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Challenges and Developments in the NOC-IOC relationship
A new era of volatility and uncertainty increases the need for more long-term, win-win partnerships between International Oil Companies and National Oil Companies, says Malcolm Brinded. IOCs and NOCs have shared interests and face common challenges – from climate concerns to the end of “easy oil”. With a growing diversity among NOCs, IOCs must evolve and adapt to be able to create value-driven partnerships, where risks and rewards are fairly shared. An “Open Doors” approach attracts more foreign direct investment into the energy sector, allowing transfer of know-how, building local resource and supply chain capacities, and generating significant growth to host nations and their people.
I’ve spoken at this event in the past, so I know that many of you will evolve into the very highest industry and government leaders in the coming years.
I use the word “evolve” on purpose. As I’m sure you know, this year is the 200th anniversary of the birth of Charles Darwin – a scientist who believed that in order for living organisms to survive, they must develop, adapting all the time to changing environments.
And so it is for energy companies – particularly at a time when our business environment is volatile both economically and politically, and sustainability challenges are becoming more intense.
So it’s not surprising that the landscape of relationships between National Oil Companies and International Oil Companies (NOCs and IOCs) is changing fast, and that the diversity among NOCs is growing. At the same time – in light of all the volatility and uncertainty – there’s a need for enduring, value-driven partnerships. These are true win-win partnerships created for the long term that remain intact in difficult times, enabling nations and companies alike to generate and share growth.
The economic recession is putting pressure on our industry’s ability to ensure supplies in the longer term. You can see what has happened to costs since 2003 – they’ve doubled.
And there is again a slump in investment: according to the International Energy Agency (IEA), this year’s investment in upstream oil and gas projects will be at least 20% lower than last year. Investments in renewable projects will be around 40% down.
The combination of reduced oil demand, lower oil prices, and the credit crunch has made it unattractive for many countries and companies to invest in new projects or project expansions.
However, the lesson from past recessions is that when the economy recovers, the demand for energy and oil prices can bounce back quickly – and usually more quickly than supply especially when there has been underinvestment during the downturn, such as now.
One thing I’m sure of: the economy will eventually recover – and when it does, the long-term trend of rising energy demand will take its natural course again. Neither China nor India has stopped developing.
What I’m less certain of is how the balance between understandable societal concerns over energy security and the even stronger societal concerns over climate change will affect our industry.
But first, in this speech I shall make three key points, all of which I will illustrate with examples from my daily work for Shell.
First, that NOCs and IOCs face common challenges that require, in response, the full range of our combined skills and capabilities. These common challenges include climate change, and the policies that governments may adopt to combat it – such as those that may seek to displace oil from transport and gas from power generation. Always well-intended – but sometimes misconceived or poorly designed.
Collaboration between NOCs and IOCs is vital to respond to this responsibly. For example, we need to show how effectively we can reduce the CO2-intensity of liquid transportation fuels on a wells-to-wheels basis. NOCs and IOCs clearly share an interest in sustaining the era of hydrocarbons in transport, whilst reducing the CO2 emissions. So together we should be supporting and promoting CO2 capture and storage technology and projects (CCS). Specifically, IOCs and NOCs together should leverage their combined know-how and wider stakeholder relations to stimulate the policy frameworks and demonstration projects that will accelerate successful wide-scale deployment of CCS.
Secondly, I’ll show the growing diversity among NOCs, in terms of business drivers, aspirations and goals. If IOCs want to strike up “win-win” partnerships with the full spectrum of NOCs, IOCs have to understand the NOC landscape and adapt accordingly.
And thirdly, I will make the case for an “Open Doors” approach to NOC-IOC co-operation by major resource holders. Why? Quite simply because this delivers higher levels of foreign direct investment and very significantly greater revenues from the energy sector to the nations concerned. In other words, such an approach grows the pie so there is much more to share.
Common challenges and opportunities
We are embarking on a new era in our industry – one that will be marked by unprecedented degrees of volatility and change. It will require constant evolution and adaptation by companies and the ability to form close, long-term partnerships based on shared interests and values and a combined approach to meeting those common challenges.
This volatility relates to uncertainties on both the total resource available and the lack of clarity on climate policies.
Looking beyond the next 2-3 years as the world emerges from recession, I can imagine two very different outlooks for the coming decades, each of which would pull the energy sector in opposite directions.
In the first outlook, the overarching theme becomes growing scarcity of oil and gas. The decline of “easy oil” and the relentless need for more energy in developing nations dominate the market. Competition for resources is ever more intense. As a result, prices would go up significantly in the coming decades – a continuation of the ’98 to 2008 decade.
Given that in this scenario real-term oil prices will likely be higher in future, the wealthier major resource holders will restrain production, to make sure that output can be sustained over decades and oil wealth shared with future generations.
In the second outlook, it becomes increasingly clear over time that the remaining window for substantial oil production growth will be curtailed by ever more stringent climate policies aimed at displacing oil from transport. In this scenario, producing nations see that at the end of the oil era they may be left with substantial resources still in the ground. It could even trigger a race for market share and reinforce soft prices. At the same time, these same climate policies promote the powering of transport with alternative sources, such as electricity.
In Europe, several governments are already actively promoting vehicle electrification. Germany aims to have 1 million full electric vehicles and plug-in hybrids on the road by 2020. In the smaller Dutch market, the government expects the number of fully electric vehicles and plug-in hybrids to be at least 200,000 in 2020, growing to a million in the ensuing years. This is over and above the growing number of regular hybrids such as the Toyota Prius. Similar plans and intentions exist in France, Britain and Denmark.
China and the USA have also announced plans to become electric mobility leaders.
At Shell we’re not opposed to vehicle electrification. Over a billion new vehicles are expected to come on to the world’s roads between now and 2050 – more than doubling today’s total. There will be need and room for different energy sources and carriers.
What’s more, we’re involved in the electric mobility value chain in many ways, including:
- through the natural gas we deliver to the power sector;
- through our coal gasification technology that enables a cleaner use of coal and more effective application of CCS technology; and
- through our sizeable wind power business, chiefly in North America.
All of which is needed to generate the electricity without which there can be no electric mobility in the first place.
But alongside this, we also believe that NOCs and IOCs should work together to preserve space for oil in transport by reducing the CO2-intensity of liquid transport fuels on a wells-to-wheels basis.
We can develop high-efficiency conventional fuels, mixing in sustainable biofuels and synthetic fuels, and build lighter-weight vehicles. We can develop more efficient engines, fuel-saving lubricants and, in the longer term, apply CCS to oil production and refining. In this way, liquid transport fuels can compete with vehicle electrification on cost, convenience and cleanliness grounds for decades to come. We need to be united in our advocacy of this as a cost-competitive route to achieve climate objectives.
Yet, we should also bear in mind that where CCS could – and should – be applied most effectively in the near term is in coal-fired power generation.
Coal and CCS
The IEA says that in the period to 2030, the growth in CO2 emissions from existing and new-build coal-fired power stations in just three countries – China, India and the USA – will be double the growth in emissions from transport in all countries worldwide.
Applying CCS to coal must clearly be a priority if the world is to tackle the threat of climate change and the rapidly closing “CO2 space” between today and 2050.
This is materially important to all oil- and gas-producing nations and companies if we are to prolong the place of our products in the global energy mix.
So today, in the run up to the Copenhagen climate discussions, I would urge the NOCs of oil and gas producer nations to promote the need for CCS in coal-fired power generation globally, in order to sustain the responsible use of hydrocarbons in transport.
So much for NOC-IOC alignment in energy policy advocacy. What about partnership in our core businesses of oil and gas?
The past 40 years have seen huge changes and swings in the roles of IOCs and NOCs. In the 1960s, IOCs concentrated on developing and exporting resources and – let’s face it – were not nearly concerned enough about adding value to the host nation. In the 1970s the pendulum swung the other way and we saw many host nations focused on nationalisation of resources without recognising the value IOCs could add. The last 10-15 years or so has generally seen a much healthier balance evolve, with a mature relationship between IOCs and NOCs.
At Shell, we have the utmost admiration for NOCs – for the skills and capabilities of their people, for their R&D programmes, and for their stewardship of national energy resources in the best interest of their countries. NOCs today are knowledgeable, capable and confident – we know very well they don’t depend on IOCs – and they can access capital in many other ways.
But today, IOCs, with their integrated, global capabilities can contribute other strengths to add value to NOCs in three main areas:
- developing and deploying technology;
- widening the customer base and extending the integrated value chain; and
- helping to build local skills, and supply chain capabilities.
I will give you one example on this last point: in 1977, a small Omani construction company with less than 30 people, won its first contract from Petroleum Development Oman, worth just $2,000. Galfar is now one of the largest engineering and construction companies in the Middle East, employing 25,000 people – and its wide-ranging work for PDO includes the huge Harweel Enhanced Oil Recovery project.
IOCs have to appreciate the increasingly varied NOC landscape. In Shell, we try to understand differences among NOCs – not just in terms of resources and assets, but in terms of history, company culture, ambitions and aspirations. We need to understand these aspects to determine how we can best adapt what we have to offer to meet their needs and be their partner of choice.
Today, there are well over 100 NOCs worldwide. One aspect they have in common, of course, is partial or full state ownership.
But there is no such thing as a typical NOC. NOCs differ widely in their origins, objectives and goals. Roughly, there are those that focus mainly on domestic resources, and those that focus increasingly on international resources.
Growing diversity of NOCs
Let’s start with those that are more focused on domestic resources. These include the traditional NOCs, usually found in countries with large oil and gas reserves. Their primary role is to deliver economic rent from the nation’s petroleum wealth. They prefer to bring in third parties such as IOCs, and service companies – for technology, operational expertise and, in some cases, capital. Increasingly they also welcome other NOCs as co-investors.
As Shell we welcome this. In Syria, the Al Furat Petroleum Company is 50% owned by the government and 50% by Shell and a joint venture between the China National Petroleum Corporation and India’s Oil and Natural Gas Corporation (ONGC). We share knowledge of operations and engineering practices with these NOCs, and we increasingly procure equipment and products from China for our projects there.
Then there are those NOCs increasingly focused on developing international resources. They aim to secure supplies for their growing domestic energy needs – possibly because their country’s national resources are not large, or are becoming depleted. These NOCs – with the strong backing of their home governments – can often be excellent partners for the long term. Shell, for example, partnered with CNPC, China Petroleum & Chemical Corporation and the Turkish Petroleum Corporation in a joint bid for the Kirkuk oil field in Iraq in the recent bid round. Not awarded yet – but we of course hope to see it progress.
Many NOCs have a solid and deep capability in conventional oil and gas plays, but they are also very much open to entering into technically complex plays, such as deep water, with IOCs like Shell.
Our multi-field project Parque das Conchas – Park of Shells – in ultra-deep water 110 kilometres off Brazil’s south-east coast – which recently came on-stream – is a great example of such a partnership.
With heavy oil and water depths of nearly 2,000 metres to contend with, we had to overcome a number of technical challenges to make this project a success.
We couldn’t have worked alone: our partners were two NOCs – Petrobras, which provided some specific deep-water technical know-how and, of course, its relations with local stakeholders; and ONGC.
Together we have opened up a field with huge resources – using a floating, production, storage and offloading (FPSO) vessel that has the capacity to process 100,000 barrels of oil and 50 million cubic feet of natural gas a day.
It’s the first full-field development utilising subsea separation and artificial lift; the first use of steel lazy wave catenary risers tied back to a turret moored FPSO; the first use of steel-tube electro/hydraulic umbilicals incorporating high voltage electric transmission circuits; and the first well completions utilising surface blow-out preventer technology.
Parque das Conchas is a perfect testament to strong relationships, shared values, and a belief in technology.
There are of course some NOCs that are truly global players. They are very similar to IOCs in terms of their business models, but retain partial government ownership. They are sometimes called the INOCs. Such companies co-operate with other IOCs chiefly in projects where innovation cost-management and risk sharing are key. Think of companies like Petronas – a partner with Shell in Egypt as well of course as in Malaysia – and StatoilHydro, partnering with Shell in the Corrib gas project in Ireland, as well as in Norway.
Finally, let’s recognise that when NOCs focus for decades on their own national petroleum resources they develop highly advanced technical and commercial skills in their own particular areas of expertise – for example, Russian companies very accustomed to sub-Arctic and Arctic conditions and technology.
Salym in Western Siberia is an excellent example. Here Shell technologies and expertise have combined with Russian experience and capabilities to create a highly successful project.
Production began in 2004 and now exceeds 160,000 barrels of oil a day. More than 95% of employees are Russian.
Yet when Shell first began to consider this project there were doubts that a foreign company could achieve anything innovative in Western Siberia, traditionally the home of Russian oil and gas operators.
How did we do it? By realising very early on that the experience of our Russian partner, Sibir Energy, and the local Russian contractors would be essential to success.
Our achievement hinged on the combination of proven Russian drilling skills and equipment with advanced Shell technologies, and expertise. Our “Drilling the limit” approach, for example, has achieved great results. The first well took 33 days to drill. The average time today is 10 days – and our record for one well is less than six days. That’s a remarkable drilling rate – especially as the local competitor benchmarks remain around 15-20 days.
Today, our local Salym suppliers have capitalised on this experience to compete successfully for international tenders. One of them is now supplying pipeline equipment for Shell ventures across the Middle East and Africa.
It’s worth noting here that IOC-NOC partnerships can flourish, not only in upstream, but also in downstream. This brings me to the point I made earlier: jointly building exposure to the integrated value chain. A good example here is Motiva, the Saudi Aramco-Shell venture in the USA, which runs thousands of petrol stations there and is currently building the largest refinery expansion project in the USA for 30 years in Port Arthur, Texas. Incidentally, Shell and Saudi Aramco are also joint shareholders in the major Showa Shell refining and marketing company throughout Japan.
In all these examples, NOCs and IOCs have each been able to bring something different and valuable to the partnership, generating more economic growth over the long term for both parties; while sharing risks and rewards fairly, including when the going gets tough.
Now, to my third and last theme – Open Doors.
As we look towards the future, I believe that stability in our industry will be greater if commercial entities are allowed the freedom and trust to find the most cost-effective solutions.
The evidence suggests that countries with an “Open Doors” attitude to NOC-IOC partnership attract much more foreign direct investment into their energy sectors.
In practice, this means more exploration wells are drilled, reserves grow more quickly, production grows faster and is maintained at higher levels, more energy is freed up for exports, and more revenue flows to the national exchequer.
Here are a couple of examples – in Qatar, proven reserves are now around five times what they were in 1990. In Angola, nearly 10 times. In both countries, production is growing very rapidly – and foreign oil and gas sector investment averages around $10 billion a year in each case. Both are countries with a relatively Open Doors approach to IOC investment and technology.
Investment and reserves growth are considerably less in some other countries.
So I do think that if we let partnerships flourish, we could see some really positive surprises in coming years. Imagine Iraq reclaiming its position as a leading oil-producing country and producing over 5 million barrels a day.
Or, if and when a political solution has been achieved that brings Iran back into the international mainstream, seeing that country export 20 million tonnes of liquefied natural gas (LNG) a year by 2020.
Finally, you have probably heard from some of the previous speakers that the future of our industry also depends on opening up resources in frontier areas, such as the Arctic and sub-Arctic.
The relation between IOCs and resource holders is also one where creating value, sharing rewards and transferring skills generate the “win-win” partnership I referred to earlier.
Sakhalin II in Russia is a case in point. It is one of the world’s largest integrated oil and gas projects, as well as Russia’s first offshore gas project and LNG plant.
LNG production began in March, and we have produced twice the planned number of cargoes, thanks to the flawless start-up programme of LNG trains 1 and 2 this year – the best start-up in LNG history.
As people in our industry will appreciate, it’s been a huge undertaking. Conditions in Sakhalin are extreme: temperatures fluctuate between minus-40° Celsius in winter – so cold that the sea freezes – and plus-30°C in summer. And there’s a high risk of earthquakes. It’s one of the most inhospitable places on earth.
At the peak of construction, 25,000 construction workers were involved. They built two offshore platforms, two onshore processing plants, the LNG plant and the export terminal, and laid two pipelines of 800 kilometres each. Over 70% of all contracts were awarded to Russian companies, over 80% of the worked hours were by Russian nationals and over 90% of the material and equipment were resourced in Russia.
It has not been easy – there were some bleak moments on the way and not just from the weather. But with the joint success we have achieved with Gazprom and our Japanese partners it is not surprising that the Russian government – and all the partners – are now looking at future projects.
Indeed, we at Shell believe that Russia could become one of the world’s largest LNG exporters. There are many other countries where we could see similar transformations.
In such an Open Doors world, Shell aims to be partner of choice in a number of areas: delivery of large complex projects, technology development, and local capacity building and supply chains.
With technology so vital to us, we make available to our NOC partners our learning and development programmes with their excellent technology and leadership content.
And as you may have heard, we have recently reorganised our company: we are further increasing our focus on technology, and on improving project delivery with lower costs.
Shell has shown it has the stamina and capability to form and develop very long-term and successful partnerships. In Oman we are involved in a wide range of thermal, miscible gas and chemical enhanced oil recovery projects. In Brunei, our smart wells snake horizontally and vertically to access hundreds of small reservoirs in the offshore Champion West field. And in Malaysia, the Gumusut-Kakap field now being developed is our first deep-water project in the region and will employ Malaysia’s first deep-water semi-submersible system.
We have been working in these countries for between 50 and 100 years, and we are still providing value by deploying new technology to maximise oil recovery, as well as continuing to develop national talent.
In fact, more than half our capital expenditure each year is with NOCs – this year our total capex is likely to be around $32 billion.
Before I open the floor for questions, I would like to share with you one more successful partnership, of which we in Shell are extremely proud, as it offers more evidence of the importance of long-term, win-win relationships between IOCs and NOCs: our partnership with Qatar Petroleum. And here I’ll say a little about the perhaps less well-known subject of worker welfare.
Pearl GTL will be the world’s biggest gas-to-liquids plant when construction is complete around the end of 2010. I could talk for hours on the advanced technology needed in this unique 14,0000 barrels-per-day facility making premium fuels and products. But it’s people that are building it. From the start, worker welfare has been a key area of focus for Qatar Petroleum and Shell and I believe this focus is playing a key role in the project’s successful execution.
Around 48, 000 contract workers from more than 60 countries are building the plant. They live in the purpose-built Pearl Village which has a range of facilities and welfare support that we believe help create a sense of community – from sports pitches, to a multilingual cinema, small shops and a bank.
A welfare team organises events and runs a counsellor service offering support to workers who can be away from home for up to two years.
The challenges and solutions for Pearl GTL are unique, but I would like to see a similar level of focus on managing worker welfare in major projects everywhere.
It may seem strange in 2009 to look to a 19th-century scientist like Darwin for inspiration. But I think many of you may agree he had a point. One we should apply to ourselves: we all need to adapt to changing environments.
As our industry faces ever-greater political, economic and technological complexity, there’s an increasing need for the constant evolution of skills, capabilities, and technologies.
A new era of unprecedented volatility and change in our industry is upon us. All the more reason for companies to constantly evolve and adapt, developing close, stable and long-term partnerships based on shared interests and values and a need for combined efforts to meet common challenges.
The oil and gas markets of the 21st century are fast-changing and global. The most successful companies, I believe, will be the ones that can adapt and innovate on a global scale.
Partnerships can help us do that. As the volatility in our industry increases, so the need for enduring, win-win partnerships between NOCs and IOCs will grow. Partnerships created for the long term, that retain their unity in difficult times, enhancing stability and generating economic value for nations and companies alike.