National oil companies reshape the playing field

Jorge Leis
Bain & Company, Houston

and John McCreery
Bain & Company, Singapore

As the balance of power in the oil industry shifts from large international oil companies (IOCs) to national oil companies (NOCs), business models for players throughout the industry are shifting in response. Only a few years ago, the state-owned ventures – companies like Saudi Aramco, China National Petroleum Company, Mexico’s Pemex, Brazil’s Petrobras, Malaysia’s Petronas and Rosneft in Russia -- depended on the expertise of large private companies, mostly based in the United States and Western Europe, to help them with everything from exploration through drilling, production, refining and marketing.

But as NOCs have taken more control over their resources, they have also become more comfortable sourcing their own talent and developing their own fields. In some cases, they now receive more favorable capital terms on the world’s markets and are even investing more in R&D than the large international oil companies -- $5.3 billion by the top five NOCs in 2011 compared to $4.4 billion by the supermajors.

IOCs, who once controlled the lion’s share of reserves, are facing ever-increasing challenges to their traditional business model, which depends on acquiring and booking reserves for future development. Their search for new resources leads them deep below the ocean’s surface, up to the icy Arctic, and into complex unconventional fields – places where oil is harder and more expensive to extract. This drives up production costs even while reserve ratios decline, presenting a worrying trend for investors.

But if the rise of the NOCs poses a challenge for IOCs, it’s a boon to the world’s oilfield service companies. NOCs are turning to experienced oilfield service providers to manage less complex fields – those with relatively simple geology and access. Some of these companies are subsurface reservoir experts; others specialize in developing the infrastructure above ground. Both types are being tapped by the NOCs, and some are being asked to manage entire fields, above and below the surface, to free up the NOCs to focus their efforts on more complex reservoirs.

To make the most of this opportunity, oilfield service companies will need to learn new skills. One of the toughest may be learning to manage the risks that come with the kinds of contracts NOCs are offering. Oilfield service companies that built their businesses on a fee-for-service model, which allowed them to take on few production risks, are now being asked by the NOCs to put some skin in the game in these contract-operator models. The NOCs are asking them to work under risk-service contracts (RSCs) and production-enhancement contracts (PECs), which carry significant development and production risks and can affect their financial performance. 

As they build new skills, oilfield service companies will also need to improve their technological know-how. As NOCs move into deeper waters and more remote regions, they will need partners and contractors who know how to work in those environments. This means oilfield services companies will need to invest more in R&D and hire top talent from around the globe, not just Houston and Europe.  

Since the technology moves quickly, the key skill here isn’t only to master the application of a given technology, but to become adept at spotting emerging trends and placing the right bets.

Project-management skills will become more important, too – not just managing their own teams, but also coordinating the activities of a host of contractors. NOCs want to focus on big complex projects, so they’re eager to have partners who can manage simpler fields in their portfolios, including the infrastructure above and below the surface and during the development and production phases in the life cycle of these fields.

As for the big IOCs, they will need to decide whether they can move away from a model that depends on owning reserves to one that allows for different roles, including partnering with NOCs to help manage their reserves under contract-operator service agreements. Although NOCs’ capabilities are developing, they still rely on the private sector’s expertise to draw those reserves out of the ground in the most challenging environments: deep sea, Artic and unconventional geologies like shale. Their scale should help them, as will their world-class project-management capabilities. They should aspire to remain the partner of choice for NOCs, especially at the high end of the production curve.  As with oilfield service companies, IOCs will need to remain on the cutting edge of technology and develop skills for spotting trends early.

But most importantly, they will have to shift from a mindset that seeks maximum control to one that balances mutual interests if they are to remain relevant in an industry dominated by the NOCs.

About the authors
Jorge Leis leads Bain & Company’s North American Oil & Gas practice from Houston. John McCreery is a partner based in Singapore, where he leads Bain’s Oil & Gas practice in the Asia-Pacific region.

 

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