Independence from political interference, transparency and bureaucracy are the three areas in which the region’s state-run oil companies need to improve most, according to MEED’s second annual survey of national oil companies (NOCs).
More than 50 per cent of respondents to the survey rate the independence of the region’s NOCs as ‘poor’ or ‘very poor’, with less than a third impressed by their performance in this area. This, coupled with heavy bureaucracy within the firms, is making them less efficient, say respondents.
But it is transparency that is the most criticised area, with three-quarters of those who completed MEED’s online survey rating the region’s NOCs as no better than average, and half saying they are either ‘poor’ or ‘very poor’
The opacity of most NOCs in the region is reinforced by the fact that of all the state oil companies MEED invited to participate in the survey, only Kuwait Petroleum Corporation took the opportunity to provide data and policy information on a series of key performance criteria (see feature, page 42).
“KPC has a good record on transparency compared to other NOCs,” says Valerie Marcel, a Dubai-based expert on NOCs affiliated to the Royal Institute of International Affairs in London. “It releases yearly financial and operational data even though it has no obligation to do so because it is 100 per cent state-owned.”
In other areas, the region’s NOCs fare better. Almost 20 per cent of respondents rate their overall performance as ‘very impressive’, while only 16 per cent say they are ‘poor’ or ‘very poor’. Prompt payment for services is the strongest area, with only 6 per cent of respondents reporting poor performance in this area.
Interestingly, perceptions of the firms’ reputa-tions surpass respondents’ assessment of their overall performance. Almost two-thirds of those who completed the survey say NOCs have an impressive reputation, while less than half rate their performance as com-parably strong.
The performance of NOCs in the Middle East is crucial to the future of the world’s energy supply. While the five largest international oil companies control 3 per cent of the world’s oil between them, NOCs globally have access to 80 per cent of known oil reserves and about 60 per cent of future oil prospects. The world’s top five national crude reserves are in the Gulf, and the Middle East and North Africa (Mena) region as a whole accounts for about two-thirds of the world’s proven oil reserves, and more than 40 per cent of its gas.
The importance of these oil-producing nations has been thrown into sharp relief in recent months by the global debate on oil prices and energy supply, which culminated in the special meeting of producers, consumers and energy traders at Jeddah in Saudi Arabia on 22 June. “The future of energy relies very much on a handful of NOCs, especially for oil,” says Marcel.
MEED’s survey, which draws responses from local and international construction contractors, consultants, suppliers and employees of NOCs who have worked with their counterparts in other countries, confirms this view, with 90 per cent of respondents saying the Middle East’s NOCs have an important role to play in meeting global energy requirements.
In the run-up to the Jeddah summit, leading energy consumers across the globe say they want the 12 members of the international cartel of oil producers, Opec – eight of which come from the Mena region – to increase oil production. But as MEED’s survey confirms, opinion is divided on whether the Middle East’s producers are doing enough to facilitate this process. Only a quarter of respondents rate the region’s oil production capacity as ‘very strong’, the same proportion say it is ‘poor’.
In many areas, there is a stark contrast between the respondents’ opinions on Saudi Aramco, which controls the world’s largest oil reserves and exports the most oil, and the rest of the region’s NOCs. Aramco, which came out on top of MEED’s first survey of the region’s NOCs in 2007, is still clearly the regional leader when it comes to developing its oil production capacity. For both oil-field development and the development of downstream infrastructure, more than 80 per cent of respondents rate Aramco as ‘strong’ or ‘very strong’, while less than a quarter hold the same opinion of the region’s other state oil companies. Similarly, 55-60 per cent of respondents say that Aramco’s technology development and its development of difficult resources is ‘strong’ or ‘very strong’, compared with less than 30 per cent for the rest of the region.
“In general, the performance of the region’s NOCs has been abysmal,” says Paul Stevens, emeritus chair of the Centre for Energy & Policy at the University of Dundee. “But Aramco is the exception. It says it will raise its capacity to 12.5 million barrels a day, and it is well on the way to doing so.”
Marcel agrees. “Saudi Aramco is the top-performing oil company in the region, and possibly internationally,” she says.
MEED’s survey also highlights some of the main challenges that the Middle East’s NOCs are facing – in particular, the impact of a tight construction contracting market and rising labour and raw materials costs on the timescales and budgets for project delivery. Of projects carried out in the past three years by respondents to the survey, 30 per cent have suffered delays and 39 per cent cost overruns. Of those that have been delayed, the average lag is six months, while 21 per cent of projects have been hit by a cost overrun of up to 25 per cent, and 18 per cent by 25-50 per cent cost increases.
The results confirm that cost inflation is having a significant impact on project delivery in the Mena region, but suggest structural weaknesses are also playing a critical role.
Based on respondents’ assessment of a particular factor as ‘important’ or ‘very important’ in causing cost overruns, 81 per cent cite rising subcontractor costs, 67 per cent raw material cost inflation, and 62 per cent labour cost inflation. On the causes of project delays, 56 per cent cite equipment procurement, 42 per cent difficulties in sourcing labour, and 33 per cent raw material procurement issues.
But some of the most important obstacles to delivering projects on time are not directly related to procurement difficulties, according to respondents. The most important factor cited is NOC bureaucracy, which two-thirds consider to be either ‘important’ or ‘very important’. Half of respondents say that political interference is a key factor in the delays, while a similar number blame the poor productivity of the local labour force. A lack of expertise at the NOC itself is also an important factor in causing delays, according to 40 per cent of respondents.
The fact that the Middle East’s NOCs are, by definition, controlled by their governments – Petroleum Development Oman is the only NOC in the Mena region that is not 100 per cent owned by the state – means there is always likely to be a gulf between what the international oil industry would like them to do and the course of action they choose to take.
In many cases, NOCs are constrained in their ability to improve the quality of their staff by their dual role as both an oil company and a state employer, and are hampered from increasing production by a political desire to preserve resources for the benefit of future generations. “NOCs are generating a huge income, but they are not growing in line with their income because of the way they are structured,” says Marcel.
Moreover, many industry analysts point to the fact that the region’s huge oil earnings are a disincentive for them to address their structural weaknesses and improve their resources. “At $130 a barrel, who cares about efficiency?” says Stevens. “A lot of the drive for reform has gone because of the high price of oil.”
Three-quarters of survey respondents say the quality of human resources at the region’s NOCs is no better than average, while barely a quarter are impressed by their investment in human resources. Respondents’ views of NOCs’ environmental performance are similar. More than 40 per cent rate the NOCs’ record on environmental protection as ‘average’, while almost a quarter say it is ‘poor’ or ‘very poor’.
“Environment has never been a big thing with NOCs,” says Stevens. “A lot of them have an appalling record. Most are concerned with their immediate targets, and if they happen to spill oil or flare gas while they are doing so, that is okay.”
Some NOCs take environmental considerations more seriously than others. “Adnoc [Abu Dhabi National Oil Company] has a strong focus on the environment, and is trying to get involved in alternative energy through the Masdar programme,” says Marcel. “It is probably the most advanced in terms of minimising its impact on the environment.”
The pressure on NOCs across the region to improve their environmental record will only increase in the future, as international standards continue to be raised and the quality of hydrocarbons deteriorates with dwindling resources. “Climate change regulations are more of a long-term issue,” says Marcel. “But companies will have to adapt their environmental practices as they develop heavier and more sour crudes. The grades that are starting to come on stream now are not suitable for the global market.”
Survey respondents are more positive about the region’s health and safety record. Only 12 per cent rate NOCs’ performance as ‘poor’, and none say it is ‘very poor’. A striking 81 per cent of respondents say Aramco’s health and safety record is either ‘impressive’ or ‘very impressive’.
One of the most effective ways such standards can be raised is through partnering with international companies.
The industry’s assessment of NOCs’ record on partnering with foreign companies is generally positive. Just under 50 per cent of survey respondents say their performance in this area is ‘impressive’ or ‘very impressive’, with just over a fifth rating it as poor. But now the balance of power in the oil and gas industry has shifted from international oil companies (IOCs) to NOCs, this is more of a concern for the international oil majors than it is for the Middle East’s state-owned companies.
Now NOCs have access to investment capital, and with their proprietary skills base and technology gradually improving, they are less reliant on the major international oil exploration companies.
Increasingly, the trend is for the larger NOCs to employ the services of oil service companies, and they are also starting to invest in partnerships with other NOCs.
When it comes to partnership with IOCs, their demands are becoming increasingly stringent, seeking equity stakes in the IOC’s overseas assets in return for partnering with the NOC in its home market.
The development of NOCs’ overseas assets is still in its relative infancy. Just 37.5 per cent of survey respondents say they are impressed with the record of NOCs in international investment, while 20 per cent rate them as poor.
NOCs are likely to remain firmly rooted in their own country for many years, but the trend of international investment is accelerating. While the Middle East’s NOCs still have weaknesses, their increasing dominance of world energy production is impossible to ignore.
30 per cent Proportion of projects suffering delays
Six months Average length of delay to projects
39 per cent Proportion of projects suffering cost overruns
14 per cent Proportion of projects suffering payment delays
Six weeks Average delay in payment where payment is delayed