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Prism / 1 / 2006

Recent years have seen interesting changes in the interac-tions between international oil companies (IOCs) and thehost governments and national oil companies (NOCs) thatown or control hydrocarbon reserves. While many coun-tries with modest oil and gas resources are making effortsto attract a larger share of international exploration andproduction investments, several of the countries endowedwith large petroleum resources are moving in quite theopposite direction. These nationalistic trends in thewealthiest petro-nations can be observed in differentregions of the world. They take the form of increased par-ticipation of the state in the oil and gas industry, rises intax and royalty levels, revisions to existing contracts andpossible expropriation of assets. At the same time, severalNOCs are increasingly engaging in international expan-sion strategies and competing strongly for scarce invest-ment opportunities around the world. This should also beof interest to executives outside the oil and gas business,as the trends and lessons explored here can easily beextrapolated to any other industries where globalisationforces are in effect.

Over the last five years, several hydrocarbon-rich countrieswhich had previously opened their doors to internationalinvestors have shown a desire to expand the role andshare of wealth of the state in their oil and gas industries,reducing the share of foreign participants. Some exam-ples in this category include Russia, Venezuela andBolivia. Other countries like Argentina, which privatisedtheir oil industries during the 1990s, have now decided torecreate their national oil companies. And in countriessuch as Saudi Arabia, Kuwait and Mexico, which havebeen toying with the idea of opening their oil industriesto foreign investment for some time, the political debatearound these issues is intensifying.

These recent trends towards increasing nationalism in theglobal oil and gas industry represent a departure fromthe wave of privatisations and openings that prevailed inthe sector during the late 1980s and most of the 1990s

The Resurgence of Petro-NationalismRodolfo Guzmán, Santos Cohen, Román Vélez

Various regions of theworld have recently seen aresurgence of nationalistictrends regarding access tooil reserves. The authorsexplore the drivers behindthis renewed push towardspetro-nationalism and dis-cuss the key implicationsand challenges of thistrend for international oilcompanies, national oilcompanies and non-oilbusinesses in a worldwhere the large majority of hydrocarbon resourcesare owned by states.

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The Resurgence of Petro-Nationalism

(see exhibit 1). The examination of recent events in differ-ent regions helps to identify the symptoms and character-istics of these nationalistic trends (see “Petro-Nationalismaround the World” on the next page). The Middle Eastaccounts for over two thirds of global hydrocarbonreserves and therefore has tremendous strategic impor-tance for the IOCs. All major oil companies would like toeventually regain a foothold in this region. However, twoof the largest countries in terms of reserves - Saudi Arabiaand Kuwait - remain largely closed to foreign investment.In Russia the state is gradually strengthening its controlof the oil and gas sector while avoiding outright nationali-sation. Meanwhile, in Latin America several countries(particularly Venezuela and Bolivia) have recently movedin the direction of increased state participation in theirenergy industries.

25

These recent trends towardsincreasing nationalism in theglobal oil and gas industryrepresent a departure from thewave of privatisations andopenings that prevailed in thesector during the late 1980sand most of the 1990s.

Exhibit 1 Changing Trends in Host Government Postures

Source: John S. Herold, Inc, analysis by Arthur D. Little

Nationalisations1950s-1970s

Increasing privateparticipation 1980s-1990s

The turn of the tide2000-2005

China-CNPC.1950

Venezuela-PDVSA, 1975

Libya- NOC.1970

Angola-Sonagol1976

India-ONGC.1959

Argelia-Sonatrach.1963

Kuwait-KPC.1975

Norway-Statoil.1962

Iran-NIOC. 1951

Norway: StatoilPublic offering. 1999

Argentina: YPFprivatisation. 1992

Spain: Repsol Publicofferings.1987-1996

Iran: Increasing nationalisticsentiments

Venezuela: 51% stateparticipation. 2005

Saudi Arabia: Elusive openingof the oil sector

Kuwait: Postponement of“Project Kuwait”

Bolivia: New hydrocarbon law/change to existing contracts. 2005

Argelia opening. 1991

Russia: 51% state participation.2003-2005

Italy: ENI, transform toa join-stock. 1992

Mexico: Intensification of politicaldebate over private participation

Brazil opening. 1997

Kazakhstan: New tax structure.2003

Bolivia: YPFBcapitalisation. 1995

Argentina: creation of anew NOC. 2004

Azerbaijan opening. 1996

Venezuela opening.1991-1997

Petro-Nationalism around the World

The Middle EastSaudi Arabia and Kuwait remain largely closed to foreigninvestment and it is unclear whether they will modifytheir nationalistic views to open their doors again to for-eign oil companies. Iraq and Iran have both allowed for-eign participation in their upstream sectors, but foreigninvestment continues to be limited due to the highlyunstable political situation in these countries. Only theUnited Arab Emirates and Qatar have reached out to for-eign companies for assistance and provide a relatively sta-ble business environment.

RussiaWith the implementation of a new subsoil law this year,foreign access to the most desirable hydrocarbon assetswill be especially restricted. In future auctions of “strate-gic properties”, the government will retain the right toexclude the participation of any joint ventures that do notmeet the minimum requirement of 51 percent Russianownership. A separate amendment limits the total amountof foreign investment to 30 percent of Russia's strategic oilreserves, and existing legislation retains a 70 percent localcontent requirement for equipment and 80 percent locallabour on all production-sharing agreements (PSAs).

Latin AmericaIn 2001 Venezuela approved a new organic law for liquidhydrocarbons (fully implemented in 2005) to replace the1975 legislation that had nationalised the oil industry. Themain changes introduced in the exploration and produc-tion sector are the limitation of private participation inany project to 49 percent of the total capital, an increasein royalties to 30 percent (compared with 16.6 percentunder the previous law), and an income tax rate of 50 per-cent (formerly 34 percent for private companies involvedin operating agreements or strategic associations). Bolivia,a country endowed with significant natural gas reserves,also approved a new hydrocarbon law last year, which sig-nificantly increased the government's take (raising totaltaxes to 50 percent) and returned ownership of hydrocar-bons at the wellhead to its NOC YPFB (YacimientosPetrolíferos Fiscales Bolivianos).

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The Resurgence of Petro-Nationalism

NOCs Go International

While IOCs are facing tougher times getting access tohydrocarbon resources around the world, many NOCs arestarting to aggressively deploy international strategies. Itis estimated that close to one third of the 120 NOCs in theworld have business interests outside of their home coun-try.

There are several reasons why NOCs are competingabroad. The most important is the need of some large andrapidly growing economies, such as China and India, tosecure their long-term energy needs with access to inter-national hydrocarbon reserves. Other more entrepreneur-ial NOCs like Statoil and Petrobras go abroad to takeadvantage of the technologies or specialised know-how(such as deep-water operations) that they have developedat home. And then there are NOCs, such as Malaysia-basedPetronas or PDVSA in Latin America, whose strategies areclosely related to political and cultural advantages.

The internationalisation of the NOCs creates further chal-lenges for IOCs of different sizes. NOCs do not alwaysrespond to normal commercial pressures and are often will-ing to sacrifice profits in pursuit of their strategic interests.Chinese NOCs, for instance, have made aggressive bids toacquire oil companies and international properties, aidedby their access to low-cost capital from their government.

The internationalisation of the NOCs creates furtherchallenges for IOCs of differentsizes. NOCs do not alwaysrespond to normal commercialpressures and are often willing to sacrifice profits inpursuit of their strategic interests.

27

With the proliferation of regional alliances such as thePDVSA-led* “PetroAmerica”, NOCs are often regardingother NOCs as the preferred partners for the execution ofpolitically sensitive projects. For example, it has beenspeculated that if Mexico ever decided to seek help fromforeign firms to exploit its potentially huge deep-waterreserves, it would be politically more palatable to form apartnership with an experienced NOC such as Petrobrasthan with any of the major oil companies. The potentialthreat to sovereign rights is perceived as lower when thecounterpart is another state because the energy coopera-tion can be placed in the context of a larger bilateral rela-tionship between two friendly countries.

Why are Nationalistic Trends Increasing?

The resurgence of petro-nationalism is the consequence ofa complex array of economic, technological, political andsocial developments that include global as well as region-al and local dynamics. The specific causes of nationalistictrends and the way in which these trends are manifestedcan be very different in countries as diverse as Russia andVenezuela. There are, however, a few common factors thathelp to explain why an increasing number of nations areshifting towards stronger state participation in their oiland gas industries. We will stress three underlying driversof these trends: higher energy prices, commoditisation oftechnologies and general disenchantment with the dereg-ulation policies of the 1990s.

Higher energy prices

The most important force behind the resurgence ofnationalistic trends in the global oil and gas industry isundoubtedly related to the increase in the level of hydro-carbon prices in recent years. As the rent generated by theexploitation of oil and gas resources has increased signifi-cantly, it is only natural for nations to aspire to a largershare of this windfall. Several countries have dealt withthe fluctuations in oil prices by developing progressivefiscal regimes in which the government's take automati-cally increases when commodity prices go up. Others,

The potential threat to sovereign rights is perceived as lower when the counterpartis another state because the energy cooperation can beplaced in the context of a larger bilateral relationshipbetween two friendly countries.

Exhibit 2 Acquisitions by NOCs (2004 - 2006)

Source: John S. Herold, Inc, analysis by Arthur D. Little

CNOOC

CNOOC

CNPC

NipponOil Corp

China

Japan

Nigerian offshore field

Unocal USA, (failed)

PetroKazakhstan

Devon Energy, Gulf of Mexico,Upstream reserves

NOC Country oforigin Target

2,300

18,500

4,200

595

Estimated amount($US million)

CNOOC South Atlantic Petroleum,West Africa Pipelines 2,268

CNPC,Sinopec

EnCana, South America,Upstream reserves 1,420

Sinopec,Sonagol China, Angola Shell, West Africa,

Upstream reserves 600

China

China

China

China

ONGC India PetroCanada’s stake inSyrian oil fields

288

* Petróleos de Venezuela Sociedad Anónima.

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The Resurgence of Petro-Nationalism

however, have implemented more radical reforms, includ-ing changing their hydrocarbon laws and revising exist-ing contracts to obtain an immediate increase in the gov-ernment take. These reactions are usually perceived byforeign investors as a violation of their contractual rights,and they are sometimes attributed to an entrenchment ofnationalistic attitudes and behaviours in the host country.The governments, on the other hand, believe they areonly exercising their legitimate rights to appropriate afair share of the wealth and allow their citizens to benefitfrom the oil bonanza.

Exhibit 3 traces oil prices over the last 55 years. It is inter-esting to note that widespread nationalistic tendencieswere also observed during the 1970s when oil prices werehitting record levels. In 1975, for example, countries suchas Kuwait and Venezuela decided to nationalise their oilindustries. However, the relatively low level of oil pricesduring most of the 90s, exacerbated by the crisis of theAsian economies in 1998, eventually forced many coun-tries to liberalise their energy markets and encouragedthem to compete more aggressively to attract foreigninvestment into their cash-strapped industries.

Oil prices are also a determining factor in the level of cap-ital investment of the NOCs. When prices are relativelylow, governments tend to extract a higher portion of theNOCs' cash flows in the form of taxes and dividends to

29

finance much-needed public spending. This can leave theNOC in a precarious financial condition, and hence for-eign oil firms are desperately needed to bring the capitalrequired for the development of large investment proj-ects. However, when oil revenues are high, NOCs areallowed to reinvest a good portion of their cash flows, andcountries can significantly reduce their dependence onforeign firms in capital investment projects.

Commoditisation of technologies

Increasing commoditisation of technologies in the globaloil and gas industry is also contributing to the spread ofpetro-nationalism. In the past, ownership of proprietarytechnologies was a critical differentiating factor for themajor oil companies, particularly in the upstream seg-ment. Technological advances led by the oil companieswere a major driver of improved performance during the1980s and 1990s. For instance, breakthroughs in explo-ration and production techniques allowed oil companiesto get access to offshore resources in extra-deep waters,significantly increase oil recovery from existing fields andreduce geological uncertainty with the use of 3D seismicmethods.

Despite the tremendous importance of technology in valuecreation, an overwhelming focus on efficiency improve-ments during the 1990s led most of the largest oil firms toreduce their levels of research and development expendi-ture. Significant cost pressures, a wave of mergers and theincreasing difficulty of protecting technology leadershipgave way to new philosophies about the role of R&D as acompetitive tool in the oil and gas industry. As a result,the major oil companies started placing more emphasis ontechnological collaboration and outsourcing, and the abili-ty to assimilate and deploy new technologies became moreimportant than invention and ownership. At the sametime, large service firms such as Schlumberger andHalliburton have been investing heavily in improving theirtechnological capabilities. In this new environment, it ismuch easier for cash-rich NOCs to get access to criticaltechnologies through such service firms, while furtherreducing their dependence on foreign oil firms for the exe-cution of technically challenging projects.

An overwhelming focus on efficiency improvements during the 1990s led most ofthe largest oil firms to reducetheir levels of research anddevelopment expenditure. As aresult, the major oil companiesstarted placing more emphasison technological collaborationand outsourcing, and the ability to assimilate anddeploy new technologiesbecame more important thaninvention and ownership.

Exhibit 3 Crude Oil Price Trends

Source: EIA, analysis by Arthur D. Little

Crude Price (WTI Nominal $/bbl)

60

50

40

30

20

10

01950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

“Seven Sisters” Ruling of the OPEC New pricesparadigm?

OPEC formed

Oil Embargo

IranianRevolution

Gulf War

Asianfinacial

crisis

War in Iraq

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The Resurgence of Petro-Nationalism

Political and social disenchantment

Another factor contributing to the resurgence of petro-nationalism in recent years is the disenchantment withthe neo-liberal policies that were enforced in severalplaces with the support of multilateral institutions suchas the International Monetary Fund. While these policiescontributed to successful economic reforms and vibrantprivate sectors in several countries, in other places, suchas Argentina, Venezuela and Bolivia, the long-term out-comes were not quite as expected. Rushed privatisations,sudden elimination of trade barriers and poorly plannedderegulation of markets in many cases led to greater lev-els of social inequality and popular discontent. As a conse-quence, new governments with fundamentally differentideologies have been elected in some countries and thebanner of nationalism has become popular once again inpolitical discourse. For instance, Argentina, which priva-tised its national oil company (YPF) during the early 1990samidst a wave of market liberalisation policies, decided in2004 to recreate a new national oil company with thename of ENARSA. This recreation of the NOC was in partdue to the government's desire to intervene in the domes-tic energy markets to prevent situations of abuse arisingfrom the oligopolistic positions of a few private players.

The impact of all these drivers must be seen against thebackground of a shift in expectations about long-termhydrocarbon availability due to diminishing explorationsuccess and faster-than-expected depletion of the world'slargest oil fields. Tensions around the control of energyresources are producing various self-reinforcing effectsincluding: 1) heightened concerns in the most powerful nations

regarding their long-term energy security; 2) increasing perception of potential political and mili-

tary conflict around the major petroleum regions; and 3) stronger manifestation of petro-nationalistic trends

around the world. The combination of these elements creates a vicious cycleby putting additional upward pressure on the price ofhydrocarbons.

31

The Implications of Petro-Nationalism

Challenges for the global oil and gas industry

In a world where approximately 80 percent of the totalhydrocarbon resources are owned or controlled by statesand NOCs (see exhibit 4), the resurgence of nationalistictrends can have significant consequences on the dynam-ics and flows of international investments in the oil andgas industry. For instance, securing access to new sourcesof abundant oil or gas reserves is becoming an ever-increasing challenge for most IOCs. In fact, several oilfirms are struggling just to replace the volumes of hydro-carbons they are currently producing, and with few bigoil fields left to be discovered, they are being forced toventure into riskier and harsher environments. The bal-ance of power is therefore shifting in favor of NOCs.

IOCs also need to be able to book reserves, or at leastshare in the profits of their oil developments in order tokeep their shareholders happy. However, this is becomingincreasingly difficult in places such as Mexico, whereemotional arguments about the ownership of hydrocar-bons are rooted in historic events and deeply connected toexpressions of national sovereignty.

The impact of all these driversmust be seen against the background of a shift in expectations about long-termhydrocarbon availability dueto diminishing explorationsuccess and faster-than-expected depletion of theworld's largest oil fields.

In a world where approxi-mately 80 percent of the totalhydrocarbon resources areowned or controlled by statesand NOCs, the resurgence ofnationalistic trends can havesignificant consequences onthe dynamics and flows ofinternational investments inthe oil and gas industry.

Exhibit 4 Proven World Oil and Gas Reserves per Company

Source: Energy Intelligence Agency 2005, Arthur D. Little analysis. Data for 2003

Oil and Gas reserves (Bboe)

300

250

200

150

100

50

0

Yuko

s

Roya

l Dut

ch

Petr

ochi

na

Pem

exBP

Luko

il

Pert

amin

a

Exxo

n

Petr

onas

Rosf

net

Liby

a N

OC

Sona

trac

h

NN

PC

ADN

OC

PDVS

A

KPC

Qata

r Pet

r.

INOC

Gazp

rom

NIO

C

Aram

co

Chev

ron

Petr

obra

sTo

tal

Surg

utne

ftega

z

State-ownedPartially state-ownedPrivately-owned

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The Resurgence of Petro-Nationalism

Meanwhile, contractual rights over oil and gas are becom-ing increasingly vulnerable in various parts of the world.In Venezuela and Bolivia, for example, new hydrocarbonlaws can overrule the validity of any contractual condi-tion granted under previous regulatory schemes. Thispresents a new challenge for IOCs, which now need toreflect the increased level of political and contractual riskin their investment equations.

The implications of petro-nationalistic trends also extendto the arena of foreign policy. In Russia, for instance, thestate is using its increasing oil power as a bargaining toolin its relations with the major superpowers of the UnitedStates, Europe, China and Japan. Venezuela is also capital-ising on its enormous oil reserves to increase its influencein Latin America and attempt to displace the UnitedStates as the dominant player in the region's politics.

Insights for IOCs

In this challenging and unpredictable global environ-ment, it will be critical for IOCs to be able to differentiatethemselves with offerings that go beyond the traditionalprovision of capital and technology. Issues such as localdevelopment, employment creation, protection of theenvironment and communities, training of local staff andtransfer of know-how will be more than ever present atthe negotiation table, gaining critical importance in theagendas of host governments. In some cases, personalrelationships and ideological affinity can supersede thebenefits of technological superiority when competing foraccess to hydrocarbon resources. Although there is noclear recipe for success in this complex and challengingnew world, we believe that there are some basic common-sense - although often ignored - rules that can help theIOCs improve their chances of survival. Some specific sug-gestions include:

1. Invest wisely in local development

Several countries around the world are already demand-ing high levels of local content for large oil and gas devel-opments. In places where the domestic construction andservices industries are still undeveloped, the IOCs need to

33

work out detailed strategies to provide appropriate train-ing as well as technical and financial support to local ven-dors and contractors. This usually requires a completelydifferent approach to project management, demandinggreater managerial attention and effort than the tradi-tional projects where most of the work was contractedout to a reputable international engineering, procure-ment and construction firm. International players with along-term business view should consider these strategiesas an investment in their own success, as the local work-forces they are training will be the enablers of more effi-cient and productive operations in the future (see BP'sCannonball example in Trinidad and Tobago).

2. Support NOCs with their social objectives

For many NOCs around the world state ownership meansthat there is no clear distinction between achieving theirbusiness and commercial goals as an enterprise and con-tributing to the social and policy objectives of their gov-ernments. In fact, these apparently contradictory objec-tives often coexist in the scorecard that is used to meas-ure management performance. While this concept may beanathema to a profit-driven IOC, it is not surprising thatmany NOCs expect their foreign partners to pitch intowards the achievement of their country's social goals.Therefore, rather than worrying about the typically mar-ginal impact that a higher level of community investmentwill have on the rate of return of their projects, IOCsshould look for ways to maximise the impact that theseinvestments can have through a closer alignment withthe stated social goals of the host governments.

3. Be open-minded, but without compromising transparency

IOCs need to be open-minded, flexible and sensitive to theneeds of different stakeholders in their host countrieseven when these requirements extend beyond traditionalbusiness boundaries. However, IOCs should never give uptheir right to specify and make transparent the type andamount of resources that they are willing to commit forthese purposes. Full transparency will always be benefi-cial to both parties. The NOC needs to know how well it is

In this challenging and unpre-dictable global environment, itwill be critical for IOCs to beable to differentiate themselveswith offerings that go beyondthe traditional provision ofcapital and technology.

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The Resurgence of Petro-Nationalism

performing commercially and how much is being con-tributed to its communities and other national goals.Such knowledge also provides the IOC with an opportuni-ty to quantify and disclose its specific contributions,strengthening its public image.

4. Learn local history

The IOCs will need to pay much closer attention to thereal needs of their host governments, and they will haveto develop a much deeper understanding of the historic,social and political factors that affect the decisions of theresource holders. IOCs should carefully evaluate issues ofhigh political sensitivity during the early planning stagesof their energy development projects, identifying solu-tions that are acceptable not only to the governments inplace but also to the population at large. Witness therecent failure of a proposed project to export Bolivian gasthrough a Chilean port, which eventually contributed tothe overthrow of the Bolivian government.

5. Pay greater attention to risks above the ground

While many IOCs pay a great deal of attention to the sub-surface and technical risks of their international explo-ration and development projects, very often they tend toignore or miscalculate the political and macroeconomicrisks associated with these investments. In some cases theIOCs base their investment decisions on misconceptionsthat arise from outdated information or a poor under-standing of the current situation, and this can also makethem miss potentially attractive opportunities. For thesereasons it is critically important for the IOCs to include intheir portfolio evaluations a thorough and objectiveanalysis of all the local, regional and national risks, par-ticularly when they lack an established presence in thetarget country. The idea that every risk involves an oppor-tunity should always be present. In more closed and dis-cretionary business environments, the barriers to entrycan be high, but once these barriers are overcome thecompetitive intensity tends to be lower than in more openmarkets.

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6. Refine negotiating skills

With the balance of power shifting in favor of host gov-ernments and NOCs, it has become apparent that IOCswill need to develop more tactful and diplomaticapproaches in their quest for new hydrocarbon resources.This is a game that can require some degree of humilityas well as a lot of patience and perseverance, but the IOCsneed to keep their focus on the long-term benefits. Toguarantee successful and longstanding relationships withthe host governments, IOCs need to deploy teams withthe power and skills to deal effectively with a myriad ofdelicate negotiation issues, adapt to often-changing inter-locutors and respond to potentially disruptive situations.

7. Reinvent the expatriate model

Most of the largest oil companies still employ a tradi-tional management approach based on using expatriateteams to conduct business in key target countries. High-level business development executives are often rotatedamong different international assignments with typicaldurations of between two and five years. In many casesthese executives do not speak the local language and arecompletely unfamiliar with local culture and traditions.Anecdotal evidence suggests that these kind of executivescan be ill-prepared to deal with the new challenges andcomplex demands of nationalistic governments. IOCsshould therefore try to establish more permanent teamsin countries with high strategic relevance, making roomfor seasoned locals in the top positions of their localorganisations. The goal should also be to establish amerged culture by exposing the local talent to interna-tional experience and corporate indoctrination, therebycapturing the benefits of both worlds.

8. Develop a friendly image

As examples in several industries indicate, foreign compa-nies can be the target of hatred and even violence whenstrong nationalistic sentiments erupt in politicallyvolatile countries. Oil companies' typical strategies to pro-tect themselves against these type of situations involvekeeping a very low profile, avoiding contact with the pub-

IOCs should carefully evaluateissues of high political sensitiv-ity during the early planningstages of their energy develop-ment projects, identifying solutions that are acceptablenot only to the governments inplace but also to the popula-tion at large.

IOCs should try to establishmore permanent teams incountries with high strategicrelevance, making room for seasoned locals in the top positions of their local organisations.

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lic and maintaining high levels of security at their instal-lations. However, these conservative approaches can back-fire when the company has not made any effort to devel-op a friendly image, particularly with the surroundingcommunities at the field level. Several examples amongsmaller and less conventional IOCs demonstrate that amore open and friendly attitude towards local citizensand communities can prove to be a more effective strategyin the long term.

9. Find the right partner

In an environment tinted by nationalistic attitudes bring-ing to the table a partner with the right pedigree canmake a huge difference to the quality of relations withthe authorities. In some cases this partner could beanother IOC from a country with a friendlier governmentor a more suitable ideological stance. In others, IOCscould make a successful move by partnering with an NOCas an entry vehicle to a third country where that NOC hasrelationship advantages. A third and perhaps more attrac-tive option for the IOC is to partner with a local player,thus supporting the host government's objectives of build-ing strong national industrial capabilities.

10. Focus your attention on the key decision-makers

In many petro-nations, the power to accept or reject for-eign proposals regarding energy developments can be con-centrated in the hands of a few individuals. In someextreme cases, these decisions can even require theapproval of the head of the country. While it is importantfor IOCs to develop business relationships at different lev-els with their key counterparts (the NOC, the ministry ofenergy, the hydrocarbon agency, regulatory bodies, etc), itis even more critical to fully identify the key decision-makers and understand what their main decision leversare. Special attention to details such as the educationaland professional background, political ideologies, com-munication style and business or technical views of thekey local decision-makers can help an IOC identify addi-tional selling points or avoid potential roadblocks evenbefore the start of a project negotiation.

37

While it is important for IOCs to develop business relationships at different levelswith their key counterparts(the NOC, the ministry of energy, the hydrocarbonagency, regulatory bodies, etc),it is even more critical to fullyidentify the key decision-makers and understand whattheir main decision levers are.

Chevron in Venezuela is a good example of an IOCunderstanding the mainissues when dealing with foreign governments.

Successful IOC Approaches

BP: Supporting the development of a local construc-tion industry in Trinidad and Tobago

BP expects that it will need to build a dozen offshoreplatforms over the next 20 years to expand its oil andgas activities in Trinidad and Tobago. When the compa-ny initiated its recent Cannonball platform project, itestablished as one of its main goals providing supportfor the development of a local platform constructionindustry. To achieve this the company aimed at max-imising local content and participation in every phaseof the project, training nationals in engineering, pro-curement and construction management services andestablishing a local manufacturing site. This collabora-tive approach is fully aligned with Trinidad andTobago's aspirations to achieve developed-country sta-tus by 2020, while BP hopes to be able to boost its busi-ness development opportunities and future profitabili-ty in the country.

Chevron: Cultivating political relationships inVenezuela

IOCs have been facing a very difficult business environ-ment in Venezuela in recent years. Not only have con-tract terms been revised, but the companies have alsobeen presented with retroactive bills for tax and royaltypayments. Key projects under negotiation for severalyears have been cancelled or restructured to accommo-date re-stated national interests. In these turbulentwaters, Chevron seems to be doing better than many ofits peers. The company has been investing in maintain-ing strong relationships with government officials atthe highest levels and has demonstrated skillful diplo-macy and tact when dealing with politically sensitiveissues. Chevron has also established its Latin Americanheadquarters in the Venezuelan capital Caracas and hasreiterated several times its long-term commitment toVenezuela and the region. Today Chevron remains oneof the largest foreign investors in Venezuela and wasrecently awarded a new offshore exploration block inthe western region.

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Insights for NOCs

Although NOCs in large petro-states may feel that the bal-ance of power has recently been tilting in their favour,they could realise significant additional gains by payingcloser attention to a few critical elements in their interac-tions with IOCs.

1. Capitalise on selected capabilities of IOCs

NOCs need to recognise their technical and manageriallimitations when dealing with new challenges associatedwith very large and complex operations in areas such asultra-deep water or large-scale development of non-con-ventional resources. Although technology is becomingmore accessible to a wider number of industry players,the technical know-how and specialised expertise of anIOC can sometimes be very difficult to replicate. It hastaken decades for the major oil companies to develop corecompetencies and assemble highly qualified managementteams in a few selected areas. BP, for example is wellknown for its capabilities and superior performance infrontier exploration, while Shell excels in secondaryrecovery. These are precisely the types of skills that canbring a great deal of value to any NOC when properlydeployed through a mutually beneficial partnership.

As an example, Kuwait has for several years been enjoyingsignificant production volumes from easy-to-exploit giantoil fields. However, a few of these large fields areapproaching the point where more advanced technologiesand sophisticated know-how will be needed to improverecovery factors and offset production decline. For thesereasons the government has proposed a project, stillunder discussion in parliament, to invest some $8.5 bil-lion, with the support of foreign oil companies, to doublethe production of its northern fields in 20 years.

2. Think long term and aim for the right balance

NOCs also need to keep looking for the right balancebetween protection of their national sovereignty and pro-motion of an efficient and thriving energy sector in theirhome countries. This requires visionary managers with a

strong ability to interpret national sentiment and thecourage to ride on often bumpy roads. But, as the exam-ples of Norway and Brazil illustrate, it is possible for thestate to maintain a strong role in the energy sector in away that does not exclude the benefits of competition andforeign participation.

3. Team up for success

Regardless of whether the trends discussed in this articleintensify or diminish in coming years, it is important forboth IOCs and NOCs to realise that finding a successfullong-term approach to their inter-dependence will be cru-cial to ensuring their success. IOCs will continue to needto identify and secure attractive project opportunities inorder to satisfy the growth appetite of their shareholders,while NOCs have to attend to the increasing needs oftheir multiple local stakeholders by finding a balancebetween short-term satisfaction of national objectives andefficient long-term development of their hydrocarbonresources. To find an answer to these apparently conflict-ing objectives, both groups should pay more attention tothe factors involved in any successful business partner-ship. More and more business models in any given indus-try consider partnering a fundamental pillar for success.Partnering aims to build and sustain competitive advan-tage by enabling easier and faster combination of capabil-ities as well as risk-sharing. These goals need not be anydifferent in the relationship between an IOC and its coun-terpart NOC, but for their partnerships to succeed theseactors need to build mutual trust and establish clear con-tractual arrangements and regular communication vehi-cles around a common set of well defined objectives.

Insights for Non-Oil Businesses

The multiplicity of challenges faced by IOCs and NOCsaround the world, and the analysis of the way in whichthe leading oil industry players are accommodating theirstrategies to respond to these challenges, can generatevery interesting lessons for firms from many types ofindustry involved in international investment activities.One area of particular interest for executives in non-oilsectors would be to study the evolution in the concept of

More and more business models in any given industryconsider partnering a funda-mental pillar for success.Partnering aims to build andsustain competitive advantageby enabling easier and fastercombination of capabilities aswell as risk-sharing.

NOCs also need to keep looking for the right balancebetween protection of theirnational sovereignty and promotion of an efficient andthriving energy sector in theirhome countries.

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Prism / 1 / 2006

The Resurgence of Petro-Nationalism

Rodolfo Guzmán...is a Director in the Global Energy Practice basedin Houston. He has over 15 years of consultingexperience in the oil and gas industry and hasprovided strategic and organisational advice tomany leading international and state-owned oilcompanies around the world. E-mail: guzman.r@adlittle.com

Román Vélez… is a Consultant in the Caracas office and a mem-ber of the Global Energy Practice. He has over 10years of experience in the oil and gas industryand has been actively involved in a variety of ener-gy-related projects. E-mail: velez.roman@adlittle.com

Santos Cohen…is a Business Analyst in the Caracas office, work-ing in the Energy and TIME practices. Santos hasparticipated in energy-related projects in SouthAmerica for both private firms and public entities. E-mail: cohen.santos@adlittle.com

partnership between international investors and resource-holders when dramatic changes are suddenly introducedin the rules of the game.

On the other hand, nationalistic attitudes that germinatearound hydrocarbon ownership issues can easily extendinto other industry sectors, impacting on the businessinterests of multinational firms. The newly elected govern-ment of Bolivia, for example, has announced its intentionto regain control not only of the oil and gas firms thatwere formerly privatised, but also of the firms that hadbeen privatised in other sectors such as telecommunica-tions. Legal disputes between governments and foreign oilcompanies over hydrocarbon contracts could also lead toerosion in the credibility of the whole judicial system,potentially affecting the stability of regulatory frameworksin other industrial sectors. For executives outside the oilsector it is also important to closely monitor the manifes-tations of petro-nationalism in the markets they serve.