Nigeria’s NNPC, other NOCs urged to transform into energy companies to avoid economic trap of lower oil prices

African countries that have for decades depended on their national oil companies as a key source of revenue will need to rethink business models and strategies to avoid being captive to a single energy source and to allow them to rebalance budgets.

These are some of the highlights from an analysis and report by PricewaterhouseCoopers LLP (PwC) entitled “The new Nation Builders: Creating the African national oil company (NOC) of the future” released Thursday.

The report particularly looked at the challenges of disruption facing African NOCs, what it means for them and how they should position themselves for a sustainable future.

Accordingly, NOCs are urged to carry out assessments of where their strengths may lie and of potential revenue streams. This will become an increasing priority with the emergence of social and political challenges amid slowing regional economies.

The analysts specifically noted that NOCs across Africa like the Nigeria National Petroleum Corporation (NNPC) have an enormous opportunity to secure a more sustainable future by transforming into “national energy companies” (‘NECs’), thereby escaping the economic trap of a lower oil price and embracing the disruptive forces unleashed by climate change and a low carbon world.

“A new era of lower oil prices is challenging business models that have long relied largely on exploration and production of hydrocarbons, particularly ‘black gold’ oil.  This is likely to prompt African countries that have for decades depended on their NOC as a key source of revenue to rethink the “nation-building” role that their NOCs have played,” they pointed out.

They averred that the sustainability of NOCs would depend on their ability to transform into NECs, responding to the demands placed on them by consumers, governments and non-governmental organizations (NGOs) to respond to climate change and a new energy future.

“Globally, the energy sector is experiencing significant change and upheaval. Whether it is in oil & gas or utilities, we are witnessing tectonic shifts in strategies, business models and ways of working,” Chris Bredenhann, PwC Africa advisory oil & gas leader, said.

“Whether we are talking about fledgling NOCs with limited hydrocarbon resources or established NOCs sitting on large reserves, all of these companies will need to work out how to seize the opportunities emerging from this disruption,” he added.

Bredenhann noted that not only do African NOCs have to navigate this disruption and tackle the challenges of uncertainty, as do their international oil company (IOC) counterparts, but given their sovereign importance as nation builders they must also identify the future pathways to evolve.

The report identifies three key factors which established NOCs should consider in order to diversify and grow beyond the historical reliance on oil, including rapid moves globally towards an increasingly low-carbon energy industry; meeting the burgeoning demand for domestic power; and a need to meet crude and refined product requirements through storage and transport in domestic African countries.

To move towards this vision, PWC recommends that NOCs may need to adopt partnership models to transform and operate successfully as NECs. In a budget-constrained environment with reduced access to resources and capabilities, partnering with IOCs will be key to delivering change. NOCs will also need to engage more widely with regulators and governments in order to ensure that they are playing an active role in the industry.

However, in most cases, the new low oil price environment is likely to force many governments to consider what the most appropriate mandate should be for an NOC. Some projects may not proceed as originally planned due to the lower oil price environment.

According to our analysis, we think it is still possible to stay true to a nation-building mission, while adapting business models to the current environment. There is an opportunity to reinvent the NOC – whether established or fledgling – as a national energy company and in the process reinvent what nation building itself can mean for the energy sector in Africa.

As NOCs go through this major period of disruption, they will need to assess their current business models and strategies in order to build a sustainable NOC of the future.

“In addition, they should consider partnering with international oil companies to develop the kind of capabilities that best complement their strategies,” Bredenhann commented.