Which are the strongest national oil companies? By Tom Nicholls, journalist Through their merger, Statoil and Hydro will set a new standard for the increasingly powerful group of national oil companies (NOCs). Both are significant upstream acreage holders in Norway. Both have solid positions overseas. Together, they form a formidable national champion – and one that will remain under government control; the firm will be 62.5% state-owned and Oslo plans to raise this to around 67%. Technology, baby, technology However, in addition to reserves, production and cash, which other big NOCs now have in abundance, Statoil Hydro will have what most other NOCs lack: state-of-the-art technology. Statoil has built a deserved reputation for sophisticated technology through decades of operating in the inhospitable North Sea. Hydro too: its development of the oil segment of Norway’s offshore Troll field, for example, is widely regarded as one of the most remarkable achievements ever accomplished by an upstream operator. Arguably, the deal makes Statoil Hydro the world’s pre-eminent company in offshore technology and certainly puts it on a par with the giants of the private sector. The new entity’s offshore production in water depths of over 100 metres will be ahead of Shell, in second place, and more than BP and ExxonMobil combined. Given that the most lucrative upstream opportunities to which Western companies have access now tend to be in offshore areas, its technological edge gives the new company a strong competitive advantage: Statoil Hydro will be an attractive business partner for acreage holders that lack the technology and skills needed to produce in deep water (the $29 billion deal will also bulk up the company’s human capital – in short supply in the overstretched upstream market). In addition, as a government-controlled company, it is a partner with which other NOCs are likely to feel comfortable. It is no surprise that both Statoil and Hydro were on Gazprom’s shortlist for Russia’s Shtokman development. And although Moscow seems to have slammed the door on foreign participation there, if Gazprom eventually decides it does need overseas partners for upstream projects, Statoil Hydro is likely to be a contender. (Could the quid pro quo of any future involvement of Statoil in Russia’s upstream sector be alignment with Moscow on gas pricing?). In addition, some commentators have suggested that the tie-up is a defensive move designed to blunt Gazprom’s aggressive expansion. Graham Weale, an analyst at Global Insight, a consultancy, has described the proposed merger as “an unambiguous response to the growing dominance of Gazprom in the global gas scene”. Without doubt, the merger (in which Hydro’s oil and gas assets will be incorporated into Statoil) seals Statoil’s position in the premier league of NOCs. NOCs versus IOCs The most significant difference between NOCs and international oil companies (IOCs) is that NOCs tend to be rich in below-ground resources – oil and gas. IOCs tend to be rich in above-ground resources. That used to mean cash, skills and technology. But NOCs are now in strong financial shape thanks to prolonged high oil prices and this has basically whittled the advantage of IOCs down to technology and skills. Herein lies one of the main strengths of the Statoil-Hydro combo. The new company will have a production of 1.9 million barrels a day in 2007 and proved oil and gas reserves of 6.3 billion barrels of oil equivalent. That upstream profile – while far smaller than that of the biggest NOCs – puts it on a similar footing to the larger IOCs. And, just as importantly, it puts Statoil Hydro on a superior footing to all other NOCs and arguably all IOCs in terms of offshore expertise. So which are the other pre-eminent NOCs? Aramco, Petrobras, Petronas, Statoil and Qatar Petroleum can consider themselves modern, sophisticated oil companies, capable of operating energy projects to the standards of an IOC. Aramco: heavyweight champ The sheer size of Saudi Aramco’s oil reserves makes the Saudi state-owned giant the undisputed heavyweight champion of the world’s upstream industry. Its natural advantages are not only its embarrassment of riches in oil reserves, but also that the resources are predominantly onshore, the fields are large and wells have high productivity rates. In addition, Aramco has developed the technical capacity to undertake projects itself and does not require help from the private sector. Few companies – if any – can match Aramco’s technical capabilities in the management of complex onshore oil projects. When it does need assistance, it is able to buy services and equipment directly from oil field services companies and does not need to cede equity in the country’s hallowed oil sector. And, for now at least, it has no worries on the budgetary side: the company is the engine room of the national economy, producing around 9 million barrels of oil a day (worth around $200 billion a year at present oil prices) and the government therefore has a strong interest in making sure it is adequately funded. That Riyadh has the flexibility to act as the world’s only swing oil producer, turning the taps on and off at will, is down to Aramco’s technical proficiency. Both Statoil and Aramco attribute their success, in part, to a hands-off approach by their shareholders – their respective governments. Commercial and operational autonomy allows each company to take decisions that are in their long-term interests – enabling business growth. Petrobras: offshore leader Petrobras falls into this category too and must be classed as a premier league NOC. The Brazilian state holds only around 30% of Petrobras’ shares, but has shrewdly retained a majority of the voting rights – and, therefore, control. Petrobras itself – while proud of its role and identity as a national champion – thinks and behaves like an IOC and continues to enjoy the operational autonomy it needs to be successful. It has already established itself as one of the world’s most effective deep-water operators, building up a large offshore industry at home and generating much of the technology required itself. Another mark of the firm’s ambition is its overseas expansion – exporting its deep-water technology to West Africa and the Gulf of Mexico, for instance. Petronas: international operator Malaysia’s Petronas also debunks the obsolete perception that a state-run company must be inefficient. Once an ineffectual NOC without the luxury of an impregnable oil-reserves position to fall back on at home, Petronas is widely rated by industry experts as the NOC that, with operations in over 30 countries, has been most successful at diversifying beyond its national boundaries. Like some other NOCs, it has the stomach for certain investments that are too much for IOCs; for example, while shareholder pressure saw Canada’s Talisman Energy pull out of Sudan, selling its 25% stake in the Greater Nile Oil production and pipeline project to India’s ONGC, Petronas stayed on (so did CNPC). Qatar Petroleum: LNG giant Qatar Petroleum has enlisted the technical help of outsiders to develop its liquefied natural gas and gas-to-liquids industries – including ExxonMobil and Shell. But, nonetheless, the company has presided over the biggest ever expansion in the world’s LNG industry, on budget and on time. Around the end of the decade, it will control around 77 million tonnes a year of LNG and its combination of market access, upstream strength and the technical accomplishments involved in its impressive slate of projects surely place the firm in the leading pack of NOCs. Gazprom: catching up Russia’s state-owned energy companies, Gazprom and Rosneft, are adrift of this elite group – but only just. As the colossus of world gas reserves, Gazprom’s future has always been assured. That advantage has been made even more formidable by the firm’s monopoly over Russia’s gas trunk-lines and its proximity to the lucrative market of western Europe. Rosneft’s upstream position has been significantly enhanced through acquisitions, notably that of Yuganskneftegaz, the oil producer formerly owned by Yukos. However, both Gazprom and Rosneft lack the technological ability of, say, Statoil and Petrobras, and the international reach of Petronas. That, though, will gradually change. Through its participation in the Sakhalin-2 LNG project, for example, Gazprom will gain valuable hands-on experience of a managing a large-scale, technologically and logistically complex project. And it would not be a surprise to see both Gazprom and Rosneft continue to build their reserves position in the coming year through acquisitions. In addition, Gazprom has plans to globalise: as well as its well-documented attempts to acquire downstream assets in target markets in Europe, it is expanding upstream outside Russia. It is involved in Iran’s South Pars gas development, for instance, and is planning to explore in India. Algeria’s Sonatrach fits into a similar bracket to Gazprom. It has prodigious gas reserves and rapid expansion plans. In addition, it is a seasoned LNG operator, which gives it a technical advantage over the Russian company, although this is outweighed by Gazprom’s comfortable superiority in gas resources. Other contenders Libya’s NOC is a step behind Sonatrach, but it is capable of catching up quickly. It has huge underdeveloped oil and gas resources and an impregnable position in its home market. Although deficient in technology and capital, NOC will become a more effective operator as oil investment flows into Libya and is likely to take on a greater number of developments itself. Iraq’s INOC has suffered because of sanctions, wars, terrorism, sabotage and the loss of crucial personnel (that it has kept going at all with the limited cash and resources available is remarkable). If physical security can be established in Iraq and when the government has decided how to structure the oil industry, INOC could have a bright future, given its huge oil reserves. Other NOC laggards include Venezuela’s Pdvsa and Mexico’s Pemex, both of which have been undermined by their need to fund the wider economy and ambitious social projects – and therefore a shortage of upstream investment. Political meddling is also likely to put the brakes on the development of Bolivia’s upstream sector and, along with corruption, has restrained the development of Nigeria National Petroleum Corporation, among others. There is, of course, much more to the NOCs story than the upstream picture: China’s state-owned oil companies have limited status in terms of oil and gas reserves, but they have been extremely active in recent years on the international asset market, racking up tens of billions of dollars of acquisitions outside China – often overpaying to meet the strategic goal of gaining access to oil and gas to fuel their booming economy. India’s ONGC, a late starter, is catching up. And while these companies may not possess large indigenous reserves, they have something else of enormous value – they are the gatekeepers of the fastest-growing and, by some measures, the biggest markets on earth. That is another feather in Petrobras’ cap: as well as its deep-water skills, it has expertise in handling a big market. The company retains a virtual monopoly on the refining industry of a country with consumption in the region of 1.8 million barrels a day – another bargaining chip for Petrobras as it forms relationships with other NOCs. However, while the likes of CNPC, CNOOC and Sinopec have expanded at an astonishing rate overseas, they still cannot be classed as leading NOCs because, while rich in ambition and cash, they lack project experience and technology. CNOOC tried to fix that by buying US explorer Unocal. Ultimately, the bid failed, but eventually CNOOC – or another NOC – could propel itself to global pre-eminence through selective acquisitions. That goes for Gazprom too.