How to create the next-generation national oil company

Sept. 15, 2003
National oil companies (NOCs) worldwide are grappling with the forces of inevitable change.

National oil companies (NOCs) worldwide are grappling with the forces of inevitable change.

"We've had a pretty easy time of it in the last 10 years," the new head of a Persian Gulf downstream national oil company said recently, "but we cannot go on in the way that we have any more."

NOCs operate in many of the same regions, use the same technologies, and sell into the same downstream markets as do international oil companies (IOCs). However, NOCs usually have been far less commercial and efficient than private companies, and they have struggled to stay at the forefront of technological change in the industry.

With a combination of determined leadership and an understanding of the actions needed to make such transformations work, NOCs can and do remake themselves into more efficient, more-commercial operations.

But a Next-Generation NOC (NGNOC) is not simply a fully commercial company that duplicates the profit orientation and efficiency of an IOC. Instead, it has strategic goals that include both commercial and noncommercial elements, and it has a clear understanding of how it will make trade-offs between those goals. What sets it apart from traditional NOCs is its determination to act with speed, flexibility, and efficiency.

Why NOCs lagged

Governments have typically expected NOCs to be more than just commercially effective generators of long-term revenue for the state.

In many cases, NOCs have become the most important contributors to government budgets. And, as political commitments have stretched those budgets, governments have tried to maximize short-term revenue from the NOCs at the expense of longer-term benefits. As a result, NOCs control rich natural resources but cannot retain enough of their earnings to finance needed investments.

Governments also expect NOCs to provide good employment opportunities for their citizens. This means that NOCs face tremendous political pressure to avoid staff cuts and to hire nationals instead of expatriates, even if the pool of local talent is extremely small. As a result, NOCs frequently find themselves in the paradoxical situation of being overstaffed but with a shortage of employees with the right skills.

At the same time, attempts to limit corruption and ensure fairness have caused governments to impose onerous rules and procedures on the NOCs. For example, many of them face tendering requirements that require them to choose the lowest bidder, even if this prevents rapid action and forces them to choose contractors that provide low-quality materials and services.

Creating the NGNOC

Changing an NOC is possible only when its leaders become absolutely convinced that change is needed, and that change must happen right away. But what is the best way to go about creating an NGNOC?

A change program is most likely to succeed if an NOC's leaders and advisors focus on the right things. Our recommendations follow:

• Recognize that an NOC is an NOC. Most states do not wish to privatize their NOCs or to turn them into purely commercial companies. NOCs cannot be expected to quickly carry out large staff cuts, outsource most of their activities, or implement organizational transformations that will turn them into purely commercial companies. As a result, it is usually neither practical nor desirable to take the organizational structure, processes, and approach of companies such as BP PLC, Royal Dutch/Shell Group, or ExxonMobil Corp. and bolt them onto an NOC.

• Start with a strategy. A strategy for an NOC is similar to a strategy for an IOC. However, there is a principal difference: NOCs have to work much harder to balance competing priorities. For example, NOC managers may conclude that large staff cuts are not politically acceptable, despite the undoubted performance benefits that staff reductions could bring. Similarly, NOCs may be expected to forgo involvement in a potentially lucrative project overseas in favor of investment in a domestic development project that appears to offer less favorable returns, at least in a purely commercial sense. NOCs must face these problems early on and prioritize accordingly.

• Don't just change the organizational structure. Although adopting a more appropriate organizational structure can help a company improve performance, structural changes in NOCs do not always have the results that one would wish. In some NOCs, the solution to every problem seems to involve creating a new department, which not coincidentally provides new opportunities for promoting colleagues to higher grades and awarding new job titles. Structural change by itself hardly ever solves problems. The point is to change people's behaviors. This requires pro- cess change and a desire to work in a new way.

• Learn to work with IOCs. Some NOCs are not experienced in working with IOCs as equity partners in local joint ventures, while others have treated such ventures as if their primary role is merely to provide regulatory oversight. The NGNOC will seek to get far more out of its joint-venture involvement and seek to change its orientation from a regulatory role that concentrates on finding IOC errors to a value-adding role that looks for opportunities to improve operational performance. At the same time, NOCs must have a clear understanding of what they wish to learn, so that they choose the right kind of partners and take the right level of involvement in joint projects. For example, Abu Dhabi National Oil Co. (ADNOC) has created a range of joint ventures with IOCs such as Total SA and BP. These joint ventures allow ADNOC to learn from seconded IOC staff, and to see how best to manage complex operations. NOCs such as Azerbaijan's SOCAR (State Oil Co. of the Azerbaijan Republic) and Algeria's Sonatrach have recognized that they do not have the skills they need to work on aging fields using enhanced oil recovery techniques. For this reason, they have begun working with IOCs on projects in older fields. Another area where NOCs can learn a great deal from their IOC peers is in deepwater operations, where only a few NOCs, such as Petroleo Brasileiro SA, have experience comparable to that of the IOCs.

• Get the technical fundamentals right. Changes in organizational roles, supporting processes, and administrative systems can be helpful for improving their performance, but common sense tells us that NOCs can succeed if they can operate at the demanding technical level of today's oil and gas industry. Experience shows that there are six areas where NOCs can address suboptimal technical performance head on: reservoir management, exploration and new business development, drilling, plant operations, integrated supply-chain management, and safety.

Efforts by NOCs to improve processes in each of these areas have been shown to pay major dividends.

Fast-track functional changes

When NOCs decide to make deep and lasting changes, the task can seem overwhelming. There seem to be problems everywhere, and those problems all seem to be linked on multiple levels.

NOC change programs are most likely to succeed when they do not attempt to do everything at once. Instead, management attention should be focused on five areas that are the most likely to create successes that will, in turn, build support for changes elsewhere in the company.

• Planning. The real benefits in planning come from converting NOC strategic plans into operational plans that cascade overall goals into clear statements of what every department and individual must do to contribute to overall success. If done correctly, planning moves from a bureaucratic exercise to a way to inform the whole company about what the leadership wants, and to align staff efforts to so that everyone contributes in the right way.

• Measurement. To make rapid transformation possible, NOCs need to link planning and measurement. Implementing a well-designed, target-setting process can aid a company in quickly simplifying its reporting system, establishing accountability, demonstrating areas where organizational changes can improve performance, and, most importantly, linking plans and measures.

• Rewards. All too often, the civil service legacy in many NOCs means the link between performance and compensation is tenuous at best, as is the connection between performance and prospects for promotion (or dismissal). Employees must be given an incentive to achieve performance levels that fit with corporate aspirations or, in other words, to meet the targets that their balanced scorecards give them. This means redesigning the rewards system.

• Project evaluation and management. An absolute must for creating the NGNOC is to make sure that the company makes the right spending decisions on capital projects ranging from major field developments to purchases of new computer systems and then manages these projects effectively. Unlike the IOCs, NOCs often need to consider projects aimed less at purely commercial goals than at improving national welfare or promoting economic development. NOCs must therefore focus on developing an appropriate mix of commercial and macroeconomic evaluation techniques and on streamlining the project evaluation process so that it is tied directly to company strategic goals and does not require multiple approvals and resubmissions as a matter of course. NOCs can put this sort of system in place relatively quickly.

• Behavior. Taking action to change the ingrained behavior of NOC employees is often the most powerful force for change available. Managers and employees in oil companies from all cultures can make a conscious decision to reduce secretiveness, to promote cooperation, to be honest about problems and obstacles, and to work more effectively in teams.

Leadership needed

The difficult and challenging environment in the international oil and gas industry will not allow NOCs to be complacent. Many are lagging behind their IOC peers technically and operationally, and they are finding it difficult to shake off internal barriers to improvement. But NOCs can rise to meet these challenges.

It is possible for a well-led and determined NOC to transform itself into an NGNOC that balances its commercial goals with its broader national obligations. Doing so requires, first and foremost, a leader who has the power and vision to drive change forward within the organization. That leader must create a strong political consensus for the change program. NOC management and their advisors must also be absolutely clear on their goals, and recognize that their problems might require fundamentally different solutions than those employed by IOCs.

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The author
Christopher Young is an associate principal in the London office of Charles River Associates and provides strategy development, organizational change assistance, and performance improvement expertise to oil and gas clients. Prior to joining CRA, Young was a manager in Arthur D. Little's Global Energy practice, working in the company's London and Moscow offices.