Could Restructuring African NOCs via Partial Privatization be a Game Changer in the African Oil and Gas Industry?

The prevailing system in African NOCs means a growing social and financial burden to oil producing countries that translates into low wages, poor quality goods and services

By Leoncio Amada NZE NLANG, President of the African Energy ChamberNOC CEMAC Region and President of APEX Industries SA.

With globalization and fierce competition in the markets, both local and international, companies face demands for profitability, quality and technology that contribute to their continuous improvement. The application of efficient management systems – such as the implementation of a Quality Management System – within a state owned or private company can help turn these pressures into a competitive advantage. In this dynamic of turning a mediocre company into a profitable and competitive one, three important concepts must be taken into consideration:

The need for leadership

There is no effective management system without a group of people working with a common purpose, and for this to be possible, leadership in senior management is necessary. The requirements of the Quality Management System must be integrated with the essential processes of the organization, and its objectives must be part of the strategic planning. To achieve this alignment, the involvement of senior management and their ability to involve the rest of the people in the effectiveness of their work is essential. Now more than ever, it is necessary to pay attention to what is happening around us, both outside and inside the organization. There are factors that need to be considered when planning processes: the competitive environment, existing technologies, the legal framework in which we operate, corporate values, etc. Any of these elements may affect the achievement of our objectives, and the degree to which we offer compliant products and services to our customers.

Managing the Change

Both a good identification of the context in which it operates, as well as a clear demonstration of leadership and commitment on the part of senior management are key to facing the situations of constant change that any organization currently faces: new business practices, technologies in permanent evolution, internationalization of the markets, all this forces us to adopt a predisposition to change. The draft of the standard has a very special impact on the way in which these situations are acted upon, both from the planning point of view (considering in a systematic and planned way, the possible consequences of the change, the availability of resources, assignment of responsibilities, etc.) as well as regarding the review and control of changes when they have occurred in an unplanned manner.

Risk as part of the process approach

Through this concept, the organization is intended to identify those possible scenarios in which the expected results could not be met and establish the pertinent actions to address such risks. In other words, it is necessary to consider the preventive nature that a Quality Management System must provide, and that seems to have been oversimplified with the application of “preventive actions” as a tool for this purpose. With this approach, it is not necessary to incorporate any specific requirement on the current preventive action. It is important to remember, however, that the risk-based approach recognizes the diversity of processes that can be defined, and the different consequences that a risk situation can have on product and service requirements, or on customer satisfaction. Therefore, the application of this approach must be flexible enough. Specific requirements on risk assessment methodologies are not included, but rather a generic framework is established for each organization to adopt based on its activity and the particularities of its management method.

Statistics show that most private companies and in all sectors of economic activity, respect the management procedures mentioned above and therefore are more efficient, profitable and tend to achieve the objectives set. The same cannot be said of state-owned companies, where waste of resources, chaos, lack of vision and leadership are the norm.

The common denominator in oil activity of all African oil-producing countries is the existence of National Oil Companies (NOCs) – in charge of safeguarding the interests of the State in the oil activity and that are called to be the locomotives of the economic activity of said countries through the implementation of rigorous management procedures in accordance with international standards – but unfortunately, and after more than 50 years of activity, they have not risen to the task. That is why the need to partially open these companies to private capital is urgent in order to bring some rigor in the management of these state “zombies” that have become a real headache for their governments. A need to start a coherent, pragmatic and well thought Partial Privatization process that is based on six fundamental pillars:

• The need to get rid of the chronic inefficiency of state-owned firms.
• The need to adopt and assimilate internationally accepted management methods in the oil industry.
• The need to meet designed and agreed business-oriented objectives.
• Implementation and assimilation of accountability culture.
• The need to encourage competition.
• And the possibility of creating a business environment that would encourage employees to become entrepreneurs.

Studies say that, in State-owned companies, the wage cost is relatively small compared to the total cost of running the company. The underlying problem does not lie in the excess of personnel, which obviously exists, but in the lack of availability of capital and technology and in poor administration. The increase in productivity generated by privatization and the increase in investment that it would give rise to would be more than enough to pay the social costs of restructuring the company.

The prevailing system in African NOCs means a permanent growing social and financial burden to oil-producing countries that translates into low wages, poor quality goods and services offered to the public, and excessive dependence on the decisions made by the multinationals with which they have signed. Joint Venture or Production Sharing Agreements, which do not necessarily obey or are in line with the short, medium and long-term policies of African governments that are facing the great problem of more than 600 million Africans without access to electricity.

The analysis of the development and operation of NOCs of African countries belonging to different generations of oil economies – Algeria, Nigeria, Angola, Sudan and Equatorial Guinea, etc, – shows many similarities. These are countries in which the production of oil in some, also of natural gas, has grown at a good rate during the last decade. In addition, the sharp rise in international prices has given rise to a sharp increase in income obtained from the export of both hydrocarbons. This being the case, there are no restrictive elements that notably affect the extractive and export activity of these considered landscapes. However, we observe with great concern in recent years the sharp drop in prospective and exploratory activity in the oil sector on the African continent, a situation that is due to the almost null experience and the unavailability of the necessary technology and funding on the part of the NOCs to face this challenge, combined with the problems of access to bank financing that the large multinationals International Oil Companies (IOCs) are having due to the pressure and blackmail of environmental extremists.

The main questions are in other different spheres, one of which is the real control of the oil resources available to African countries, in other words, who controls the deposits? In this work, we deal with this question based on the functions that NOCs carry out. The central question that we address is to what extent the NOC typology that arises from the functions exercised by state companies provides satisfactory answers to understand the degree of national control over national oil resources. This analysis is relevant because it contributes to the debate on a frequently ignored perspective: the activity of NOCs. Its creation and development depends on political decisions by governments. But, at the same time, its evolution conditions the forms and degree of control of the national players (government and NOCs) in the control of oil resources.

State-owned oil companies were created as depositories of legal rights over the existing hydrocarbons in the subsoil that belong to the State. This power is exclusive when the laws deny foreign companies the possibility of accessing ownership of those resources. Based on this legal definition, the difference between the NOCs derives from their different capacities to take charge of the exploitation of these resources and the specific functions attributed to them by the State. The inability of the NOCs to have the equipment, techniques, organization and financial resources with which to exploit their resources means that all or most of the effective control over the exploratory, productive and largely exporting cycle falls to the IOCs that do have those capabilities. This situation has lasted indefinitely in most oil-producing countries in Africa, as they continue to lack the technology, managerial experience and financial resources to make the large investments that oil and gas activity requires.

However, the government can induce various changes that do not directly depend on its collection capacity, although they are favored by the existence of better international prices and by greater collection of income by the State. The purpose of these changes is for the NOC to start developing productive activities through four possible complementary measures:

• Negotiate its position within the JV so that the NOC carries out extractive tasks that facilitate the assimilation of technology.
• Acquire imported equipment that can be used by the NOCs.
• Hire highly trained national and foreign technical personnel with clearly defined objectives and functions to work with NOCs and facilitate the training of company technicians.
• The partial privatization of NOCs, thus opening them to national and foreign private capital so that their management style becomes rigorous and to guarantee that points 1, 2 and 3 are implemented, since with the entry of private partners in the shareholding structure, it is guaranteed that the decisions adopted in the Board of Directors are based on the profitability, development and commercial expansion of the company.

These decisions would allow the NOC to start its productive functions and strengthen its participation in exports, increasing direct oil revenues and its participation in the entire value chain of the oil industry, from exploration, production, processing and transformation, transportation and marketing of the final product in national and international markets.

It is not by chance that the state oil company of Saudi Arabia, Aramco – the most profitable company in the world, the giant that produces about 10% of world’s crude oil and that registered in 2018 a net profit of 111 billion US dollars and that exceeds the combined earnings of Apple, Facebook and Microsoft according to Moody’s agency – has opted for a partial issuance of bonds by the company to go public and attract private investors. During the last 20 years, we have seen the rise of independent oil companies such as ConocoPhillips, Marathon Oil, EOG Resources, Pioneer Natural Resources, Apache, Hilcorp, Trident Energy, Kosmos, Oranto Oil, Springfield, etc….that are doing a great job and a great service to the Oil and Gas industry community and are operating in many part of the world; while at the same time African NOCs with much more resources and power at their disposal have been gradually losing their relevance in the international arena.

Moving in the direction of a partial privatization, in the course of time may lead to the national players (government and African NOCs) reaching a position of empowerment over their resources, that is, majority or total control of the oil cycle. The fundamental requirement is the technological, organizational and financial capacity of the NOC to take charge of the activities involved in the oil cycle.

In other words, having reached this position of empowerment, the NOC has substantially altered its central function, ceasing to be a mere collector of the share received from the IOCs, as is currently the case in most oil-producing countries in Africa, to become the majority or exclusive producer and exporter of oil extracted in the country and become a true actor and promoter of change and comprehensive economic development.