An Oil & Gas Council article written at the beginning of this crisis read:

“NOCs that are re-strategizing and forging short-term resilient measures will be best placed to prosper when the global economy restarts”

Two months on and the practicalities of most NOCs’ corporate strategies can begin to be identified and analysed. Much of the global economy is starting to gradually open up again and the spike in demand in China has generated optimism within the industry, reflected in the 2-month high of WTI, at the time of writing.

According to the IEA, US Gasoline demand is expected to be down 25% on May 2019, which whilst on the face of it is concerning, considering the YoY decrease in demand from April was in excess of 40%, it is further evidence that we are heading in the right direction as the world gets moving once again.

From our conversations with NOC executives, it would appear that most are preparing for an array of scenarios ranging from: a return to normal operations in Q4 2020 on the optimistic side of the scale – to a 24-month period of depressed prices and significantly reduced operations. Sub-strategies exist within this scale and it will no doubt be the strategies that are resilient to sudden change that will best adapt to the unpredictable nature of the road ahead. As mentioned, most NOCs are focusing on cost-cutting and assessing portfolio structure, however very interestingly in the case of the Chinese NOCs and Petronas, Wood Mackenzie believe we could see counter-cyclical business development as some NOCs look to broaden their overseas portfolios.

Indeed, perhaps this is a time for NOCs to think about what can be done instead of what must be done. Identifying attractive M&A opportunities in the months to come will not be difficult, however ironing out price discrepancies between buyers and sellers will be. In addition, timelines will be interesting. In the case of cash-rich NOCs, the window of opportunity is not a particularly large one, although smaller companies will be understandably eager to sell. It will therefore be interesting to see how 2H 2020 develops as NOCs play out their differing strategies to deal with a problem all oil companies share.

 

In the case of the Oil Majors and the large IOCs, the Energy Transition has been about embracing greener energy, renewable sources, ambitious net-zero targets and mass diversification into Energy Companies. TOTAL, BP, Shell and ENI have all pledged significant percentages of CAPEX in the next 30 years to ensure their portfolios reflect what they perceive to be the changing face of the Energy Mix. In the case of NOCs, the Energy Transition has broadly been approached in a different way. This is not to say that NOCs have not embraced the Energy Transition, as the evidence would suggest otherwise: Saudi Aramco has pledged a 2% yearly reduction of carbon emissions to 2030, Pemex pledged back in 2018 to reduce CO2 emissions by 15 million tons by 2021 and Gazprom that their 2030 emissions would reflect a 75% decrease from their 1990 levels. What is important to note however, is that NOC approaches to the Energy Transition have generally been focussed on harnessing the potential from renewable sources and utilising emissions reduction technologies to make their oil and gas operations more cost and energy efficient, instead of becoming producers and providers of renewables.

There are, of course, some exceptions. KPC for example have pledged that by 2030, 15% of Kuwait Energy will come from renewable sources and NOCs such as Petronas seem keen to be involved in some of the more intricate details of the Energy Transition such as the electrification of transport, by pledging to build and install 25,000 EV charging stations.

What is consistent, is the acceptance among NOCs that, while there may not be a mandate to move away from hydrocarbons, as the Energy Transition progresses – the need to make processes cleaner increases. As such, ADNOC have been proportioning significant CAPEX into digital transformation, especially in downstream assets, and embracing emissions reduction programmes such as their Carbon Capture Utilisation and Storage (CCUS) program, which they pledge to expand five-fold by 2030. The unavoidable reality is that regardless of whether the Energy Transition has been accelerated or decelerated as a result of Covid-19 and the Oil Price crash, demand for hydrocarbons will fall and their share of the energy mix will reduce and each NOC will need to decide what role they will play long-term.

 

NOCs have never been in need of a clear vision for their portfolios more than now. Striking the balance between prioritising low cost and short-term projects, and at the same time remaining vigilant to the inevitable M&A opportunities requiring market aggression, will be key for NOCs.

One NOC VP told the Oil & Gas Council that perhaps in the next 5 years we will see a significant increase in JVs that forge collaboration between NOCs and IOCs, on the basis that IOCs can provide capital and expertise for NOC resources. What we are seeing already is that NOCs are having to significantly cut back investment in projects that are costly and higher risk. In the short-term, analysing how NOCs allocate their expenditure gives us the clearest picture of where their asset priorities lie.

For example, in the case of Ecopetrol, CEO Felipe Bayón announced that of their budget (which was cut 30%), 80% of investment would go to protecting E&P “to protect that part of the business”, while refinery upgrades and international ventures may see delays. It is undoubtedly a troubling time for NOCs and it will force the hand of companies that have not yet decided which baskets to put their eggs in. Inextricably linked with the concept of having a robust short term strategy resilient to sudden change, the same importance can be given to the value of a profitable and prioritised asset structure.