June 2010 Vol. 237 No. 6


Big Oil Faces Global Competition From National Oil Companies

Geeta Agashe

Until recently, nationalized oil companies (NOCs) posed a competitive threat to international oil companies (IOCs) only in their home countries. However, a number of factors have now converged to prompt once-isolated NOCs to expand their reach on a global scale.

This emerging threat will force IOCs to devise new strategies to compete in the worldwide marketplace against nationalized companies, for which profits and shareholder satisfaction are not the only motivating factors.

The role of the state has declined steadily in nearly every sector of world economic activity. However, the pattern in hydrocarbons is very different. For better or worse, NOCs remain firmly in control of the vast majority of the world’s hydrocarbon resources. The run up in energy prices in 2007 and 2008 has encouraged governments to shelve or postpone plans to open up their hydrocarbon reserves to outside exploration and development.

Beyond Borders
In the past, most NOCs have been content to do business in-country and mostly dealt in low-grade, low-priced lubricant products. More recently, however, as oil prices increased and emerging economies flourished, increased oil consumption fueled a significant up tick in financial earnings at some NOCs. They’re becoming more secure and financially stable—particularly in developing nations where reserves are plentiful and labor costs are relatively low.

This financial security has enabled the growth of in-house R&D and the procurement of advanced technologies to develop more sophisticated production processes and products. Coupled with a growing knowledge of global markets and managers who have been educated and trained abroad, this has enticed many NOCs to look beyond their borders. With worldwide lubricant demand at around 35 million metric tons in 2009, the global market is tempting, particularly in the Asia-Pacific region, which now accounts for more than one-third of global demand.

Signs Of Expansion
The potential for growing competition from NOCs is of grave concern to multinational suppliers who see the ambitions of nationalized companies as a major threat to their global leadership. We’re already seeing signs of global expansion from several NOC brands, as discussed below:

  • PETRONAS has made a bold expansion by acquiring Italian FL Selenia, which has significantly expanded their lubricants business in Europe and Brazil.
  • Petrobras has acquired Chevron’s lubricant business in Chile, including a blend plant in Santiago.
  • TOTAL has purchased the lubricants business of ExxonMobil in Vietnam, Ultramar in Canada, and Chevron in Uganda and Kenya.

In 2009, many NOCs make the list of Kline’s top 15 leading global lubricant marketers (by volume) including China’s PetroChina and Sinopec, France’s TOTAL, Brazil’s Petrobras, Malaysia’s PETRONAS, India’s Indian Oil, and many others that have setup offices in foreign lands or explicitly expressed their intent to expand outside their home markets.

Apples Vs. Oranges
The problem for IOCs is that many of these government-run NOCs operate on a significantly different business model, driven by factors that might not seem like “rational” business principles. Where IOCs make decisions based on profits, ROI, and performance, NOCs must factor in feelings of national pride, supply requirements to local government-owned automotive and industrial OEMs, and the need to maintain certain levels of employment in order to preserve political and social stability. NOCs also typically benefit from government funding reserves to keep the doors open.

Meanwhile, some privately-owned companies (POCs) are not faring well due to increasing raw material prices and tightening of demand in key end-use industries and country markets. How are they to compete with this new force in the market when they may already be suffering?

One successful strategy for IOCs, even inside largely NOC-controlled markets, has been to focus on the hi-performance market—synthetics and high performance blends that require advanced technology and command premium pricing. NOCs have not traditionally had access to the kinds of technology, additives, and other components necessary to make a splash in the hi-performance segments.

To sustain a competitive edge on niche products, some IOCs may look to struggling privately-owned companies who are ripe for acquisition or merger. Many key regional players have great niche positions, but are weakened due to the current economic situation. Multipliers for acquisition are at an all time low due to the current economic recession. Hence, this might be a good opportunity to pick up key assets in depressed product categories (such as metalworking fluids) and in depressed countries of the world, including Russia, the United States, and others, in preparation for recovery.

Many IOCs will also benefit from key legacy relationships with larger automobile OEMS, particularly those who have targeted emerging markets for expansion—including GM, Volkswagen, and Mercedes Benz. Foreign auto sales continue to grow in developing nations as the local population enjoys a higher level of disposable income and buying power. The history of these OEM relationships will help to provide some IOCs with a cushion against the growing NOC threat in both automotive and industrial applications.

The strength of their brands and the “foreign is better” consumer appeal in many countries will also serve IOCs well as NOCs expand globally. IOCs have well-developed branding, advertising and promotional programs that will maintain or enhance their top of mind awareness with consumers. Meanwhile, NOCs have a lot of catching up to do in the marketing department. In addition, global distribution and supply capabilities of the IOCs will also keep them in good stead, particularly in end-use markets like marine, aviation, mining, automobile production, and others.

IOCs will likely continue to have a technological advantage compared to NOCs for quite some time. In areas of the world where hi-performance lubes are a must for resisting the elements—heat, dirt, dust, sand, and cold—foreign brands tend to perform better. IOCs benefit from greater access to higher quality base stocks and additives, where NOCs are typically limited by their own integrated production supply. If NOC basestock refineries are churning out only API Group I baseoils, then they must purchase high-performance baseoils to cater to the high-end market, which is growing in demand as OEMs and environmental regulations mandate higher-quality grades. However, this equation is rapidly changing as many of NOCs, including PERTAMINA of Indonesia, PETRONAS of Brazil, Bharat Petroleum of India, and others, have begun producing API Group II and/or API Group III quality baseoils.

While the threat of competition from NOCs may keep global oil executives awake at night, the fact remains that the qualities that put IOCs on the leaderboard will continue to serve them well. A focus on cutting-edge technology, innovation, and brand leadership backed by strong technical support and distribution channels, access to high-performance baseoils, cutting edge additives, and strong relationships with automotive and industrial OEMs are some of the key ingredients in any successful business model, which some bloated, inefficient NOCs may soon find out for themselves the hard way.

About the author
Geeta S. Agashe is vice president of Kline & Company. She directs the market research activities for the energy industry practice at Kline, a worldwide consulting and research firm. She has 14 years of experience serving clients in the global basestocks, finished lubricants, lubricant and fuel additives, waxes, and other related downstream petroleum markets. She assists clients with strategy and market development, technology and economic feasibility analysis, benchmarking analysis, customer satisfaction and image analysis, and mergers and acquisitions support. Prior to joining Kline, she was a management consultant with KPMG. Telephone: 973-435-6262.

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