Mark C. Thurber, David R. Hults
National oil companies (NOCs) often behave in strikingly different ways from one another and from private, international oil companies (IOCs). Given that NOCs control about three-quarters of world oil reserves by equity share, their variation in corporate strategy has important implications for the world oil market. The recently released book Oil and Governance: State-owned Enterprises and the World Energy Supply, which we co-edited (along with our colleague, David Victor) and contributed to, explores the variation among NOCs through 15 detailed case studies and several cross-cutting pieces. Building off the research in that book, our aim in this essay is to discuss the differences among NOCs in their approach to risk.
As described by Nolan and Thurber in Chapter 4 of our book, the notion of risk encapsulates both the likelihood of a negative outcome (e.g., of drilling a dry hole) and the loss that such an outcome would entail (e.g., the investment in an exploration well). Risks are pervasive in the oil industry because of the enormous sums of money on the line and the significant uncertainty around whether investments will prove successful. In this article we suggest that the goals of the state and its tools of governance may cause an NOC to tend towards one of three types of behavior: risk avoidance, risk taking, or risk management. Each of these three approaches to risk, we find, can be useful or counterproductive for the state depending on the context.
It can be useful for an NOC to avoid risk, as Sonangol has done, if its government is highly dependent on oil revenue, but this approach usually means that it must allow IOCs to shoulder risks if the oil sector is to thrive. Intelligent risk taking by the NOC, on the other hand, can help build domestic technological capability and may be a reasonable approach if the government has less need to maximize hydrocarbon revenue in the short term. Finally, commercial risk management by the NOC may be an appropriate model where the NOC has developed some competitive advantages and its government has few remaining expectations for the NOC apart from revenue generation. There is no “right” or “wrong” approach to risk for NOCs in a general sense. The goal of each government and its NOC should be to make sure that the way the NOC takes, avoids, or manages risk is of benefit to both the country and the NOC itself.
Link to article (free trial subscription available) => http://www.worldoil.com/June-2012-Risk-attitudes-shape-national-oil-company-strategies.html