International Oil Companies, National Oil Companies, and Hybrids

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Introduction

The global oil industry includes thousands of companies that are different in terms of size, revenue, strategies, and operations. Such types as international oil companies (IOCs) and National Oil Companies (NOCs) are often key players in the market, while the so-called hybrid companies are starting to play a more prominent role. Historically, these companies were involved in the production and distribution of such major products as oil and gas, but now they have reshaped their operations to enter the environmental sustainability paradigm (Silva Gutiérrez et al., 2021). At that, the primary products and services of IOCs, NOCs, and hybrids remain natural gas and oil, as well as associated goods and services. Some researchers believe that hybrid companies are likely to become leaders in the use of sustainable practices, while there are certain internal and external factors enabling IOCs to remain more sustainable than others. This paper includes a description of the key features of these companies, their advantages and disadvantages, objectives and strategic goals, as well as their role in the international gas and oil industry.

The Key Features of IOCs and NOCs

As the term IOC suggests, these companies operate across national borders, and some of the largest OICs include BP, Shell, ExxonMobil, Total, and Chevron. IOCs compete in the international energy market and can be characterized by a large size. These organizations often cooperate with National Oil Companies within national borders where the national company operates. IOCs are vertically integrated multinationals operating in the global energy market. As mentioned above, these companies are privately owned and governed by shareholders.

The major goal of these organizations is to generate revenue. As with any vertically-integrated companies, IOCs are characterized by a full cycle of operations, including exploration, production, transportation, and storage, as well as sales and marketing. Importantly, these organizations do not have government support and, on the contrary, often have to respond to the national governments attempts to limit their operation within their countrys borders. IOCs also have limited (if any) governmental support during economic crises and diverse financial fluctuations in the market.

National Oil Companies (NOCs) operate within the boundaries of one country, although they can compete in the international market (for example, as in the case of Gazprom or Statoil). The primary peculiarity of the NOC is that these organizations are controlled by their countrys government (Silva Gutiérrez et al., 2021). These companies tend to aim at managing the countrys resources, with such examples as Gazprom, Sinopec, or Petrobras. NOCs are mainly owned by the government, although some private investors can also have a part of the shares (Natural Resource Governance Institute, 2019). At that, NOCs are becoming larger, with facilities across the globe expanding their influence on the international arena; the difference between IOCs and NOCs is becoming less prominent. However, the type of governance in these companies still makes them distinct.

The role of NOCs has become more prominent since the 1970s. In the 1970s, NOCs controlled only approximately 10% of gas and oil reserves (Cabrales et al., 2017). In the 2000s, these companies controlled over 70% of oil reserves and about 65% of gas reserves (Cabrales et al., 2017). These organizations dominate in key oil-rich countries, such as Iran, Saudi Arabia, Mexico, and Venezuela. It has been acknowledged that, in many cases, NOCs are less profitable than IOCs, which can be explained by less effective policies related to employment and operations (Cabrales et al., 2017). Corruption and the pursuit of some political interests are the issues causing low financial success (compared to IOCs). According to Natural Resource Governance Institute (2019), many NOCs have substantial debts that can reach up to 10% of their countries national GDP. These countries governments have to provide considerable investments and even bailouts to save these companies from bankruptcies or major financial issues.

Hybrid Companies

Hybrids operating in the modern oil and gas market are quite few and refer to the organizations that bear the traits of both IOCs and NOCs. These are usually NOCS, operating in countries with small natural resource reserves. Such NOCs enter partnerships with IOCs trying to obtain their technologies and expertise. The most distinct features of these hybrids include governmental control, financial goals and pursuit of economic gains, the use of advanced technology and business strategies, and wide access to available resources in the corresponding country. On the one hand, governmental control is maintained, while business governance is mainly conducted by IOCS. On the other hand, the company obtains governmental support that enables it to access resources and operate in a favorable environment (such as taxation options) on the local level.

Such organizations started to emerge in the 2000s when countries faced the need to attract investment while IOCs acknowledged the need to seek innovative ways to adjust to the changing world with its price fluctuations. The Venezuelan oil company, Petróleos de Venezuela (PDVSA), was state-owned in the 2000s, but the new government needed to improve the economic situation in the country (Rosales, 2018). One of the ways to address the economic constraints the industry and the entire economy of the country faced was to attract foreign investment. The Venezuelan government reshaped the contractual cooperation between the PDVSA and foreign investors (Rosales, 2018). The rent became higher, but foreign companies were given more freedom and access to more resources. Although the governmental control was preserved, under the influence of foreign investors, the company adopted innovative strategies that enabled it to improve its operations and financial performance.

Although hybrids are still not numerous, this form of cooperation between the state and big business displays its benefits. The priorities of such organizations remain within the scope of social and political aspects. These companies are seen as the state asset that supports or contributes to the economic stability of the country. At the same time, profit and financial gains are becoming top priorities as well. In simple terms, hybrids are not entities providing employment to people and distributing available natural resources, as is often the case with NOCs. Hybrid companies pursue clear economic goals, such as generating a profit and competing effectively locally and globally.

Advantages and Disadvantages of IOCs, NOCs, and Hybrids

The key advantage of NOCs related to their governance and revenue is that they can rely on massive governmental support from their countries. During periods of major market downshifts and price fluctuations, NOCs are secured as their losses can be covered by the government. Moreover, governments create policies and regulations that create a favorable environment for these organizations. The advantage of the NOC is its compliance with major social laws and regulations, as these companies are often socially-oriented. Employees of these companies can feel secure as their rights are most likely to be safeguarded by the existing employment law.

The major disadvantage of NOCs is the lack of flexibility and quite strict governance managed by the government. In many cases, governmental control has an adverse impact on NOCs performance and their progress. The low interest in substantial innovation and easy access to resources makes these organizations less able to compete with other players in the international market (where governmental support is important but not decisive).

The advantage of the IOC, which is closely related to these companies revenue generation, as well as the development of the oil industry at large, is that these companies aim at profitability. This means that companies try to innovate, be flexible, and address the needs of their customers and changes happening in the market. This focus on constant growth enables IOCs to introduce new strategies and instruments that guide their followers and push the industry forward. However, the disadvantages of this type of oil company include their focus on optimization and profitability, which may come at the expense of employees. Workers of these organizations may be less secure as compared to NOCs and have worse social benefits. IOCs tend to have limited access to new sites, which limits their exploration opportunities. At the same time, due to these companies advances in technology, their increased access to resources would be beneficial for the industry and overall economic situation in the world.

The major advantage of hybrid companies is their more balanced strategic development compared to both NOCs and IOCs. Hybrids combine the primary features of the two other types of organizations, which is their important advantage. Remaining under direct control over the state, the company pays much attention to social aspects, such as proper employment policies, high investment into innovation, and high rents serving an important part of the budget. At the same time, these companies find themselves in a favorable position locally, which can often lead to gaining a competitive advantage and an opportunity to be more visible in the global market. The example of Singapores state policies regarding oil and gas companies is a good illustration of the benefits of the cooperation between NOCs and IOCs that form hybrids (McGregor & Coe, 2021). Thus, hybrid companies can be seen as potentially beneficial entities for the global industry due to their more sustainable policies and operations in different aspects.

However, these organizations also have certain disadvantages that have to be considered to develop the most effective framework for hybrids. One of these is related to the lack of stability in their host countries, which may lead to rather undesirable consequences. For instance, the situation in Venezuela can be an example exhibiting the possible adverse effects of the change of the government or fluctuations in its political agendas (Rosales, 2018). Companies that invested in the PDVSA saw substantial financial losses due to the changing regimes and the attempts of the countrys government to use the company and its vast reserves of oil as an instrument to achieve particular political goals. Thus, the sustainable development of hybrid companies is possible in countries characterized by political and social stability.

The Role Played by Such Companies in the International Gas and Oil Industry

Since IOCs heavily depend on customers and public opinion, they are often the primary innovators and pioneers. The slow but apparent transfer to the sustainable energy industry is also guided by these organizations. Under the pressure of shareholders and public opinion that is characterized by the sentiments related to environmentally friendly strategies, IOCs invest substantial funds in the reduction of their carbon footprint (Shojaeddini et al., 2019). These organizations try to produce energy simultaneously, trying to diminish the associated harmful emissions and make their resource use more effective.

These companies strategic goals are changing considerably as well because they aim at the utilization of renewable energy, further emission reduction, improving carbon storage facilities, and developing hydrogen technologies. For instance, according to BPs announcement, the company reduced its methane emissions to 0.2% of the amount of produced natural gas in 2017 (Shojaeddini et al., 2019). Other IOCs also move in this direction, shifting towards more sustainable practices. Chevron, for example, reduced the flaring of natural gas by over 20% over five years (from 2012 to 2017) (Shojaeddini et al., 2019). It is also necessary to note that governments of many countries introduce new laws and regulations aimed at reducing peoples footprint. Hence, IOCs and NOCs, as well as other players in the market, have to comply with these rules and contribute to the advancement of innovative sustainable technologies (Zhong & Bazilian, 2018). All companies operating in the global market have to adopt similar policies and approaches to remain competitive.

Another important role IOCs and NOCs have played recently are associated with the type of governance and strategic vision in the oil industry. The emergence of hybrid companies is a result of a certain competition between IOCs and NOCs and their attempts to adapt to the ever-changing environment. The new type of oil companies can become the basis of the new paradigm where social aspects and financial gains can be balanced.

The shift towards more sustainable practices in environmental and social terrains has been caused by the major changes that have taken place in society. IOCs seem to pioneer such socially-oriented and environmentally-friendly business practices, while NOCs remain concentrated on supporting the economic and social stability of the corresponding nation. Hybrids are based on the balance between these two priorities (Rosales, 2018). In simple terms, IOCs and NOCs have to transform and change to be more sustainable, while hybrids have an opportunity to build on these values and strategies. Rosales (2018) notes that hybrids can be important players leading the oil and gas industry to more sustainable practices. However, multiple obstacles to such progress and empowerment exist as governments tend to use their power over hybrids to attain goals that may not be associated with their peoples well-being or even economic benefits.

At this point, it is necessary to add that the roles of the three types of oil companies are largely shaped by international institutions as their policies regulate the global oil and gas market. The United Nations can be seen as one of the major drivers of sustainability in the global arena, and this institution creates policies, regulations, practices, and standards international organizations have to follow (Inkpen & Ramaswamy, 2018). The enhancing focus on environmental sustainability and the need to address the harmful effects caused by humanity marked the second part of the twentieth century and the twenty-first century. These concerns and inclinations were manifested in the development of various programs and standards to ensure sustainable operations of oil and gas companies. Hence, organizations operating in the global market have to adhere to the rules created by supranational entities.

Conclusion

To sum up, it is necessary to note that IOCs and NOCs that have dominated the global oil and gas market for over a century now have to compete with hybrid companies that mainly appear in countries with limited natural resources. The primary peculiarity of the modern oil and gas industry is the major shift of key players to more sustainable practices with a focus on the reduction of the environmental footprint. IOCs, being more flexible and dependent on public opinion and customers attitudes, have become pioneers in this area. However, NOCs being controlled by governments may be reluctant to adhere to some international standards but also have to adopt such practices to be competitive in the global market. These two types of oil companies are often in serious collisions, especially when it comes to local markets, and IOCs tend to lose the competition. NOCs are supported by local governments having unlimited access to resources and even funds during an unfavorable economic situation in the market. However, they lack flexibility, making them lose competition in the global market.

It is apparent that the oil and gas industry is undergoing significant transformations. Some researchers expect the rise of hybrid companies, which are seen as examples of sustainable organizations contributing to the development of solutions to environmental and social issues. However, due to the comparatively short period of hybrids functioning, it is unclear whether these organizations can remain competitive over a prolonged period of time. At present, it is possible to note that IOCs, irrespective of all challenges they have to face, remain leaders in the global oil and gas industry.

As far as the sustainability of the three types of oil companies is concerned, IOCs and hybrids seem to be more sustainable than NOCs. Although NOCs are controlled by governments and often aim at ensuring the well-being of their nation, these organizations often employ quite unsustainable practices. Nevertheless, in some countries, environmental sustainability is far from being their top priority, so NOCs are not required to follow strict standards and regulations. When they operate in the global market, NOCs have to adhere to the existing environmental laws. That IOCs and hybrids operate across borders in local and global markets, so their practices tend to be more sustainable.

Finally, it is necessary to note that IOCs focusing on economic gains and having access to the best talent and resources are likely to retain their role as sustainable innovators. These companies have to meet their customers and end consumers needs and expectations. Modern people value innovation, technology, and sustainability, so these principles are guiding IOCs. The rapid rise of electric vehicles in all parts of the world forces former oil and gas companies to focus on energy production rather than resource extraction. Since IOCs are most dependable on the trends reigning in society, they are more likely to adopt sustainable practices making them central to their operation. Thus, IOCs will remain leading sustainable organizations, followed by hybrids, while NOCs are likely to remain less environmentally friendly due to their lack of flexibility and limited access to talent.

References

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Inkpen, A., & Ramaswamy, K. (2018). State-owned multinationals and drivers of sustainability practices: An exploratory study of national oil companies. Advances in Strategic Management, 38, 95-117.

McGregor, N., & Coe, N. M. (2021). Hybrid governance and extraterritoriality: Understanding Singapores state capitalism in the context of oil global production networks. Environment and Planning A: Economy and Space, ahead of print.

Natural Resource Governance Institute. (2019). The National Oil Company database. Resource Governance.

Rosales, A. (2018). Pursuing foreign investment for nationalist goals: Venezuelas hybrid resource nationalism. Business And Politics, 20(3), 438-464.

Shojaeddini, E., Naimoli, S., Ladislaw, S., & Bazilian, M. (2018). Oil and gas company strategies regarding the energy transition. Progress in Energy, 1(1), 1-20.

Silva Gutiérrez, D., Paz, M. J., & Moreno Vite, A. (2021). Factors that explain the results of the national oil companies: The impact of the fiscal role on Pemexs results. Resources Policy, 74, ahead of print.

Zhong, M., & Bazilian, M. D. (2018). Contours of the energy transition: Investment by international oil and gas companies in renewable energy. The Electricity Journal, 31(1), 82-91.

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