A step too far – the rise in power of the national oil companies
For several years now, a major topic of debate within the oil and gas industry has been the increasing tension between the huge international oil companies (IOCs) and the rise in number and power of national oil companies (NOCs).
Key to this change in relationship between IOCs and NOCs has been the growth of the global service sector. Popular opinion has been that the growth of the NOCs throughout the world requires the IOCs to consider appropriate new business models to take account of the change in order. The alternative is for the IOCs to be squeezed out or by-passed as the NOCs look to deal directly with the larger service companies.
But it is not just the IOCs who are facing a changing relationship with the NOCs. Indigenous service companies are also looking anxiously at the rise in popularity of the national oil companies with uncertainty over what the future holds.
There has been a growing trend for NOCs to look at creating their own national service companies, in some cases with major service company assistance, and this situation is creating concern within the existing mid-tier service sector.
One company that has made significant strides in this field is Qatar Petroleum, which has linked with Weatherford to create its own service company, and has also created the drilling company Gulf Drilling International through a joint venture with Japan Drilling Co Ltd. Another is Petrovietnam with its creation of a drilling services division, while a third was the establishment of COSL (China Oilfield Services Ltd.) by CNOOC. Other examples of growing NOC activity can be seen in the United Arab Emirates, Algeria, and Iran.
Suggested reasons for this shift vary. One could be that the NOCs consider they can provide the services they need at a cheaper rate than their indigenous service companies, while another could be that they believe they can create more employment for their own people by bringing the services “in house.” In our opinion, both these arguments are flawed. We believe that the NOCs that go down this route of “super sizing” are losing focus on their real raison d’etre, which is the production of oil and gas, not venturing into the service sector.
We have seen in the past what has happened when a national oil company tries to absorb all sectors of the industry under one roof. In the first instance, it creates a system of unfair competition, where it is difficult if not impossible for the private sector service companies to operate against a nationally owned competitor, often buoyed up by subsidies. In such circumstances the NOCs will clearly be able to claim that their service companies are able to deliver at a lower cost than the private sector, while in reality the exact opposite may be true. Under these conditions, many local service companies will struggle to survive and there is a very real threat that some will not.
The creation of super nationalized companies and the elimination of local competition to such massive firms can create its own problems. At the moment, the competitive environment encourages firms to seek ever-greater efficiencies for their clients through the ongoing development of new technologies, business models, and working practices.
The existence of the private sector in the service industry keeps the industry as a whole lean. The fear is that with the deterioration of the private sector, the service sector that is absorbed into the NOC will become more “flabby,” good working practices will erode, and the NOC’s performance will slide.
In answer to the second argument for nationalizing service companies – the creation of greater employment for local workers – the local service companies already do a very good job. Taking our example, in the last two years AlMansoori has acquired three companies in Egypt – the tubing conveyed perforation division of Energy Inc, Gulf Petroleum Investments, and Alpine Oil Services Egypt – and our policy has been to employ local workers wherever possible.
Earlier this year AlMansoori signed a joint venture agreement with one of the world’s leading core analysis companies, Corex, to establish a new facility in Abu Dhabi to provide the Middle East with core analysis and pressure, volume, and temperature services.
Last year AlMansoori agreed to another joint venture with Hilong Group of Companies of China to establish a drill pipe manufacturing plant and an oil country tubular goods finishing plant in Abu Dhabi, while in March this year Global Chemical Co. LLC, a wholly owned subsidiary of AlMansoori, announced plans for a world leading specialized chemical manufacturing facility in Abu Dhabi costing $20 million. In each case, we will look to provide employment locally.
The expansion of NOCs to create their own service companies may seem attractive in theory, but in practice there are several disadvantages in stretching too far. There is a very real danger such a move will sound the death knell for a number of private sector service companies, and that will remove the very same enterprising spirit that has been at the heart of this industry worldwide since its inception.
Where, in this new order, will the next generation of industry leaders – the risk takers, the pioneers, and the innovators – come from? Will they emerge from these super NOCs? History suggests not.
Abdulla Nasser
Chairman
AlMansoori Specialized Engineering
This page reflects viewpoints on the political, economic, cultural, technological, and environmental issues that shape the future of the petroleum industry. Offshore Magazine invites you to share your thoughts. Email your Beyond the Horizon manuscript to Eldon Ball at[email protected].
