Dennis U. Atuanya submits:
In an earlier article,
International Oil Companies: The Challenges Ahead, l discussed three broad challenges that International Oil Companies, IOCs, were and still are grappling with. Over the last decade for example, major IOCs have had increasing difficulty to profitable reserves addition. More worrisome for them is the rise of National Oil Companies, NOCs. The increasing domiciliation of national reserves with these NOCs, their access to large state funds on terms that are more favorable, as well as other perquisites of state, have sharpened their competitive edge over IOCs.
Investment interest has been shifting in favor of NOCs and not surprisingly so. According to PFC Energy, growth in market value of NOCs has far outstripped that of IOCs. For example, in 2009, NOCs gained an average of 66% in market value compared with less than 1% for the six largest IOCs. The NOCs Rosneft (
RNGZY.PK): 125%, Petrobras (
PBR): 103%, Sinopec (
SHI): 101%, Gazprom (
OGZPY.PK): 67% and Statoil Hydro (
STO): 57% showed stronger share price changes (y-o-y) than the IOCs ExxonMobil (
XOM): (-15%), Chevron (
CVX): 4%, Enersis (
ENI): 8%, TOTAL (19%) and Royal Dutch Shell (
RDS.A): 26%. PetroChina (
PTR) recently replaced ExxonMobil as the largest group by market capitalization, while Brazil’s Petrobras moved up to the fourth position. Among the top 15 energy companies, 6 are NOCs.
While some smaller (even if newer) IOCs are showing good growth prospects (these companies will be evaluated in a subsequent post), major IOCs however, face growth constraints. For example, recent industry reports indicate that because of limited access to major new sources of reserves, major IOCs plan to increase upstream expenditure by a meagre 1% in 2010, compared to about 15% for NOCs (which boast greater access to sources of reserves).
Access to reserves is critical to growth. In Russia for example, access by foreign oil companies to strategic petroleum reserves (essentially, offshore fields or those with more than 500 million barrels of oil or 50 billion cubic meters of gas) is limited to companies in which the Russian stake exceeds 50%. In Nigeria, reserves are domiciled with the state, which extracts steep taxes and levies from operating IOCs. A recent proposal in Brazil provided for about two thirds of total rights in the massive sub-salt fields to be reposed with that country’s NOC. Even in those NOCs with lower domestic reserves, their easy access to massive state funds and product markets give them the competitive advantage over IOCs. Table 1 below is illustrative (click to enlarge).
Proceedings of Iraq’s recently concluded, second, bid round for oil block, service contracts clearly demonstrate the
rising dominance of these NOCs in the global oil and gas industry. The service contracts were auctioned for one of the world’s last, largest, easily (and cheaply) exploitable reserves and as such were highly competitive. In a bid round that initially registered more than forty oil and gas companies, the NOCs Petronas (Malaysia) and Sonangol (Angola) were successful in five bids while only three European IOCs were successful. No U.S. IOC was successful and Chinese NOCs entered the highest number of bids. The largest field (12.9 billion barrels) was won by a partnership between Russia’s privately held Lukoil (major) and Norway’s state-controlled Statoil (minor). The next largest (12.6 billion barrels), was won by another partnership between Royal Dutch Shell: 45% and Petrobas: 30%. In the earlier bid round, a partnership between BP (
BP) and CNPC, a Chinese NOC for development of the super-giant Rumaila field (about 17 billion barrels) was the the only successful bid. Generally, these NOCs boast the advantage of lower operating costs (mainly personnel and matériel) and with state leverage, are able to operate even in high-risk zones.