Financial and operational efficiencies of national and international oil companies: An empirical investigation

Highlights

• IOCs perform better than the NOCs, in general. .

• Performance and efficiency of NOCs remains contentious since some NOCs perform as good as the best IOCs. .

• Privatization of NOCs may lead to improved performance and efficiency. .

• NOCs play critical role in economic development and welfare of host countries. .

Abstract

The last two decades have seen a shift in market interest in favor of national oil companies (NOCs) to replace the dominance of international oil companies (IOCs). Since approximately 90% of the oil reserves and 75% of oil production is under the control of NOCs, it is imperative to analyze and understand their performance and efficiency in comparison to the successful business and governance model of IOCs in order to have enhanced forecasts in highly fluctuating market conditions. In the past, some studies attempted to understand the influence of different ownership models, i.e., public or private, but these studies are constrained by their assumptions and limitations. Moreover, the previous studies fail to reach a consensus with regards to the effectiveness of a given ownership model in comparison to the other. The present work is an effort to fill this gap by estimating the operational and financial efficiency differentials of NOCs and IOCs. A comprehensive literature review is carried out as a first step, which helped in identifying the relevant performance measures and the statistical methods that should be employed to obtain conclusive results. Overall, 10 indicators (3 financial and 7 operational) are used in this study to perform four analyses: (i) financial analysis; (ii) operational analysis; (iii) Stochastic Frontier Analysis (SFA); and (iv) Data Envelopment Analysis (DEA). The sample consists of 50 firms (composed of 16 NOCs and 34 IOCs), and our temporal interest is in fifteen years (2002–2016). The results suggest that, in general, IOCs perform better than NOCs but the role of privatization on the performance and efficiency of NOCs remains contentious since some NOCs perform as good as the best IOCs. Nevertheless, on average, it is safe to imply that privatization may lead to improved performance and efficiency since shareholder-owned firms, generally, perform better than the national players. For that matter, even some partially privatized firms show evidence of better performance in comparison to NOCs. However, since NOCs are mandated to fulfil the non-commercial objectives of the state as well, in addition to commercial obligations, it would be interesting to establish the comparison between NOCs and IOCs based on commercial and non-commercial performance.

Introduction

More than 80% of global economy still runs on fossil fuels (World Bank, 2015), of which oil and gas dominate the market and economic use. Any slight variations in extraction, supply, quality and security of oil and gas resources have the tendency to make an impact on the global markets. In essence, National Oil Companies (NOCs)¹ and International Oil Companies (IOCs)² conduct most of the oil-related commercial activities across the world, but the prominence of NOCs has increased in recent years as oil-exporting countries, such as those in Organization of the Petroleum Exporting Countries (OPEC), seek to control their national assets (Wolf, 2009). While NOCs control much of the oil reserves and industry, these companies have come under intense scrutiny because of their diminishing efficiency and decreasing contributions to their countries’ GDP (Stevens, 2003).

Countries that have a significant presence of NOCs depend heavily on achieving maximum operational efficiency of the oil and gas sector (Kjærnet, 2009; Stevens, 2008). Moreover, respective governments use the national oil and gas firms as a tool to execute strategic policies (Hartley and Medlock III, 2013). For example, the overseas expansion of Chinese NOCs is a strategic move of Chinese government in order to secure foreign production of oil and gas (Ma and Andrews-Speed, 2006), which may significantly help the country in meeting its energy needs, particularly in case of domestic crisis. The importance of NOCs in a global economy is significant since 90% of the oil reserves and 75% of oil production are under the control of these national actors (Tordo et al., 2011). Also, the share price performance indicates the superiority of NOCs over IOCs; in the latter part of 2002, prices of NOC shares (12 selected NOCs) rose by 531% while those of the IOCs (major 5) increased by only 113% – compared to the share prices at the beginning of the year (Jaffe and Soligo, 2007). Such huge hold over the most crucial commodity of the present day makes these organizations unique and important from the research perspective.

Over the last few decades, especially since the early 2000s, there has been a significant decline in the participation of the private sector in the oil industry (Wolf, 2009). However, the literature on NOCs and their operations and efficiency is limited (Losman, 2010). Much of the literature is anecdotal and centered around the history of individual NOCs. Only a few studies focus on the efficiency and investment patterns of NOCs, and their subsequent comparison with IOCs. The gap is probably due to the lack of complete and reliable data related to operations and finances. In addition, many researchers argue that comparison between NOCs and IOCs is not meaningful due to the significant deviation between the goals and objectives of the two (Wainberg et al., 2007); while IOCs are expected to maximize the profit of shareholders, NOCs are expected to contribute in the betterment of the society, in general, since the stakeholder spectrum of NOCs is broader than IOCs (Hartley and Medlock III, 2008).

On the other hand, many researchers are in favor of comparing the performance of NOCs and IOCs as long as the operational assumptions and variations are clearly separated from the results (Eller et al., 2007; Krasnopeev, 2016). In fact, few models have been proposed in the literature to separately assess the non-commercial objectives of NOCs in comparison to the commercial objectives of IOCs (Hartley and Medlock III, 2008). On the other hand, numerous studies attempt to compare the performance of NOCs with IOCs, either as one-to-one case study (Chen, 2007; Dun, 2017; Ma and Andrews-Speed, 2006), or over a temporal range (Hartley and Medlock III, 2013; Losman, 2010).

The primary shortcoming in the literature is the limitations pertaining to data and methodological choices for establishing the comparison between NOCs and IOCs, which essentially requires an apple-to-apple assessment (Krasnopeev, 2016). In addition, use of performance measures is limited to revenue, reserves and production, capital expenditure, and headcounts for comparing NOCs and IOCs. This results in overlooking other dimensions in which a given ownership model may be doing better than the other, especially the NOCs – due to their mandated non-commercial objectives. Another weakness in the literature is the analysis at national-levels only, which makes it difficult to differentiate between the performance of NOCs and IOCs within that country (Akobi, 2016).

In order to fil these research gaps, this study aims to answer the following:

• What are the efficiency differences between NOCs and IOCs?

• To what extent does acquisition and privatization influence the performance of oil companies?

We collected and analyzed the data from 50 organizations (16 NOCs and 34 IOCs) for a period of 15 years (2002–2016). Four methods of analysis are used in this study, including financial analysis, operational analysis, stochastic frontier analysis (SFA), and data envelopment analysis (DEA). The integrated analysis helped us in triangulating our findings and overcoming the shortcomings of each method.

This article is divided into seven sections. Followed by the introduction, a comprehensive literature review is presented in the second section. Third and fourth section summarize the methodology and data to be used in the analysis, respectively. Results of the analysis are provided in the fifth section. Sixth section offers a discussion to compare the findings of this study with the literature review. And the final section concludes the discussion and highlights opportunities of future research.