The recent surge in the oil price is an opportunity for National Oil Companies (NOCs) in the Middle East to reinforce their commitment to transformation. For the moment, profits are plentiful and providing ample funding to their host governments’ budgets. However, the long term pressure on the oil price remains significant and there are no grounds for complacency. Instead, NOCs should intensify their transformation programs so they become more cost efficient, have coherent portfolios, build partnerships, and invest in new energy sources.
During the last eight years, NOCs have launched programs to become more efficient and generate more value. NOCs were responding to the sustained decline in the oil price from a mid-2014 peak of over $130/barrel. The price dropped after the U.S. shale oil boom and the economic slowdown in major oil importing countries. The brief recession caused by the COVID-19 pandemic exacerbated this trend, with the oil price falling below $50/barrel. NOCs suffered dramatically lower earnings, causing significant national fiscal problems.
Among these transformation programs have been the changes at the Abu Dhabi National Oil Company (ADNOC) since 2016. ADNOC has strengthened its corporate core, established a unified brand identity, consolidated its subsidiaries, and established new capabilities such as ADNOC Trading. The company has monetized assets through international partnerships such as ADNOC Gas Pipelines Assets and international private offerings (IPOs) such as ADNOC Distribution and ADNOC Drilling. Other NOCs have similar initiatives. Saudi Aramco’s IPO has unlocked growth capital. Qatar Energy has integrated and streamlined its liquified natural gas marketing by merging QatarGas and RasGas. Kuwait is restructuring its oil and gas sector. Oman has established OQ, an integrated national energy company merging nine legacy companies across the energy value chain.
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Although the oil price has rebounded due to geopolitical concerns, and oil and gas sector investment has surged since 2021, there is uncertainty about how long this will last. In the near term, supply pressures due to the EU’s need to replace Russian energy could be offset by recession in developed markets or a slowdown in Asia. In the long term, key markets are reducing their fossil fuels dependence.
The EU plans to eliminate its need for Russian energy, which accounts for 40% of its gas and 26% of its crude oil imports. EU countries are expected to invest some €210 billion ($220 billion) by 2027 to end these imports. Similarly, most European countries are accelerating their transition away from fossil fuels, with more deployment of renewables, investment in hydrogen infrastructure, energy efficiency, and the deferred shutdown of nuclear power plants. Germany, Europe’s largest economy, aims to have 80% of power in its national grid from renewables by 2030.
What this means is that NOCs should resist any hint of relenting on transformation. Rather, they should accelerate change in four main areas.
First, they should continue to focus on reducing costs and increasing their margins. NOCs should be as financially focused now that the price is high as when it was rock bottom. For example, they can enhance their trading capabilities to take advantage of volatile markets, thereby raising margins. That will maintain their positions as the lowest cost producers of hydrocarbons and strengthen their ability to meet demand at any oil price.
Second, they should focus their portfolios. The move away from fossil fuels will make smaller assets across the energy value chain unattractive—such as isolated international upstream assets or refineries in high-cost markets that are rapidly abandoning hydrocarbons. NOCs can take advantage of favorable valuations to streamline their portfolios, thereby releasing capital to invest in capacity, increase market share, and allay supply fears during the energy transition.
Third, they should build partnerships. NOCs should broaden government and private sector partnerships, in particular by promoting government-to-government engagement in Europe and Asia where countries are concerned about energy security. Allaying these such concerns is a chance for NOCs to become the preferred energy partner and diversify risk. NOCs can promote cooperation by bringing international partners into domestic value chains, sharing investment risk, and jointly mobilizing much-needed technical capabilities.
Fourth, they should decarbonize and invest in new energy sources. NOCs can reduce the carbon intensity of their oil compared to that of other suppliers, while transitioning to the role of sustainable energy providers. They should allocate a portion of their hydrocarbons profits to investment in decarbonization and alternative energy sources.
Middle East NOCs have made notable progress over the last eight years, taking the need for change seriously. The recovery in the oil price is not an excuse to relent, rather it should feed their appetite for transformation.
