Role of National Oil Companies (NOCs) in energy transition: no more business as usual?

National Oil Companies (NOCs) are complex companies with different strengths and goals than their international peers. And as the world plans to gradually shift away from hydrocarbons, NOCs will follow different trajectories. Some have industry-leading technology, engineering capacity and strong balance sheet to invest in energy transition, but many are already struggling and will be challenged by the accelerating shift.

The essential task of a traditional state-owned NOC is to meet government revenue needs and satisfy domestic demand. NOCs in developing and advanced economies need to supply sufficient resources to fuel economic growth and industrialization. This is a dynamic rather than static relationship, and NOCs goals change over time as governments pursue different strategies.

Major exporting countries are already accelerating efforts to diversify their economies. Their NOCs will protect the revenue base that will fund energy transition initiatives, but they may also be asked to invest in new sectors and develop new partnerships. States with declining, uncompetitive oil and gas resources face more pressure, suggesting their NOCs should evolve into more diversified and resilient players or risk becoming obsolete.

In this new business environment, some NOCs will be successful, and others will struggle. State oil companies will pursue different business models depending on what their governments want. Various NOC models are already emerging:

Type	Oil and Gas strategies	Energy Transition goals	Examples
Late-stage NOCs (from advanced economies)	· Keep focus on oil and gas but seek to decarbonize production to meet investor and stakeholder demand.	· Meet market demand for lower-emission fuels and low-carbon energy. · Harvest cash from traditional business to finance Energy Transition.	Equinor
Diversified players (from globalizing and rapidly growing states)	· Evolve over the longer period away from oil and gas. · Secure sufficient energy supplies to ensure growth and industrialization.	· Achieve government Net Zero & climate ambitions. · Differentiate with "decarbonized" products & supply that may be sold at a premium. · Invest in low-carbon fuels, electricity generation and distribution. · Invest in & use renewables for their own operations; along with providing more hydrocarbons to customers.	Qatar Energy, Saudi Aramco, ADNOC, Petronas, Ecopetrol, PTT, CNPC, CNOOC, Sinopec
Traditionalists (hydrocarbons-dependent states)	· Focus on oil and gas as the core business. · Protect and even grow oil and gas production, secure enough revenue to keep political stability.	· Enjoy support from state banks since NOCs face less pressure from authorities. · Decarbonize production to meet future customer demand. · Differentiate with "decarbonized" products & supply that may be sold at a premium.	Rosneft, Gazprom and Petrobras (at least under the current government)
Struggling NOCs (from economically weak countries)	· Continue their approach, increase oil and gas output and capture market share. · Provide subsidized fuel to citizens. · Deliver enough revenue to keep political stability.	Energy transition presents serious risks to their competitiveness or even survival.	Pemex, Sonatrach, Pertamina, Sonangol and NNPC

As the energy transition unfolds, governments will challenge NOCs directives. Cash-rich NOCs, e.g. Saudi Aramco and some of its neighbors in the Middle East, are in a relatively good position to be the last ones standing amid a global decline due to their access to plentiful, cheaply exploited oil and gas reserves. They have more opportunities to diversify and secure their future goal of becoming energy companies. NOCs in e.g. Angola, Colombia, and Mexico, have high project costs, and a larger share of their new potential projects may not survive a dramatic shift away from fossil fuels. In countries like Nigeria and Russia, the amounts that NOCs are risking in high-cost oil and gas projects surpass their governments' annual "health" budgets.

In a scenario of declining global oil and gas investment and still-robust demand, NOCs would play a critical role in ensuring global energy security. Some could act opportunistically and grow their market shares. Those with greater technical capacity, access to capital, and project management skills could become key players in government plans to achieve Net Zero targets and climate goals.

The directives that NOCs will follow to address the energy transition will vary depending on a number of factors: size of resources at their disposal, cost competitiveness and carbon footprint of their operations, government climate goals, financial resources and access to capital, and the ability of NOCs to adapt and acquire new skills in renewable energy.

To read the first part of the blog, please, visit:https://blog.se.com/oil-and-gas/2021/10/05/role-of-national-oil-companies-in-energy-transition-no-more-business-as-usual/

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