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NOC, Local and Foreign Investor Interests in the Oil Sector: The New Paradigm
By Donald Ibebuike Esq., LLM, Oil & Gas, University of Aberdeen, UK.
Foundation Chambers
24B Apapa Lane, Dolphin Estate, Ikoyi Lagos
d.ibebuike@foundationchambers.com
Abridged version published in The Guardian Newspaper of December 18, 2013 at page
42.
The recent prominence of NOCs in the world oil and gas business has altered the control
structure of most of the world’s oil and gas reserves. The NOCs controlled less than 10% of
the world’s oil and gas reserve in the 1970s but today it is estimated that they control more
than 90% of proven oil and gas reserves. This reversal in fortune has enabled the NOCs to
raise capital and source human and technical resources especially from oilfield services
companies (OSCs). The reliance on OSCs by NOCs for specific capabilities has forced IOCs
and independents to contract-operator service. This change of batten in the industry has
created enormous challenges for the IOCs and the sustainability of their resource-ownership
business model.1 A major challenge confronting the IOCs is the issue of falling production
levels and difficulty in replacing reserves in countries where resource-rich nations have
restricted access to their reserves. It is estimated that the reserve replacement ratio (RRRs) for
the top six IOCs is in the region of 75% over the last ten years. Based on this, it is further
estimated that the top 10 IOCs combined to have an average reserve life of 13 years as
against top 10 NOCs with an average reserve life of 78 years.2
The successful and well run NOCS have developed global reach and influence and now
compete with major private IOCs in the acquisition of exploration, development and
production assets both locally and at international spheres. For example, Thailand’s NOC,
PTT recently outbid shell for Cove Energy’s East African assets and the Chinese NOCs
which had made serious inroad into North American and African assets. The increasing
influence of the NOCs supported by high oil price, have resulted in huge investment in
research and development with the aim of developing new technologies for global
exploration and production3. For example, Malaysia’s Petronas operate in more than 35
countries while Brazils’s Petrobras has developed leading-edge technology for deep-water
exploration, development and production4
These show the competition that IOCs face with these well capitalised NOCs. The
internationalization of NOCs shows that IOCs will continually be in face to face contact not
only as customers, partners or custodians in developing the resources of the host country but
also as commercial competitors on the world oil and gas stage. Owing to the fierce
competition emanating from the NOCs, IOCs have been forced to engage in countries with
1 Bain & Company ‘’National Oil Companies Reshapethe PlayingField’’
2 Ibid.
3 How National Oil Companies canfuelEconomic Development byJose Sa andJohn McCreery
4 Ibid.

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political instability, absence of adequate legal framework as in Iraq as well as in the frontier,
unconventional plays and other expensive resources like Canada’s oil sands for reserve
additions and this has brought in another challenges – high cost of production and decline in
profit margins.5 This competition enhanced the bargaining power of the NOCs who have
capitalised on their comparative advantage to make laws asserting more rights and
participation in the industry. Consequently, IOCs working with NOCs have the obligation to
observe the local content policy, research and development or education programmes of the
host state etc. The availability of low-cost service providers from the host states, supported by
NOCs and their governments, who supply mature technologies has introduced another
dimension in competition with OSCs.
It is worthy to mention that leading NOCs emerged by insisting on awarding contracts to
domestic companies not just to support domestic companies, but also to develop suppliers
that can compete globally. They recognize that unless the scale of oil reserves is large enough
to sustain business for local companies in the very long term, benefits such as preferential
contracts can have only limited impact.6 Norway is a good example in this wise. As domestic
production peaked, the country recognized that Statoil and the Norwegian oilfield service
companies would need to become more international in their operations. They also would
need to compete with IOCs and other global service companies if they were to generate
wealth for Norway. So the country focused on developing local suppliers with strong
Research & Development capabilities. Between 1977 and 1980, Norway established
“Goodwill Agreements“ offering preferential access to new concession blocks to oil
companies that invested more heavily in R&D with Norwegian researchers in Norwegian
institutions. The more critical the technology and the greater the investment, the more
preferential was the access to new blocks.7 This arrangement eventually paid off.
The current trend in Nigeria is in response to the success story of NOCs of other resource rich
nations who developed by asserting more rights over their resources by ensuring government
revenue growth, job creation through industrialisation, security of supply, high profit margin,
local economic and infrastructural development. The emphasis in Nigeria now is directed
towards development of the Oil and Gas Industry to increase the government’s take through
fiscal regime, NOC and active participation of local companies not only in exploration and
production activities but also in the service and supply chain sub-sectors. These ambitious
targets can only be achieved through a competitive fiscal policy, technology transfer,
availability of investment capital, manpower development, capacity building and patronage
of local companies by way of award of contracts.
Nigerian government has taken a bold step towards realization of the set targets by
promulgating the Nigerian Oil and Gas Industry Content Act, 2010 which mandates IOCs and
OSCs to support local content initiative of the government in terms of contract awards,
technology transfer and manpower development. Similarly, the PIB currently before the
National Assembly makes provisions relating to fiscal policy which has generated
controversies between the IOCs and the government. It also provides for the unbundling of
5 Ibid
6 Supra – no 1.
7 Ibid

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NNPC by requiring the incorporation of National Oil Company (NOC) and National Gas
Company (NGC). The essence of which is to shift from the traditional NOC/NGC
represented by NNPC to hybrid NOC/NGC that is commercially driven.
The proposed arrangement under the PIB requires the government to divest up to 30% of its
interest in NOC/NGC to the public through the Nigeria Stock Exchange within 6 years of
incorporation of the companies. This will create a commercially viable concern that can while
representing the interest of the government in the industry also work to ensure value for its
shareholders. The PIB also empowers the Minister to consult with the Upstream Petroleum
Inspectorate and issue regulations or guidelines prescribing targets and programmes for
continuous and increasing indigenous participation in the industry. Such regulations or
guidelines shall include targets for indigenous petroleum reserves, production personnel
content and measurable parameters for determining the level of indigenous participation
which shall be reviewed by the Minister at intervals of two years.
Available statistics as disclosed by the Director, DPR, Mr. Osten Olorunshola in March 19,
2013 edition of the Vanguard Newspaper show that active participation of local companies in
the oil & gas industry is far from being robust. He disclosed that Nigeria has active 173 oil
blocs out of which local companies own 52% representing 90 oil blocs while foreign oil
companies own 48% representing 83 oil blocs. Regrettably, indigenous players account for
only six per cent of the country’s total crude oil production, representing about 150,000
barrels of crude oil per day; while foreign oil companies account for 94 per cent of the total
output representing 2.35 million barrels of crude oil per day. He further disclosed that
government decided to encourage local participation more by introducing Marginal Fields
Policy and awarded 24 fields in 2003. The dismal performance of indigenous companies is
attributed to the lackadaisical attitude of the owners towards development of their fields,
funding constraints, technical competence, non-bankable proposals and litigations among
others.
The purpose of the Local Content Act and the PIB mirrored the model adopted in other
resource rich nations through which they were able to develop capacity in the industry and
encourage their NOCs and local companies to gain competence. Norway’s Statoil with 67%
government take, Petrobras of Brazil with 32% government take, Rosneft of Russia etc with
75.16% government take are good examples of Hybrid NOCs that have successfully
contributed to the development of their respective local economies and have emerged as
international players. Unlike the successful NOCs, NNPC has no international appeal, lacks
commercial drive, lacks capital to fund operations and is technically deficient to carry out
independent operations without recourse to Oil Servicing Companies or IOCs as Alliance or
Joint Venture Partners. Realization of this fact informed the unbundling of NNPC as
contained in the PIB for repositioning to face real commercial challenges.
The recent trend by the NOCs, which combined to hold about 90% of the worlds proven
crude reserves to play active role in the industry has truncated the dominant role enjoyed by
the IOCs and will ultimately further widen the relationship gap of the NOCs and IOCs which
originally has different operational targets – NOCs are interested in the social and economic

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development of their country while IOCs work towards rewards to their shareholders. Any
attempt to find balancing interests of the parties that fail to recognise these differences is
unlikely to be sustainable8.
The following suggestions have been outlined as possible middle ground for balancing the
NOC, Local and Foreign investor’s interests:
 Though it is acknowledged that NOCs are in control of world petroleum reserves but
IOCs are in control of the markets. The IOCs can through cooperation provide the
nationally owned companies with access to the main energy markets and can help to
develop markets for new products. For instance in Nigeria, IOCs helped through
partnership with NNPC to create export market for Nigerian gas through Nigeria
Liquefied natural Gas Limited where NNPC holds 49%, Shell 25.6%, Total 15% and
Eni 10.4%. A similar project worth $17billion is due to take off in Iraq in a joint
venture where Iraqi government holds 51%, Shell holds 44% and Japan’s Mitsubishi
holds 5%. The gas will be used mainly for domestic energy needs as against Nigeria
where the gas is mainly for export. These projects would not have been possible to
realise by the NOC alone due to its complex and technically challenging nature
without an effective and strategic partnership with IOCs.
Consequently, cross-investment throughout the value chain, vertical and horizontal
integration in host countries and access of NOCs to consuming countries' markets
were identified as mutually beneficial approaches that improve security of supply for
importing countries while enhancing security of demand for producing countries.
Governments can help in encouraging this trend to develop further.
 Not least of these challenges is how to satisfy the ever-growing energy demands of
our modern society. This means finding and developing new resources in hostile
environments or technologically demanding situations, which in turn requires sector-
level cooperation. Cooperation between NOCs and IOCs is the way forward to secure
and optimize investment in the oil and gas industry, help ensure its development, and
by inference, improve global energy security of supply and demand. The cooperation
and synergy should be directed towards development of innovative business models
that go beyond the conventional joint venture and Production Sharing Contracts
model and go towards long lasting partnership. Attention may be directed towards
Contract-Operator Service and Integrated Service Contracts (ISCs) model. ISC is of
two types – Risk Service Contracts (RSCs) and Production Enhancement Contracts
(PECs).
For Instance Kuwait through its NOC, Kuwait Petroleum Corporation (KPC) has
adopted Enhanced Technical Service Agreements (ETSAs) which were developed as
a new model to define its relations with IOCs. Through these agreements the IOCs are
to provide the technical knowledge, the know-how, the expertise and the reservoir
management KPC needs.
 Host governments to endeavour to set clear and stable energy policy frameworks
especially as it relates to fiscal policy, since unpredictable and frequently changed
8 AOICORP Research on ShiftingBusiness Models and Changing Relationship Expectations of IOCs,NOCs and
OFCs (Economic Commentary) Vol. 6 No 8 August 2011.

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policies contribute to business uncertainty and have an adverse effect on the viability
of hydrocarbon projects;
 IOCs should ensure that investment plans are maintained and sustained as much as
possible to cope with the decline of production from existing fields and meet future
demand;
 NOC and IOCs should favour dialogue and re-negotiations or mediation when their
views differ on what 'changing circumstances' mean for contracts. This point is
particularly relevant to Nigeria considering the changes the PIB would introduce on
existing projects. In a situation like this, stabilisation clauses in contracts should be
given effect and not jettisoned – pacta sunt servanda. This will promote investors
confidence.
 NOC and IOCs must seek value-driven long-term partnerships that go beyond basic
joint-venture business practices to cover technological and project management skill-
sharing, and demonstrate alignment of mutual interests and commitment to the
development of local infrastructure, and the generation of indigenous employment
opportunities. IOCs are known for their historical philanthropic approach to
contribute in host states through investment in social initiatives like health, education
and the environment. Smart IOCs have moved beyond philanthropic approach to a
more long term strategic needs of the NOCs and their governments by investing in
economic and infrastructure development, internationalization, environment etc. The
IOCs that adopted this long term approach to strategic investment in the host states
are those that are successful in winning business and securing a licence to operate.
For Example in the last open bid in Nigeria, IOCs manifested their reluctance to make
investment for the development of downstream energy infrastructure and assets which
was a key element in the licensing rounds. CNPC, Sinopec and CNOOC were willing
to invest in the downstream and open bidding was only used to establish a fair price
and the Chinese, as strategic partners, were given the right of first refusal, and were
awarded the assets. For effective partnership, IOCs should change this attitude and be
willing to invest in critical infrastructures in the local economy.
Conversely in Trinidad, BP has committed to working for the long term development
of the nation by investing in the local supply chain, education and community
projects. This means looking beyond short term as long term skills development for
local workforces is a manifest intent of handing over operations.
Thinking long-term means leveraging everyday local business, employment and
supplier spend. For example, the IOC that genuinely integrates itself to maximize its
use of a local workforce and supply chain can make a substantial impact on the
economy, while at the same time benefiting from a simplified sourcing model and
economic savings on import premiums.9
9 The Accenture: ‘’The National Oil Company – Transformingthe Competitive Landscapefor Global Energy’’.