NOC Assembly June 2017: Feedback

WBC’s Jon Green and Angus Warren attended this year’s NOC Assembly, hosted by The Oil & Gas Council, in Paris on Monday.  The event was well attended, mostly by African NOCs and Ministries given the follow-on Africa Assembly the next day.  It was good to see old colleagues and to meet new.

 

Despite the challenges faced by the industry over the last 2-3 years the conference was upbeat and dynamic with many excellent presentations and discussions.  Here are some highlights of the NOC Assembly:

 

Current Challenges to NOCs

The following were discussed:

  • Affected by government: elected officials have a four to five year vision in a business that has a ten to 30 year cycle. Ministers and senior civil servants do not necessarily have the necessary knowledge of the business to make informed decisions and directives. Educating upwards is a serious challenge.
  • Excessive social responsibility: exaggerated demands on NOCs and investors for local employment into jobs where skills and education may be insufficient or simply enough suitable candidates do not exist.  Other examples include building hospitals, building schools or over reliance for administration of government.
  • Financial (high debt, low oil price): the budget constraints causing governments to put unmanageable demands on the dividends paid by producing NOCs or to make severe cuts to NOCs trying to solicit direct foreign investment in E&P.  There is increasing pressure on fund managers to withdraw financing of hydrocarbon exploitation, especially sovereign   wealth funds and pension funds.
  • Employment: it was thought that many times NOCs employ too many – larger NOCs often have legacy inflated staffing levels and restrictive regulations preventing the necessary downsizing.
  • International: NOCs have very limited international investment in exploration and have cautious and highly selective investment in international E&P.
  • Flexibility: It was felt that NOCs are reluctant to soften PSC and license terms, especially in reducing fees and obligations.
  • Energy: the move from oil to gas to renewables risks creating stranded reserves – can NOCs respond?

NOC Opportunities

Despite the challenges, it was felt that a number of opportunities present themselves to NOCs:

  • Reducing operation costs.
  • Climate change (including energy policy, efficiency, Carbon Capture and Storage, improving production quality).
  • Move from oil to gas to renewables.
  • The current lower oil and gas prices are favourable to removing fuel subsidies and unloading the tremendous burden on NOC to sell product below market price.

Investment

There was a lively discussion on what governments and NOCs can do to attract more investment.  Options include:

  • Review contracts: extend surface exploration period, reduce drilling obligations, cut fees and bonuses.
  • Improve fiscal terms
  • Efficiency: reduce bureaucracy and delays in approvals and customs processing.
  • Granting instrument: move to service contracts with focus on costs, although it was felt that IOCs will not like this approach, unless it is for mega projects – it could be interesting now that oil companies are more concerned about margins than production and reserves.
  • Extensions: give extensions on existing contracts where otherwise good companies are in financial difficulty.
  • Promotion: support the IOCs in promoting the country and its investment opportunities.
  • Restructure: Saudi Aramco and Oman Oil are planning partial IPOs; Qatar Petroleum is merging its LNG divisions, Qatargas and RasGas.
  • Capability building: invest in training including seconding staff into IOCs.

What are NOCs looking for from IOCs?

There was a session that covered the relationship between NOCs and IOCs and this included a debate on what NOCs are looking for in IOCs:

  • Still looking for capital, project management and technology.
  • Master plans for development of energy sector (including renewables).
  • Development of supply chain
  • Development of capacity, e.g. community relations, on-the-job training and formal education of citizens.

Evidence that link between oil price and economic growth is weakening:

  • Particularly that lower oil prices gives proportionally higher economic growth – may no longer correlate strongly.
  • Net importing countries benefit from low oil prices even if the producing NOC suffers

Cost of capital for NOCs:

  • Mid-single digits for big producers.
  • Mid-teens for speculative NOCs and in countries with high civil and political risk.
  • Cost of capital for the development of infrastructure is lower – may be mid-single digits.

We look forward to next year’s NOC Assembly and more details can be found at Oil & Gas Council.

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