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Oil&Gas Financial Journal

How national oil companies can fuel economic development

How national oil companies can fuel economic development

National oil companies can serve national interests the most when they bring global standards home.

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How national oil companies can fuel economic development
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National Oil Companies (NOCs) are transforming themselves into lean, professionally managed enterprises, shaking off old criticisms of being overstaffed and underfunded. They now compete with major private international oil companies (IOCs) to explore, develop and produce oil and gas domestically and abroad. Malaysia’s PETRONAS operates in more than 30 countries, and Chinese and Indian NOCs are making deals in Africa, the Middle East, Latin America and Central Asia. At the same time, they’re exerting more influence in their home markets: hiring more local suppliers, nurturing entrepreneurship in energy-related sectors and spreading their wealth. For example, Norway’s Statoil partnered with the Norwegian government, research institutes and universities to build a vibrant and flourishing oil and gas industry. Despite declining Norwegian oil production, the country’s oilfield services companies are now globally competitive.

What does it take for NOCs to compete globally while also becoming instruments of social change and economic development at home? Leading NOCs take a three-pronged approach to develop their own capabilities and those of a support network of related companies around them.

First, successful NOCs bring their managerial and operational standards up to global levels. Malaysia’s PETRONAS could have limited itself to its original charter, managing and regulating Malaysia’s upstream oil sector. Instead, it worked closely with ExxonMobil and Shell—both contractors in Malaysia—to develop the capabilities of an independent operator. Today, PETRONAS has more than $70 billion in revenue and a global footprint matching that of many IOCs.

Petrobras of Brazil is another good example. Over time, it developed breakthrough technologies for exploration, development and production in Brazil’s deep-water oil reserves. With 2011 revenues of $146 billion, Petrobras is the largest company in Brazil and one of the largest energy companies in the world.

Leading NOCs also build world-class suppliers. They typically insist on local contracts not just to support domestic companies, but also to develop suppliers that can compete globally. For example, to improve the R&D capabilities among local suppliers, Norway offered preferential access to new concession blocks to oil companies that invested more heavily in R&D with Norwegian researchers in Norwegian institutions, spurring Statoil to increase its investments in those companies. The more critical the technology and the greater the investment, the more preferential was the access to new blocks.

The Nigerian National Petroleum Corporation’s (NNPC) directive on local content also resulted in a thoughtful, staged development of the country’s oil industry capabilities, in this case by Shell. The company launched a major effort to comply with the NNPC’s directive, which is based on a simple premise: As Nigerian suppliers acquired more capabilities, they would secure larger contracts. Shell provides knowledge transfer, training, bidding preference and financing to those companies. Over time, these steps ensured that nearly 90% of all Shell contracts went to Nigerian companies.

Finally, NOCs work with their national governments to encourage geographic clusters of companies related to a particular industry—for example, oilfield services, machine tools, petrochemicals, automotive—that might have synergies with oil and gas. A successful cluster strategy can help balance three outcomes: generating sustainable local jobs and wealth, improving public accounts and creating attractive returns for investors.

Brazil reaps the rewards of cluster-led economic development. Already benefiting immensely from its ultra-deepwater pre-salt oil fields, the country attracts local R&D investments not only from companies like Schlumberger, Halliburton and Baker Hughes, but also from Petrobras, BG Group, Shell, ExxonMobil and Chevron, which operate different pre-salt deepwater concessions. In the future, like Norway, Brazil can create a macro-cluster, forging powerful connections between robust local oilfield services clusters. Today the world is coming to Brazil to participate in the deepwater developments; tomorrow, Brazilian companies will be going to the world as competitive players in the new exploration frontiers.

Leading NOCs not only channel capital, technological and operational know-how into the country, they also serve as custodians of their nation’s wealth. Ideally, they help insulate the socioeconomic development strategy from pulls and pressures, and they guard its integrity as the country moves through economic cycles. Most important, they maintain a steady course in the quest for global competitiveness. The best NOCs serve national interests the most when they bring global standards home.

José de Sá is a Bain & Company partner based in Rio de Janeiro. John McCreery leads Bain’s Oil & Gas practice in Asia-Pacific from Singapore.

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