National Oil Outfits Looking to Expand into Foreign Markets

National oil companies (NOCs) are looking to capitalise on the high oil price and the weak dollar by expanding into foreign markets either to secure further reserves or gain access to western technology. Gone are the days when the major international oil companies such as BP and Shell controlled directly or indirectly international activity, with more than 80% of global reserves now thought to be held by NOCs.

An increasing number of opportunities in the oil and gas-rich states in the Middle East, Russia, West Africa and south-east Asia are being developed by indigenous business and NOCs.

The technology, capital and project management expertise once controlled by the major oil and gas companies can be directly accessed by NOCs as investment capital is cheap and abundant, technology that resides within the service companies can be easily accessed and significant levels of professional recruitment has developed in-house expertise.

Eastern energy businesses are thus becoming increasingly aggressive on a European acquisition trail.

In the past year, the Abu Dhabi National Energy Co, or Taqa (75% owned by the Abu Dhabi government), has invested more than pounds500million in the acquisition of North Sea interests.

Recently, Gazprom, the Russian energy giant, inspired by recent EU regulation on energy liberalisation, bought out a number of small natural-gas companies in the UK, including Natural Gas Shipping Services and Pennine Natural Gas.

There have been links to a move for UK gas supplier Centrica – reflecting Gazprom’s intentions to gain influence in the distribution side of European gas markets through direct investment.

Early in 2008 it was reported that Gazprom had tabled an offer to Nigeria to fund gas projects – seen by many as a move to gain a foothold in the energy-rich nation with the ultimate aim of taking an equity stake in upstream developments.

The NOCs that currently possess in-house capability and technology are actively seeking new opportunities abroad, such as the Petrobras moves into deepwater plays in the US Gulf of Mexico and Gulf of Guinea.

The question for NOCs is why share a development with a major oil company if they can control it themselves?

NOCs will continue to take control of their own destiny and operate oil and gas fields their way – with their own supply chain and procurement practices.

What this means is that the traditional barriers to entry for a number of non-western service firms on size, technical ability and other aspects are being eroded in most significant growth markets.

We are witnessing a growing appetite for Middle East businesses to grow operations outwith their home country with a number of service contractors acquiring complementary business, while also raising significant finance to invest, develop and grow their operations across the region.

As NOCs have a preference for using indigenous providers, this actively aids their development. The clear strategy is to challenge the technical and operational dominance of household names such as Baker Hughes, Weatherford, Halliburton and Schlumberger in these markets.

Russian markets are also booming. The oilfield service market is expected to double in size to more than pounds16billion by 2012. Western businesses keen to access this market have also invested in operations – albeit with limited success – and have resorted to higher-risk M&A activity.

Such activity has been subtle, as we have seen with the staged Schlumberger acquisition of well services provider PetroAlliance, Weatherford’s minority stake in electrical submersible pump manufacturer Borets and Baker Atlas’s acquisition of Orenburgneftegeofizika (ONFG), a Russian wireline service company.

However, more recently, it seems that this market is going the other way, with Russian service providers looking to expand with deals such as CatOil’s 2007 acquisition of one of TNK-BP’s service divisions.

In spite of western investment, the Russian market is still predominantly Russian-owned. Almost all indigenous Russian firms have benefited from the increase in activity and have focused current efforts in growing technical and operational capability to service their home markets.

What will be interesting will be the future growth initiatives of Russian businesses as their home markets either mature or witness a slower rate of growth. With a strong offering and a price advantage, we will witness increased aggression and focus on internationalisation.

The perception of Soviet-bred, inefficient, lower-quality operations in the market is a dangerous assumption. A significant and increasing amount of assets and operations in Russia are of good quality, fit for purpose and able to compete with western offerings. Sooner rather than later, we will see the Russian firms penetrate markets in south-east Asia and the Middle East more aggressively.

Over time, of a number of giant Russian service businesses will emerge that will be able to compete effectively with ours.

Other regions, such as China, are also looking to expand geographically.

Andrew Reid is a director in Aberdeen with Douglas-Westwood

(c) 2008 Press and Journal, The Aberdeen (UK). Provided by ProQuest Information and Learning. All rights Reserved.