The Role of National Oil Companies in International Energy Markets

This study was made possible through the generous support of The Baker Institute extends its sincerest thanks to these sponsors for their support and participation for this important program.

Finalized in 2007, the project explores the influence of emerging national oil companies and partially privatized national oil companies on international energy markets. Throughout the 1990s and into the next century, economic liberalization, market economy reforms and Western-style corporatization management reorganizations have characterized the oil and gas industries of major energy producing countries such as Russia, Norway, Canada and Malaysia, as well as the energy industries of major consuming countries in the developing world such as China, Brazil, Japan and India. These emerging hybrid firms, together with remaining traditional oil and gas state monopolies, control the vast majority of proven resources remaining for exploitation and development. The Western international oil majors now control less than 10% of the world’s oil and gas resource base.

Ranked on the basis of oil and gas reserve holdings, 14 of the top 20 upstream oil and gas companies in the world are national oil companies or newly privatized national oil companies, according to the annual survey of Petroleum Intelligence Weekly (PIW). State monopolies represent the top 10 reserve holders internationally. By comparison, ExxonMobil and the Royal Dutch Shell Group are ranked 12th and 13th while BP and ChevronTexaco are ranked 16th and 19th respectively.

In terms of world oil production, however, only six of the top firms are national oil companies, while ExxonMobil, Royal Dutch Shell, BP and ChevronTexaco represent among the largest oil and gas producers worldwide. These Western majors also have also achieved a dramatically higher return on capital than national oil companies of similar size and operations. Of the top 20 oil and gas producers worldwide, 14 are national oil companies or newly privatized national oil companies, according to PIW. PIW’s ranking shows that Saudi Aramco, Gazprom, NIOC, Pemex, Sonatrach, INOC (Iraq), PetroChina, KPC, Petrobras, Petronas, Yukos, Lukoil, PDV (Venezuela) and NNPC are among the most important oil and gas companies in the world. PIW’s ranking on all measures ranks Saudi Aramco, PDV, NIOC, Pemex and PetroChina in the top 10 oil companies in the world.

The influence of national oil companies on the industry structure and pace of resource development has not been comprehensively studied and therefore is not well understood either by industry leaders or the energy policy community. These national oil companies are in the process of reevaluating and changing business strategies, with substantial consequences for international oil and gas markets. It is a time of great change inside the leadership of these national oil companies, and goals and priorities will be different than those of the Western international majors, with potentially serious consequences for market stability and oil geopolitics. The Western international majors are interested in strengthening ties with emerging national oil companies to diversify their operations and enhance supply security but strategic alliances have been difficult to form.

The gap between the high ranking of national oil companies’ resource holdings and the ranking of the world’s largest oil and gas production operating companies highlights a potential source of supply instability in world energy markets. The fate of emerging national oil companies, their strategies and policies, will have a substantial, long term impact on the pace of resource development in the coming years.

Asian and Russia national oil companies have increasingly begun to compete for strategic resources in the Middle East and Eurasia, in some cases knocking the Western majors out of important resource development plays. Firms such as India’s ONGC and IOC; China’s Sinopec, CNPC, and Malaysia’s Petronas have been successful in Africa and Iran, with eyes now on investments in Saudi Arabia, Kuwait and Iraq. Russia’s Lukoil is also becoming a major international player in key regions such as the Middle East and Caspian Basin. Wood Mackenzie Consultants notes that producing countries are getting more preferential financial arrangements from these firms who do not use rate of return criteria to guide their operations (see Energy Compass March 12, 2004 “Corporate Majors Under Threat”). Many of these emerging national oil companies are bankrolled or have operations subsidized by their national governments, with geopolitical and strategic aims factored into investments rather than purely commercial considerations.

Strategic investment and trade alliances for emerging national oil companies are also being sought on the basis of geopolitics rather than economic considerations. CNPC, for example, is studying forming investment alliances with Petronas and continues to desire a strategic investment in a Russian oil company. Russia, on the other hand, has shown reluctance for its oil companies to connect with Western or Chinese firms but has announced interest in forming alliances with Saudi companies.

The interplay between emerging national oil companies, major oil producing countries and Western consumer countries will have a large impact on the question of energy security and stability of oil and gas markets, raising many questions.

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