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EASTERN MACEDONIA AND THRACE INSTITUTE OF TECHNOLOGY

FACULTY OF ENGINEERING

DEPARTMENT OF PETROLEUM AND NATURAL GAS TECHNOLOGY

MSc in OIL AND GAS TECHNOLOGY

Coursework Assignment:

NOCs-IOCs Relationship

Coursework Supervisor: Nikolaos C. Kokkinos

Prepared by: Leonidas Eleftheriadis, Athanasios Pitatzis, Kantartzis

Apostolis

KAVALA 2015

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ABSTRACT

This study is an initial attempt to investigate the relationship between National Oil companies and

International Oil Companies (NOCs – IOCs Relationship). Moreover using local, national and

international data this study was designed to contribute to the global literature to identify the future

structure of Oil and Gas Industry.

SUBJECT AREA: NOCs – IOCs Relationship

KEYWORDS: NOCs, IOCs, Energy Policy

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Table of Contents International Oil Companies (IOCs) .............................................................................................................. 5

National Oil Companies (NOCs) ................................................................................................................ 6

Strategic alliances in the O&G industry .................................................................................................... 7

The Goliat project ..................................................................................................................................... 8

China Shale Gas Sector ................................................................................................................................ 10

Complexity of the information................................................................................................................ 13

China Natural Gas Industry ..................................................................................................................... 14

Barriers to the development of China’s shale gas industry .................................................................... 14

China Energy Reforms – Increase Flexibility on Shale Gas Sector – Attract IOCs to enter to China Shale

Gas Sector ............................................................................................................................................... 14

China NOCs invest in USA and Canada Shale Gas Sector ........................................................................ 16

Extraction issues on Shale Gas development in China ........................................................................... 19

SWOT Analysis of China Shale Gas Sector............................................................................................... 20

China NOCs and IOCs cooperation on China Shale Gas sector ............................................................... 21

Mexico Oil and Gas Sector .......................................................................................................................... 22

Mexico Energy Reform ............................................................................................................................ 22

Energy reform could increase Mexico’s long-term oil production by 75% .......................................... 23

Some facts about Mexico Oil and Gas Industry ...................................................................................... 25

Opportunities for IOCs in Mexico Oil and Gas Industry .......................................................................... 28

Upstream Sector ................................................................................................................................. 28

Midstream and Downstream Sector ................................................................................................... 30

Mexico benefits from the Energy Reforms ............................................................................................. 31

Win - Win Situation ................................................................................................................................. 32

Qatar LNG Prospect .................................................................................................................................... 33

Gas Demand ............................................................................................................................................ 34

Qatar Petroleum and Exxon shared Projects .......................................................................................... 36

Conclusion ................................................................................................................................................... 38

NOCs on decline, IOCs diversify performance for 2013 .......................................................................... 38

Energy Outlook for 2020: IOC-NOC Partnership? ................................................................................... 38

Third International Energy Forum NOC-IOC Forum ................................................................................ 40

Final Assumption ..................................................................................................................................... 44

References: ................................................................................................................................................. 45

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5

International Oil Companies (IOCs)

The term “international oil companies (IOCs)” is referring to companies which compete across

borders and, despite of the term, almost all IOCs have to do with gas production and sales also.

The acronym “IOCs” is also used for the “integrated oil companies”, meaning companies which

compete in every sector of the oil and gas value chain, from the upstream segment to the midstream

and downstream ones. In general and in this assignment as well, IOCs is mostly used to describe

the major integrated non-state-owned oil and gas firms. Nowadays, the most important of them are

the supermajors Exxon, Chevron, BP, Royal Dutch Shell, ConocoPhillips and Total, but the

smaller one Italian ENI is also included. [1]

The IOCs are the most traditional and historic players in the field. The current status quo of the

supermajors’ has gone through a large circle of mergers and acquisitions. In any case they are still

the largest operators in the market, being the first to develop competence, technological

advancement and generally the ability to work effectively and efficiently in large scale level and

to fulfill big risk projects and operations in a quite profitable manner. [2]

Nevertheless, their main weakness in the last decade is the replacement of their holding reserves.

IOCs hold nowadays less than 20% of the conventional oil reserves worldwide and their

production has fallen significantly since 1990s. In order, to replace their reserves they require large

investments in unconventional resources, such as oil sands and heavy oils. In addition, most of the

known conventional reserves worldwide are located in technologically challenging areas, such as

the Arctic and the Asia-Pacific, which also require heavy and expensive research and development

investments in order to exploit them. Furthermore, other known conventional reserves are located

in countries which lack political stability, like for example Nigeria and Sudan, making their

exploitation extremely insecure. [3]

As a result, sustainability has become a challenge for the IOCs. In order to continue in the

traditional way and sustain their production at same level, heavy investments in drilling in extreme

and cost intensive environments are needed. Since their main target is monetization and keeping

their stakeholders satisfied, that could prove a difficult balancing act.

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National Oil Companies (NOCs)

One could say that the National Oil Companies (NOCs) are the other side of the coin. Unlike the

IOCs, the NOCs are governmentally controlled and they usually manage a country’s hydrocarbons

resources. Unlike most of the other markets, the O&G one is far from an exclusively economic

and technical market, but it many cases it has a rather strong political or – more accurately

geopolitical- character. Certain countries prefer to obtain control of their own national resources,

gaining control of their energy efficiency, rather than giving the initiative to the free markets alone.

Having been given the privilege to the domestic reserves, the aim of the NOCs is, differently than

the IOCs, not monetization, but serving the national interests, supporting the local economies and

even protecting the territorial environments. [3]

Some examples of the most important NOCs are Saudi Aramco (the largest integrated oil and gas

company in the world), Kuwait Petroleum Corporation, Petrobras, Petronas, PetroChina, Sinopec,

StatOil, and Malaysian NOC. The NOCs are traditionally characterized by lower technological

capabilities than the IOCs, thus giving the latter usually a partial access to their reserves in order

to obtain technical competence through collaboration. In some cases, the NOCs are partially owned

by private investors like for example Gazprom, Petrobas and Sinopec, while some of them even

operate internationally much like an IOC (Gazprom, Petrobas, Statoil).[4]

Back in the 70s the market was literally controlled by the IOCs, which owned 75% of the oil

production and held 90% of the reserves worldwide. Nowadays, the situation is different. NOCs

control now more the 80% of the world’s known reserves. The tradition they have built in the area,

has given them the technological advancement to compete side to side with the supermajors in

environments that were unreachable so far.

According to Daniel Wagner (CEO of Country Risk Solutions): “Brazil's Petrobras, Malaysia's

Petronas and Norway's Statoil are prime examples of NOCs which have specialized in deepwater

drilling technologies - once monopolized by the IOCs. NOCs have also set their focus on

unconventional oil plays - particularly in the Americas - by leveraging themselves as strong

financial partners and acquiring a large number of shale oil and gas plays around the world.” [5]

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In conclusion, the boundary limits between the IOCs and the NOCs have become more and more

unclear. Yet, the IOCs still have the competitive advantage as far as competence is concerned,

while the main advantage of the NOCs remains the privileged access to the O&G resources, which

means that more changes to the current landscape are going to happen, especially through strategic

alliances that will be further analyzed.

Strategic alliances in the O&G industry

First of all the meaning of a strategic alliance should be clarified. One of the common definitions

of a strategic alliance is “an agreement between two or more parties to pursue a set of agreed upon

objectives needed while remaining independent organizations.” In the markets, a strategic alliance

has the meaning of two or more companies collaborating in order to achieve common goals. This

collaboration requires the sharing of the resources of each company, in order to achieve a common

competitive advantage. [6]

Secondly, the question about the reason that companies proceed to strategic alliances should be

answered. Since the main goal of a company is gaining a competitive advantage, an alliance is

created when the companies do not individually hold the sum of the resources needed in order to

achieve this goal. In that case the only way to obtain the necessary tools is to search for them

beyond their internal boundaries. Other methods that a company can use could be mergers or

acquisitions of other companies, although a strategic alliance has the major advantage of the

flexibility that it involves and it also does not contain the cost of merging two separate companies

into one. An alliance does not permit its parts to operate independently and gives them the option

to involve more players or to form further alliances if needed.

But what is the case in the O&G industry? Why would an IOC or an NOC be interested in taking

part into a strategic alliance? From the IOCs’ perspective the case is obvious. It is about reserves,

reserves, reserves…As it was previously mentioned; replacing their reserves is the most important

issue that the IOC’s have to face in the recent years. The states are nowadays more protective about

their existing reserves than ever before, especially with the presence of today’s’ more advanced

local O&G companies. In this case a strategic alliance with them is the option for an IOC in order

to operate in reserves, which would be otherwise impossible to gain access to. [6]-[7]

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On the other hand, there also many advantages for both the NOCs and the states that are involved

in a strategic alliance too. The main reason for a state to give partial access to its O&G reserves is

still the expertise that an IOC can offer. The IOCs remain the top experts in the industry, especially

in cases where the exploitation requires high-end technological knowhow, like for example in the

cases of unconventional or even deep water O&G fields.

Another advantage for the states could even be the justification of political decisions which would

be otherwise unpopular. A NOCs main aim is to serve the local public interests, but in a so

competitive industry like the O&G one, often unpopular decisions have to be made, like for

example decisions which could have environmental consequences. In this case, a strategic alliance

with an IOC often provides a political cover, since the politicians can simply raise the argument

of not having the ability to interfere.

The Goliat project

The Goliat project is a characteristic example of collaboration between an IOC and an NOC. In

this case the operators are the Italian Eni, which holds 65% of the total production, and the

Norwegian StatoilHydro, owning the other 35% of the licenses. Eni is now a private O&G

company, member once of the so called “seven sisters” which were dominating the oil production

worldwide back in the 70s. On the other hand StatoilHydro is considered a major NOC, despite

the international profile that it has adopted, because 67% of its shares belong to the Norwegian

State. [8]

The Goliat oil and gas field, which is located some 85km northwest of Hammerfest in Finnmark,

was discovered in 2000. Nine years after its discovery, the development and operations plans were

approved. According to the plan, 22 wells will drilled from eight templates during the field

development. The method that was chosen in order to achieve effective reservoir drainage was

pressure maintenance by injecting water. According to Statoil official website, this method will

provide also an opportunity for the reinjection of produced water. A solution for withdrawing the

gas was needed; therefore the reinjection of the associated gas into the reservoir was preferred.

The production is planned to start in the third quarter of 2015. [8]

What makes this project an interesting example of a strategic alliance, is the circumstances that

exist in the area. The oil fields are located in the Barents Sea, north of Russia and Norway, where

drilling for hydrocarbons is considered too risky, especially because of the environmental hazards

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that exist. In addition, the local regulations regarding those hazards are very strict, in order to

protect both the environment and the local economies. The latter mostly rely on fishing.

So, far no other IOC was willing to take the risk of involving in that mega project, except Eni.

Being maybe the smallest of the major IOCs and having the smallest international network among

them, Eni decided to operate in Norway for the profound reason of gaining access to new reserves,

which would offer her further sustainability. On the other hand, sustainability was the issue for the

Norwegian oil industry in another manner. So far, the Norwegian state was unable to exploit those

reserves. The collaboration with an IOC has two significant advantages though. The first one is

that Eni can offer the expertise and the competence needed to fulfill the project. Secondly, sharing

the responsibility with an international major player such as Eni, reduces the risk involved and

makes the political decisions much easier to take. To conclude a strategic alliance was the best

option for both of the companies in order to undertake a project which would be otherwise not

possible. [9]

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China Shale Gas Sector

According to the (Xu & Investment n.d.) Competition between NOCs and IOCs will continue to

increase in the future, but the two business sectors which can promote the cooperation of the

NOCs and IOCs are:

Cooperation in NOCs’ home countries, and

Cooperation in many host countries against the harsh investment climate [10]

In our example the Chinese Shale Gas Sector is belongs to the first case. Also according to the

U.S. Energy Information Administration (EIA) (Statistics 2013) China ranks first between the

Top 10 countries with technically recoverable shale gas resources. (Observe the graph below) [11]

Source: U.S. Energy Information Administration Statistics, I., 2013. Technically Recoverable Shale

Oil and Shale Gas Resources: An Assessment of 137 Shale Formations in 41 Countries outside the

United States. , (June).

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More specific China possess the 1115/7299= 15, 2% of the total technically recoverable shale

gas resources. To identify the opportunity for the IOCs we must examine and the consumption

and the production of natural gas in China. (Observe the graphs below)

Chinese Natural Gas Demand Reality and Medium-term Perspective, Source: Series, P.C., 2011.

Update on Overseas Investments by China’s National Oil Companies.(International Energy

Agency)

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Chinese Natural Gas Supply Reality and Medium-term Perspective, Source: Series, P.C., 2011.

Update on Overseas Investments by China’s National Oil Companies.(International Energy

Agency)

According to the IEA Medium-term Gas Market report 2014 we identify that China will be very

dependent to natural gas imports until to increase its own production. As the given date we

conclude in two facts about this situation:

China until 2020 must import enormous natural gas quantities

Shale gas reserves is the only alternative for China to increase its own natural gas

production and if we consider that the Chinese natural gas consumption will reach at 350

billion cubic meters the 2019 according to the IEA this choice is obvious.

Finally if we consider the global market trends in natural gas from the IEA (Anon 2015) which

predict global production of natural gas rises in a near-linear fashion to 5 400 bcm in 2040, with

an increasingly important role for unconventional gas which increases its share in output from

17% to 31%. Also this mini report predict that Gas resources are more than sufficient to meet

this increase in demand, but the required cumulative investment of more than $11 trillion along

the gas supply chain represents a stern challenge, with the way that gas will be priced on

domestic and international markets a key uncertainty. (IOCs great opportunity for profits and

beneficial cooperation for the foreign companies with the China NOCs)

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Complexity of the information

During our research for our basic hypothesis for China shale gas sector, we observe information

diversification or manipulation you can call it. Observe the photos below.

Source of the first photo: http://www.economist.com/news/business/21614187-china-drastically-

reduces-its-ambitions-be-big-shale-gas-producer-shale-game

Source of the second photo: http://www.reuters.com/article/2014/08/29/china-shalegas-outlook-

idUSL3N0QZ1R420140829

One common clue in these articles is the almost same date of publishing. We mention all of that

because we want to conclude that the cooperation of NOCs and IOCs in China Shale Gas sector

has many geopolitical consequences.

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China NOCs-IOCs

Cooperation Barriers

Uncertainty in water

management systems

Monopoly over pipeline

access

De facto monopoly over

exploration rights

Institutional barriers to innovation

transfe

China Natural Gas Industry

China possess three integrated national oil companies, CNPC, Sinopec and CNOOC. Also

according to the (Sandalow et al. 2014) in the year 2011, CNPC, Sinopec and CNOOC

respectively represented 71%, 12% and 15%of natural gas production in China. Also according

to the same research Petro China, a subsidiary of CNPC, controls 80 to 90% of the trunk natural

gas pipelines in China. (China has roughly 40,000 kilometers of natural gas pipelines, if we

consider that this amount is roughly represent 10% of that in the United States) [12]

Barriers to the development of China’s shale gas industry

The information for this graph was derived from this article (Wan et al. 2014) (more information

to the references). [13]

China Energy Reforms – Increase Flexibility on Shale Gas Sector – Attract IOCs to enter to

China Shale Gas Sector

According to the article (Wan et al. 2014) in the conclusion describe how China can accelerate

the shale gas production. Also the writers of this article claim that China must inspire by the US

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Shale Gas revolution. Moreover suggest to the Chinese government many energy reforms which

must be implemented such us:

Breaking the monopoly that major state-owned oil companies have over high-quality

shale gas resources

opening pipeline network access

providing geological data,

developing the domestic oil service market [13]

Source: Wan, Z., Huang, T. & Craig, B., 2014. Barriers to the development of China’s

shale gas industry. Journal of Cleaner Production, 84, pp.818–823. Available at:

http://linkinghub.elsevier.com/retrieve/pii/S0959652614004363 [Accessed January 2, 2015].

If China wants to accelerate the development of shale gas technologies must open its market to

IOCs, more especially to USA IOCs which obtain the know-how of the shale gas technologies.

creating conditions for fair competition between service providers, and

Improving the water management system.

Finally the opportunities for China thought the increasing of shale gas production is:

Increasing the use of natural gas in china energy mix

Use of natural gas to produce electricity, reduce coal use – Environmental benefits

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Increasing China Energy Security

Increasing China GPD through the development of china shale gas industry

Strategic cooperation of China NOCs with major IOCs players, this cooperation has

many beneficial geopolitical consequences for China such as strategic alliance with USA.

China NOCs invest in USA and Canada Shale Gas Sector

According to the IEA Report with the name “Update on Overseas Investments by China’s

National Oil Companies OECD/IEA 2014 Achievements and Challenges since 2011”China

NOCs follow a different strategy from our basic hypothesis. More specific China NOCs through

their financial strong position (possess enormous capacity of cash and Chinese economy is the

leading economy in the word as the given date) invest in USA and Canada Shale Gas sector with

merges and acquisitions with IOCs and local USA and Canada O&G companies. [14]

Source: IEA Series, P.C., 2011. Update on Overseas Investments by China’s National Oil

Companies

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Source: IEA Series, P.C., 2011. Update on Overseas Investments by China’s National Oil

Companies

Source: IEA, P.C., 2011. Update on Overseas Investments by China’s National Oil Companies

The last years the China NOCs have invest 27 billion dollars to USA and Canada O&G sector,

according to the above IEA report. Also China NOCs focus their investment to access to the

know-how of upstream shale gas technologies and LNG technologies. We observe from the

above graphs that major NOCs of China gain experience on shale gas production through their

evolvement in shale gas projects in North America. For instance in February 2013, CNOOC

completed its USD 15.1 billion takeover of Nexen, representing China’s largest NOC takeover of

an oil and gas company.(Series 2011) Also according to CNOOC, the deal increased the

company’s production and reserve base by 20% and 30%, respectively. The deal also

strengthened CNOOC’s positions in Canadian shale and oil sands. (Series 2011). [14]

The general trend as the given date promotes that China NOCs

prefer to partner with IOCs to benefit from their experiences and

networks outside China.

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Source: IEA, P.C., 2011. Update on Overseas Investments by China’s National Oil Companies

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China's Shale Production Falls Short, but Goals Remain in Place, Source:

http://www.stratfor.com/analysis/chinas-shale-production-falls-short-goals-remain-

place#axzz3MtuNNs3w

Extraction issues on Shale Gas development in China

According to the (KPMG.) The shale gas production in China faces many challenges and it is

more complex than USA shale gas production. Some issues on extraction of shale gas in China

is:

Gas reserves in the Sichuan basin tend to contain high amounts of corrosive and

potentially lethal hydrogen sulphide, and levels of carbon dioxide and nitrogen could also

be high.

China gas reserves are buried twice as deep as those in United States

China gas fields are placed in mountainous regions, making drilling a complex and very

costly process

China reserves are located in areas with high level of seismic activity

All the above potential extraction issues could prove time-consuming and costly [15]

Also according to the (KPMG.) China general strategy for the development of shale gas is the

strategic partnerships with foreign companies in order to help China acquire the necessary skills

and technologies. Also these foreign companies must cooperate of course with the main China

NOCs.[15]

Stratfor claim the super majors have struggled in China, and their investments have not always

been profitable. Also in the same article mention that oil service companies such as Weatherford

International and Halliburton Co join ventures with China NOCs to provide hydraulic fracturing

and other advanced oilfield services or to collaborate on advanced drilling tools, such as those

used in high temperature and high pressure wells, and well completion. [16]

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• Unconfirmed resource potencial

• Imperfect policy system

• Poor Infrastructure

• Deficient investment mechanish

• Huge potensial market

• Policy Support

• Increased investment and financing channels

• Plentiful foreigh development experience

• Deepend international cooperation

• Lack of funds

• Lack of Key technologies

• Prominent watertreatment

problems

• Serious enviromental risks

• Enormous Resource Reserves

• Great development potencial

• Enviromental benefits,reducing the use of coal

• Long life time for exploitation, China shale gas wells can produce stably for a longer time

Strengths Weaknesses

ThreatsOpportunities

SWOT Analysis of China Shale Gas Sector

The information for this SWOT Analysis was derived from all the above facts about China shale

gas sector and from the articles (Xingang et al. 2013) and (Wang et al. 2014) [13] – [17]

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China NOCs and IOCs cooperation on China Shale Gas sector

Some of the key points are derived from (Ernst & Young 2013). [18]

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Mexico Oil and Gas Sector

Mexico Energy Reform

Until 2013 Petroleos Mexicanos (Pemex – Mexico NOC) was 75- year monopoly in Mexico oil

and gas industry since 1938 when the company was created. The December of 2013 the

Mexico’s congress approved a legislation which liberate and open the Mexico oil and gas sector

to foreign companies and allow foreign investments. According to U.S Energy Information

Administration (EIA) this reform is very important for the future of oil and gas production in

Mexico. The last decade the oil production in Mexico continuing to decline from 3.85 million

bbl/d in 2004 to 2.90 million barrels per day (bbl/d) of total liquids in 2013. (Observe the graph

below) [19]

Mexico’s energy reform seeks to reverse decline in oil production, U.S Energy Information

Administration (EIA), Source: http://www.eia.gov/todayinenergy/detail.cfm?id=16431#

The new key elements of the reforms include the following:

Open the upstream oil and gas sector, allowing foreign companies to invest in this sector.

Also the state create four oil and gas exploration and production contract models.

Give Pemex the advantage to access to oil and gas fields of Mexico before the private

companies. (round zero) Also this legislation provides Pemex the right to provide

financial and technical plans to develop the resources within three years.

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Establishing the Mexico Petroleum Fund, a sovereign wealth fund to manage and invest

the oil revenues.

Keep Pemex under national;- state control but provide to the government financial and

cooperate independence

Open downstream and midstream sectors to private investments and competition [19]

A general view of the Energy Reform in Mexico, Source: Pemex- Mexico NOC internal file, more

specific a presentation by José Manuel Carrera Panizzo CEO of PMI Groups of Companies,

www.pemex.com

Energy reform could increase Mexico’s long-term oil production by 75%

According to EIA if Mexico implementing the new reforms the long-term oil production could

stabilize at 2.9 MMbbl/d through 2020 and then rise to 3.7 MMbbl/d by 2040. Also in the

previous projection of IEA if Mexico don’t implement these reforms then Mexico's oil

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production would continue to decline from 3.0 million barrels per day (MMbbl/d) in 2010 to 1.8

MMbbl/d in 2025 and then struggle to remain in the range of 2.0 to 2.1 MMbbl/d through 2040.

[20] (Observe the graph blow)

Energy reform could increase Mexico’s long-term oil production by 75%, U.S Energy Information

Administration (EIA), Source: http://www.eia.gov/todayinenergy/detail.cfm?id=17691

Quick take on the new energy sector in Mexico, Source: Pemex- Mexico NOC internal file, more

specific a presentation with name Mexico’s Energy Reform & PEMEX as a State Productive

Enterprise, www.pemex.com

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Some facts about Mexico Oil and Gas Industry

Source: U.S Energy Information Administration (EIA)

Mexican Oil Production, Consumption, and Exports 2002 – 2013, Source: BP Statistical Review of

World Energy 2013, June 2013.

26

Mexico Energy Infrastructure, Source: Compiled by CRS using data from IHS, Platts, and Esri.

Date: September 2013. Original Source: Seelke, C.R., Ratner, M. & Hagerty, C.L., 2014. Mexico ’ s

Oil and Gas Sector : Background , Reform Efforts , and Implications for the United States.

Mexican Natural Gas Production, Consumption, and Imports 2002 – 2013, Source: BP Statistical

Review of World Energy 2013, June 2013

27

Mexico Shale Gas Reserves – Regions, Source: World Shale Gas and Shale Oil Resource

Assessment, U.S. Energy Information Administration

28

Mexico Shale Gas Reserves

Source: U.S. Energy Information Administration Statistics, I., 2013. Technically Recoverable Shale

Oil and Shale Gas Resources: An Assessment of 137 Shale Formations in 41 Countries outside the

United States. , (June).

More specific Mexico possess the 545/7299= 7,4% of the total technically recoverable shale gas

resources. This enormous shale gas reserves can provide to US IOCs very big opportunities such

as:

Enter Mexico Shale Gas Industry

Enter Mexico natural gas market

Strategic alliance with Pemex

Increase U.S Energy security

Opportunities for IOCs in Mexico Oil and Gas Industry

Upstream Sector

The IOCs if enter to Mexico Upstream Sector can gain many benefits, such as:

Access to Mexican Shale Gas Reserves

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Access to new oil and natural gas contracts

According to Ernst & Young the Mexican government on 11 December 2014 made a call for

bids and announced the terms and conditions for the bidding of 14 blocks in shallow waters as

part of Round 1. Also it is known that Mexico will declare and a Round 2 the next years. [21]

The new Mexico Oil and Gas Blocks, Source: http://www.ronda1.gob.mx/

Moreover according to the EIA the Energy Reform introduced three new types of contracts,

these are:

Profit-sharing contracts

Production-sharing contracts

Licenses allow participating companies to be paid in the form of oil and natural gas

extracted from each project. [20]

All of these contracts can allow to the IOCs to invest in Mexican oil blocks in the next rounds.

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Mexico Moves to Open Its Energy Sector, Stratfor, and Source:

http://www.stratfor.com/analysis/mexico-moves-open-its-energy-sector#axzz3NsZXhUGn

Long – term Partnership

Access to Mexico Oil and Natural Gas Market

Risk diversification

Midstream and Downstream Sector

The main trend the last years when a country like Mexico privatize its energy sector then IOCs

or other NOCs get in the game and buy major assets. Also a common tactic of the IOCs through

merge, acquisition and joint ventures agreements participate in the midstream and downstream

sector. For instance the buy 20% of a refinery and 30% of a pipeline.

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Mexico benefits from the Energy Reforms

According to the Mexican government the recent energy reforms can:

Reduce prices for natural gas and electricity

create 500,000 new jobs, and

boost GDP growth by 1% by the end of his term in 2018 [22]

Also JP Morgan claims in its report with name “J. P. Morgan, “Mexico: Positive Surprises in

Mexico Energy Reform and Implications for Fixed Income” may increase annual growth rates in

Mexico by up to 0.8% and foreign investment in Mexico by $20 billion per year by 2016 or

2017. [22]

Finally according to International Monetary Fund (IMF) the first phase of development of the

Mexico upstream sector, between 2015 and 2019, is estimated to require investment of about $40

billion per year. These investments are focus in shale and deepwater oil and gas blocks. For the

second stage, between 2020 and 2025, about $50 billion per year is needed (see chart below) [23]

Source: Issues, S., 2014. Mexico: Selected Issues; IMF Country Report 14/320; October 23, 2014. ,

(14).

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Win - Win Situation

From our analysis so far it is obvious that our basic hypothesis the cooperation of the

NOCs and IOCs is cooperation in NOCs’ home countries for Mexico Case Study is feasible

because this cooperation lead the two parties in a win – win situation.

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Qatar LNG Prospect

Qatar is ranked first among the producers of LNG. During the last decade, when the evolution of

LNG production started to boom, Qatar was the fastest growing LNG producer in the world. In

2006 Qatar outpaced traditional producers and became the top LNG exporter with 33 bcm. Other

significant exporters are Indonesia, Malaysia, Algeria and Australia. During the following five

years after 2006, Qatar expanded massively its production from 42 bcm to 105 bcm till the end of

2011, and 165 bcm at 2015 with an expected increase of 11% annually after the completion of

several major projects. At year 2011 Qatar had a liquefaction capacity almost a quarter of global

LNG liquefaction capacity. Qatar has a leading role in the world’s evolving LNG market according

to Boon von Ochssée (2011) because of its geographical location and its huge gas reserves, third

largest globally after Russia and Iran. [24]

Global LNG supply by country [25]

Qatar’s National Oil Company is Qatar Petroleum (QP) established in 1974. This National

Company is responsible to manage all the activities related to oil and gas, including exploration

and production. LNG production and exports boost the Qatari economy during the last years. It is

easier to understand how LNG exports and production contribute to the economic growth of Qatar,

when according to the Economist Intelligence Unit oil and gas exports accounted 70% of the total

government budget revenues and 40% of the GDP. [24]

34

The government of Qatar in order to strengthen its position as a leading LNG producer decided to

improve its LNG projects, including the production platform and the re-gasification terminals. In

order to achieve this, Qatar Petroleum turned to US super-major energy company ExxonMobil as

the partner of choice. Exxon is the major foreign investor in almost every project in Qatar by

owning a considerable share. The cooperation between QP and Exxon representing a unique

relation of National and International oil companies. [24]

LNG Project under construction (as of May 2012) [25]

Gas Demand

The global energy demand is expected to increase 40% until 2035. In this energy pie natural gas

is expected to double its share. The market for natural gas gradually becomes more global and

the demand for gas will keep growing in Asia and Middle-East. According to Ian Cronshaw,

Head of Gas, Coal and Power Markets at the IEA, “gas is set to become an increasingly

important energy source for future generations”. [26]

35

Growth in total primary energy demand [27]

Gas demand will increase in the next two decades from buildings, industry, transportation and

other areas because of the population growth. But, the electricity generation is expected to boost

the demand for gas, accounting according to IEA 45% of the extra demand of gas, since the world

electricity demand is expected to increase by more than two thirds over this period. [26]

The increased global demand will be met by 60% by regional domestic production, while the rest

40% will be covered by imports. LNG exports are intended to relief the countries that cannot meet

their increasing domestic demand for gas. LNG imports accounting 20% of the growing gas

demand. The main LNG importers are China, India, Taiwan and Japan. The LNG demand is

projected to boom during the next two years from South East Asia when more countries start to

import. [28]-[29]

Qatar manage to meet the growing LNG demand, therefore Qatar has a leading role in the evolving

LNG market. This was achieved by investing in big projects through the entire LNG chain, taking

in to advantage of its geographical position and resource base. Qatar Petroleum is strengthening

its position as an international investor, by the establishment of effective partnerships and

alliances, such as Exxon which has the US government backing. [24]-[30]

36

Qatar Petroleum and Exxon shared Projects

Qatar Petroleum sees Exxon as preferred partner with who decided almost 15 years ago to proceed

to the completion of strategic projects which offer increased volume capacity and economies of

scale. As mentioned above, Qatar’s geographical position and its continuously improved

infrastructure with mega projects offer to the country access to different markets.

Qatar oil and gas infrastructure [31]

Qatar Petroleum invested huge amounts in upstream liquefaction projects and has the largest share

by far in any of these projects. Exxon, on the other hand, is the largest foreign shareholder in Qatar.

Exxon owns up to 30% in all LNG projects (see table1), except two liquefaction terminals

(Qatargas 3 and 4) that have been awarded to Shell and Conoco Phillips respectively with a share

of 30%. Qatar Petroleum through the effective partnership with Exxon managed to acquire three

re-gasification terminals in the Atlantic Basin. These terminals are the first of their kind in an area

(Atlantic Basin) where the bulk of constantly increased LNG demand according to IEA is expected

to materialize in the following years. Additionally, Qatar recently completed a Gas to Liquid

(GTL) mega project. [32]-[33]-[34]

37

QP and Exxon: Ownership structure in re-gasification and liquefaction assets in 2011. [24]

38

Conclusion

After the Case Studies in the main part of our research we conclude that the main trend in global

O&G industry is the cooperation between NOCs – IOCs. In the conclusion we will examine the

NOCs and IOCs relationship from a general perspective.

NOCs on decline, IOCs diversify performance for 2013

According to the IHS Energy 50 outlook for 2013 (Shell & Morgan 2014) for the year 2013 the

combined value of the IOCs increased by average 9%. On the other hand the combined value of

the NOCs for the year 2013 fell by 15%. Also according to this report investors is very

concerned about the expectation of the NOCs to build value not only for the shareholders, but for

the national state and the key factors of the national host economy. This assumption is strictly

connected with the ability of the NOCs to have access to enormous oil and gas reserves. [35] -[36]

Source: Shell, R.D. & Morgan, K., 2014. The Definitive Annual Ranking of the World’s Largest

Listed Energy Firms JANUARY 2014. , (January).

Energy Outlook for 2020: IOC-NOC Partnership?

During our research we spotted a very interesting article/speech by Martin Bachmann

(Exploration & Production Europe and Middle East, Wintershall Company) for the NOC – IOC

39

relationship. This speech took place during the “The Gulf Intelligence UAE Energy Forum

2014”. We will mention the key points of this speech:

NOCs in 1970’s controls only 15% of the oil and gas reserves but nowadays controls

85%

Back in 1970’s IOCs financial stability and strength it was the key that opened the doors

of cooperation with NOCs

Nowadays technology and long-term strategies / partnerships are the important keys for

NOCs – IOCs cooperation. For instance in terms of technology, geological conditions in

the reservoirs are becoming tremendously complex (Sour gas fields and tight gas)

Also Martin Bachmann claims that technology expertise is not enough, we need a new

“partnership culture” between NOCs and IOCs. On general terms we must have a win –

win situation in which IOCs must gain access to the sources in sources in the large

producing countries and the NOCs to gain access to sources outside their regions

Wintershall was the first NOCs pipeline operator in Libya (IOCs invest in energy

infrastructure in NOCs home countries)

Wintershall cooperation with Gazprom in many projects such as tight gas competence

and from joint production to the joint construction of high-performance transit pipelines

to the markets in Europe. Wintershall and Gazprom cooperate for 20 years. (IOCs and

NOCs long term strategic alliance)

Wintershall also cooperate with UAE NOC ADNOC in the exploration and development

of the sour gas and condensate field Shuwaihat. (Wintershall is leader of the know – how

of the exploration of sour gas fields due to their experience in sour gas fields

development in Germany) (NOC – IOC cooperation due to technological expertise)

Finally energy consumption in Middle - East countries increasing rapidly, this situation

can lead the countries of Middle East to improve the recovery rate from their existing

fields – with Enhanced Oil Recovery technologies or to explore more complex fields

such as tight gas and instead of flaring the associated gas can use it for electricity, (IOCs

– NOCs cooperation long term strategic alliance)

40

He closes his speech with this phrase:

“Those who work alone, add. Those who work together,

multiply”

This speech explain to us the main trends between NOCs and IOCs cooperation in different

regions of the world, with the use of a variety of technologies and finally for the exploration of a

variety of conventional and unconventional resources. [37] - [38] - [39]

Third International Energy Forum NOC-IOC Forum

This forum took place on New Delhi, India at 11-12 June 2013. According to the summary report

of this conference the current situation of the NOCs and IOCs as the given date represented in

the next table.[7]

Source: Summary, Third International Energy Forum NOC-IOC Forum, www.ief.org

41

According to the forum results the main trends of investments in O&G Industry are:

On nowadays NOCs follow and implement very different strategies than in the past, more

specific implement international portfolio diversification and access to technology. One

other global trend is that Asian NOCs invest in all over the world.

How the companies will get access to capital to complete gas projects if the underlying

contracts are not linked to oil prices. (periods of high and low prices, unstable project

financing)

Asset swap, especially for contracts with a timeframe of 20-30 years (balance in the

upstream/downstream investment mix). With the use of these financial tools many

companies sell equity and receive the value in cash, thus increasing liquidity.[41]

Some facts about the future co-operation of NOCs – IOCs according to the forum, these are:

IOCs must offer value proposals to the biggest producer host countries if they want to

gain access to the reserves.

If IOCs wants to succeed to the host countries must share technology and try to

strengthen the domestic economy

In the near future may be we will observe the Asian NOCs to invest in the exploration

and production segment in the Gulf region

The future for IOCs and NOCs is likely one in which they will both compete and co-

operate. [40] - [41]

42

Source: Ledesma, D., 2009. The Changing Relationship between NOCs and IOCs in the LNG Chain

Oxford Institute for Energy Studies. , (July).

Source: Ledesma, D., 2009. The Changing Relationship between NOCs and IOCs in the LNG Chain

Oxford Institute for Energy Studies. , (July).

43

Source: Ledesma, D., 2009. The Changing Relationship between NOCs and IOCs in the LNG Chain

Oxford Institute for Energy Studies. , (July).

Source: Deloitte Report, 2013. Oil and Gas Reality Check 2013 A look at the top issues facing the

oil and gas sector Contents.

44

Final Assumption

We would like to conclude our research with the phrase from the Third International

Energy Forum NOC-IOC Forum, more specific:

The future for IOCs and NOCs is likely one in which they

will both compete and co-operate

Source: www.economist.com

45

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