Dances With Wolves

Populist leaders in oil-producing countries often depict International Oil Companies (IOCs) as exploitative wolves. More recently, the image has been reversed, with IOCs viewing National Oil Companies (NOCs) as all-powerful and merciless. As always, the true situation is far more complex.

The growing strength of the NOCs reflects not only a shift of power in increasingly tight energy markets, but also profound geopolitical changes that are underway in the world. The US has retreated from the role of hegemony that it played so effectively in the second half of the 20th century, when it set the rules of the post-World War II order, paid for the military and other costs of maintaining the system, and promoted economic coordination for the benefit of all. As this Washington Consensus collapses, new powers are emerging on the scene, particularly China and India. These countries – the “neo-globalizers” – are creating their own rules of engagement – new institutions like the Shanghai Cooperation Organization, and new rules like their readiness to provide infrastructure development in exchange for access to resources.

The process of neo-globalization also creates new roles for NOCs. They are no longer required simply to hold national hydrocarbon assets and deliver revenue to the national treasury. Some are expected to be engines of diversified economic growth or agents of education and training for a youthful population. Others are required to provide energy security by developing diversified foreign energy resources. To succeed in this new environment, IOCs must understand the new NOC paradigm and the specific goals and needs of the different NOCs, each of which reflects its own domestic conditions.

In this new world, many of the strengths that worked for IOCs in the past have lost their value. The best NOCs are sophisticated technologically and managerially; they contract directly with international service companies and other NOCs; they no longer confine their operations to a single country; they are not short of capital or access to financial markets. This means that IOCs cannot – and should not – expect things to return to the way they were in the 1970s and 1980s.

The world has certainly changed, but one thing has not changed. It has not run out of risk. That means that it has not run out of opportunities, either. To succeed in the neo-globalizing world, companies must find the new value propositions that meet the new needs of NOCs and resource-holding countries. This does not mean developing brand-new skills and business lines, but rather identifying and repackaging strengths the IOCs have had all along that are valuable to potential partners. These might include cost management expertise, market access, value chain risk management, and many others. We are beginning to see a few deals that use these insights to create value for both parties, and we will surely see many more such “Dances with Wolves” in the future.

Key Conclusions:

In the neo-globalizing world, NOCs have new priorities and new roles, so the old paradigm of NOC-IOC relations does not apply.

IOCs have strengths that are valuable to potential NOC partners, although these are not the same set of strengths NOCs sought from IOCs relationships in the past. IOCs will need to identify and repackage the strengths that NOCs need and that can create value for both parties in a partnership.

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Robin West is PFC Energy’s Chairman. For further information on this article contact Enews_rwest@pfcenergy.com.