Much has been written about the diminishing role of international oil companies (IOCs) in controlling the world’s energy supplies. While state-run national oil companies (NOCs) have historically depended on the capital and technological expertise of Big Oil, analysts increasingly argue that we have entered an era in which the balance of power between IOCs and NOCs has shifted in favour of state entities.
Flush with the revenues of high oil prices and record levels of production, analysts say NOCs are investing substantial sums to develop their in-house capabilities, and no longer depend on foreign capital or technology.
But the demise of the IOC is greatly exaggerated. While there is no question that NOCs wield increasing influence, they are still dependent on their private-sector counterparts. A far more complex relationship is now developing between IOCs and NOCs.
“The NOC/IOC definition is getting blurred,” says Chad Deaton, chief executive officer of US oil field services firm Baker Hughes. “Take [Malaysia’s] Petronas and [Brazil’s] Petrobras, for example. The traditional NOCs are much greater users of technology.”
Mohamed Saleh al-Sada, Qatar’s Minister of State for Energy & Industry, agrees. “NOCs are starting to be international, expanding their technologies and studying IOCs’ tactics and strategies,” he says. “But at the same time, IOCs are becoming environmentally sensitive and politically responsible. In the 1960s and 1970s, there was a dichotomy, but increasingly this is merging.”
Nowhere is the relationship between IOCs and NOCs more complicated than in the Middle East, where ever since the oil-sector nationalisations of the 1950s, 60s and 70s, IOCs have been largely unwelcome - with Abu Dhabi the notable exception. But as conventional, easy-to-access oil resources in the region become more limited, and the search for even greater sources of oil and gas becomes more pressing, IOCs are finding their services - or, more precisely, their technological expertise - is in demand once again.
IOCs are finding doors that were previously closed are slowly opening. Most often, they are required for specific projects, such as BP’s tight gas project in Oman and the Shah sour gas scheme in Abu Dhabi. More rarely, the scope is broader - ExxonMobil Corporation’s agreement to help Kuwait Oil Company produce 700,000 barrels a day from north Kuwait, for example.
Ironically, it was the IOCs’ expulsion from areas of easy oil following the nationalisation drive that resulted in them developing the technological edge they have today. With only limited access to conventional oil reserves over the past 30 years, they have been forced to tap into much harder hydrocarbons deposits around the world, developing methods such as deep sea or Arctic exploration.
“I have long held the view that IOCs have been at the forefront of the industry, going to the frontiers of exploration and development of the day, such as the North Sea and Alaska, on the back of nationalisation,” said Tony Hayward, chief executive officer of the UK’s BP at the International Petroleum Technology Conference in Dubai on 4 December. “Our [the IOCs] role today is the difficult stuff - tight gas, enhanced oil recovery, heavy oil.
“I believe it is inevitable...that the two [IOCs and NOCs] need to work together because generally IOCs’ technological capability is much greater. How it will happen I don’t know, but it needs to happen.”
As the region’s oil fields age, a lot of NOCs are finding they need IOC technology, not to increase output, but simply to maintain production. Kuwait, for example, has conceded it cannot hit its 2020 production target of 4 million barrels a day (b/d) without IOC assistance, as the majority of the 1.5 million-b/d capacity increase will come from heavy oil, with which it has only limited experience. In Libya, two decades of sanctions and a lack of capital mean that IOCs are being brought in to develop potential fields through concession agreements.
The same is happening in neighbouring Algeria, where oil firms are gaining access to the potentially lucrative upstream sector in exchange for their expertise in oil and gas exploration.
Offshore developments are another key factor. With NOCs traditionally focusing on cheaper, onshore exploration, offshore expertise has remained limited.
And as NOCs in countries from Morocco to Oman continually look for undeveloped acreage offshore, opportunities have emerged for IOCs to come in.
“I think the reality is that we have to go for resources that are deeper, like the deserts and the Arctic, or other unconventional resources such as oil shale and tight gas,” Michael Naylor, vice-president, exploration technical, at the UK/Dutch Shell Group tells MEED.
“There is a lot of oil still to be discovered. You can measure it in trillions of BOE [barrels of oil equivalent].”
“We have no way but to work together,” says Abdullah al-Saif, senior vice-president for exploration and production at Saudi Aramco. “I think we ought to be looking at the IOC/NOC relationship for the future rather than looking back on the ‘bad old days’, when there was this perceived adversarial relationship.”
Aramco’s case not only applies to upstream opportunities, such as where IOCs are helping in the hunt to find gas in the Rub al-Khali (Empty Quarter), but also downstream.
It is developing two export refineries at Jubail and Yanbu in partnership with France’s Total and the US’ ConocoPhillips, and has teamed up with Japan’s Sumitomo Chemical and the US’ Dow Chemical Company for two downstream refinery integration and petrochemical schemes at Rabigh and Ras Tanura.
Apart from the injection of technological expertise, IOCs can provide other benefits. During an age of soaring development costs, they can help on both the equity and debt side, spreading the risk beyond the NOC.
They can also assist in the marketing of the final product and help the NOC enter fresh markets.
“Although NOCs are banded together, there are definitely important differences,” says Al-Saif. “Some are strong in oil, others in gas, some in both. In some cases, they have no need for upstream partnerships; in others, partnering is required downstream - in petrochemicals and so on.
“There are many examples where they [IOCs and NOCs] work together. They are made for each other, depending on each other’s need. I have no question they will be together as long as each one understands the other’s requirements.”
Increasingly, IOC involvement is being led by non-hydrocarbons-fuelled energy concerns. As the Middle East wakes up to climate change, the number of alternative energy opportunities, ranging from solar and wind power to hydrogen energy and biofuels, increases.
It is another area where IOCs have a clear lead over NOCs. The US’ Occidental Petroleum has teamed up with Abu Dhabi’s Mubadala on its Masdar initiative. Refinery operator Kuwait National Petroleum Company (KNPC) is in talks with various IOCs over integrated gasification combined cycle (IGCC) technology, while it is not expected to be long before IOCs and regional NOCs reach agreement on wind and solar developments.
In some parts of the region, such as Kuwait, the NOCs’ leading position is guaranteed by law. In others, such as Abu Dhabi, fiscal terms ensure that IOCs may participate, but with the bulk of the profit going to the leading NOC. For instance, the profits of the main IOC shareholders in Abu Dhabi Company for Onshore Oil Operations (Adco) are limited to no more than $1 a barrel produced.
NOCs and their state governments continue to drive a tough bargain out of international firms, and there are few, if any, cash cows available for incoming IOCs. In the most recent licensing round in Libya, the average production share awarded to IOCs was just 12 per cent.
Record oil prices have made NOCs understandably more reluctant to open up to IOC participation, even if the situation sometimes demands it.
Terms are often so severe that they simply do not work out. Saudi Arabia’s gas initiative notably fell through because the ultimate margins did not meet the minimum required by the IOCs.
In some cases, hindsight has made some of these breakdowns seem like a blessing. If Kuwait’s landmark upstream initiative had been awarded as originally planned in 2003, for instance, the IOCs working on the 20-year scheme would today be suffering huge losses because of the fixed-price nature of the deal.
“At the time there was huge disappointment,” says one IOC executive. “But now we thank our stars that we never won it, because if we had, we would be getting crucified by rising prices.”
Another example is the multi-billion-dollar Gassi Touil integrate liquefied natural gas (LNG) project in Algeria.
After winning the IOC role in 2006, Spain’s Repsol and Gas Natural were forced to pull out of the scheme earlier this year because of rising costs, resulting in a loss to the two companies of hundreds of millions of dollars.
While the demise of the IOC may have been greatly exaggerated, and IOC involvement in the region is increasing, there is no doubt that the government companies have been able to lever their growing financial muscle to enhance their own expertise to the extent that the IOC/NOC distinction is blurring.
There are important roles to play for both the private and state-owned energy companies. It is also clear that the two must work together.
But for the IOC/NOC relationship to be successful, risk and reward need to be shared so that each feels it has something to gain from the other.
With both parties fighting for the best possible terms, only through comprise will such a deal ever be achieved. “Quite simply,” says Al-Sada. “You need to share the pain and the gain.”
A MEED Subscription...
Subscribe or upgrade your current MEED.com package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.