Financial performance – national oil companies

Oil and natural gas exports as a share of total exports

20%

High dependence on oil export revenue has long been recognised as a strategic vulnerability for resource-rich economies. However, changes in the energy system, including the shale revolution in the United States as well as the gathering pace of energy transitions, are raising the stakes both for NOCs and INOCs, and their host countries.

The role and governance of each NOC and INOC vary widely, but they are nonetheless critically important stakeholders in their host countries and in the energy sector as a whole.

The typical mandate given to an NOC gives it a privileged position in its domestic upstream sector. On occasion, it is also given a role in seeking out profitable investment opportunities abroad (i.e. to act as an INOC).

Some countries with modest reserves require their NOC to focus on the downstream sector, taking on the role of refiner or purchaser.

Many states rely heavily on the oil income from their NOCs or INOCs

(which is usually far larger than the revenue from natural gas). This has financed a great deal of public spending, infrastructure and employment, but it is also associated with significant risks – especially if exports provide the main source of national revenue.

Domestic sources of revenue imply productive sectors of the national economy. External revenue, if large enough, however, can support an economy even without a strong productive domestic sector. Under these circumstances, there is a risk that the functioning of such states focuses more on the distribution and allocation of hydrocarbon income than on the creation of the conditions for enterprise, leading to a narrow and undiversified economic structure.

The roller coaster in oil and gas prices over the past decade illustrates the challenges. From a high point of USD 1 900 billion in 2012, we

estimate that the net income generated by the world’s NOCs and INOCs

(before tax and other transfers to governments) fell by some 70% to USD 570 billion in 2016, then rebounded to USD 1 100 billion in 2018.

Major swings in hydrocarbon revenue can be deeply destabilising if finances and economies are not resilient, and NOCs play a huge role as conduits for these shocks to the system. Indeed, data collected by the Natural Resource Governance Institute show that after the oil price crash in 2014, the amounts transferred to governments by NOCs dropped even more sharply than overall revenues (NRGI, 2019).

The risks of high dependence on volatile oil and gas revenue have prompted a number of countries to renew their commitment to reform and diversify their economies. A well-performing NOC can provide an important element of stability for economies during this process.

By contrast, today’s Venezuela provides a stark example of the potential risks. Despite having some of the largest hydrocarbon reserves in the world, the Venezuelan NOC, PDVSA, is caught in a vicious cycle of dwindling revenue, mounting debt, and falling investment and output. The company is desperately short of funds, not least because it has to supply almost one-quarter of its production to the domestic market at such a subsidised price that it barely recovers any revenue. Mismanagement of the oil and gas sector has accelerated the downward spiral of the economy as a whole.

Billion dollars (2018)

1 600

1 400

1 200

1000

800

600

400

200

Average annual net oil and gas income before tax of all NOCs and INOCs, by scenario

Oil

Natural gas