Image placeholder

State-Owned, Still Struggling: Our New Research on National Oil Companies

Events unfolding in two major oil producers underscore the critical role that state-owned companies play in shaping how much a country earns from its oil—and how much citizens can expect to benefit.

Indonesians are eagerly awaiting the results of the July 9 presidential elections, which pitted Jakarta governor Joko Widodo against former military officer Prabowo Subiantio. One of the most critical tasks for whoever wins will be to address pressing concerns about Indonesia's national oil company, Pertamina. In the face of declining production and concerns about public revenues and energy security, oil sector reform was one of the issues at the top of the electoral agenda. At a forum organized in June by an energy-focused Indonesian think tank, the camps of both leading contenders emphasized the need to reinvigorate Pertamina and restore some of the privileged positions the company once held in the country's upstream, without alienating foreign investors. Many Indonesians view pumping up Pertamina as a priority, but significant debate remains about how to get there.

Meanwhile in Mexico, where revenues from state-owned company Pemex fund one-third of the government budget, heavy financial losses and delays in developing untapped reserves have prompted the government to do what was once considered unthinkable—removing the company's monopoly over Mexican oil and opening the sector up to foreign competition. Implementing the plan will require a series of difficult decisions, not just about how Mexico will manage private oil companies, but also about what Pemex will do in such a landscape. Also in question is how Pemex will meet President Enrique Peña Nieto's expectation that it transform from a de facto bureaucracy into a more efficient commercial player that competes with the world's best.

The questions in these two countries are, of course, context-specific, and each country with a national oil company (NOC)—from experienced global market-makers like Saudi Arabia to brand-new producers like Ghana—faces different kinds of challenges. But the issues that Mexico and Indonesia currently face reflect a broader set of governance quandaries associated with the slow-going effort to build NOCs into successful engines of national development.

In the best cases, such as Brazil's Petrobras or Norway's Statoil, companies have become dynamic and sophisticated actors that generate significant financial returns and promote the development of a stronger domestic private sector. But in many countries the most ambitious dreams for NOC development have gone unfulfilled, and in the worst cases these companies have retarded oil-sector development or served as parallel states-within-states that hand out political favors without meaningful public accountability. One need look no further than Nigeria—where the central bank governor accused the national company of failing to send along tens of billions of dollars owed to the treasury, and where recriminations have been going back and forth ever since—to get a sense of the scale of confusion that's possible.

It's these sorts of challenges that prompted us to write Reforming National Oil Companies: Nine Recommendations. The briefing paper builds on earlier work focusing specifically on NOCs in low-capacity oil hotspots and new producer countries, as well as our series on the governance challenges that emerge when NOCs are responsible for selling large shares of their countries' oil. What we have done in this new work is to examine the experiences of 12 NOCs with a diverse set of goals and competencies, to try to draw out actionable, practical lessons that policymakers and NOC officials in a variety of settings can consider as part of their efforts to make national companies more effective and more accountable.

Some of the recommendations are narrow and targeted— for example, companies are most likely to succeed if the government limits the number of entities defined as "shareholders," to promote coherent management. Other recommendations tackle more fundamental conceptual questions, such as striking the right balance in the rules governing how the NOC gets money from, and shares money with, the treasury. But throughout the paper we seek to be specific, and to ground the recommendations in the experiences of national companies throughout the world. We hope that the research will inform the ongoing debates in places like Indonesia and Mexico, and will be valuable to those making tough decisions about how to structure, lead and monitor the work of NOCs.

Patrick Heller is the head of legal and economic programs at NRGI.