Performance of international oil companies and national oil companies: a comparative analysis

Theoretical basis for comparing the effectiveness of international and state companies. Action theory of the principal agent in companies. The behavior of international and state oil companies in the period of falling prices for oil and natural gas.

Рубрика Международные отношения и мировая экономика
Вид дипломная работа
Язык английский
Дата добавления 30.10.2017
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St. Petersburg University

Graduate School of Management

Master in Business Program

performance of international oil companies and national oil companies: a comparative analysis

Master's Thesis by the 2nd year student

Concentration -- International Business

Alexey Krasnopeev

Research advisor:

Olga Garanina, Associate Professor

St. Petersburg

2016

ЗАЯВЛЕНИЕ О САМОСТОЯТЕЛЬНОМ ХАРАКТЕРЕ ВЫПОЛНЕНИЯ ВЫПУСКНОЙ КВАЛИФИКАЦИОННОЙ РАБОТЫ

Я, Краснопеев Алексей Иванович, студент второго курса магистратуры направления «Менеджмент», заявляю, что в моей магистерской диссертации на тему «Эффективность международных и государственных нефтяных компаний: сравнительный анализ», представленной в службу обеспечения программ магистратуры для последующей передачи в государственную аттестационную комиссию для публичной защиты, не содержится элементов плагиата.

Все прямые заимствования из печатных и электронных источников, а также из защищенных ранее выпускных квалификационных работ, кандидатских и докторских диссертаций имеют соответствующие ссылки.

Мне известно содержание п. 9.7.1 Правил обучения по основным образовательным программам высшего и среднего профессионального образования в СПбГУ о том, что «ВКР выполняется индивидуально каждым студентом под руководством назначенного ему научного руководителя», и п. 51 Устава федерального государственного бюджетного образовательного учреждения высшего образования «Санкт-Петербургский государственный университет» о том, что «студент подлежит отчислению из Санкт-Петербургского университета за представление курсовой или выпускной квалификационной работы, выполненной другим лицом (лицами)».

___________________________________________ (Подпись студента)

________________________26.05.2016_______________ (Дата)

STATEMENT ABOUT THE INDEPENDENT CHARACTER OF THE MASTER THESIS

I, Alexey Krasnopeev, (second) year master student, 38.04.02 program «Management», state that my master thesis on the topic «Performance of international oil companies and national oil companies: a comparative analysis», which is presented to the Master Office to be submitted to the Official Defense Committee for the public defense, does not contain any elements of plagiarism.

All direct borrowings from printed and electronic sources, as well as from master theses, PhD and doctorate theses which were defended earlier, have appropriate references.

I am aware that according to paragraph 9.7.1. of Guidelines for instruction in major curriculum programs of higher and secondary professional education at St.Petersburg University «A master thesis must be completed by each of the degree candidates individually under the supervision of his or her advisor», and according to paragraph 51 of Charter of the Federal State Institution of Higher Education Saint-Petersburg State University «a student can be expelled from St.Petersburg University for submitting of the course or graduation qualification work developed by other person (persons)».

_____________________________________________(Student's signature)

_______________________26.05.2016________________ (Date)

АННОТАЦИЯ

Автор

Краснопеев Алексей Иванович

Название магистерской диссертации

Эффективность международных и государственных нефтяных компаний: сравнительный анализ

Факультет

Высшая Школа Менеджмента

Направление подготовки

Международный бизнес

Год

2016

Научный руководитель

Гаранина Ольга Леонидовна

Описание цели, задач и основных результатов

Цель исследования изучить и сравнить поведение международных и государственных нефтяных компаний во время падения цен на нефть и газ.

Первая глава исследования содержит теоретический основу для сравнения эффективности международных и государственных компаний, действие теории принципала-агента в этих компаниях и обзор предыдущих академических дискуссий по теме. Вторая глава содержит методологию проведенного эмпирического исследования. Третья глава содержит результаты эмпирического исследования и их обсуждение.

Исследование 46 компаний показало, что в целом международные и государственные нефтяные компании вели себя похожим образом, но были и некоторые различия в период падения цен на нефть и природный газ.

Ключевые слова

Нефть и газ, международная нефтяная компания, государственная нефтяная компания

ABSTRACT

Master Student's Name

Alexey Krasnopeev

Master Thesis Title

Performance of international oil companies and national oil companies: a comparative analysis

Faculty

Graduate School of Management

Main field of study

International Business

Year

2016

Academic Advisor's Name

Garanina Olga Leonidovna

Description of the goal, tasks and main results

The goal of the research is to explore and compare the behavior of international and national oil companies during oil and natural gas prices decrease.

The first chapter provides the theoretical background for the international and national oil companies' performance comparison, principal-agent theory in those companies and previous academic discussions on the topic. The second chapter provides the empirical research methodology design. The third chapter provides the empirical research results and discussions.

The study of 46 companies demonstrated that NOCs and IOCs behave mostly similarly but there are some differences as well during oil and natural gas prices decrease.

Keywords

Oil and gas, national oil company, international oil company

TABLE OF CONTENTS

INTRODUCTION

1. COMPANIES IN OIL AND GAS INDUSTRY

1.1 International and national oil companies definitions

1.2 Principal-agent problem in oil and gas companies

1.3 Oil and gas companies performance indicators

1.4 Previous studies on comparison of international and national oil companies

1.5 Research hypothesis statement

2. EMPIRICAL RESEARCH DESIGN

2.1 Methodology and sample

2.2 Variables

2.3 Data analysis

3. EMPIRICAL RESEARCH RESULTS

3.1 Results and their interpretation

3.2 Results discussion

3.3 Managerial implications

3.4 Research limitations

REFERENCES

APPENDIX 1. SAMPLE LIST OF COMPANIES

APPENDIX 2. REGRESSION RESULTS

APPENDIX 3. T-TESTS RESULTS

INTRODUCTION

Global market economy is based on a competition of all types of companies from all over the world. There are two main types of companies operation on the market: international and national oil companies (IOCs and NOCs). They differ in the ownership structure, since national oil company has the government as a major shareholder and international oil company does not.

National oil companies control the majority of the oil and natural gas resources on the planet, so they are very important players on the market, so it is necessary to know how they behave in both stable and shock market situations. In 2014 the world faced such a shock, when the oil and natural gas prices declined significantly.

The goal of this research is to explore and compare the performance of the international and national oil companies during that shock by exploring their performance over that year. To achieve the goal it is necessary to do the following:

· Explore the differences of the IOCs and NOCs and how principal-agent theory works in those companies;

· Explore how the productions change, reserves change, headcount change and capex change influence the revenue change;

· Compare the performance of the IOCs and NOCs over one year of operation using those five performance indicators: productions change, reserves change, headcount change, capex change and revenue change.

1. COMPANIES IN OIL AND GAS INDUSTRY

1.1 International and national oil companies definitions

company international state oil

Global oil industry is one of those industries that work throughout the borders. The oil is being produced and sold all over the globe, since the need in fuel is typical for all countries. Because of that, companies from all countries compete on the same global oil market.

Broadly, oil industry constitutes of “upstream” and “downstream” segments. Upstream sector main activities include exploration and production (E&P). Because segment players usually come across of oil and gas together, both are comprised in the upstream segment of the industry. Downstream operations include refinery, distribution and marketing. Two segments are connected with various meanings of transport, naming such activity as “midstream”. The transportation of oil is made with pipelines, tankers, trucks of railway tank cars. Natural gas is transported from the extraction field to the distribution system in the pipeline. In there is a need in intercontinental gas transportation, it gets liquefied (LNG) and shipped in marine tankers and then goes through regasification procedure. Company that operates in both upstream and downstream segments is called vertically integrated. (Van Vactor 2010).

Both national and international oil companies are companies involved in oil and gas production that have different ownership structure: national oil company (NOC) is being owned and controlled by national government (more than 50% of shares), while international oil company (IOC) is being mostly or exclusively privately-owned (Linde 2000; Stevens 2004). According to its name, IOC is strong enough to operate in several countries (at least in two of them), while NOC is not necessarily does that, although it uses such opportunities if it has any. The industry also has small players, that are public or private and operate only within one country and could produce oil and gas together or one of them. However, if a company has a government stake but of such size so that government does not have full control over the company, it is considered as international oil company. NOCs are the most outstanding feature of government activity in the industry, so that the power concentrated in those firms could be a good indicator and example of the government intervention into the economy. It is necessary to notice that government involvement can also be in other forms but not just share ownership of enterprises. Naturally, there is a big number of mechanisms and policies available to countries' governments - a continuum of governance mechanisms (Laffont and Tirole 1993) - to define the forms and extent of government involvement (Wolf 2009).

Historically, such economic sectors like postal services, railways, telecommunications, energy and water were usually state-owned. While a lot of companies in those economic sectors are or were natural monopolies and potentially can face serious economic problems, the energy industry is government controlled because of the political reasons, such as high rents, economic importance, national security and employment supporting (Wolf 2009). Because of that, both society and government think that those firms are too important to be allowed to work on the market without state control (Robinson 1993).

Initially, most national oil companies were used as keepers of home country's oil industry and resources, by working instead of international oil companies or by operating together with them (Stevens 2004). Domestic oil industry is extremely important for many countries in the world, because it significantly influences economic, social and political spheres of countries' lives. It also brings big share of GDP, state profit and foreign exchange revenues to the countries that export oil. On the other hand, countries that import oil have quite big share of foreign exchange expenses (Wolf 2009). Oil consumption taxation brings a lot to fiscal revenues, or sometimes, oil consumption subsidies lead to huge fiscal deficits (McPherson 2003).

Back in 1970s so called “OPEC revolution” and wave of nationalization of oil companies was caused by concerns that IOCs had support of foreign “imperialistic” states and their governments in opposition to countries of operations' state interests. (Grayson 1981; Hartshorn 1993) A lot of nations that had high shares of oil industry' revenues in total state revenues wanted government control over the oil industry and thought that legislative or regulatory procedures would not be enough. Nationalistic concerns together with low development of the business environment that were often seen in many developing countries resulted in appearance of private domestic enterprises working in the home countries oil industries (Linde 2000).

In addition to this, similar opinions - governments should more actively interfere in solving of social and economic problems - started to appear in developed countries. The fact that oil companies are controlled by the governments gives the public assurance that surplus profits from the oil production and sale redirect to citizens and their needs and provides the confidence of the public in ability to control such an important thing as gasoline and other oil products prices (McPherson 2003). At the same time, oil importing countries took foundation of many national oil companies very seriously, as a matter of concerns of possible insecurity of oil and oil products supply, power imbalance in the politics with advantages of oil exporting countries. NOC also give state an inside view on the oil industry (Grayson 1981), helping to get over the information imbalance that appears between the state and private parties in the oil industry, because otherwise it might lead to the country's inability to properly control the state of the industry and effectively regulate it (Wolf 2009).

1990s were a decade distinguished by instability and volatility of oil prices, which resulted in an increased number of mergers and consolidations in the oil industry around the world, which, in turn, resulted in a structural move in the oil industry still happening even nowadays. In 1998 Exxon and Mobil signed an agreement to merge and establish ExxonMobil (Independent 1998). Four years later Conoco Inc. and Philips Petroleum Co. also merged together and founded ConocoPhilips (CNN Money 2001), In 2013 Russian Rosneft acquired a joint venture of Tyumenskaya Neftyanaya Kompaniya and BP - TNK-BP for $55 billion, thus becoming world's biggest publicly traded producer of oil (Reuters 2013).

Table 1 2014 Petroleum Intelligence Weekly “World's Top 50 Oil Companies”

Rank

Company

Country

Rank

Company

Country

1

Saudi Aramco

Saudi Arabia

26

Statoil

Norway

2

NIOC

Iran

27

Pertamina

Indonesia

3

CNPC

China

28

ConocoPhilips

US

4

ExxonMobil

US

29

ONGC

India

5

PDVSA

Venezuela

30

Libya NOC

Libya

6

Shell

Netherlands

31

CNOOC

China

7

BP

UK

32

Kazmunaigas

Kazakhstan

8

Gazprom

Russia

33

PDO

Oman

9

Rosneft

Russia

34

Repsol

Spain

10

Chevron

US

35

Ecopetrol

Colombia

11

Total

France

36

Uzbekneftegas

Uzbekistan

12

Petrobras

Brazil

37

Novatek

Russia

13

KPC

Kuwait

38

Anadarko

US

14

PEMEX

Mexico

39

Devon Energy

US

15

Sonatrach

Algeria

40

Apache

US

16

Lukoil

Russia

41

BG

UK

17

Adnoc

UAE

42

Socar

Azerbaijan

18

QP

Qatar

43

Occidental

US

19

Sinopec

China

44

Chesapeake

US

20

Petronas

Malaysia

45

BHP Billiton

Australia

21

INOC

Iraq

46

CNR

Canada

22

Eni

Italy

47

Suncor

Canada

23

NNPC

Nigeria

48

EOG

US

24

EGPC

Egypt

49

YPF

Argentina

25

Surgutneftegas

Russia

50

OMV

Austria

Source: Petroleum Intelligence Weekly 2014

Such huge mergers are a serious challenge for national oil companies. According to 2014 Petroleum Intelligence Weekly “World's top 50 oil companies” rating (table 1), which is based on six operational criteria such as liquids and gas outputs, liquids and gas reserves, product sales and refining capacity, roughly 40% of the companies in the list are private companies, while the other 60% are national (state-owned) oil companies.

During 2000s oil prices were generally growing, reaching the peak in 2008, followed by a dramatic drop caused by the world's financial crisis. However, first half of the 2010s oil prices were very high (figure 1), giving huge revenues to oil producing companies, thus enabling them to engage in developing costly projects and allowing to feel really good. But in middle of 2014 oil prices started to significantly decrease because of the oil overproduction, which started a new era of low oil prices, making companies to cut costs and leave capital intensive projects.

Figure 1 Brent crude oil historical prices for January 1, 2000 - December 31, 2015, US$/BBL

Source: ICE

However, natural gas prices were fluctuating a lot in the 2000s, also suffering a huge decrease because of the 2008 economic crisis. The first half of the 2010s the world spent with more stable but lower than in 2000s gas prices (figure 2), anyway giving high revenues to the producers, but in 2014 natural gas price started to decline, significantly dropping in the end of the year. The decline continued in 2015, thus also starting an era of low natural gas prices.

Figure 2 Natural gas historical prices for January 1, 2000 - December 31, 2015, US$/MMBTU

Source: NYMEX

1.2 Principal-agent problem in oil and gas companies

Principal-agent theory (also called agency theory) was introduced by Ross and Mitnick in 1973 (Mitnick 2013). This theory is devoted to finding solutions to two issues that might arise in the agency relationships. The agency relationship is a relationship between two or more parties when one, specified as the agent, acts for, on behalf of, or as representative for the other, specified the principal, in a certain set of decision making situations (Ross 1973).

The first issue is the agency problem that appears when goals of the principal and agent are opposite or not the same and verifying the actions of the agent is hard or expensive for the principal. In other words, the principal is not able to verify that the agent's actions are appropriate. The second issue is the problem of risk sharing that appears when the principal and agent have different views and opinions on the risks, so that they might act differently. The theory is focused on the analysis of the contract defining the relationships between the principal and the agent, thus trying to specify the most suitable terms and conditions based on the assumptions about persons (for example, persons' own interests, risk avoidance), organizations (for example, contradiction of members' objectives) and information (for example, information could be sold and bought). In other words, agency theory reflects the relationships of the principal and the agent that are involved in collaborative activity, but have differing goals and differing positions on risks (Eisenhardt 1989).

Comparing the decisions of NOCs and IOCs, the IOC supposedly maximizes the present value of expected future profits at the required rate of return which is determined by the market. Since one of the goals of publicly listed company is maximizing its value, IOC might ignore potential controversies over the different goals of shareholders and managers. However, quite a lot of evidence supports the hypothesis that companies' managers maximize firms' value most of the time, so that many of the institutional features of shareholder-owned firms can be considered as mechanisms of owners' effective control of managers (Hartley and Medlock 2008).

More precisely, principals benefit from being able to have additional signs (other than the payoff) that demonstrate agents' actions, as Holmstrom (1979) showed. For example, it can be a reason for strict financial reporting and accounting. Moreover, Holmstrom (1999) demonstrates that managers obtain a stimulus to work better because of the competition in the managerial labor market, so that better performance can be strengthened by having compensation policy that ties salary and performance by giving shares or share options. Company's leverage might also encourage managers for maximization of profits (Harris and Raviv 1991). Growth in leverage enlarges the managers' share of equity and puts their interests together with interests of the shareholders. In addition to this, managers might suffer a lot from bankruptcy because, for example, their managing knowledge and skills are overvalued. Managers can be made to use company's cash flow to decrease the probability of bankruptcy by bigger debt service payments. Consequently, it can keep managers from using firm cash flow for their own interests and goals (Hartley and Medlock 2008).

Politicians play a role of shareholders in state controlled companies. Although they usually do not get any residual money flows right from the enterprise, politicians' goals contain political benefits originating from inflow of additional money to the Treasury. Politicians can also have power over the decisions within NOC about production, employment, and pricing and receive support from certain interests. There are two very important features of a state-owned enterprise:

* state-owned company's debt is ensured by the state government;

* residual ownership claims may only be given to another party with enterprise's end of being state-owned. (Hartley and Medlock 2008).

These features influence the principal-agent conflict and, consequently, company's goals and decisions. Specifically, being state-owned gives the firm assurance that it would be “bailed out” if it faces serious financial problems (Hartley and Medlock 2008).

Laffont and Tirole (1991) demonstrate that state-owned enterprises managers could lose their job because of wrong decisions, like their colleagues in private companies. They could also have to work with audited accounts or under formal control systems similar to those used in private companies. However, while private company's shareholders can look at the company's shares' market value, politicians have no such measurement to estimate the performance of a state-owned company. In addition to this, politicians probably could be interested in more sophisticated performance criteria than just company's market value, which could help to increase complicity and decrease effectiveness in the NOC reporting requirements (Hartley and Medlock 2008).

Laffont and Tirole (1991) also write that if shareholders suffer loss of wealth if managers do not work well, politicians could lose their jobs. Nevertheless, politicians and private company investors have different time periods of planning. Because of having more short-term goals, politicians could use return to capital of the NOC for other things rather than reinvestment in resources, even though it is likely to hurt national oil company's future profitability. On the other hand, private company investor thinks about the shares' sale values that depend on the future profitability of the NOC. Due to this fact, shareholders have a serious reason to stimulate managers to make better trade-off between current income and future profitability (Hartley and Medlock 2008).

Overall, there are many institutional features helping to control the principal-agent issues of companies. State-owned enterprises often do not have many of those features. Politicians have information which is inferior comparing with the information gained from the stock prices. As a result, state-owned enterprises' managers are probably overlooked less well than private companies' managers. Consequently, goals of the state-owned companies are expected to demonstrate managerial privilege to a bigger extent than in case of a private companies (Hartley and Medlock 2008).

Even though NOC can potentially face of managerial efficiency, it can become more preferable than IOC due to its ability to control other inefficiencies for exploring oil fields, especially in developing countries. Firstly, big private upstream player is able to monopolize the home country market. Secondly, developing transport infrastructure and hiring local workers can have a positively affect public image because roads (asphalt and rail) and ports are also being used by other parties (governments and businesses). So, since private enterprise can have poor investments into those objects, a state-owned enterprise might be managed with an order to increase investments thus to receive additional social benefits. Thirdly, production royalties and taxes taken for mineral resource “rents” redistribution in favor of country's citizens can at the same time impose significant efficiency losses which could be lowered in case of operation of NOC (Hartley and Medlock 2008).

Another justification for state ownership of enterprises could be that the politicians care not just about operational efficiency, but about other things. For example, politicians can promote special employees of the same interests as they have to high ranked positions or make decisions in favor of certain people or influential groups when deciding which projects would receive investments, even if such decisions contradict with economic efficiency. The groups that are able to have influence over politicians usually vary from one country to another depending on such factors as political system, social and ethnic diversity, and of course the geographical location of the oil resources within the country's territory. There are two groups that are usually favored by the politicians:

* home country consumers of oil and products of oil refinery;

* employees or other suppliers of various resources or materials to the national oil company (Hartley and Medlock 2008).

The first group (home country consumers) can receive cheap oil and oil products as a way of resource rent sharing. The second group (employees or domestic suppliers of various materials) can be an influential group, able to raise political pressure on vital issues connected to their own wealth. Politicians then may step back and thus increase their political support, for example, by hiring too many employees (having an excessive level of employment) in the national oil companies. Moreover, managers may have a positive point of view on excessive level of employment because managing a company with higher headcount might make the managers more prestigious, also increasing the production costs together with excessive level of employment would result in growth of money under their control (Hartley and Medlock 2008).

Also, national oil company is more likely to have a higher discount rate than international oil company. Politicians controlling the national oil company as well as shareholders controlling the private oil company would like the NOC to produce bigger revenue. NOC's profit flows to the Treasury and allows politicians to accumulate power by increasing spending or reducing other taxes. At the same time, both politicians and shareholders of private companies would care about current and future profits. Nevertheless, politicians are expected to discount future profits more seriously. In addition to this, NOC managers might want to have a higher rate of return than private oil companies' managers. Even though managers of the private enterprises have approximately equally strong reasons to work so that to increase share prices or avoid share prices decrease or stop share prices dropping, if the NOC has no established and properly measured goals, it influences state sector positively and negatively in a more asymmetrical way. In case the wrong decision resulted in mistake is made, company spends resources for recognizing that mistake and penalties for those who is discovered to be responsible, but in case of success, it could be significantly more difficult to recognize and praise responsible persons. Because of that, managers of the NOC try to avoid risks as much as possible and even greater than private companies' managers (Hartley and Medlock 2008).

NOCs were initially established as governments' instruments, evolved into important self-sufficient players, put between the state and generally foreign oil companies (Waelde 1995). States and their national oil companies are stand-alone players that could have same goals and interests, but usually they have different opinions. Principal trade-off, often met in various countries, is located between state control over the NOC and company's ability to successfully follow its business goals (Wolf 2009). There is an opinion that trade-off is a no-win situation: NOC could follow its own objectives that are probably would result in takeover of the state, or the state successfully keep its national oil company from working effectively (Stevens 2004).

Eller, Hartley and Medlock (2011) state that some company's effectiveness analyses that were exploring principal-agent paradigm demonstrated that company's ineffectiveness is likely to happen if existing control system is not enough or not properly working to prevent managers (or agents) from achieving their own goals at expense of the shareholders (or principals). Institutional features of private companies, like shares that could be bought and sold, are suggested to seize threat and bankruptcy threat help connect and unite goals of managers and shareholders. At the same time, lack of such features in state-owned enterprises might be a reason of relative ineffectiveness of NOCs. Moreover, if private company's shareholders want management to increase company's value, politicians that control state-owned companies usually have less clear goal of political support's increase. So, any actions and policies supporting that goal probably have negative effect on company' effectiveness (Eller, Hartley and Medlock 2011).

National oil companies operate not only according to shareholder value maximization plan. Since state controls national oil companies, firm's value maximization could be forced to compete with other state-promoted goals. Besides, the influence of the governments over national oil companies varies around the world. NOCs in more developed countries like Statoil in Norway and Petronas in Malaysia, usually pursue more commercially oriented strategy than, for example, Nigerian National Petroleum Company (NNPC) and Petroleos de Venezuela (PDVSA), which have state goals substituting the commercial ones to a significant extent so that those firms operate under strong pressure and strict control in order to make inflow of funds to the state budgets maximal (Pirog 2007).

State uses NOCs for wealth redistribution. Subsidized gasoline prices reduce energy price to the common population, develop transport infrastructure, and protect home country economy from the harmful effects of fluctuating global oil prices, but, on the other hand, they contribute to extremely huge losses of potential benefits of the NOCs. Low gasoline prices supported by the governments encourage demand increase, corruption, ineffective use of oil, and arbitrage-based smuggling schemes. The larger fuel consumption at home country market results in reduction of export and decline of supply to the global market thus making prices in the oil-importing countries grow (Pirog 2007).

States also use national oil companies for stimulating economic development of domestic economy. Some countries have their oil industry being first to cooperate with international companies on exploration, production and development of the oil within the country. Due to this fact, oil industry may be the first to bring innovations or new technologies to the country or improving national legislation in accordance with the international legislation, or implementing international accounting and financial standards. National oil companies might be also made to sell subsidized oil products to certain economy sectors considered as important for countries' economic development strategies (Pirog 2007).

State governments could also use national oil companies as a foreign policy instrument, for example, in making an alliance with other countries' national oil companies. Oil is one of the most important commodities of the global economy and trade, and its production and use can build and maintain strategically important relationships (Pirog 2007).

One of the most important and sensitive topics in every country's national interests is energy security, which is also included in the NOCs agenda. One of the goals of NOCs is keep customers from getting critical of the national oil company in order to provide security of the demand. However, sometimes technologies make this type of strategy hard to follow. A continuous relationship of the oil exporter and importer might end as investment in some specific projects that participate in the production or use of the country's oil. Also, sometimes NOC's energy security plans are connected with security of supply. Countries' security of supply means having a diverse set of producers and oil supply inflows security. Sometimes oil supply security means having certain rights for the oil supply (Pirog 2007).

Although majority of the national oil companies in countries with huge reserves work in upstream segment, some of them are trying to become truly vertically integrated oil companies. From the economic point of view, vertical integration lets the national oil company to seize the funds received from production and sale oil products. When PDVSA bought US based Citgo, it brought refining and retail marketing opportunities for Venezuelan oil. Also demand security was strengthened because of gaining a share in the huge US gasoline market. Sometimes national oil companies might enter the markets not available to them before. National oil companies might also diversify and reduce risks by vertical integration. Since oil price is fluctuating nowadays and money may flow to various parts of oil production and supply chain under various market conditions, vertical integration of the NOCs may strengthen the opportunities and ability to generate revenue in different economic situations (Pirog 2007).

At the same time, because of the high capital expenditure in the industry (next paragraph contains more detailed view on capital expenditure in the industry) national oil companies can go public, as Russian Rosneft did in 2006. It might be a very good option for the industry players if they want to start developing expensive projects, since the IPO helps to attract money for expanding the operations (Draho 2004). However, going public is not really popular option for the NOCs: 4 out of 5 companies from the 2014 Petroleum Intelligence Weekly “World's Top 50 Oil Companies” (table 1) are private NOCs.

1.3 Oil and gas companies performance indicators

Since oil and gas production business focuses on extracting the limited resource, there are two very important performance indicators of each company: reserves that company have and the production.

According to 2015 Eni World Oil and Gas Review, at the end of 2014 global oil reserves were equal to 1659372 million barrels, 79% of which is national oil companies' share, which increased significantly for the last 15 years, when in the end of 2000 NOCs controlled 74% of world's oil reserves, which were equal to 1239374 million barrels. More specifically, global oil reserves are presented in the table 2 below.

Table 2 Global oil reserves by region in 2014

Region

Crude oil reserves, million barrels

NOCs' share, % of region's

North America

213931

47

Latin America

338423

96

Europe

12453

2

Russia and CIS

118281

88

Middle East

802509

97

Africa

125765

62

Asia - Pacific

48010

47

Source: Eni World Oil and Gas Review, 2015.

Despite the fact that international oil market's main players are national oil companies that have a considerable market share and the biggest ones of those are united in a cartel (OPEC) that has more than 40% market share (Bloomberg 2015), international oil market is still could be considered as competitive since there are many sellers (not only NOCs) and many buyers from all over the world (Jaffe and Soligo 2007).

At the same time, in the end of 2000, global natural gas reserves were equal to 158983 billion cubic meters, 77% of which were controlled by NOCs. 15 later, in the end of 2014, the global gas reserves grew to 201771 billion cubic meters, having the share of NOCs increased to 79%. More specifically, global natural gas reserves are presented in the table 3 (Eni World Oil and Gas Review 2015).

Table 3 Global natural gas reserves by region in 2014

Region

Natural gas reserves, billion cubic meters

NOCs' share, % of region's

North America

12088

4

Latin America

7979

82

Europe

5078

1

Russia and CIS

64637

97

Middle East

80480

91

Africa

14478

77

Asia - Pacific

17031

38

Source: Eni World Oil and Gas Review, 2015.

So, since most of the oil and gas reserves are owned by national oil companies, some concerns about international oil companies' future were raised. Ability to explore and work on oil field in different parts of the world significantly influences IOCs' future and reasons for their mergers with each other. Besides, international oil companies cannot work in some areas or in cooperation with companies that belong to nations under any kind of sanctions levied by, for example, United Nations or the US, like it was not possible for international oil companies to operate in Iran because of political tension and situation improved after sanctions were lifted in 2015 (Forbes 2016). So this is where national oil companies have advantages over the international oil companies, since they belong to the state and their operation is mostly defined by political negotiations (Jaffe and Soligo 2007).

So, some IOCs (especially so-called “big five” - BP, Chevron, ConocoPhillips, ExxonMobil and Royal Dutch Shel which together with Total and Eni make a group known as “supermajors”) are included in the biggest oil production companies' global ratings and possess significant assets (and money) which they easily can invest in production development (Jaffe and Soligo 2007).

Companies with significant market shares have control of the oil future price by controlling the rate of capacity growth, but only when the oil demand is growing faster than production capacity. Another way of influencing the oil price is reduction of production levels: because the oil demand is inelastic and the supply is provided by non-OPEC countries in the short term, short reduction of production level influences the oil price a lot. Consequently, if the demand is growing and the powerful players use this strategy of limitation of oil production, the oil price inevitably would grow. Since there are also many companies that are not OPEC members, their activity might be targeted at increasing their own productions and thus market shares. However, most of those companies are smaller than OPEC-members, so they cannot affect the price significantly alone. But there are usually many companies that invest a lot in oil exploration and production that together with those several huge international oil companies might affect the oil price very strongly. Exactly these things happened after 1973 oil shock when huge growth in non-OPEC production and sales, especially form the North Sea and Prudhoe Bay, helped to make oil prices go down (Jaffe and Soligo 2007).

As 2015 Eni World Oil and Gas Review reports, in the end of 2014 global oil production was equal to 89080 thousand barrels/day, 64% of which were done by NOCs. In the end of 2000, NOCs produced 62% of global oil production, which was equal to 75186 thousand barrels/day. A detailed global oil production is presented in the table 4.

Table 4 Global oil production by region in 2014

Region

Daily oil production, thousand barrels/day

NOCs' share, % of region's

North America

16012

1

Latin America

10401

80

Europe

3562

4

Russia and CIS

13828

83

Middle East

28523

88

Africa

8556

67

Asia - Pacific

8119

70

Source: Eni World Oil and Gas Review, 2015.

At the same time, in the end of 2014 global natural gas production was equal to 3474,46 thousand cubic meters, 49% of which were done by NOCs. 15 years earlier, in the end of 2000, NOCs produced 42% of global oil production, which was equal to 2457,57 thousand cubic meters (Eni World Oil and Gas Review 2015). More detailed global natural gas production is presented in the table 5.

Table 5 Global natural gas production by region in 2014

Region

Natural gas production, billion cubic meteres

NOCs' share, % of region's

North America

880,24

1

Latin America

225,69

70

Europe

272,37

2

Russia and CIS

831,92

85

Middle East

565,84

79

Africa

189,34

69

Asia - Pacific

509,05

51

Source: Eni World Oil and Gas Review, 2015.

Saudi Arabia, the world's biggest oil producer (through its national oil company Saudi Aramco), plays a role of key oil price regulator, by increasing or decreasing oil production, thus decreasing or increasing oil prices respectively in the world to the certain levels set up by OPEC or to levels that follow country's national interests. At the same time, international oil companies look at the revenues they generate so that to bring as much as possible to their shareholders. In addition to this, it is very important for the international oil companies to reinvest enough of their revenues to exploration of new oil fields, growth of oil and gas reserves and production, because IOCs sometimes do not completely replace their reserves and consequently are slowly eliminating long term assets, that might lead to a reduction in production in future (Jaffe and Soligo 2007).

Since private enterprises' main target is maximization of share prices, companies' managers could achieve that target with organization of production process in such a way that company earns money in both current time period and future time period. Another option for managers is to invest wisely in order to use the discovered opportunities and increase enterprise's rate of return. In addition to this, managers could also try to work on production efficiency improvement in order to decrease costs and raise profitability of the company. It should bring positive effect to customers since the shortages of the products are eliminated and products are available at the lowest possible price. Shareholder value of oil industry players is connected to company's oil resources value and could be increased by proper management of production, exploration, and development activities in order to help the market work continuously (Pirog 2007).

Thus for the facilitation of company's long term survival it is necessary to replace reserves constantly. If the oil firm wants to grow, it must increase the oil production and sales to satisfy growing needs in oil in developing countries and in industrialized countries as well. Achieving effectiveness in every part of the production chain results in both costs reductions and in production processes developments and improvements (Pirog 2007).

Because of the having relatively small reserves, IOCs would compete severely for the access to new oil fields, particularly when the oil prices stay high for quite a long period (Jaffe and Soligo 2007).

In 2014 oil and natural gas prices drop resulted in serious exploration and production (E&P) spending reduction (figure 3), according to Barclays E&P Outlook (2015).

Figure 3 Worldwide E&P capital spending by company type/region

Source: Barclays research and company reports, 2015.

Global reduction of spending for exploration and production in 2014-2015 was 20,3% comparing with previous year. North American E&P spending reduction was even more - 35,2%, while just international spending reduction was 14% (Barclays 2015).

Nowadays every company in the oil industry works on the contractual agreements with other companies that have certain specializations. Since the IOCs are becoming to operate more and more like general contractors, controlling the work of many sub-suppliers doing exploration, seismic activities, drilling, data analysis, supplying drilling equipment and teams, etc. Big IOCs also work like banking organizations, supplying the money for new greenfield projects development in severe and harsh conditions (like technological, climate or geographical) and their managerial and organizational capabilities to control and help to maintain the operations required by those projects (Jaffe and Soligo 2007).

Because of that, NOCs might also consider this type of doing business very effective and useful or they might understand that are capable to undertake all those activities on their own. Last decade IOCs had little success in avoiding huge costs overruns on giant projects in Kazakhstan, Sakhalin or the Middle East, which means that NOCs could become unsure about the IOCs benefits. In addition to this, more and more industry experts are getting skeptical about such huge companies' future if nowadays the average size of new discoveries is reducing. Also, since small upstream oil companies have lower expenses than their big competitors filled with bureaucracy, they could have advantages in exploration and development of the small oil fields (Jaffe and Soligo 2007).

NOCs and IOCs also have differences in such aspects as non-commercial goals, underground assets, operational profile and taxation.

Use of standard performance measurements, and specifically profitability, provide untrue results, because the majority of the state-owned enterprises have goals other than profit maximization (Bozec, Dia and Breton 2006). As for the companies working in competitive markets, Boardman and Vining (1989) claim that if such basic social benefits are internal to the company (like excessive level of employment), they can only be reached at a cost of losing social welfare. If the benefits are external to the company (like constructing of social infrastructure), then financial performance comparison could at least demonstrate the real prices of those activities. However, some countries provide monopoly status to their NOCs (often considered as a compensation for non-commercial commitments), which can result in the market power and huge monopoly earnings (Wolf 2009).

Amount of available resources is a key characteristics defining performance of any exhaustible resources industry. Oil resources existence, access to and moving out simplicity, extraction rate and cost of production differ in every oil field and country. A considerable number of NOCs is known to be monopolies having huge resource reserves. Even if NOCs and private oil companies compete nowadays inside the country, the state-owned enterprises have usually primary access to the most valuable resources like oil fields or refinery plants. But not everything about quality of assets is reasoned by geology or geography, there are also investments, research and development and management. A conclusion about management's performance could only be made with clearly separating those things one from another (Wolf 2009).

Different segments of the oil industry (upstream and downstream) differ in terms of capital and personnel requirements, price volatility, competitiveness level and overall profitability. According to EY, in 2010 average return on capital employed for the upstream was equal to 20% and for the downstream just 8% (EY 2010).

Johnston (2007) showed that state' share in upstream taxation is about 40-90% in different countries, resulting in huge differences in the companies' payed taxes. In addition to this, some governments have equal taxes for both NOCs and private oil companies and some use different and sometimes unclear rules. This to a significant extent depends on the state and power balance of state government and national oil company - so that this special tax regime for the NOC might be soft or severe. The situation could get more sophisticated if monetary transfers between state and NOC for social provision, fuel subsidies and so on exist (Wolf 2009).

Non-commercial goals, underground assets and operational profile are very important characteristics to be taken into account when comparing companies in the oil industry. Also, OPEC membership is supposedly could show that state involvement might have the political nature, retail gasoline price could demonstrate whether fuel subsidies exist which would be an example of non-commercial obligation. It is also important that all of above mentioned factors are company-specific and usually do not change in time (Wolf 2009).

Al-Mazeedi (1992), Gochenour (1992) claim that operational inefficiency of NOC is caused by technical and managerial underperformance. They also state that IOCs during the period of high oil prices of 1970-1985 managed to restructure and develop effectiveness capabilities by investing hugely in research and development, while NOCs did not do that. NOCs are blamed for excessive level of employment and above-average salaries (Waelde 1995). They also usually hire people because of family or tribal ties and religion instead of looking at skills, experience and performance (Al-Mazeedi 1992). McPherson (2003) also names often seen absence of competitors for NOCs and mechanisms of corporate governance, the distorting essence of gasoline subsidies, and conflict of interest in the home country oil industry arising from the fact that NOCs in many countries helps to develop, implements and controls industry policy while being incredibly powerful industry player (Wolf 2009).

Many countries look forward to simplifying and making working conditions better. So, there are two obvious option of doing that: liberalization - allowing the competition to exist, and privatization - changing the owner of the company from state to private. However, state's wish to control the national oil companies does not connect well with competition itself. Moreover, there are strong clashing groups inside of a public company (like management, employees or unions) that have a stimulus to force the appearance of competition. But groups having clear interest in such competitive environment (like potential new market players and consumers) usually are not successful in winning in those situations. Commercialization, however, is an internal process of enterprises devoted to concentrating on effectiveness and profitability, can be reached separately from liberalization and privatization, but still there are crucial useful connections (Wolf 2009).

First, market liberalization is widely used as a policy instrument in case of existing market power limitations or effectiveness insufficiency both caused by the poor competition or its absence. The last situation considers liberalization's objective as larger extent of commercialization of the industry (Vickers and Yarrow 1988). Second, start of company's privatization frequently leads to firm's commercialization (Wolf 2009). Quite often commercialization is necessary to increase privatization's attractiveness to private investors. Concentrating on commercialization means limitations introduction to non-commercial goals and activities of the company, but introduction of these limitations without changing ownership is usually hard to make (Horn 1995). Kikeri, Nellis and Shirley (1992) write that att...


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