Transitions toward the use of low-carbon sources of energy are changing the way the world produces and consumes energy in fundamental ways. In response to growing calls for action, several international oil companies (IOCs) have redefined their businesses in recent years and expanded into alternative-energy areas. National oil companies (NOCs), IOCs’ fully or partially state-owned counterparts, are also under pressure to review their strategies and define their path ahead in the emerging landscape. But their purpose differs from that of IOCs, and they face different challenges as well.
By growing their businesses, IOCs create value for public shareholders. NOCs’ central role, however, is to monetize national hydrocarbon resources as effectively as possible in order to maximize state revenues while guaranteeing a secure supply of affordable energy for the nation’s needs. But like IOCs, they must respond to societal pressures at home and abroad and adapt meaningfully to energy transitions. The task they face is how best to do all that in the most environmentally sustainable way.
NOCs that operate in geographies with abundant, readily available reserves of lighter oil have a head start when it comes to producing hydrocarbons cheaply, efficiently, and with the lowest possible emissions. But all NOCs will have to significantly reduce their emissions while lowering production costs in order to remain competitive and play their part in mitigating climate change. They will need to develop new carbon abatement technologies, streamline their organizations, and prioritize low-cost production.
The Importance of NOCs
NOCs are major players in the global oil and gas sector. Together, they control more than 65% of global crude oil reserves and more than 55% of global gas reserves. (See Exhibit 1.) Some of the world’s biggest hydrocarbon producers are so-called export-focused NOCs, which have large domestic oil and gas resources that they sell in global markets. Import-focused NOCs, on the other hand, depend on resources that they’ve acquired abroad to supplement their domestic production and meet local demand.
As state-owned organizations, NOCs play a pivotal role in their countries’ political economies. Several OPEC member countries, despite efforts to broaden their economies, still derive more than 60% of their revenues from oil and gas sales generated by their NOCs. (See Exhibit 2.) The proportion is also significant in some non-OPEC countries, including Mexico and Russia, which have far more diversified economies and where the oil and gas sectors contribute a smaller share to their respective countries’ GDPs.
In most countries with NOCs, the revenues produced by those organizations are vital for economic sustainability. They help to finance public infrastructure projects and development and welfare programs. The NOCs themselves play a key role in developing national resources and capabilities and in supporting employment. And global demand for the NOCs’ oil and gas offers a source of international political influence for the governments that own them.
We believe that NOCs can continue to play an important role in the global energy landscape if they tackle their emissions and improve their operational efficiency. Consider, for example, that:
Nevertheless, with their government owners’ finances increasingly challenged by low oil prices, NOCs will have to compete harder for scarce state funds and demonstrate greater capital discipline. But as IOCs are forced by their public shareholders to curb capital spending and diversify their portfolios, the importance of NOCs as oil and gas producers is likely to grow, reinforcing their value as revenue generators for their government shareholders.
Some NOCs Have a Head Start
Faced with the dual pressures of scarce finances and a growing demand for cleaner crude, NOCs need to reduce their emissions, improve their operational efficiency, and lower costs to compete. Some are in a better starting position to deliver on these imperatives than others. While NOCs include some players that depend heavily on foreign capital and expertise to develop oil and gas resources, others are technically and operationally advanced, and well-financed domestically. In broad terms, NOCs differ along the following four dimensions:
Over the next decade, NOCs with access to abundant low-emission production, robust and agile decision-making processes, a supportive and financially healthy government shareholder, and strong operational efficiency will have a head start over their peers. They will be well placed to be among the cheapest, cleanest, and most efficient operators.
Clearly, some of these factors are outside NOCs’ direct control. A company’s domestic reserves are determined by geology; healthy government finances are shaped by fiscal policies and wider economic drivers; and an NOC’s strategic course is set, or at least influenced, by the state. But all NOCs can improve their competitive potential by taking steps to become cleaner and cheaper producers.
Five Steps to Become Cheaper and Cleaner
A commercial imperative is influencing the move toward becoming cleaner and cheaper producers. Export-focused NOCs will have to do so to sell their products to increasingly environmentally conscious consumers abroad, while import-focused NOCs with large domestic markets will need to follow suit to ensure continued energy security as their governments seek to meet climate goals. Companies should consider taking the following actions:
The ownership structures of NOCs and the unique role they play in meeting government objectives allow them to focus on producing oil and gas while demand remains strong. But they can’t ignore the climate change imperative. They will need to improve their operational efficiency and achieve the lowest emissions possible in order to compete in the years ahead.