Investors Beware: National Oil Company Internationalization Full of Risk

RelevancePetrobras, which has signed an exploration agreement in Portugal, makes a good case study in the rather mixed bag of NOC internationalization efforts. Petrobras neatly illustrates the 2 key success factors for NOC internationalization:

  1. Exploit competitive advantages. For Petrobras these are holding deep water technology developed through its domestic operations and the ability to trade acreage in Brazil as a part of its efforts to access foreign assets.
  2. Compelling business and political drivers. For Petrobras it was simply economics and portfolio management: Brazil does not have sufficient oil resources to support its ambitions for Petrobras to become a major world player. The political will to see Petrobras grow is large, and the changes made include: a large chunk of Petrobras was sold off in a privatization; the Brazilian constitution was changed to allow foreign access to domestic oil; and support for IOC entry to Brazil as part of Petrobras’s foreign access efforts.

AnalysisInvestors planning on partnering with NOCs acting as operator outside their home country should beware. The results so far are mixed, and only in recent times have NOCs learned the painful lessons of past failures. Examples of failures include:

  1. Petrobras (1980s). Petrobras has operated successfully outside of Brazil for some time now, but previous attempts to internationalize were an abject failure. In the 1970-90s Petrobras completely ignored its unique deep water competitive advantage (at that time it was a clear leader) and chose to invest in poor quality land deals in South America that were a poor match with its capabilities and portfolio.
  2. Sonatrach’s political entry into the Middle East, trying to exploit its desert experience. Sonatrach pulled out after it realized it did not have the required technical expertise.
  3. Sidepetrol (ENAP) initially internationalized well through investments in the Latin American countries. However, its investments in offshore US and UK failed due to lacking technical capability and financial strength. There was a rapid decline and non Latin American assets were sold off.
  4. Statoil’s first attempt to internationalize involved partnering with BP to learn operator skills. However, the political will at that time for Statoil to become a national champion evaporated and it became clear that there were no security of supply considerations in Norway. Statoil did not become an international operator at that time.

Recent NOC internationalization efforts have been largely driven by security of supply. China (through CNOOC and CNPC) and India (through ONGC and GAIL) have been particularly aggressive. Both can offer market access, bilateral trade agreements, cheap capital and a willingness to deal with pariah states in their quest for oil and gas. These firms have been paying high prices for assets and it remains to be seen whether the investments will be economic successes.

Increased NOC activity throws up a rather unpalatable paradox for the traditional IOCs: not only are NOCs restricting access to their home countries, they are also expanding to new provinces, increasing the pressure on IOCs to deal with them. It’s becoming a crowded party.

25 May 2007

Speak Your Mind

Do NOT follow this link or you will be banned from the site!