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

2. 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

3. 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.

4. 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.

5. 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.

6. 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.

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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