National Oil companies (NOCs) must take a holistic approach to the oil and gas value chain to fuel economic development, according to a recent study by management consultancy Strategy& Middle East (formerly Booz & Company), part of the PwC network. Recent oil price volatility, coupled with an uncertain outlook for global oil and gas markets, is putting pressure on NOCs to maximize the overall benefit of hydrocarbon resources by pursuing an integrated policy towards the management of their portfolio of operations.
- Uncertain oil & gas markets have forced NOCs to rethink their approach to portfolio management
- The challenge for NOCs is to maximize the overall value of the integrated portfolio rather than any single element
- Strategy& outlines two complementary measures in line with broader national objectives to help NOCs overcome barriers
The study reveals that NOCs across the maturity spectrum have typically developed their oil and gas production, refining, and petrochemicals portfolios as a series of semiautonomous assets and companies. But with an increasingly volatile market outlook and pressure to align with wider national objectives, the challenge for NOCs is to move their focus away from single elements and towards greater integrated portfolio management. This requires companies to address a number of barriers that often reflect legacy ways of working, including:
- Fragmented, incomplete, or inconsistent data
- Diverse, non-standardized planning and portfolio management tools and systems
- Rigid organizational silos that focus on the individual organization entity, rather than the NOC as a whole
- Key performance metrics that incentivize operations within only one organizational entity
- Limited capabilities to resolve cross-organizational and cross-functional issues
- Culture and behaviors that discourage collaboration
Commenting on the challenges faced by NOCs, Georges Chehade, Partner with Strategy& Middle East, said: “NOCs increasingly have a mandate that goes beyond profitability to support the broader development of the non-oil economy and job creation. As a result, the model of semiautonomous operating assets managed primarily to meet ambitious production and output targets has changed for good.”
In the GCC, for example, mature NOCs in Abu Dhabi and Qatar, have embarked on the merger of previously stand-alone joint ventures, whilst the need to make better use of capital is one factor behind the partial privatization of non-core operations in Abu Dhabi and Saudi Arabia.
The Strategy& Middle East report identifies two complementary measures to help NOCs overcome barriers to integrated portfolio management:
1) Establish an integrated planning and capital allocation capability:
This approach starts with the strategic objectives of the NOC as the key driver along with an explicit consideration of how each element of the value chain will support them. This is in contrast to typical NOC planning policies that often consider the operational needs of the assets. With an integrated planning approach, for example, financial and operational resources are allocated on the basis of priority, rather than bottom-up operational need, to those assets and activities that best support fulfilment of strategic objectives.
James Thomas, Partner with Strategy& Middle East, said: “NOC strategies involve balancing multiple objectives and trade-offs, particularly between growth and profitability. Consequently, key metrics under an integrated planning approach are often based on operational and capital efficiency, rather than expressed primarily as top-down production or capacity targets. This results in targets that are realistic and achievable, and forms a firm basis for the monitoring of corporate performance.”
2) Develop new models to evaluate options for optimizing operations across the value chain
The development of a value chain optimization model starts with the mapping of the physical network of infrastructure and the actual and planned flows of oil, gas, and other products across the network. The second step is to identify the key nodes where alternative options for the allocation of hydrocarbons exist, or are feasible, for example in the allocation of crude oil to domestic refining or to export. The third step involves converting the network into a numerical model that includes all key information required to develop scenarios and test the impact of different scenarios on the portfolio.
David Branson, Executive Advisor with Strategy& Middle East, concluded: “NOCs need new models of the end-to-end oil and gas value chain to identify bottlenecks and areas of misalignment, and to assess and quantify strategic options for the allocation of oil and gas to competing end-uses.”
Many of the most pressing strategic questions for NOCs cut across organizational divides, and involve decisions and trade-offs across the value chain that cannot be evaluated using a traditional approach to planning. The benefits of taking an integrated approach to oil and gas management are not only substantial for the financial performance of NOCs, but also to the achievement of broader national objectives.