National oil companies look to expand scope

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National oil companies will play an increasing role in meeting the growing global demand for energy — and provide new opportunities for Canadian firms, say analysts.

A recent KPMG-sponsored report, Key Issues for Rising National Oil Companies, says national oil companies (NOCs) — companies that are either fully or in the majority owned by a national government — will benefit from high oil prices.

They, in turn, will be looking for more partner options when developing resources, the report says.

This is particularly promising for integrated service-oriented companies, says report author Valerie Marcel. Companies such as Petro Canada, which explore, refine, produce and market crude oil, natural gas, and natural gas liquids across the globe, will have more opportunities to create partnerships with companies in direct control of oil and gas supply.

According to the International Monetary Fund, NOCs controlled close to 50 per cent of global oil production in 2005, but were involved in more than 70 per cent of oil reserves globally; this is due to the increasing trend of NOCs to invest outside their national borders.

In a report called the Role of National Oil Companies in the International Oil Market, Congressional Research Service researcher and energy specialist Robert Pirog says national oil companies hold the majority of petroleum reserves and produce the majority of the world’s supply of crude oil.

This emergence of state-owned, or majority-owned hybrid firms has meant a reduction in the dominance of international oil companies (IOCs), which include ExxonMobil, BP Amoco and Royal Dutch/Shell, Pirog said in a report to the U.S Congress. As a result, he noted, Western international oil companies now control less than 10 per cent of the world’s oil and gas resource base.

How NOCs respond to the challenge of growing demand and shrinking supply (while negotiating a volatile and evolving global market) will have a significant impact on the stability of oil and gas markets in the future.

“National oil companies typically do not operate strictly on the basis of market principles,” Pirog says in his report. “Because of their close ties to the national government, in many cases their objectives might include wealth redistribution, jobs creation, general economic development, economy and energy security, and vertical integration.”

While these objectives may be desirable and essential – from the point of view of the nation’s government – they may not be beneficial to shareholders or end-users, Pirog said.

Yet, it is the ability of NOCs to respond to current and future global demands that is drawing the most attention from industry analysts.

Marcel, an associate fellow at Chatham House, Royal Institute of International Affairs, a U.K.-based policy think-tank, examined the preparedness of NOCs and how this affects the marketplace.

In her report, Marcel defines two broad categories of NOCs. The first consists of companies whose domestic reserves and production are so large that they are (and will continue to be) vital to global energy markets. These are called the NOC “Titans.”

NOC Titans include Saudi Aramco, Gazprom (Russia), National Iranian Oil Co., Iraqi National Oil Co. and Kuwait Petroleum Corp.

The second category is companies whose performance and achievements are propelling them onto the global energy stage.

Known as the NOC “Tigers,” this category includes PetroChina, China National Petroleum Co., Petrobras (Brazil) and Sonangol (Angola).

Many NOC executives see their emerging global status as a supplement to the industry, rather than a direct, polarized competitor of the IOCs. These executives agree that NOCs are moving outside their national boundaries and also partially privatizing their assets, but that this growth would create new and strategic relationships, rather than polarized competition.

For Canadian players, the emergence of NOCs provides an opportunity for new partnerships and increased global investment, says Marcel.

For example, the Libyan National Oil Co. has formed a new partnership with Petro-Canada, this nation’s second-largest downstream company.

Last summer the two businesses signed six new exploration and production-sharing agreements, which will result in the redevelopment of existing producing fields by Harouge Oil Operations – a joint venture operation co-owned by Petro-Canada and the Libyan NOC.

According to Petro-Canada, the payoff over the next five to seven years is that the redevelopment program is expected to double the current production levels from existing fields to approximately 200,000 barrels of oil per day.

It’s an investment of $460 million in exploration, with Petro-Canada paying 100 per cent of all exploration costs; it is also an opportunity for a Canadian corporation to become intimately involved in the production and distribution of oil and gas outside the Canadian borders, thereby increasing its investment in the global supply chain.

Marcel suggests that, in order to remain competitive, NOCs will need to examine a few key issues, including strategic partnerships, recruiting and nurturing talented employees and addressing new technological development challenges, including the development of renewables, coal gas- ification, carbon capture and storage.

However, the main stumbling block will be political commitment.

For example, in June 2007, ExxonMobil Corp. and ConocoPhillips, two of the largest U.S. oil companies, abandoned their multibillion-dollar investments in the heavy oil deposits of the Orinoco basin in Venezuela.

It was a result of a breakdown in negotiations between the companies and the government of President Hugo Chavez and Petroleos de Venezuela, the Venezuelan NOC. ConocoPhillips was especially and adversely affected by the decision to withdraw.

Prior to the decision, ConocoPhillips recorded 1.1 billion barrels of proved reserves from its Venezuelan ventures. This amounted to approximately 10 per cent of the company’s total reserve holdings, and its production from Venezuela amounted to four per cent of its total crude oil production.

The failure to produce an amicable solution and the decision to withdraw cost ConocoPhillips $4.5 billion in its second-quarter 2007 earnings. The company was seen as less likely to be able to meet its reserve replacement targets and the price of its shares fell on the stock market to a 52-week low of $68.31.

Considering that seven of the top 10 producing companies in 2006 were state owned (the five largest producers were NOCs), Marcel suggests that NOCs must address the political commitments that may contradict the goal of meeting a growing global demand for oil and gas.

Originally published in Business Edge on October 3, 2008