Skip to main content

Low oil price challenge for NOCs

Just an observation on national oil companies (NOC) in my region of interest (South East Asia) since the collapse of the oil price in 2014.  An implicit role of the national oil companies is to provide technical and professional employment to the citizens of the country.  There is the trickle down effect of spending by the NOC's employees but also an overall development impact of raising the skills pool of the nation.  So with the oil price collapse, and the continuing demand to satisfy the government's income requirements (some SEA countries have a heavy reliance on oil revenues), the NOCs are faced with a challenge.

Maintaining cash positivity in the face of a 50% cut in income has required oil companies to take action.  Immediately, many suspended investment projects and reduced external non-critical spending.  Next was internal and supply chain efficiencies: cutting staff and imposing blanket price reductions on suppliers.  This immediate cash saving activity has been followed with a period of portfolio re-adjustment.  Some companies offloading assets to boost cash whilst others using the opportunity to acquire assets that provide a better long term strategic fit. 

For NOCs the challenge is that one of these levers to reduce cash outflow, cutting staff, is politically difficult given their implicit role of providing employment for nationals.  Non-critical external spend (like that on consultants) has been slashed and, within their procurement systems, huge pressure has been applied to suppliers to take straight price reductions. But lay-offs of nationals have been avoided. 

The low oil environment does provide an opportunity for NOCs to make good on the ambitions they all had to become truly international operators.  For those that can access funding, there are assets available that would extend their footprint and allow them to move into new areas of oil and gas production using new technologies.  But it seems the needs of public coffers are at least as demanding as those of the shareholders of International Oil Companies as we have seen NOCs re-focus themselves on their national or regional assets.   PTTEP, the Thai NOC's upstream division, have announced such a move after several years of international expansion.

Longer term, as the domestic resources deplete further, NOCs in South East Asia will have to make a decision to either wind-down or seek to convert themselves into true International Oil Companies.  The government shareholders will still derive value from their NOCs but it will have to be as arms length investors.  If such an arrangement is to be successful NOCs can no longer be used as a shadow lever of public policy or worse, a piggy bank to be raided in a cash crisis.

Comments

Popular posts from this blog

Brown paper bag accounting

I recently had cause to recall a type of work I did whilst studying to become a chartered accountant and in the period just after I qualified - brown paper bag accounts .  This is not some kind of under the table tax evasion scheme but a phrase used to describe the accounts preparation work for the smallest of small businesses. It describes what the client would provide in terms of records from which to draw-up accounts, submit their VAT returns and produce their tax returns.  It would be a bag (ok, sometimes and folder or a box) of expense receipts of various types, from shop tills and handwritten chits to vellum fee notes from solicitors.  There would also be a bunch of bank statements and credit card bills.  If you were lucky there would be a cash book which may record the client's drawings (money taken from the business for personal use) but often not. This was at first a huge struggle for a new trainee, but with guidance from senior colleagues a...

What I learnt...as Finance Director of a small UK motor car manufacturer

I was reminded recently of one of the more interesting episodes in my career when, for about twelve months, I was fortunate to be seconded to a small car manufacturer as Finance Director (both the cars and the company were small!).  It presented an exciting departure from my normal way of working but was also an opportunity to learn.  Here are the major takeaways for me from this experience: Collective executive responsibility Being part of the executive team meant that we plotted the course for the company and that we all bought into the strategy and the plan to deliver it.  We were making significant changes to the products, to the manufacturing process and to the supply chain and we all had to be clear about what we were doing, why we were doing it and how we were going about it.  Employees, shareholders, bankers, auditors and the press would be asking questions and we had to be consistent and clear in answering those questions but then in the actions and decis...

Cloud ERPs' impact on Partner business models

Having carried out some recent work with the cloud based version of Microsoft's Dynamics AX ERP offering (now called Dynamics 365 for Operations), it strikes me that the business model being followed by the application developers for their cloud hosted solution is going to have a disruptive effect on the businesses of their partners.  The traditional model was typified by the Application Developers (SAP, Oracle, Microsoft etc.) selling, implementing and supporting their products through a network of independent partner companies. These partners typically cover a region or a country. In this relationship the Application Developer gets a local salesforce and local implementation resources to help their customers get the software working.  The Partner gets a cut of the license fee income as well as implementation consulting income and then ongoing support income. Generally, the relationship is not exclusive, on either side, but the Application Developer requires som...