The NOC Mission and Strategy

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The NOC Mission and Strategy
Jean-Matthieu Castellani Valerie Marcel Good
Governance in Oil and Gas Producing
Countries Chatham House 24-25 February 2005
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Outline

• Why have an NOC?
• How do you define its mission?
• How to you demarcate roles and responsibility of
  NOC and state?
• How do you assure effective decision-making?
• How do you measure success?

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Who are NOCs today?
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Deregulation has advanced . . .Quite a few NOCs
have opened for private owners
PETRO-CANADA 1991
GAZPROM 1996
BP 1977
ORLEN 1999
LUKOIL 1996
YPF 1993
OMV 1987
Sinopec 2000
Petrobras 1997
Repsol 1989
PTTEP 1993
Petrochina 2000
Hellenic Petroleum 1998
elf 1991
Eni 1995
STATOIL 2001
TOTAL 1992
Fortum 1996
MOL 1995
Source Willy Olsen for Statoil
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Why have an NOC?

•  State within a state 
• Development of oil and gas industry slowed by
  bureaucratic processes
• Discourage IOC activity
• Becomes a drain on resources by investing in
  un-economic/risky projects
• Protects an inefficient support of private sector
• Lower exposure to global industry trends and
  technology
• Conservative strategy and investment

• Safeguard against dependence on IOCs
• Optimize resource development
• National control
• Sole risk
• Develop management and technical expertise
• Source of foreign currency
• Support of local service sector
• Control over operational decisions
• Direct country access to rent
• Could be catalyst for cost reduction
• Control reservoir management
• Help implement OPEC policies

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NOC mission and objectives

• A clear mission is key to success
• It also needs to be accepted by all stakeholders
• Objectives must be
• Achievable
• Prioritized
• Stable
• Clear
• Backed by the Government/owner
• Issue with NOCs is tension between commercial and
  national mission

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How do you define the NOCs mission?

• Do you want a narrow or wide mission?
• Explore and produce hydrocarbons
• Optimise development of resources
• Behave commercially
• Maximise oil rent
• HSE standards
• Supply world markets
• Supply domestic market (at socially acceptable
  prices)
• Acquire technology
• Employment and training for nationals
• Promote national economy and favour local
  companies
• Develop infrastructure

narrow
wide
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Issues in setting NOC mission objectives

• NOC have sometimes conflicting objectives
• Change in government priorities
• Interest in keeping it vague
• Often developed in isolation by NOCs
• Knowledge gap between Government and NOC

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Examples of evolving missions
Golden quadrant
Saudi Aramcos New mission concept
Profitability/ Commercial mission
Supply markets
National mission
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Making good decisions

• Establishing decision-making processes
• Need to balance control and autonomy (speed)
• Who appoints the NOCs management?
• There are alternatives for a wider representation
  in Executive Committee and the Petroleum Council
• Civil society representatives
• Domestic industry leaders
• International oil and gas leaders
• What is the difference between oil policy and
  strategy?
• Who does strategy? Who does policy?

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A clear governance structure
Primary Responsibilities
Ministry
Regulator
Shareholder Board
CEO
Management Board
Management Board
Management Board
Business Unit
Service Unit
Project Management
Business Unit
Service Unit
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Monitor or audit?

• Can a state secure its interests (avoid rent
  absorption) without excessive monitoring of NOC
  activities?
• Monitoring can mean
• Loss of speed and autonomy for NOC
• Loss of productivity
• Political interference
• Auditing requires
• Bridging the knowledge gap
• Internal transparency
• When to monitor activities and when to audit its
  performance?

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Fiscal processes

• Seeking a fiscal structure that increases
  efficiency and rent transfer AND provides capital
  for investment
• A) Formulas for state control
• NOC must request funds
• Issues - reduces NOC productivity, initiative
• - investment capital sacrificed to states
  short-term needs
• B) Formulas for NOC budgetary autonomy
• NOC retains a share of profits (eg, after
  royalties, taxes and dividends)
• Issues Possible rent absorption
• NOC must generate own profits (eg, downstream,
  international)
• Issues Diminished interest in productivity of
  rent producing business

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Assessing performance

• 1) What do you need to measure?
• gt Success in achieving the objectives set out in
  the mission
• Requires clear set of priorities at the outset
• Could you adapt IOC performance assessment tools
  to NOCs?
• Benchmarking -- Against whom? With what data?
• 2) How do you measure it?
• gtTransparent internal processes and accounting
• Vested interests are obstacles to transparency
• 3) Who measures it?
• The Ministry of Petroleum doesnt usually have
  the skills and technical knowledge to audit
  performance (geology, accounting, welfare)
• The Ministry and the NOC may oppose introducing a
  Regulator
• Is there a role for civil society? (internal vs.
  external accountability)

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Questions

• What is the hierarchy of objectives of your NOC?
• What is the difference between oil policy and
  strategy?
• What fiscal structure would maximise rent
  transfer and leave enough funds for investment?
• What activities or decisions should be monitored
  (rather than audited afterwards)?