The challenging relationship between national oil companies (NOCs) and international oil companies (IOCs) can rapidly evolve when the level of influence shifts dramatically between the parties.
During much of the 1990s, IOCs held sway over their NOC counterparts through sustained investment in R&D and adherence to rigorous fiscal and operational management as well as their ability to make large, long-term investments. At that time, NOCs partnered readily with IOCs.
The level of influence started shifting dramatically toward the NOCs in the mid-2000s, when they significantly increased their own acumen and also co-opted the latest IOC technology. This trend, coupled with the subsequent increase in the availability of capital once commodity prices rose, made many NOCs reconsider their relationship with IOCs. The fact that these NOCs had grown to control the lion’s share of global reserves made partnering with an IOC seem less of a necessity.
In today’s stressed global economy, NOCs have again lost their edge. Lower commodity prices are not sufficient to fund NOCs’E&P efforts and government programs. Meanwhile, IOCs continue to need access to new reserves and must rely on NOCs to get them.
This means NOCs and IOCs are facing another inflection point by which to re-forge their relationships and partner for long-term success. To do this, both parties need to better understand—and cater to—one another’s needs.
Basic negotiating strategy tells us to look beyond the simple elements of a partnership and to look instead at the long-term relationship over the course of multiple partnerships. To do this, each party must understand how to meet the other’s needs and to look beyond the question, “What’s in it for me?”
There are several driving fundamentals that each side must understand:
NOC Mantra: Protect My Resources, Support My People
• Preserve assets for future generations. NOCs must wisely manage natural resources so that future generations can benefit from ongoing production. This is especially true in countries with few revenue-generating alternatives.
• Obtain reasonable compensation. NOCs need to construct a fiscal policy that encourages foreign investment but allows the government to participate in the “upside” when commodity prices are high. Stability and transparency in the fiscal take regime is a key issue to every NOC and IOC.
• Become more self-dependent. NOCs have to develop the technology, infrastructure, management practices, and competent work forces to operate costefficiently and safely.
• Support government’s social and political objectives. NOCs often provide a significant source of revenue to the government and support national employment levels through job creation, even if it requires a certain level of inefficiency. IOC Mantra: Increase Shareholder Value
• Increase economically viable reserves and production. IOCs need to demonstrate the value of exploration activities through annual production growth and annual reserve replacement at a rate greater than 100%.
• Tightly manage projects to increase profitability. IOCs must manage joint operations with well-trained teams and processes to maintain profitability.
• When partnering, ensure reasonable fiscal take by host government. IOCs have to partner in countries where the fiscal take is transparent and stable— and where they can also enjoy an adequate return on investment at both low and high commodity prices.
• Avoid unstable government regimes. IOCs will continue to look to exit countries that do not demonstrate predictable constructs for foreign ownership and investment to reduce risk of asset seizure. • Maintain proprietary technology. IOCs have to maintain intellectual capital for proprietary tools and techniques but use these as bargaining chips to develop resources NOCs could not economically exploit without more sophisticated technology.
Playing for the long term
The needs on either side of the NOC/IOC equation are not mutually exclusive, which begs the question: “Why haven’t we seen partnership before that considers all of these needs?”
While part of the answer lies in the specifics of each partnership, most NOC/IOC partnerships fall short of parity in the initial deal structure, management practices, or other external factors. Looking forward, partnerships based on a balanced attempt to satisfy the priorities on both sides will prevail, including access-for-access arrangements and a more equitable sharing of decision-making and leadership responsibilities. The pendulum can, in fact, stop swinging for NOCs and IOCs, but only if they are able to develop a real and durable partnership and, in so doing, lead the industry going forward.