7. NOC and IOC relations
NOCs and IOCs can best be described as having a love-hate relationship.
NOCs have in some countries completely unseated IOCs in resource projects. In the 1970s resource nationalisation strategies in the developing world and in the second resource nationalisation wave of the 2000s, NOCs were established as the governments’ replacement of IOCs in resource projects or privately held companies were nationalised into NOCs and IOCs excluded from operations. This was the case with for instance, Saudi Aramco and Venezuela’s PDVSA.
NOCs in many developing countries work as partners with IOCs. This is especially in developing countries where the government and NOCs still lack sufficient capacity, technical competence and funding, to carry out oil and gas projects exclusively. Such partnership is usually in the form of being counterparties in PSCs and in NOCs having a carried interest or participating interest in development operations on behalf of the government.
Local content policies and technical capacity
Local content policies are also used in a government’s policy mechanism, in order to influence partnership between NOCs and IOCs. Local content policies were first introduced in the North Sea in the early 1970s. NOC participation as a local content tool is in addition to bidding parameters that include local content, contractual requirements that favour local goods and services, requirements for investment in local infrastructure and education, mandatory local incorporation of foreign companies and local ownership requirements.
An example of the technical capacity and funding gaps that call for NOC-IOC participation is in Kazakhstan, where its NOC, Kazmunaigaz (KMG), is financially overburdened and lacks the technical capacity to operate major offshore projects. IOCs are integral to the Kazakh government, despite the sometimes strained relations. For instance, in Kazakhstan, PetroKazakhstan, a Canadian company with interests in the Turgai Basin region, was in 2005 imposed with new environmental and tax-related charges. It sold its stake. KMG acquired one third of the project at a discounted price, and China National Petroleum Corporation (CNPC), acquired the other two-thirds of the project.
Explore the Extractives Hub Local Content topic overview for a comprehensive review of this subject.
Disputes between NOCs and IOCs
NOCs have been the subject of bitter petroleum disputes with IOCs, mostly due to: resource nationalisation; as collateral damage due to state actions; and because of operational joint venture relations. For instance:
a) Resource nationalisation and state action – in 2005, the Venezuela government declared some terms and conditions in joint venture agreements between its NOC, PDVSA and several IOCs to be inconsistent with the Hydrocarbons Law, and sought to offer new, less favourable terms to the IOCs. One of the IOCs, ExxonMobil not only commenced international arbitrations proceedings against the Venezuela government, but also applied for injunctions in different jurisdictions, freezing PDVSA’s assets held outside Venezuela
b) Joint venture relations – in the 1990s, Ecuador’s NOC, PetroEcuador had a partnership with Texpet, owned by Texaco and Chevron. Pollution from oil drilling operations in the Amazon rainforests was the subject of 20 years of disputes between the partners, aggravated by the fact that PetroEcuador had over the years taken on bigger roles in conducting and directing the drilling operations.
Promotion of good NOC-IOC relations
In many countries with forward looking natural resource policies aimed at promoting competition, NOCs and IOCs operate as competitors. In a perfect world, such competition should be on an equal footing. However, this is at times not achieved due to the close relationship that NOCs have with host governments. Good examples are reforms in Norway and Mexico which created competition of IOCs with NOCs, and which are discussed in this paper.
Promotion of good NOC-IOC relations whether as competitors or joint venture partners requires a strong regulatory environment and political will of a government.