So are IOCs’ days numbered? The CEO of Italian energy conglomerate Eni, Paolo Scaroni, believes that is the case and has said so in open forum on several occasions.
He has pointed out that, during the 1990s, the IOCs allowed investors to push them into calculating value creation by using a long-term oil price of about $16 per barrel in nominal terms.
To make matters worse, stock markets expected that, in such a price scenario, the companies would produce a return on capital employed (ROCE) at least 4-5% in excess of their weighted average cost of capital, which was generally in the range 7-8%.
In Scaroni’s opinion, this was an impossible situation at the outset and the ROCE obsession did huge damage to the oil majors and led to today’s still endemic short-termism, though there are signs of longer-term thinking and decision-making creeping back.
His attack on the financial community is intriguing, as the Baker Institute claims that, while individual NOCs may vary in efficiency, on average, government-held corporations exhibit only 60-65% of the efficiency of IOCs.
The inference is that, if the performance of IOCs has been poor in Scaroni’s opinion, using the Baker’s metrics, the performance of NOCs has been rank bad, which is hardly surprising, in some instances, given the way in which governments frequently siphon off revenues and give little or nothing back. Pemex is a case in point.
Of the market’s obsession with ROCE, Eni’s CEO once said in a speech: “Silently, this phenomenon further aggravated the basic long-term challenge facing the IOCs … reserves replacement, which has emerged as their nightmare in the last few years.”
Eni’s CEO has warned, too, that there is a growing realisation among NOCs that the bulk of Western expertise is now held within the supply chain as a result of the huge structural changes brought about as a result of the global oil-price crash of 1986 and late-1990s slump.
“Outsourcing has led them (the IOCs) to shed expertise, so that, over the last 15 years, a group of oil service companies have developed technological leadership in drilling, exploration, engineering, construction … taking this away from the traditional oil companies that have so irresponsibly surrendered this expertise.”
And yet Scaroni said that only a limited number of NOCs had the ability to cope with the extreme complexity and technological challenge of many of today’s energy projects. So, paradoxically, IOCs still had a role.
Peter Robertson, who, on April 1, stood down as vice-chairman of Chevron, is clear that IOCs do have a role.
“The first thing is that we tend to lump everyone into IOCs and NOCs. But NOCs range from a bunch of people who don’t have much competence … government administrators who set leases to all-comers … to companies at the other end of the spectrum like Petrobras, Said Aramco and StatoilHydro that are world class in specific areas,” says Robertson.
“Take StatoilHydro. I wouldn’t say they have the breadth of a Chevron or Exxon, nor Petrobras, but they are as good at deepwater/harsh-environment exploration and production as anybody. They’ve led the world in many ways. And they’re NOCs. StatoilHydro’s just come into one of our deepwater Gulf of Mexico projects as a partner. They bring lots of expertise.
“So, are there differences between an IOC and the likes of StatoilHydro in terms of tensions or relationships? As far as we’re concerned, they’re a company with an excellent track record.”
Robertson points out that every company has its own peculiarities.
“We bitch and moan about each other, and probably about the national companies that we deal with. But I don’t see the tensions, I really don’t.
“Look, we’re (Chevron) in Venezuela and many others aren’t. We have an excellent relationship with PDVSA. We don’t agree with them on everything; they don’t agree with us on everything. They have their perspective, we have ours. They have their government to deal with; we have Washington.
“We try to stay out of politics, though it’s a fine line as almost everything you do in this industry is political to some degree.
“We try to form relationships with whoever the government is that’s in power. Fact is that governments come and go … I don’t mean to be flip … so if we’re signing up for a 50-year project in Venezuela, the likelihood is that we’re going to have more than one government to deal with over time, and we just have to do our job, try to understand the world from their perspective and try to work with them.”
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