Lower cost of production must be drilled into decision making at all levels. No longer can regional energy giants remain impervious to the cost factor. Image Credit: Supplied

Today, national oil companies (NOCs) are in privileged positions, firmly established as major players due to their influence, contributions and resources.

As state-owned organizations, they play a pivotal role in their countries' political economies – financing public infrastructure projects, driving societal welfare programmes, developing national resources, and facilitating employment opportunities. Revenues produced by these organizations are vital for economic sustainability – and demand for their prized assets offers a source of political influence for the governments who own them.

In the GCC, NOCs contribute substantially to government budgets. For instance, Saudi Aramco is responsible for approximately 70 per cent of government revenues generated by NOCs in the Kingdom. Similarly, in the UAE, Abu Dhabi National Oil Company (ADNOC) is responsible for over 60 per cent of annual revenues.

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Raise their game

As the energy sector landscape evolves amid growing volatility, NOCs must act to enhance operational efficiency, lower expenditure, and remain competitive in light of insufficient finances and the growing demand for cleaner crude.

While NOCs do include organizations that depend heavily on foreign capital and expertise to develop resources, others have significant domestic financial backing. They are advanced technically and operationally – and differ along four dimensions.

• Resource-development costs: NOCs with substantial resources benefit from economies of scale, which help to reduce costs. And those with cleaner reserves and smaller carbon footprints are likely to secure buyers more easily.

• Institutional robustness: Companies with greater decision-making and robustness competencies have more freedom to make strategic choices without government intervention.

• Governmental financial strength: NOCs depend on funds from their government shareholders and the depth of state finances can directly impact strategic options.

• Operational efficiency: Companies with sophisticated technical and operational capabilities can generate greater profits without increasing costs.

Efficiency driver

Over the coming decade, NOCs with access to extensive low-emission production, robust and agile decision-making processes, a supportive and wealthy government shareholder, and strong operational efficiency will have a head start over peers. As such, they will be primed to solidify their status as the cheapest, cleanest, and most efficient operators.

It is important to note NOCs cannot control some of the factors – domestic company reserves hinge on geology, fiscal policies and wider economic drivers shape government finances. And strategic courses are influenced by the state.

Regardless of individual positions, though, every NOC in the Middle East can take several steps to bolster their competitive potential and become cleaner, cheaper producers:

Reduce emissions

Restricting greenhouse gas footprints as much as possible should be a priority for NOCs, and success in this direction is achievable by implementing several simultaneous actions. Improving energy efficiency, halting natural gas flaring, reducing methane leaks, adopting renewable sources for power, pursuing biofuels for heat generation, using low-carbon hydrogen to refine businesses, and applying caron capture, utilization, and storage are all viable emission reduction measures.

Low-cost production

Developing cheaper hydrocarbons that ensure lower emissions and deliver sizeable revenues at minimum expense should be a necessity for NOCs, particularly those with a broad mix of oil and gas resources. Looking ahead, concentrating investment on maximizing production from existing fields – particularly those with low-carbon resources or where oil and gas can be extracted cheaply – instead of searching for new reserves would be prudent.

Devise new means

NOCs should develop new technologies internally, especially if oilfield services and equipment (OFSE) companies cannot do so due to balance-sheet discrepancies. Investing in R&D and forging healthy relations with tech providers would be a good start and help NOCs acquire and reduce technology solution costs.

Streamline and improve

NOCs have often been tasked with creating employment for the domestic workforce by the government. However, lowering operational costs and enhancing efficiency is imperative. These requirements depend on companies introducing newer yet simpler organizational structures and processes.

Success here will increase agility, improve decision-making, and ensure cost base reductions. At the same time, NOCs should publicly disclose their emissions data. Doing so will bolster their social license to operate both at home and abroad, as well as showcase sustained emissions improvements.

Looking ahead, GCC NOCs have a window of opportunity to take proactive action and position themselves to lead the new reality energy sector by becoming cheaper, cleaner, and far more efficient. By taking the above steps, NOCs can meet these simultaneous priorities, securing their future from a competitive standpoint in the process.

- Bjorn Ewers is Managing Director and Partner at Boston Consulting Group.