NS4960 Spring Term 2017 Handbook of Oil Politics Jean-Francois Seznec – NOCs/IOCs Federal Reserve Bank of Chicago, Strong Dollar Weak Dollar

NOCs/IOCs I Wants to compare actions of National Oil Companies (NOCs) – stated owned with International Oil Companies (IOCs) – privately owned Point: In energy business the concept of companies held in private hands verses state owned companies can be misleading Differences are not always clear Some NOCs act as if they were large IOCs and some NOCs work very closely with IOCs

NOCs/IOCs II Logically NOCs should be focused on maximizing the long-term rate of return of oil to the country – yearly rate of return should be of no importance Takes into account the incomes of future generations and maps out optimal use of resources to keep income flows balanced between the present and the future Unfortunately this has been more the exception than the rule Many countries use the NOCs revenues for other purposes than to create wealth for the country. For their part, IOCs main concern is should be to maximize the return to their shareholders – maximize the return on investment (RoI) Financial markets provide a check on IOC operations.

NOCs/IOCs III To maximize ROI IOCs have to focus not on whether their production will benefit future generations of a state, but whether their annual return will met expectations of the market. More complicated because many IOC projects take ten years or more to develop Point of chapter – shows that there is a spectrum of companies across NOCs and IOCs from complete state domination to primarily driven by market forces Main NOC problem – preserve independence from state Main IOC problem – Often do not own their oil and gas reserves in a strict sense – at mercy of whoever controls the land where they operate Often have to work with “bad” retimes to maintain production.

NOCs/IOCs IV Distinctions between NOCs and IOCs not always as clear cut as might appear at first Many IOCs are not “private” – many are corporations with sometimes millions of shareholders, individuals, mutual funds etc. IOCS have operations which cover numerous countries and their shareholders come from many different financial centers Also many IOCs are “mixed” – have a large shareholding from the state and a large number from the public at large Are these companies NOCs or IOCs? Some NOCs can only operate if they are well supported by foreign firms Can be fully professional like Saudi Aramco or Have to turn to IOCs to catch up.

NOCs/IOCs V On other hand as IOCs lose their ability to find reserves, may become more involved in some of the NOCs business – a meshing of interests in the long-run One could also speculate even if NOCs from countries with large oil and gas reserves may begin to see decline in their easy oil and gas and could start eying investments abroad, becoming much closer to the IOCs. In sum while IOCs may join forces with NOCs, we may see the latter become more like former.

NOCs/IOCs VI Chapter summary Major drawback of NOCs lies in propensity to become overwhelmed by government control Some governments under huge pressure to increase income rapidly without investing in necessary, but very expensive technologies and maintenance programs Iran and Venezuela good examples – the case with Iraq under Saddam The governments of these companies want their oil companies to maximize income Thus in OPEC meetings they usually ask for larger quotas and demand higher prices

NOCs/IOCs VII However even with higher quotas they tend to be unable to increase production reliably and when able will not cut production when needed to maintain prices to maximize income. They will tend to freeload on the cuts made by Saudis and other gulf producers. Huge investments needed to maintain and develop upstream and downstream facilities just do not get made as governments find higher priorities The lack of investment slowly strangles the company and production falls secularly

NOCs/IOCs VIII In contrast the IOCs like ExxonMobil, Chevron, Shell, BP or Total appear often to be more disciplined and better able to promote the proper management of the fields They rely on the most advanced technology to extract the best of the geology and will develop technology to maximize their activities downstream As a result many NOCs have come to rely on the IOCs to develop their resources Many NOCs and their governments watching to see if Iraq will be successful in increasing its production from 2.3mbpd to almost 10mbpd within the next 10 to 15 years with very aggressive management of the production agreements signed with the major IOCs

NOCs/IOCs IX NOCs like Saudi Aramco, Statoil (Norway) or Petrobras (Brazil), while being closely monitored by their governments have managed to keep their distance from state interference Some of these firms are as technologically advanced as the major IOCs and in some cases even more advanced than most IOCs Seems NOCs by and large should be the companies that will be more likely to succeed They do control most of the world oil and gas reserves If they could ensure a certain financial independence they would be able to increase their influence worldwide

NOCs/IOCs X In cases where the NOCs do not have enough local crude oil reserves to draw from they have started going international Particularly case of Chinese companies who compete directly with IOCs in Africa and Iraq and try to take advantage of the political tensions between the IOCs home countries and Iran In sum – NOCs and IOCs are much closer than often perceived Ultimately the goals of NOCs and IOCs may be differ net in that NOCs are thinking more to maximize their long term impact to their country while IOCs tend to seek maximization of income to their shareholders

NOCs/IOCs XI In both cases the result may end up being the same. The NOCs need to maximize income in the long run while the IOCs require long term thinking as they do have a ten year lead time from decision to refining Not surprising many NOCs are moving to privatize portions of their shareholding and like Total (France), Sinopec (China), Rosneft (Russia) or Lukoil (Russia) did some years back may become increasingly owned by the pubic at large, both in their home country and internationally