NOCs begin a new phase of upstream internationalisation

The strategies of National oil companies (NOCs) have turned to building upstream portfolios for the next decade, much like the Majors. Neivan Boroujerdi, Andi Harwood and Maria Ditzel of our Corporate Strategy and Analytics team have assessed the upstream internationalisation strategies of 12 of the largest NOCs from across Asia, Latin America and the Middle East. They shared their insights with me.

What’s driving NOC internationalisation?

Essentially, more NOCs see internationalisation as a way to strengthen their portfolio in anticipation of resilient global oil and gas demand into the next decade. But each has its own motive. Some are looking to offset maturing domestic production – Asian and Chinese NOCs, even with years of internationalisation behind them, still face steep declines over the next 15 years. Others, with more stable or even growing production through 2040, including ADNOC and Saudi Aramco, want to diversify from an oil-weighted domestic portfolio into international gas and LNG. Qatar Energy, gas-weighted domestically and already with international LNG exposure, is investing in frontier exploration.

Do NOCs have the financial fire power to do big M&A deals?

Certainly. If gearing ratios are raised to 30%, the upper end of ‘comfortable’, we estimate the 12 NOCs have debt capacity of US$400 billion, twice that of the seven Majors. However, it’s questionable whether strong balance sheets will be put to work anywhere near that scale.

NOCs’ international M&A activity has slumped over the last decade. Spend is now a fraction of the US$20 billion to US$45 billion a year spent between 2009 and 2013 when Chinese and Asian NOCs were on a buying spree. A big factor behind the subsequent stance has been the value destruction from this past phase of deal-making exuberance, triggered by the collapse in oil prices in 2014.

The big resource holding NOCs from the Middle East are emerging as the new driving force of NOC-led international M&A activity, with ADNOC leading the way. However, material deals have proved difficult to close. ADNOC’s 2024 bid for 50% of Israeli E&P New Med is currently on hold while its new international subsidiary, XRG, pulled an indicative US$24 billion offer for Santos last month.

Do NOCs want to do international exploration?

Yes, NOCs are embracing frontier exploration, perhaps spurred on by CNOOC’s success as a joint venture partner in Guyana’s giant oil discoveries on acreage which came with its 2013 corporate acquisition of Nexen. Qatar Energy’s frontier exploration strategy – to partner with seasoned explorers including ExxonMobil, TotalEnergies, Shell and Eni – has resulted in several big discoveries.

More capital is being allocated to exploration at home and abroad, spend doubling to US$8 billion last year compared with 2018 and against the IOC trend. Most of the increase is targeted at domestic wells, but international exploration spend has jumped from US$0.6 billion to US$2 billion. Our analysis shows that the 12 NOCs created significantly more value from international exploration than from domestic drilling from 2020 to 2024, mostly in Guyana. That success could attract more funding.

What about discovered resource opportunities:

DROs are a business development tool favoured by Asian and Chinese NOCs looking to access large volumes of oil or gas. While activity has waned since the peak more than a decade ago, a declining opportunity set elsewhere means that DROs’ currency may be on the up, notably in the Middle East with its rich, untapped resources. Asian and Chinese NOCs, however, are likely to find themselves increasingly in competition with IOCs similarly looking to secure long-life material resource.

Will NOCs seek partnerships with IOCs?

Undoubtedly, and we expect more partnerships to develop. Diversifying into different countries, entry to challenging themes such as deepwater exploration and development or the LNG value chain, are all fraught with risks. NOCs can leverage existing partnerships with Majors, and other IOCs in their domestic sector, to strengthen their own capabilities. There are already examples besides Qatar Energy in frontier exploration, such as ADNOC/BP (the Arcius Energy gas JV in Egypt), and Petronas/Eni (Indonesia). NOCs may also invest with private equity to access new themes as Saudi Aramco has shown in partnering with EIG in LNG.

The reciprocal opportunity for IOCs, besides sharing the risk capital, could be access to resource opportunities – discovered or yet-to-find – and on a scale that moves the needle. Much of the world’s remaining oil and gas resource is in the hands of NOCs. Understanding individual NOCs’ needs and ambitions would improve the chances of IOCs forging the partnerships to open the door to those resources. Doing so could materially strengthen the IOCs’ own next decade portfolios.

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