While it’s often presented as IOC versus NOC, the underlying reasons are much more complex, from politics and national interest to garnering future favor.
Perry A. Fischer, Editor
In all the talk about National Oil Companies (NOCs) and International Oil Companies (IOCs), one thing has become clear: While the IOCs can usually be grouped as having a common purpose and method of business practice, the NOCs, despite their common acronym, often have nothing in common. That’s not to say that there aren’t numerous issues-there are. It’s just that there are often only one or two NOCs that have a given issue in common.
THE BIG QUESTION
One issue that is the most emotional, especially for those who consider themselves laissez-faire capitalists, is whether a given NOC exists for making money for itself and its shareholders, or whether it exists for strategic/national reasons to secure supply. Emotions can run high if the latter is suspected, because patriotism can run deep in every country; so if the business is viewed as making a deal for strategic/national reasons, money can be lost. And the lack of reciprocity is another issue that evokes patriotic fervor: Why should we let you do business in our country if we cannot do business in yours?
Obviously, these global matters won’t be solved in an article, but the key question in doing business with NOCs is: Do you want to make profit, or do you just want to produce hydrocarbons at almost any cost? This came to a head during the failed CNOOC Ltd. takeover bid for Unocal. And IOCs still do not like the fact that an NOC that is backed by a wealthy government can outbid everyone, if it wants to, in a lease sale that is open to all.
FINDING OIL
Where to look for oil continues to be a difficult decision, as always, but all the virgin or sparsely explored areas that are safe and politically stable have been taken. With all the difficulty and risk involved in dealing with companies that might have motives far different than an IOC’s simple profit, why should an IOC do business with them at all? It’s simple: NOCs control more than half of the world’s reserves. Exactly how much is subject to great misrepresentation, because it depends on what you mean by “control.”
Worse, if you do come up with a number, it changes all the time. How many IOCs want to sign new E&P contracts in Russia or Venezuela, even though they technically could? So, does this mean that we take those two countries reserves off the “IOC access” table? The Daily Oil Bulletin said 65% of oil and gas reserves were off-limits to IOCs today. According to Global Pacific & Partners in 1972, 7% of world oil production was from NOCs. In 2007, it was 77%! We’ve all heard many other figures.
These are strange times for IOCs: They are awash in money, but also have fewer unexplored places to invest their money. (How much more of their own stock can they buy?) The high price of oil means that there’s no shortage of investors, but buying oil on Wall Street has become very expensive, so it’s cheaper to drill, unlike the late 1990s, when oil prices collapsed and you could buy reserves for pennies relative to today’s price per barrel. That’s one reason why many IOCs have gone to Qatar (gas) or Alberta (tar sands) or similar places to invest in engineering risk rather than exploration risk. They are also investing heavily in next-generation technologies, such as hydrogen production, gas to liquids, coal to liquids and solar. It’s becoming an increasingly safe place to put money if you have a lot of it. As an engineer from a major IOC said while discussing alternative energy R&D spending, “One way or another, we’re going to be in the energy business.”
THE SERVICE COMPANY ROLE
There was a time when oilfield technology meant US oilfield technology and, hence, US IOCs. But those days are gone for many NOCs. Norway’s Statoil, Brazil’s Petrobras and Saudi Aramco come to mind as prime examples. Even more glaring than that is the role of service companies. Part of the reduction for IOC expertise began when the IOCs reduced their internal R&D and in-house expertise in services, in favor of having oilfield service companies spend their resources on these critical, but outsource-able, technologies.
This eventually led to new relationships, since many NOCs still needed expertise, particularly in the giants such as Baker Hughes, Schlumberger and Halliburton, allowing them to bypass IOCs altogether. But this meant that service companies could no longer count on piggybacking onto an IOC’s presence; instead, they had to invest in real estate, infrastructure and make their own contracts with the NOCs. It’s no secret that the oil services giants have helped many an NOC become successful without the need to partner with an IOC.
A unique case is Pemex. This NOC, by constitutional law, cannot sign a Production Sharing Agreement or Exploration Lease, nor make any agreement that allows another oil company to come into Mexico and operate there: It must maintain a complete monopoly status. For many years, Pemex officials have complained to their government that the company lacks the manpower and expertise to do certain kinds of work, such as deepwater E&P. The government is split, but not evenly, with the strict monopolists always eventually winning the day.
The situation changed a little when Vicente Fox became president of Mexico, and espoused loosening the federal prohibition on foreign participation. Pemex seized the opportunity, and in April 2003, a $500 million contract for a Multiple Services Contract (MSC) was granted to Schlumberger for exploration, drilling and production services in Burgos Basin. The size and the scope of the contract left little doubt that this was very close to a Production Sharing Contract that an IOC would normally sign with an NOC. Several more of these MSCs have been signed since then, while opponents of the constitutional runaround continue to try to fight these MSCs in court to this day.
In April of this year, another version of the MSCs was offered by the new president, Felipe Calderón, for liberalizing investment in the downstream and pipeline segments of the industry, but also, to “allow private contractors a greater role in boosting declining oil production.” Country-wide protests are taking place as this is being written, as expected. Meanwhile, Mexican production fell 8% in the first quarter of 2008, as the giant Cantarell Field continues to decline.
QUASI-IOCs
There is a weak grouping of NOCs that allow private participation through ownership of a minority of shares of stock that are allowed to trade on open markets. Statoil is one, with 37% of its shares traded, while Petrobras allows nearly half of its stock to be traded on the market, but the company keeps a “golden” share, for voting rights, so that it can never lose control. The recent pulling of offshore blocks surrounding the recent Tupi/Sugarloaf discoveries is suspicious, if for no other reason than the NOC nature of Petrobras, and the fact that a federal agency conducts the lease sales. Hopefully, the blocks were pulled to add excitement, to increase revenues.
But the idea of allowing a part of an NOC to be privately owned is gaining ground, with plans announced for initial public offerings for PNOC Exploration (Philippines), PetroPeru and Pertamina (Indonesia). The latter needs the money desperately to stem the depletion curve, as it is on the verge of becoming the only OPEC member that imports oil. But investors looking to make a quick buck will be forced to examine the trust and transparency issues, which lead them back to the opening question with all NOCs: Are they in it for the money or for strategic/national interest?
WHEN DEALS GO AWRY
Sometimes, doing business with an NOC goes awry, such as recent developments in Russia. Besides wasting everyone’s time (except Russia’s) with an apparent fake call for bids in the giant Shtokman Field project in 2006, Russia then reneged on its contracts with Shell on Sakhalin II. Citing environmental concerns as a pretext, Moscow forced Shell to sell a controlling stake to Gazprom, Russia’s state-controlled gas conglomerate, which previously had no involvement.
Russia hasn’t decided just what the split of state and private ownership will be. BP, Shell and others are much less confident in their investments there because of moves by the state to re-monopolize the industry. In a rather ominous recent development, but not out of character today, the government granted a production license to Gazprom for development in Chayandinskoye Field, in Eastern Siberia. According to the Ministry of Natural Resources, it was supposed to be awarded through an open auction, but the Energy Minister trumped that by saying the law allows such awards if the field is deemed “strategic.” The field is a 1983 discovery that has recoverable 2P reserves of 13.1 Tcf of gas, 310 million bbl oil and 46 million bbl of condensate, according to a report from IHS in April this year.
Another infamous reneger is PDVSA, which is in a class of its own. While it’s true that most NOCs (and governments for that matter) have increased government take during the recent extraordinary price increases, no one has gone about it as frequently as Venezuela’s President Hugo Chavez. This is making IOC partners very nervous about the future, knowing that not one, but numerous changes to the national hydrocarbon laws and taxation and contract terms means that anything is possible, including full nationalization. Exxon had enough arm twisting and withdrew from its Orinoco Belt project, choosing to fight what, so far, has been a losing battle in international courts.
Those who remain “renegotiated” what they could. PDVSA subsidiary CVP and Chevron formed a JV named Petropiar for an ongoing Orinoco Belt heavy oil project. CVP holds a 70% stake; Chevron holds the remaining 30%. Petrocedeno is the JV of CVP (60%), Total (30%) and Statoil (10%) in their heavy oil project. These are much less than the previous takes by the IOCs. Eni also renegogiated, but not for heavy oil-rather, for 19.5% and 24% stakes in two exploration-risk partnerships with state firms in the Gulf of Paria. Chavez lost an election last year which might have allowed him to become president for many more years, but he said that he would honor the results, so it’s at least possible that things could stabilize.
PLANNING FOR THE FUTURE
Sometimes, an IOC and an NOC will partner for reasons other than immediate profit. These include goodwill, gaining experience with unfamiliar technology, and trying to form a relationship for future business in an NOCs homeland. Some examples include Colombia’s state-owned Ecopetrol, which has just taken a 25% interest to explore Blocks 777 and 778 in the Garden Banks area of the Gulf of Mexico, along with partners Shell (65%) and Newfield (10%). The NOC says it wants the deepwater experience, according to a report from Lawrence Poole in December, via Ernst and Young.
Without violating any laws, ExxonMobil and Pemex signed a technology sharing agreement “to reduce deepwater exploration risks by sharing experiences in using electromagnetic soundings.” ExxonMobil has been at the forefront researching marine EM for 30 years. This writer imagines that it is the IOC that will be doing most of the sharing. It also extended a similar 2002 agreement. Pemex has other, similar technology sharing agreements with other major oil companies.
Among other NOCs that prefer to stray from home, an unusual partnership was recently announced where ConocoPhillips will form a joint venture with Qatar Petroleum for international E&P outside of both companies’ home states.
A FINAL WORD
Clearly, each of the IOC/NOC issues is unique, but this primer touches on the main points, and shows, just in the last six months, how fast things move on the international front. Maybe by next month Mexico will have changed its constitution and most of the NOCs will be 49% privately owned. But don’t hold your breath. 
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