Governance in the GCC Hydrocarbon Sector - The Right Time to Act

The hydrocarbon sector in Gulf Cooperation Council countries has grown significantly over the last three decades, transforming the region into a dominant participant in the global oil and gas market. Today, GCC governments have the opportunity to use this strength to diversify their economies thus growing their GDPs, meeting employment needs, and contributing to the social welfare of their people.

Over the last decade, the hydrocarbon sector has generated the majority of the gross domestic product (GDP) of nations in the GCC, and this meaningful contribution is expected to continue well into the foreseeable future. At the same time, the sector has reached a point in its evolution where it can help jump-start new ancillary industries to spur long-term job creation. Generating this new business activity, though, will require a fundamental change in the way GCC countries govern and manage their oil and gas resources. 

“The hydrocarbon sector in GCC countries is in the early stages of what is often referred to as the “golden age”—the period in the sector’s evolution at which its strategic importance in national economies has grown far more than any other sector’s,” said Dr. Raed Kombargi, partner, Booz & Company. At the same time, the sector has become more complex, with the activities of the national oil companies (NOCs) spanning the value chain—from upstream, to downstream, to petrochemicals, to oil and gas services, to international operations, and even to nation-building activities. The sector also has an increased need for local and foreign partnerships to access technology, skills, and capabilities. If GCC countries can harness this golden age and use it to its full potential, their hydrocarbon sectors will mature enough to create offshoot industries and national champions, generate employment, and facilitate economic diversification.

However, generating this new business activity, and consequently more jobs, will require increased private-sector and foreign participation in the hydrocarbon sector. This warrants a change in the way GCC countries govern the sector and manage their oil and gas resources—one that acknowledges the merit and appeal of private and foreign participation while protecting their national interests. Given the maturity level of the sector in the GCC, the time is right for governments and NOCs to take stock and redefine the way forward. Successful transformation of the hydrocarbon sector governance would rely on a holistic governance framework. Multiple options are possible for governance entities at various levels. The governance framework should take into account a number of factors.

A. Separation of the Roles Required to Effectively Govern and Manage the Sector

Effective sector governance requires an unambiguous definition of the roles and responsibilities of all the entities involved in the hydrocarbon sector, as well as a clear segregation of duties. The separation of the policy-making, regulatory, and operating roles helps to balance strong state control over national resources while providing the necessary transparency, oversight, and security to attract private-sector participants.

B. Strong and Independent Board to Govern and Oversee the NOC

GCC governments, as the shareholders of the NOCs, have thus far adopted several alternative models to oversee their management—via a ministry, supreme council, or board of directors. The choices of model are determined in part by historical events and the specifics of the country in question. Each of these alternative models has served well in managing the rapid growth in the nationalization stage and moving the nation’s oil and gas industry into its current golden age.

C. Strategic or Active Involvement of the NOC in Managing its Business Units and Subsidiaries

NOCs could be more involved in the management of their hydrocarbon related subsidiaries, overseeing performance and ensuring alignment on issues such as the subsidiaries’ strategy direction, targets, and capital allocation, in order to better optimize the value across the hydrocarbon value chain. 

The sector’s next chapter could launch a change in the way the sector is governed and the NOCs are managed. Our experience suggests that there is no textbook solution. On the contrary, GCC governments and their NOCs need to carefully consider and evaluate the range of options available for an effective, customized governance framework. A properly governed sector creates a level playing field that will encourage private enterprise, increase the interest of foreign partners, and create a healthy and competitive hydrocarbon industry that uses resources optimally and allocates capital efficiently.

“GCC countries that maintain a “business as usual” approach will likely continue to enjoy stable proceeds from their oil and gas sector for some time to come. But because the industry is rapidly evolving and becoming more complex, they risk leaving significant social and economic value on the table,” said Asheesh Sastry, principal, Booz & Company. Failing to effectively address sector and corporate governance issues in the near future may mean that the significant promise that the GCC countries currently demonstrate may not fully blossom to its ultimate potential. Making the first steps in transforming the sector’s governance model now will help ensure that those opportunities are not lost, and that the region will be firmly in control of its future.