Last Updated 18 Jan 2021

International oil companies

Category Industries
Essay type Research
Words 920 (3 pages)
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NOCs perform an indirect role both as a regulator and advisor within the hydrocarbon value chain of a nation. One of the major reasons why NOCs were set up in 1970s was the existence of information asymmetries between the government (principal) and International Oil Corporations (agents). Proponents of NOCs argued that through NOCs, governments would exert adequate control over the IOCs. Surprisingly, after the nationalization wave in the 1970s, the NOCs assumed the position of the agents and it was in their interest not to disclose all information to permit more rent seeking behavior. That notwithstanding, NOCs offer advice to other government departments especially the energy ministry.

The petroleum value chain involves various processes among them exploration, production, storage, refining, marketing, processing among others. Each stage in the value chain has risks with exploration and production presenting the greatest level of risk but with the highest value in the chain. Governments formulate policies that shape the operating environment. These policy choices include petroleum contracts, resource depletion, taxation, and local content, which have a significant impact on the value created by NOC.

To appreciate NOCs, one must take into consideration the political, historical, and socioeconomic contexts under which they were formed. Direct state involvement can be justified based on: the historical context upon which the decision was made; the significance of the industry to the country`s economy; the political gains associated with state control; the benefit of NOCs on industry wide economic efficiency; improved rent capture by the state, and the potential to pursue broader socioeconomic programs through the efforts of NOC's financial and operational strength. Despite the optimism and the valuable reasons for setting up NOCs, their performance in practice has been largely disappointing. Some of the key failures include the economic costs associated with political intervention, NOCs' operational inefficiencies, poor delivery on the non-commercial objectives, weak corporate governance systems, as well as the poor organization of the sector.

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Moving into the future, NOCs are expected to encounter insurmountable challenges in the area of governance and risk management that will continue to shape perception, value creation, and performance for the NOCs. The specific challenges include: The raise of Chinese NOCs: while other NOCs are attempting to create demand for their oil and gas sector, the Chinese NOCs are focusing on securing resources for the country. Read about the impact of globalization on Ghana's economy

In the last 15 years, China has been expanding its acreage holdings particularly in Africa. From 1995, it is estimated that NOCs from China have signed approximately70 exploration and processing contracts in 16 different African countries with 646,000 square kilometer of acreage. However, Chinese NOCs' ambitions to become global leaders will have to face the strong competition between the existing IOCs that are striving for new resources and reserves; creating a more challenging environment for smaller NOCs to become international, such as Qatar Petroleum.

Talent retention and development: many NOCs are suffering from high staff turnover especially in the upstream segment in Europe and North America. Chinese NOCs are equally losing their talented staff to international oil companies. In addition most of the workers in the oil and gas sector are aging (over 45). The younger generation is not willing to work in the industry due to its finite-life nature making staff replenishment difficult.

Environmental factors and climate change: Environmental concerns and the effects of global warming have been accorded significant importance in many countries. As NOCs expand their geographical presence and investment horizons, they must protect the environment not only domestically but also in their overseas operations. While NOCs have achieved significant landmarks in matching their environmental practices to the demands of the consumers, they must continue to do more if they are to remain relevant in the eyes of the public. Negative environmental perception at home, can reduce a company's prospects of securing overseas markets.

Supervising remote operations: As NOCs expand their operations and investments overseas, they face the challenge of garnering and preserving the cooperation and trust of their stakeholders. Any mistake especially in the areas of labor practices, health, and safety can attract the attention of non-governmental organizations, activists and global media. These groups are interested in identifying any inconsistencies between the NOCs practices at home and overseas. Both NOCs and IOCs are expected to observe high corporate standards, and exhibit care for the environment, their workers, and commit themselves to the communities within which they operate.

Relations with international oil companies: NOCs have demonstrated a strong desire to expand their operations beyond their national borders. To expand globally, NOCs have to be in good relations with IOCs. Given the technical expertise and practical experience in the international arena, IOCs are the most attractive venture partners for NOCs. With increased complexity in oil production, NOCs are leveraging on their IOC relationships to develop the needed institutional knowledge in a number of technical area that include reducing corrosion, handling complicated geology, and use of artificial lifting technologies. As the NOCs forge into the future, more alliances, acquisitions, and integration agreements between them and the IOCs are expected. The shape of relationships is however changing from the traditional long-term relations to short-term project based dealings.

References

Al-Mazeedi, W. (1992). Privatizing the National Oil Companies in the Gulf. Energy Policy, 20, 983–94. Center for Energy Economics. (2007).Commercial frameworks for national oil companies. Working Paper, Center for Energy Economics, University of Texas, Houston. Coady, D., El-Said, M., Gillingham, R., Kpodar, K., Medas, P. & Newhouse, D. (2006). The Magnitude and Distribution of Fuel Subsidies: Evidence from Bolivia, Ghana, Jordan, Mali, and Sri Lanka. IMF Working Paper WP/06/247, International Monetary Fund, Washington, DC.

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International oil companies. (2018, May 19). Retrieved from https://phdessay.com/international-oil-companies/

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