National Oil Companies (NOCs)

4. State interest

Often referred to as ‘national champions,’ NOCs have been established with a wide range of both commercial and non-commercial objectives. Non-commercial objectives in countries like Nigeria and Angola have included licensing, revenue collection and public expenditures. Other non-commercial objectives can include job creation, development of local capacity, and provision of social and physical infrastructure.

In addition to these roles, petroleum NOCs have also had a key role in income redistribution through the supply of products at subsidised prices for domestic consumption. Importantly, these may not cover even the NOC’s operating costs. If the NOC tolerates an accrual of arrears by consumers, the de facto subsidies can be even higher. More often, governments use NOCs to control the energy sector, and hide the cost of petroleum subsidies when there is political or social pressure to offer low domestic prices. However, this sometimes has negative effects. For instance, In the mid-1990s, Brazil’s NOC, Petrobras was in heavy debt and the government was forced to transfer U.S.$5.8 billion to the company as compensation for selling oil below market price. It is estimated that global petroleum subsidies peaked at U.S. $520 billion in 2008 and reached U.S.$212 billion in 2011, carrying high fiscal and environmental costs. In Uruguay, where the downstream sector is regulated, ANCAP cannot pass on fuel cost increases to domestic consumers, and the NOC offsets losses with debt. Its downstream activities are therefore not profitable.

Another way open to governments to achieve low domestic prices, with respect to hydrocarbons pricing, is to require the foreign oil company to accept a Domestic Market Obligation (DMO). This commonly requires the foreign company to sell a proportion of crude oil production to the domestic market at below the market price. The NOC would at times be the DMO buyer.

Other assigned functions for petroleum NOCs include acting as the petroleum sector regulator, and in the case of petroleum projects under Production Sharing Agreement (PSA), NOCs act as a fiscal or commercial agent selling the government’s share of petroleum on the government’s behalf.

Non-commercial roles allocated to NOCs

Examples of non-commercial roles allocated to an NOC are many. In Angola, Sonangol, the national oil company, has the duty to use its revenues to manage and service Angola’s sovereign debt. In Mexico, PEMEX, the state petroleum company, has directed a program called Gifts and Donations, which aims to promote social development by providing small-scale infrastructure, in-kind goods and cash transfers. This is one of the areas that were targeted for reform in 2013.  It may be argued that the NOC is better suited to provide services to remote communities than the central government: this was an argument that made in Angola with respect to Sonangol. The transparency of any such activities would need to be clear however, with reporting requirements put in place. Often they are not.

NOCs’ performance in pursuing non-commercial objectives has provoked debate and prompted responses aligned with what is now considered good practice. Initially, there was a tendency to evaluate them in relation to the kind of objectives that International Resource Companies set themselves, and identify ways in which they could be more effective in value creation. More recently, appraisals of their performance have focused on their governance, since often they operate with low levels of oversight and accountability. Indeed, recent research has indicated that no less than 18 out of 45 NOCs are not under any legal obligation to report information about their operations and 28 fail to provide comprehensive reports on their activities and finances. However, where existing NOCs have accepted remedial reform measures, there is good evidence of their achieving enhanced levels of performance.

Potential for tensions between the State and NOCs

NOCs should be established as distinct legal entities under the state’s corporate laws and not as a unit within a governmental department. This legal separation assists in providing a clear profit motive and avoids productive enterprises being used for predominantly social or political purposes. Corporatization can also help avoid operational subsidies being subsumed in the budgets of government departments. It can also help incorporate fiscal discipline principles from the corporate world in terms of both capital raising and corporate decision-making. Beyond corporatisation, a partial stock listing (where the state maintains majority control) can bring the added discipline of meeting stock market listing and reporting requirements. The story of the NOCs and particularly the tensions of the NOC and the state over time are very well told in Daniel Yergin's book, The Prize.  Among the significant factors identified there are the ways in which the NOC comes to absorb state roles and can come to compete with the state itself, given the scale of revenues and tax/fiscal dependency. Independent chair-persons and budgetary autonomy could reduce the NOC’s role as an instrument of political control.