Uncertainty in global oil seems to be the rule rather than the exception. Oil shocks, peak prognoses, price volatility, and intractable oversupply…in the course of more than a century the energy industry has become extremely familiar with moving goalposts. But now a new uncertainty looms on the horizon – one that particularly impacts national oil companies (NOCs).

The quest has changed

The quest has changed. Instead of looking for reserves, oil companies are now mainly focused on protecting returns. This will apply to the whole industry, but it’s likely to pose a bigger challenge for NOCs than for international oil companies (IOCs).

While IOCs have multiple levers with which to respond to cost challenges, NOCs have a strong local content agenda requiring them to provide benefits to the wider economy and society. As a national entity, each NOC is now expected to become more performance driven, more efficient, and more profitable. Every person on the payroll must be justified, and every cost must be cut to the bone.  In addition, some will seek to internationalize and diversify to cushion the impact of market events.

From reserves to returns

To varying extents, governments in oil exporting countries have always relied on NOCs to implement economic objectives. This will continue to be the case.

Illustrations of this can be found in the development strategies of countries belonging to the Middle East Gulf Cooperation Council; these strategies are directly aimed at advancing sustainable development across the region. New approaches are evident in several oil exporting countries – prime examples include the recently issued roadmaps for the future of Canada’s oil, Pemex plans to partner with the private sector and the announcement that Aramco is to be transformed “from an oil producing company into a global industrial conglomerate” that is expected to contribute not merely to its own success but also to the success of its national economy.

In oil-producing countries around the globe, the new mandate for each NOC is to adopt a more competitive business model, contributing to their country’s overall wealth and ultimately its transition to a low-carbon economy.

Partnering with the private sector

Partnering with the private sector will bring NOCs almost full circle from nationalization in the 1970s. As today’s NOCs go to market, some will seek to partner or attract investments from their previous owners.

In the intervening decades, when NOCs controlled the reserves, there was less need to be competitive. But today it’s all different. Now these companies are becoming international businesses and will come head-to-head with IOCs and other NOCs. Stakeholders will demand that each NOC maintains good returns and supply chains must support increased productivity, efficiency, and profitability.

When NOCs controlled the reserves, there was less pressure to be competitive. But today it’s all different. Now these companies are becoming international businesses. Stakeholders will demand that each NOC maintains good returns.

Impacting the supply chain

The supply chain will become more international, more efficient and performance driven. Abandoning local subcontractors is not an option, and therefore NOCs will have an important role to play in helping to develop these local suppliers to achieve higher performance levels in parallel with making their own improvements.

The task ahead for NOCs is huge and relatively new territory. In the current low oil price environment, competitive advantage necessitates lowering the cost base without shedding local employees and subcontractors. Finding new efficiencies in the supply chain looks like the best solution.

Published: July 2016

Image: DHL