Hydrocarbon-driven economies in emerging markets
For many emerging economies heavily dependent on oil revenue, the dramatic fall in prices has unleashed a chain reaction with far-reaching consequences on government budgets, sovereign investment, economic development incentives, and critically, on subsidy support and social welfare programs. This is increasing the pressure on the National Oil Companies (NOCs) and changing the very nature of the relationship with the State (their key stakeholder).
The recent agreement between OPEC and non-OPEC producers to cut output has provided much needed reprieve to the oil market by setting a floor price. However, we do not see that this development will change our outlook of longer-term low prices.
We are witnessing an unprecedented number of governments considering partial privatization or listing of their NOCs to raise capital, exploring alternative means of funding capital requirements and project financing. The level of economic diversification, and thus relative contribution of the oil and gas sector to the country’s GDP, is pivotal on the urgency of action required.
The manner in which these NOCs are operating, their structures, and their contributions to the State, are simultaneously changing; a transformation so profound that it stands next to the nationalizations of decades past as the most defining moments of their respective histories.
Role of the NOC — The “contract with the State”
NOCs are major players in the global oil and gas industry, accounting for 58% of global reserves and 56% of production. They often play a leading role in emerging market economies, and are normally called to be the custodians of a nation’s resource development and energy security. The immediate focus is on the expectations faced by the NOC, to sustain and grow in this new oil price environment. We identify this critical expectation on the NOC as the new “fiscal responsibility” regime, which places a clear emphasis on profitability and quality of earnings.
Redefining the NOC strategy: Moving from “volume to value”
With revenues per boe at less than half of their 2014 peak, NOCs are quickly becoming aware of the need to shift away from a focus on volumes towards the realization of value. In this capital-constrained environment, the focus needs to be on extracting the maximum sustainable value from capital assets or, in other words, doing more with less. While moving from volume to value is not a new concept for IOCs, the concept has only been more recently embraced by NOCs.
The NOCs who will succeed in maximizing their potential enterprise value, and thus maximize their contribution to the nation, will be those who succeed at building capital excellence and operational excellence into their culture.
Setting the path for the NOC transformation journey
To conclude, the case for NOC transformation is clear. The coming years will be defining for the NOCs as they progress to become “commercial NOCs,” fully embracing the need to embark on the capital transformation.
Industry transformations are never simple. For an NOC to be able to maximize the quality of its earnings and contribution to the State, many aspects critical for the successful NOC of the future will need to be understood and addressed.
NOCs must change the way they relate to their government in order to maintain their critical roles within the global oil and gas market and within their governments. By implementing changes that maximize their margins and increase capital efficiency, NOCs will position themselves for survival and growth through this new era of abundance. For an NOC to be able to maximize the quality of its earnings and contribution to the State, many aspects critical for the successful NOC of the future will need to be understood and addressed, these are included in the diagram below.