As the oil and gas supply challenge mounts, a disconnect between state companies and private companies is threatening output growth. A new form of private-state partnership is needed to bridge this gap, Badr Jafar, executive director of Crescent Petroleum Group, explains.
“The current arrangement of the oil and gas industry is dysfunctional.” Jafar says. “The private and state oil sectors should be symbiotic, but the divide between the two is actually growing. I believe that a new partnership mentality needs to be developed between these two groups to create the stable and focussed environment necessary for sustained productive investment”.
The traditional relationship between National Oil Companies (NOCs) and the private sector, mainly International Oil Companies (IOCs), has been for the IOCs to provide capital and technical expertise to NOCs in return for access to resources and economic returns, typically via a Concession Agreement.
This business model, however, now makes much less sense. Today’s NOCs are not financially weak or technically limited institutions.
Comparing the top seven listed private sector oil companies, the Majors, with their top seven listed NOC counterparts shows how much the gap has narrowed in the private sector’s primary area of core strength: its access to capital markets. The aggregate market value of these leading NOCs is currently around US$750 billion not far short of the approximate $1,000 billion aggregate market value of the Majors. The debt levels of the two groups are also similar on average at c. 15% of market value. The comparable financial strength of the NOCs versus the Majors is further demonstrated by the fact that the E&P capital expenditure commitments of the NOCs looks to have matched the Majors in 2009 and is set to exceed it in 2010.
In addition, NOCs are becoming much less dependent on IOCs for technical industry expertise as they develop their own capabilities. NOCs are now increasingly working with service companies to develop their own expertise in areas suited to their respective oil and gas resources development challenges and increasingly expect their private sector partners to work with them on technical issues rather than keep them at a distance. The fruits of this approach can be seen in, for example, Petrobras’ success in developing itself as a leading deepwater exploration and production company, able to effectively exploit Brazil’s offshore oil and gas potential.
If IOCs continue to offer NOCs the same menu as they have done in the past the current strains between NOCs and IOCs will only increase. A new form of relationship is essential, one that is based on reciprocal cooperation as equal partners. Through a reciprocal partnership IOCs and NOCs can develop a new working model which channels the necessary capital, technology and expertise into oil and gas resource developments. With an ever growing need for sustainable and affordable energy solutions for the world’s 6.7 billion citizens, such partnership based cooperation is essential.
Badr Jafar cites a recent agreement between Crescent Petroleum and Rosneft to cooperate on joint development opportunities in the Middle East and Africa (MENA) as his response to this new oil industry landscape.
“Crescent Petroleum’s Strategic Cooperation Agreement with Rosneft demonstrates the way forward.” says Jafar, “This partnership brings together two companies, pooling their talents rather than acting in opposition to each other. Both Rosneft and Crescent have established relationships within the MENA region on which to draw and both are prepared to commit capital to new opportunities. I expect us to sustain and deepen this relationship over many years, to both parties’ considerable mutual benefit.”
