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Comment: NOCs need to up their game

by Guest on Apr 9, 2017

Alexander Franke is the head of Oliver Wyman's Midstream, Trading and Risk practice.
Alexander Franke is the head of Oliver Wyman's Midstream, Trading and Risk practice.
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National Oil Companies (NOCs) and their governments — less than three years ago riding high on $100 barrels of oil — are facing unusually trying times. Thanks to the plunge in oil prices, to below $30 at one point, they’re earning in excess of $170bn less than they did a decade ago, while their sponsor governments are being asked to spend more on defence and infrastructure.

The result: many of their parent governments are confronting daunting budget deficits for the first time. In 2016, Qatar reported its first budget deficit in 15 years, while Saudi Arabia reported its largest shortfall ever the year before. Cumulative government net lending and borrowing by OPEC members went from a positive $188.12bn in 2012 to a negative $312.79bn by the end of 2016, based on data and 2016 estimates from the IMF World Economic Outlook. Between 2014 — the year oil prices took a nosedive — and 2016 alone, OPEC borrowing grew by more than eight times.

The pressure is rising, not just on governments, but also on National Oil Companies, especially those that supply oil-dependent nations with the overwhelming majority of their revenue. To overcome the volatile economics of the oil market and buy access to new markets, the NOCs have been actively investing for more than a decade in operations outside their home countries.

While NOC profit margins have plunged by roughly 9% since oil prices recently hit $50, their decline actually started in 2006, not long after they began to expand their operations globally. The reason? In addition to benefits, internationalisation increased the NOCs’ exposure to risks ranging from delivery delays, cost overruns, and partner disputes on international projects, to a globally diverse menu of regulatory requirements. With more of their operations stretched across continents, there is a risk that the timelines and budgets for even domestic projects may be affected. Expanding international footprints also put them at greater risk of ‘black swan’ events, such as sophisticated cyberattacks, that could trigger global operational meltdowns — risks that few, if any, NOCs had prepared for.

If the NOCs want to compete globally with international oil majors and match their financial performance, they need enterprise risk management (ERM) infrastructures that go beyond recognising and assessing risk to putting a price tag on its potential impact — essentially the monetary quantification of a certain key risk.

Where for years the NOCs were money-making machines fuelling their governments with no reason to diversify and little need for advanced data collection, they have become international players with a requirement for total transparency into their systems and data. They need to use ERM not just for risk mitigation but, if implemented correctly, as a business driver.

First, National Oil Companies need to develop the kind of enterprise-wide risk management systems that embed risk assessment and mitigation into all of their key decision-making processes, such as strategic planning, investments, and business planning and budgeting. This ensures management timely and adequate access to risk-related intelligence and insights that then can be used to navigate through uncertainty with a greater chance of success or better inform decisions on proposed expansions and new projects as well as active operations.

That said, senior managers must understand and know how to apply the data and insights when they receive them. That will require NOCs to professionalise and formalise their ERM by adopting standardised and consistent definitions of risk management concepts and processes, as well as delineating the roles and responsibilities of those who manage risk. It really boils down to establishing a risk culture.

Additionally, NOCs need to invest in the kind of state-of-the-art automated solutions — typically in use at the majors — that will streamline and upgrade internal data flows. Such a framework empowers the entire workforce to protect the enterprise from downside scenarios, increasing a company’s organisational resilience and establishing a consistency in how ERM is applied.

As international operations playing in a much more public space, NOCs are taking on new reputational and regulatory risks as they contend with scrutiny from foreign entities. Outside their own countries, they lack the clout and control they enjoy on home turf automatically, elevating their risk exposure. One key element of their ERM will be the need to recognise the vastly different regulatory environments that exist across their enterprises and develop risk management processes that adequately address the variety of standards and politics.

Ultimately, National Oil Companies have to analyse their own risk appetites and develop a global agreement among major stakeholders on the amount and type of risk they are willing to accept. Without that baseline assessment, NOCs will find it difficult to create the kind of cross-functional cooperation and perspective that will allow them to not only improve their financial performance, but also take advantage of offshore opportunities that will help them continue to grow over the long run.


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