Explanation of performance ranking

In this appendix we classify the overall performance of the fifteen NOCs in our sample into four categories – high, upper middle, lower middle, and low. The assessments are based on the detailed case studies presented in Chapters 5–19. This classification is then used in other parts of this book, such as the Chapter 3, on how national governments attempt to govern NOCs, as well as the Conclusion that summarizes what we have learned about the factors that explain performance (Chapter 20). As we describe below, characterizing performance at the level of the individual firm – especially for firms that are often secretive and designed to perform many functions – is a necessarily qualitative and subjective process. Nonetheless, any study that aims to explain performance must make an effort to measure its quarry. This Appendix explains what we mean by “performance” and explains our scoring for each case in the spirit of transparency and debate.

For the purposes of comparing NOCs (and NOCs with IOCs), we initially sought quantitative metrics. The Introduction (Chapter 1) summarizes some of the existing quantitative research. Within the realm of what can be measured quantitatively, existing studies show that state ownership does in fact have a noticeable effect on standard performance metrics such as output efficiency, per-barrel operating cost, investment cost, and net present asset values. However, this kind of research is difficult to implement because there are no universally applicable benchmarks for performance comparison between individual companies; the variables that are most interesting to measure are usually the hardest to quantify.

Introduction

In this chapter, I analyze how states govern national oil companies (NOCs) – typically their chief sources of revenue and technocratic expertise. Some governance systems set clearly defined lines of authority, separating policymaker, regulator, and operator responsibilities, whereas others blur those lines almost completely. States differ in their control over NOC budgets, appointments, investments, and contracting arrangements with international oil companies (IOCs).

Despite these differences, a common thread exists: Most NOC governance systems are a hybrid of corporate governance, public administration, and regulation. Many NOCs’ founding laws and organizational by-laws mimic private sector corporate governance models. NOCs typically have a board of directors, hold annual shareholder meetings (with the state as the only or more important shareholder), and pay dividends. Many states also subject their NOCs to the same public administration tools that states use to control government agencies, like legislative budget approvals. And several states use regulatory powers to indirectly control their NOCs, with some also commandeering their NOCs as energy regulators. NOC governance reflects this hybrid blend because of the special challenges posed by managing oil companies. NOCs are almost invariably the leading state-owned enterprise (SOE) and often the largest domestic company, public or private, in the domestic economy. And unlike the perennial problem in many SOEs, which lose money, NOCs usually produce copious rents.

Introduction

Venezuela’s national oil company (NOC), Petróleos de Venezuela, S.A. (PDVSA), has undergone the most significant recent transformation of the NOCs in this volume. Between its 1976 creation via nationalization and the early 2000s, PDVSA was one of the most capable, forward-thinking, and autonomous NOCs. During 2002 and 2003, however, it launched a series of politically disastrous strikes against President Hugo Chávez. After surviving the strikes, Chávez purged the company in 2003 of (real and perceived) dissidents, converting PDVSA from a commercially oriented firm to one that is less proficient but much more attentive to state objectives. The current version of PDVSA functions simultaneously as an operating company, development agency, political tool, and government cash cow.

Yet in some respects the PDVSA of today remains similar to its pre-Chávez incarnation. PDVSA has maintained its status as one of the world’s fifty largest companies and two or three largest NOCs (Petroleum Intelligence Weekly 1986–2009). Since the 1980s, the company has held extensive international interests, including major US gasoline chain CITGO. And since the 1990s it has been one of a handful of NOCs to partner with international oil companies (IOCs) in domestic upstream operations (though not without acrimony).

Introduction

An array of state-owned entities – known as “national oil companies” (NOCs) – dominate the world’s oil and gas industry. Concentrated in the Middle East but also based in Africa, Europe, Latin America, and other parts of Asia, NOCs own 73% of the world’s oil reserves and 61% of production. (Their dominance in gas is similar – 68% of reserves and 52% of production.) In most segments of the world economy, state-owned enterprises (SOEs) have waned in influence, often due to government policies that favor privatization and competition. But in oil and gas (together known as “hydrocarbons”) the role of state enterprises is stronger than ever. This book looks at the origins and operations of NOCs, which are a major part of our global energy portfolio and a significant presence in the world economy. Our analysis of NOCs thus has important implications for global oil and gas markets and the shifting balance between market and state.

Despite the common name, “NOCs” play many different roles (see Box 1.1). A few are commercially minded entities little different from their private sector international oil company (IOC) counterparts. These NOCs, like Saudi Arabia’s Saudi Aramco or Norway’s Statoil, are highly profitable and in some cases worldwide operators themselves. Other NOCs carry many political and social functions alongside their commercial missions. These include Russia’s Gazprom – the world’s largest gas company and the Kremlin’s instrument of choice in the 2000s “gas wars” with the Ukraine – and Venezuela’s Petróleos de Venezuela, S.A. (PDVSA), which under President Hugo Chávez is the government’s primary agent for providing social services and nationalizing the domestic economy. Some NOCs perform functions that are normally left to government. Angola’s Sonangol, for example, is foremost a highly effective regulator of IOC operations within the country; its role as an oil producer is secondary.

Introduction

Here we return to the central question posed in the Introduction to this book: Why do national oil companies (NOCs) vary in their performance and strategy? In the Introduction we offered three broad hypotheses that might provide answers. NOC performance and strategy might simply reflect the goals and interests of governments. Alternatively, NOC strategy and performance might mainly reflect the quality of state institutions and the associated mechanisms that states use to control their NOCs. Both of these hypotheses suggest that while NOC managers have a role to play, the actual performance and strategy of NOCs depends mainly on their host governments. A third hypothesis suggests that NOC strategy and performance simply reflect the nature of the resources at hand. Where there are large quantities of “easy” oil and gas to be obtained then adequate performance is not difficult to achieve, but when resources are more scarce and difficult to find and tap then there is a bigger premium on organizing the sector for better performance, such as by opening the country’s oil and gas industry to outside experts or even fully privatizing the enterprise.

These hypotheses overlap and also leave room for many other factors, including management, to play a role. But they help broadly organize this volume. The three cross-cutting chapters in this volume (Chapters 2–4) looked in detail at each of the broad hypotheses. And case studies (Chapters 5–19) examined strategy and performance empirically for a sample of fifteen of the most important NOCs. Those case studies all followed a common framework, reprinted here from Chapter 1 (see Figure 20.1).