Comments: The Rise of INOCs
Authors: Donnelly John 
Published: February 2015

The value of transactions in the oil and gas industry last year more than doubled from 2004, the most activity since the corporate megamergers of 1998–99. And some of the most active players were the formerly stodgy national oil companies (NOCs). Gazprom's U.S. $13 billion takeover of Sibneft and China Natl. Petroleum Corp.'s $3.9 billion buyout of PetroKazakhstan were two of the largest deals that took place last year, according to consultancy John S. Herold, and China Natl. Offshore Oil Corp.'s unsuccessful $18.5 billion bid for Unocal also made headlines. There was a threefold increase in NOC international merger and acquisition activity last year, according to Herold.

Times have changed for state-owned enterprises. Most were founded to ensure national energy independence for their countries and have been major employers as well as major funders of government coffers. Now, it is just as likely to see NOCs competing head to head against the majors for prized acreage or for other companies. Some analysts have begun calling these more aggressive state-owned firms international national oil companies (INOCs). The industry is more internationalized, and state companies have become more adept at using technology. States are also concerned about security of supply.

The shift of technology ownership from operators to service companies over the past decade and firmer oil prices—which has lessened the need for external financing of some big projects—also have played a role, according to the Accenture consulting firm. Accenture interviewed the senior leaders of 10 NOCs about their objectives. All were interested in growth opportunities, but each had their own distinct priorities, often reflective of their government's policies. All indicated a desire to investigate deals beyond the typical production-sharing or joint-venture contract that, up to now, has been a mainstay of NOC business partnerships.

The consequences for the private international oil companies (IOCs)—and the future global energy market—are huge. This new competition is driving up bid prices and pinching returns for private companies' international projects. And the majors are increasingly looking for oil outside mature provinces in places where state enterprises dominate the landscape.

Relationships between NOCs are becoming more strategic and longer term as dealings between IOCs and NOCs are becoming more transactional, the Accenture report concluded. NOCs working together make a formidable bidder for projects. China Natl. Petroleum Corp., Lukoil, Uzbekneftegaz, Petronas, and Korea Natl. Oil Corp., for instance, recently joined forces to develop gas fields in Uzbekistan. Often, an NOC and its host government would prefer to work with another NOC, particularly if the countries have similar geopolitical interests.

In a recent speech in Singapore, BP Chief Executive Officer (CEO) John Browne pointed out that eight of the 10 largest oil companies in the world are state-owned. "Those state companies control huge resources, far more in total than all the private-sector companies put together," he said. Since 2003, more than half of all reserves sales have been to state companies, he said.

To participate in this new competitive climate, private companies will have to bring value to the table, Browne said—namely, "the ability to access and apply knowledge very rapidly on a global scale." That means technology and the skill to apply it. His contemporary, Jeroen van der Veer, Chief Executive of Royal Dutch Shell, agrees. "National and international companies have complementary strengths, and our relationship will be vital for the future," he said at a recent Houston energy gathering. Several NOC leaders in the Accenture study mentioned that they are envious of IOCs' downstream assets and technology.

While NOCs may appear to have an advantage over their private counterparts, they also have the burden of satisfying their government's financial needs. In the future, IOCs and NOCs may pursue mergers with each other, particularly if the size and scope of energy projects become burdensome. IOCs and NOCs certainly should consider pursuing joint ventures outside the host country and looking at ways of developing partnerships across the value chain, Marathon CEO Clarence Cazalot said recently. The bottom line is that IOCs need the resources the NOCs control, and NOCs need the technological expertise of private companies, he said.