5 key recommendations for governments & NOCs
National participation in the development of a country’s resource base is an important goal throughout Africa. To move beyond a symbolic presence in the upstream and play an effective, meaningful role, national oil companies (NOCs) require a clear mandate and sufficient resources, and the support of government.
In a recent study (2014) we identified five key recommendations for governments to maximise the chances of success for newly established NOCs or those undergoing restructuring:
1. Government must understand what different NOC roles cost in their specific national context
The resources and time involved in the expansion of the NOC’s role can be significant. To make good decisions about the role the NOC should play, governments require a clear understanding of the capital and time needed for it to develop into an effective player in the national petroleum sector.
There is no one-size-fits-all plan for this. The investments required will depend on a country’s capacity levels in the following areas:
- Capable state administration and effective legislative framework to regulate the petroleum sector;
- The level of oil sector experience of key personnel;
- Existing or potential relationships with foreign oil companies and service providers;
- Specialised higher education in geosciences, geology, engineering – how many graduates of higher education are there per year in these fields?; and
- Primary and secondary national education.
In the most conducive national environment, developing solid operator capabilities takes a minimum of 7 years, and 15 plus years otherwise.
2. Government and NOC should review the state of the resource base, available capabilities and possible revenue streams, and task the NOC with a role that it has the capability to execute and the state can afford
The strategic ambitions of NOCs and the mandate they are given by government must be in line with the potential size of available revenue streams. Governments and NOCs must first assess whether the resource base warrants the investment in developing operational capabilities.
We have reviewed some of the revenue streams available to NOCs in the pre-discovery phase, post-discovery phase, and once in production. Realistically, no revenue stream will be sufficient for an NOC to engage in a growth strategy towards operatorship until there are significant proved discoveries in the country, which increase the value of its minority stakes — and the debt incurred to pay for these minority stakes has been paid off by production revenues.
The goal of operating in the upstream should be delayed until discoveries promise a reserve lifespan that is longer than the time it would take to develop these capabilities. Eddy Belle, PetroSeychelles CEO, explains this point well, “We are not in a growth stage. We must stay lean until we make discoveries. Otherwise, you train people and then they are disheartened because they don’t have enough work to keep them busy.”
When discoveries are large enough for the NOC to aspire to an operational role, its regulatory responsibilities should be transferred to a government agency, to avoid a conflict of interest.
3. It is critical for governments to approve an explicit financing model for NOCs
The petroleum sector is capital intensive, especially when countries begin to produce. Petroleum ministry officials and NOC executives have highlighted the difficulty they face in convincing their counterparts in the Ministry of Finance and Treasury to allocate the necessary capital to the NOC because they do not understand its financial requirements. Another common concern relates to expenditure rules governing salaries in state-owned enterprises (SOEs).
Similarly, a challenge specific to NOCs without production revenues is the lack of reliable revenue streams that complicates forward planning. Upstream revenues from data sales and payments from operators will necessarily be cyclical and outside of the control of NOCs – namely in response to exploration interest and the occurrence of a licencing round. Similarly, downstream levies, import mandates and government allocations fluctuate with the political will of government.
Another problem typical in the pre-production phase is that when revenues do not allow NOCs to pursue their growth strategy, they create new revenue streams, sometimes to the detriment of other organisations or companies.
To enable NOCs to be competitive, governments must approve an explicit and enabling financing model for NOCs. This will clarify revenues the NOC can generate from the downstream and/or upstream business. These must be sufficient to finance the agreed upon NOC role. With an explicit financing model that establishes revenue streams for the medium term, NOCs should map out a human resource strategy for building competences in line with what they have been tasked to do.
4. Introducing strong accounting and reporting standards improves the governance of the NOC
As the capacity of the NOC grows, however, there is a risk that the state does not develop the capacity to hold it to account for its performance. NOCs must maintain financial and operational accounts that the state can understand and access in a timely way. And the state administration must invest in developing its auditing capacity. It is crucial that strong accountability processes are in place and state capacity to oversee the NOC grows in line with the sector. The value of having an effective agent to oversee the sector declines when nobody is able to hold it accountable.
5. Government and NOC should invest strategically in skills development
Having identified their recruitment needs, almost all the NOC executives surveyed for the study identified skills shortages as a key factor holding back their growth strategy and one of their biggest challenges.
Training too is a high priority for the NOC executives interviewed. Many have significant training budgets. However large financial investments can easily be wasted and deliver few tangible results if companies are unable to:
- Identify skill gaps in the company
- Select training programmes that fill specific gaps
- Understand and test the employee/executive’s acquired skills
- Utilise the skills in the employee/executive’s job
It is also important to draw on the expertise that partners can offer. NOCs that have joined other private groups in partnership have benefitted from the mixing of business cultures, as well as knowledge and skills transfer.
To invest strategically in human and technical development, emerging producers need a clear view of what capabilities they have and what skills will be called on at each stage of development of the resource.
National aspirations would see NOCs in emerging producing countries play a strong role in the upstream sector, overseeing foreign operators and eventually competing with them; they would be expected to drive the development of local supply chains and help develop national capabilities. Looking to the NOC to play a meaningful and effective role in the upstream is achievable. But what such a role entails in practice has to be carefully assessed – so as to reveal what capacity is required and how much it will cost to develop it – and then reassessed again over time, as the resource base develops. Unlocking the potential of African NOCs will require a clear mandate and sufficient resources, and the support of government.