucial personnel (that it has kept going at all with the limited cash and resources available is remarkable). Once physical security in Iraq is established and the government has decided how to structure the oil industry, INOC could have a bright future, given its position in the league table of corporate oil reserves.

Yet while the influence of IOCs is being checked by resurgent NOCs, big oil is not about to disappear. Stewart Johnston head of the oil and gas division of the Charles River Associates consultancy, says IOCs retain considerable clout in resource-rich areas. In the Middle East, he says, NOCs need IOCs as much as IOCs need access to the NOCs' resources. "NOCs need IOCs to help them develop more complex reservoirs and with secondary and tertiary recovery, and, importantly, to help them create employment opportunities."

Admitting defeat 

Nonetheless, the present phase of share buy-backs, although popular with the City, is, he says, "to a certain extent" an admission of defeat by the IOCs – symptomatic of the shortage of investment options open to them.

Also of comfort to IOCs is that NOC expertise generally tends to concern oil projects. With obvious exceptions, such as Sonatrach and Statoil, they are less adept at handling gas ventures. For example, the sophisticated and expensive technology needed to launch LNG projects means IOC participation suits Qatar Petroleum (QP), which signed a $7bn deal for an LNG venture with Shell in February (see p13), adding to multi-billion-dollar deals with ExxonMobil and ConocoPhillips, as well as various proposals for gas-to-liquids and petrochemicals plants. Overall, some $90bn is being sucked into various oil and gas infrastructure projects in Qatar.

The logic of those agreements from Doha's point of view is buttressed by the need to gain market access. Whereas oil can be sold easily on the world market, gas cannot – large-scale, long-term sales agreements are needed, as well as large infrastructure developments and an expert knowledge of and familiarity with end-user markets. Offloading cost, technology and market-access risks in exchange for rapid project development involving little up-front investment for QP is worth the sacrifice of a small slice of equity. "Qatar doesn't want the market or technological risk, but the government still ends up with 85-90% of the revenue. It's an excellent model for them," says Zanoyan.

It is in areas such as this that IOCs are likely to remain dominant for the foreseeable future. Qatar's crumbs are a year's worth of hot meals for even the biggest Western oil company. The emirate accounted for around 95% of the equity reserves ExxonMobil booked last year and the intense interest in the country – more stable and attractive than the other huge gas-resource nations, Russia and Iran – reflects the shortage of investment opportunities on offer.

The result is that upstream returns are likely to come under increasing pressure. Libya's licensing round in January produced extremely competitive bidding, as Western oil companies fought hard to win exploration rights. Venezuela, another highly attractive resource base, has slashed returns for foreign investors in recent years. The problem is intensified by competition from NOCs that are not constrained by the demanding investment criteria IOCs must meet.

Duped by consuming countries

The point that access to good-quality oil reserves will carry a heftier price tag in future was rammed home in a blunt speech to Opec leaders late last year by Alí Rodríguez, then head of PdV. In a bitter attack on Western investors, Rodríguez, now the country's foreign minister, said the company's management in the 1990s – before his boss, Hugo Chávez, assumed the presidency – was effectively duped by consuming countries and IOCs into offering investment terms that short-changed Venezuela. Praising the stiffer terms Chávez brought in, he told IOCs to "overcome" their "colonialist past" and "acknowledge the right to sovereign natural resource management of the exporting countries".

But forward-thinking IOCs can still do well, says Zanoyan. To keep up they must "develop new above-ground competencies. IOCs need to widen the gap again." It can happen – ExxonMobil spends some $0.7bn a year on R&D. Last month, the firm released a press statement acknowledging that the "energy market is changing" and said the changes are "playing to" its strengths. The principal explanation offered by CEO Lee Raymond for this claim was that the firm has good technology.

IOCs that communicate effectively with NOCs (France's Total being a prime example) are likely to outperform rivals that do not. IOCs can also diversify more easily, moving into other business areas, such as power generation and supply, and alternative energies.

But while IOCs still have some room for manoeuvre – their capital, technology and commercial and technical expertise is still essential in many areas and their wealth means that they can attract the best employees – development prospects are limited by the overriding problem of access to oil and gas reserves. As long as Opec is careful to keep oil prices at a low enough level to discourage the growth of other forms of energy that advantage will only grow. As one NOC executive puts it: "Saudi Aramco and Petronas have a great long-term future. Can you say the same about Shell? I'm not sure."


Although the Brazilian state holds only around 30% of Petrobras' shares, it has shrewdly retained a majority of the voting rights – and, therefore, control. In the national and government psyche, the company remains very much an NOC. Yet Petrobras itself – while proud of its role and identity as a national champion – thinks and behaves like an IOC and continues to enjoy the operational autonomy it needs to be successful.

"We are a company with two faces – a private face and a government face," says Claudio Castejon, an executive manager of the firm's international division. "We can operate with both without a problem. That is not a common achievement." Investors think so. Petrobras ADRs on the New York Stock Exchange have risen in value from about $28 to nearly $50 since mid-2000.

Petrobras has already established itself as one of the world's most effective deep-water operators, building up a large offshore industry at home and generating much of the technology required itself.

Another mark of the firm's ambition is the way it has stepped up the pace of overseas investments in recent years. The shifting motivation for Petrobras' expansion outside Brazil illustrates the transformation of its strategic priorities in recent years. When Petrobras first invested outside its home market, in 1972, it did so to secure oil supplies for import-dependent Brazil. Now the country is virtually self-sufficient in oil, so that rationale no longer exists. But it continues to build abroad because, explains João Figueira, an executive manager of the international division, it enables "growth, the diversification of the portfolio and access to hard currency". Ultimately, that means cheaper access to capital.

A level-headed approach to its international business – in the face of opposition from some politicians and some sections of the public, who would prefer to see the cash reinvested in Brazil – is one of the reasons why the ex-monopoly has won over private investors.

Compared with around 40,000 boe/d 10 years ago, production from overseas ventures is now 263,000 boe/d. Argentina is the single-largest contributor, with 44% of the total, following the acquisition of Perez Companc (now Petrobras Energia) in 2002. The aim is to reach 300,000 boe/d by the end of this year and about 0.6m boe/d by 2010. All growth will come organically.

Petrobras' main areas of focus are South America, where it sees itself as a regional leader, and – playing to its technical strengths – the deep waters of west Africa and the US Gulf of Mexico (G0M). The company will soon reap the rewards of investments in Nigeria's Agbami and Akpo fields. First oil is expected in 2007, reaching a 100,000 b/d peak – net to Petrobras – a year or two later. Meanwhile, several discoveries are under appraisal offshore the US that should result in a "big jump" in Petrobras' GoM reserves.

Its international horizons seem to expand frequently. Petrobras is trying to eke value out of frontier areas, such as Tanzania. And, with contracts singed in Iran and Libya, there is a growing focus on the Middle East, where it may be able to exploit good relations with other NOCs and healthy government-level relations.

It has a lot to offer other NOCs. As well as its deep-water skills, expertise in handling a big market – Petrobras retains a virtual monopoly on the refining industry of a country with consumption in the region of 1.8m b/d – is another bargaining chip for Petrobras as it forms relationships with other NOCs.

At home its contribution is beyond doubt. Through taxes, employment, infrastructure and economic development and the supply of oil products nationally, Petrobras is a mainstay of the Brazilian economy. With continued exploration success offshore in oil and, more recently, gas, it is the engine room of Brazil's upstream sector.

Petrobras is also an example to many other NOCs (and indeed IOCs) in its attitude to social responsibility, which forms part of its mission statement, and the environment. A few years ago, the firm had a poor environmental record, but has spent heavily on improving it and has set its sights on being included in the Dow Jones Sustainability Index.


Petronas' description of itself on its website is telling – "an integrated international oil and gas company with business interests in 35 countries". There is significantly less emphasis on the fact that it is a state-run firm. Once an ineffectual NOC without the luxury of an impregnable oil-reserves position to fall back on at home, Petronas is widely rated by industry experts as the NOC that has been most successful at diversifying beyond its national boundaries.

And, although the workforce may be bloated by IOC standards, it is generally considered to provide compelling evidence that the perception of state-owned companies as inefficient enterprises is an obsolete one.

Says PFC Energy's Zanoyan: "Petronas is a great NOC that has learned the game of business development outside its home borders. In common with Petrobras and Statoil, Petronas can compete successfully with IOCs on a level playing field outside its home market."

Set up in 1974, Malaysia's state-owned energy corporation is involved in a wide range of activities, from exploration and production (E&P) to refining, marketing and distribution, and from gas processing and transmission to petrochemicals.

In the early 1990s, having organised Malaysia's upstream industry effectively – creating a transparent regime that has been successful in attracting foreign investment – Petronas turned its sights on overseas operations in order to compensate for Malaysia's weak reserves position in oil reserves.

The results speak for themselves. While Malaysia's reserves amount to about 4.84bn barrels of oil and 87 trillion cf of gas, Petronas Carigali, the firm's overseas E&P division, has built up non-Malaysia reserves of some 6.3bn boe.

Diversified assets portfolio

Staff are well trained and employees are given as wide an operational experience as possible. Carigali is always keen to assume operatorship of projects, allowing it to enhance project-management skills and technical expertise as quickly as possible. Its wide range of investments reflect an open mind to E&P – it seems prepared to consider investments almost anywhere. That philosophy means the company now has a diversified portfolio of assets, reducing credit risk and improving its ability to raise financing.

Like other NOCs, it has the stomach for investments that are too much for IOCs – while shareholder pressure saw Canada's Talisman Energy pull out of Sudan, selling its 25% stake in the Greater Nile Oil production and pipeline project to ONGC, Petronas and Talisman's other foreign partner, CNPC, stayed on.


Set up in 1972 to develop the country's hydrocarbons resources, Statoil has evolved into a fully commercial company that competes on equal terms with other companies in Norway. While the state retains 70.9% of the firm, the government does not get involved in running the business and is not represented on the board or the executive committee. Statoil says it has no obligations to the state.

Commercial freedom, says Peter Mellbye, executive vice-president and head of international E&P, is essential because it allows the company to take decisions that are in its own long-term interests – enabling business growth. Like many of its NOC counterparts, Statoil is growing by expanding internationally, because investment opportunities in the maturing Norwegian North Sea are limited for a company of its size.

Achievable target

Production in 2004 averaged 1.106m boe/d. Of this, 115m boe – about 10% – came from international operations. The target for 2007 is to produce 1.4m boe/d, which would involve an average annual increase of 8%. But growth over that period will be skewed towards international operations. In 2007, Statoil expects to be producing 300m boe/d outside Norway – an annual increase of 40%, raising the contribution of international operations to total production to over 20%. This target will be difficult to reach, admits Mellbye, but it is "achievable", because it is based on projects already sanctioned.

Managerial and financial independence aside, Statoil will continue to benefit from the sophisticated technology it has developed in the inhospitable operating environment of the North Sea.

Its technology, says Mellbye, makes it "an attractive and reliable partner for IOCs in major projects in Norway and internationally." Statoil has wide-ranging experience in the fast-growing gas business, including production, transmission and marketing. Mellbye identifies expertise in enhanced oil-recovery and subsea developments as other strengths. In addition, it will leverage its identity as a state-owned firm to develop partnerships with other NOCs, he says.


When Boris Yeltsin was President, in the 1990s, much of the oil industry fell into private hands, although the state hung onto ultimate control by retaining ownership of crude and oil products pipelines.

Under President Vladimir Putin steps have been taken to strengthen the state-owned oil company, Rosneft, which, during the Yeltsin era, looked something of a lame duck among its burgeoning, private-sector competitors.

Efforts to beef up Rosneft have aroused controversy from the start. Envious majors cried foul when it won juicy acreage at an allegedly rigged auction in northwest Russia. Public criticism abated after a Kremlin reminder that leading corporations had themselves bagged assets through dubious privatisation schemes.

In September, the government announced plans to merge Rosneft with Gazprom, creating a huge state-owned oil and gas company. Once integrated Rosneft/Gazprom would have gas output to dwarf all others but would lag far behind in fifth place among Russian oil producers.

By the end of the year, Rosneft had won the former Yukos producer, Yuganskneftegaz, which was sold at auction to help the government recover billions of dollars worth of back taxes allegedly dodged by its parent company. Yuganskneftegaz produces some 1m b/d – far more than Rosneft's 400,000 b/d. But the acquisition came laden with risk. Yukos owners threatened Rosneft with a "lifetime of litigation" to protest what they saw as expropriation of their property by the state. Even some Kremlin insiders complained that the Yuganskneftegaz sale looked like daylight robbery.

Indicating a growing split in government, Moscow's relatively reformist economy ministry said oil and gas assets were usually more efficient in private rather than state hands.

In an attempt to quarantine Gazprom from attack by litigators, the government has decided to leave Yuganskneftegaz out of the gas giant's merger with Rosneft. India's ONGC and China's CNPC have been invited to buy stakes in Yuganskneftegaz. But both have hesitated for fear of inviting charges of collusion in the Yukos affair.

By March, the Yuganskneftegaz scandal was turning into a fiasco. Behind the scenes, bickering in the Kremlin broke out into an open scrap between rival Gazprom and Rosneft chiefs about who should head which company. But even if implementation of the Rosneft/Gazprom merger looks botched, there seems little doubt that the overall strategy to ensure a state-owned company dominates the oil and gas sector remains intact.

The property of the state

Rosneft and Gazprom are expected to win the best acreage in eastern Siberia and the far east where a large number of blocks are to be parcelled out in 2005 and 2006. Putin has said that oil and gas pipelines must remain the property of the state. Gazprom has always owned the sprawling gas-transportation network. It remains to be seen whether the crude pipeline operator, Transneft, will be drafted into the Rosneft Gazprom merger.

Having witnessed the slaughtering of Yukos by federal taxmen and the imprisonment of its founder, Mikhail Khodorkovsky, the leaders of other privately owned Russian oil companies are unlikely to challenge the government's state-oriented oil policy until there is a stronger scent of political opposition in the air.

Once enlarged into an oil company, Gazprom, already perceived partially as ambassador for Russia on the international stage, will be empowered to play a stronger geopolitical role for Moscow. With 28.8 trillion cubic metres (cm) of reserves and annual production of over 0.54 trillion cm, Gazprom is the biggest gas company on the planet. Already a major force on European gas markets, where it accounts for over a quarter of the region's imports, Gazprom is planning to expand internationally, setting its sights on the US and Asian LNG markets.

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