National Oil Companies (NOCs)

16. Best practices

The debate over NOC performance in the past has prompted a number of positive responses. Commercial performance has been enhanced by the introduction of competition (by partnering with IRCs) and by privatisation in varying degrees (by partial listing on stock exchanges). Funding issues have been addressed by adopting flexible contractual formulas (such as carried interests or production sharing) with the private sector that defers or cancels funding obligations. Efficient modern extractive industries sector tax systems can be relied on to generate revenues for the state comparable to those obtained through equity participation without risking public funds.

As reflected in a number of states, most reform recommendations include the transfer (with suitable transition arrangements) of non-commercial functions to government, leaving the NOC to focus primarily on commercial activities. Most states have avoided giving regulatory roles to NOCs in the mining sector, but in the petroleum sector it is quite common for NOCs to have considerable regulatory obligations in addition to commercial functions. This is usually attributable to capacity issues or overriding political considerations.

A measure of pragmatism is required in addressing the presence of non-commercial functions however. Probably the only NOC that has eliminated all of these functions from its portfolio is the Norwegian NOC, Statoil. The challenges to exporting the Norwegian model to other countries are significant in this and in other areas. Context is crucial here. For small states that are commencing extractives development, a strict separation of functions may not yet be attainable or even desirable. For states with limited capacity or political constraints, it may also not be feasible, at least in the near term. Indeed, some countries, such as Brazil, Indonesia, Colombia and India have temporarily assigned regulatory responsibilities to an NOC during an initial phase of development, only to take them away at a later, more mature phase of operations when commercial behaviour appears feasible and when conflicts of interest may create performance costs.

If regulatory functions cannot be separated from the NOC, they can be ring-fenced within it for operational and accounting purposes, and reported in the national budget and accounts. Transfer of regulatory functions out of the NOC is high on all EI sector reform agendas, but internal ring-fencing may be preferable until credible capacity and assurances of good governance can be established in an external agency. Serious commitment to eventual NOC commercialisation is also essential.

Without resources, the path to eventual commercialisation will prove elusive. If revenue cannot be retained by the NOC, or if flows from the finance ministry cannot be guaranteed, the results are likely to be negative. PEMEX, Petronas, and in Nigeria, the NNPC, have incurred significant losses since revenue flows have proved inadequate to cover operational costs on a regular basis. The experience of Angola’s Sonangol illustrates that the opposite, too much autonomy, can have damaging effects upon revenue flows to the central governmental institutions.

Within the NOC, transparency should be accepted as a critical ingredient to good governance. This starts with properly prepared, externally audited, and public accounts. Disclosure of such key data on company finances and activities on a regular basis is critical. One of the ways in which this can be achieved is to partly privatize the NOC, as with Petrochina, Gazprom, Petrobras, KazmunaiGaz E&P (Kazakhstan) and Statoil. This requires the NOCs to demonstrate to prospective investors that they have good commercial prospects, transparent decision-making and accounts that are clear and fit-for-purpose. Adherence to the EITI standard of 2013 would require the publication of information on the in-kind sales of oil, gas and minerals managed by NOCs; on NOC transfers to and from the state finance ministry; on the overall revenues earned by the NOC; and on basic information about quasi-fiscal expenditures on infrastructure, subsidies and debt relief. Behind this emphasis on transparency is the familiar concern with effective performance rather than transparency as an end in itself. It can play a key contributory role in transforming economic success in oil, gas and mineral activities into sustainable advances in development.