Financial and operational efficiencies of national and international oil companies: An empirical investigation
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:
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What are the efficiency differences between NOCs and IOCs?
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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.
Section snippets
Literature review
NOCs and IOCs continue to be the key players in national and international development due to the eminent demand of oil and gas despite the high investments in green and renewable energy. Nevertheless, among NOCs and IOCs, which model is more efficient than the other is an ongoing debate (Wolf, 2009). A large number of studies explore the specifics of oil businesses and the types of companies involved; however, researchers have not yet reached a consensus regarding the prevalence of an
Methodology
Literature review highlights the need for future studies to consider revenue and profit efficiency to estimate the differences between ownership structure. We have used a hybrid-empirical method to transform simple numerical data into understandable statistical expressions, such as percentages and correlations, as well as metrics of financial and operational ratios. Since, the objective of our study is to compare NOCs and IOCs, it is appropriate to apply longitudinal empirical design, as it
Data
A stratified sampling criteria was used to account for broader sample and allow sufficient elements for comparison between NOCs and IOCs using the Bloomberg's financial database (Bloomberg, 2017). Other data sources included organizational reports and audited financial statements. Companies with following criteria were selected using stratified sampling:
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Oil and gas companies that publish data related to upstream, midstream and downstream activities.
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Oil and gas companies with financial data
Financial analysis
The three financial ratios collectively provide an overview of each company's financial performance. Using a 10% cutoff value for all three ratios, ROA, ROE, and ROIC, only 11 companies achieved a triple success level, and all of these are IOCs except one NOC (Qatar Petroleum). The IOCs include ExxonMobil, LUKOIL, SASOL, Woodside, EOG, Shell, Total, Suncor, Continental, and Chevron. The top five performers in each financial ratio are tabulated in Table 3. Generally, IOCs dominate NOCs since
Discussion
As illustrated in the financial and operational efficiency analysis, NOCs face a host of practical challenges and setbacks that limit their performance, which was also concluded through SFA and DEA. A comparative summary of the performance of NOCs and IOCs over the input and output ratios is shown in Fig. 7. On average, IOCs mostly dominate NOCs, with the only exception of net income per employee, where NOCs’ performance better.
From a discussion point of view, the effect of control of the state
Conclusion
Based on the literature review, findings of this article, and experience in this field, we have outlined some recommendations for NOCs and IOCs in the discussion section. We believe that this research is likely to benefit policymakers, ministries and governments of oil-producing states in designing objectives and strategies for the NOCs.
Following a comprehensive literature review, financial and operational analysis is carried out for 50 organizations over the course of 15 years (2002–2016).
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