National Oil Companies (NOCs)

15. Key policy considerations

There have been problems and controversy with respect to both the assigned functions and the NOCs’ performance in carrying out these functions. Meeting commercial objectives has proved difficult; in fact, with few exceptions, NOCs have scored poorly in this area. This is attributable to a number of factors which primarily include a lack of competition and weaknesses in capacity among them. Funding equity participation in the EI sector has also proved a problem for NOCs. In states where there are urgent competing priorities for the use of public funds, choices not to contribute NOC equity participation in EI sector projects can hold back performance and development of capacity. Other causes have been attributable to political interference (using the NOC as a ‘cash-cow’, for example, or changing the directors or management arbitrarily) and requirements to carry out non-commercial activities.

Assignment of non-commercial objectives to NOCs

By assigning non-commercial objectives to NOCs (sometimes called ‘non-fiscal’ goals), most of which would usually be seen as falling within the proper province of government, the NOCs have the potential not only to undermine their own commercial effectiveness, but also the effectiveness of governmental macroeconomic management. In granting these non-commercial functions to NOCs, governments can unnecessarily complicate macroeconomic management and diminish transparency and accountability. NOC assumption of the role of sector regulator while simultaneously pursuing commercial objectives creates serious conflict of interest issues.

Along with the assignment of non-commercial objectives, the other main impediment to commercial performance relates to a lack of good governance. Primarily, this issue relates to the problem of NOCs becoming captured by a small number of privileged elites who then use the NOC for their own gain rather than for the national interest and poverty alleviation. With access to significant financial flows and the ability to exercise considerable influence over economic activity both inside and outside the resource sectors, the NOCs have been natural targets for control by elites interested in pursuing their own political and personal agendas. In so doing, these elites have an interest in promoting a lack of clarity with respect to NOC operations, in politicizing management, and in ensuring dependency of the NOCs on the elites for funding and other operational prerequisites.

Improving resource governance by NOCs

According to the Natural Resource Governance Institute’s (NRGI) Resource Governance Index, 80%of resource-rich countries fail to achieve good governance in their resource sectors. One of the policy considerations suggested by NRGI to improve resource governance include: extending transparency and accountability standards to state-owned companies; and adopting international reporting standards for governments and companies.

To improve resource governance globally, the NRGI, together with the Columbia Centre for Sustainable Investment (CCSI) provide a twice yearly training course titled: Natural Resources for Sustainable Development: The Fundamentals of Oil, Gas and Mining Governance, which would be of interest to NOCs, among other state players. The NRGI also has country specific training courses on its website.