The global oil and gas industry is often viewed through the lens of the Big Seven IOCs, companies whose global presence upstream and downstream has ensured they are household names. Change seen within these companies is seen through the eyes of shareholder value, what makes sense for the investor reflects in the company’s strategy. Yet, it is the National Oil Companies (NOCs), as they have traditionally been known, that produce the majority of oil and gas and who own the largest oil and gas reserves. Their mandate is to secure the long-term energy provision to their country, at the most affordable rates to their consumers – but in light of the energy transition, of more frequent oil market shocks and an uncertain energy landscape – that mandate must now include the provision of renewable generation. The Energy Council looks at how NOCs are reimagining their futures and if they may soon be replaced by the NEC.

Mandates of the NOC

The state-issued mandate to NOCs is often to provide sufficient supply of oil and gas that will ensure the dual-purpose of maintaining power generation at affordable rates to consumers and ensuring industrial or manufacturing demand will be met.

While these incidences are often isolated and abnormal, the circumstances that led to the difficulties and the chances of those circumstances repeating, is only increasing. Therefore, the mandate to ensure energy security at affordable prices must be expanded beyond the exploration and use of oil and gas to a range of renewable energies. In doing so, states can achieve their Paris Climate Agreement objectives and secure their energy supply from market shocks or abnormal climate conditions.

As IOCs hurry to commit to greener processes due to financial and investment pressures, shareholder activism and increased regulation in their European domiciles, it leaves the concern that global oil and gas production will only strengthen the hand of the OPEC+ states. While many developed states are keenly seeking PCA alignments, the same cannot be said for many NOCs, especially those from the OPEC+ nations who hold the majority of global oil and gas reserves.

Over the Covid pandemic, many of the vulnerabilities of economic systems and supply-chains have been exposed to be a lot more fragile than anticipated, especially in the provision of energy. Continued oil and gas production is a certainty, despite the IEA’s declarations that investment in new projects should cease, this places many of the world’s NOCs at peril. Broadly speaking, these companies are among the biggest employers in their countries, central to the economic health of their nation and developing natural resources is crucial to the development of many poor nations.

If we imagine a world where oil and gas projects do not cease without international legally-binding commitments, we must imagine what the purpose of a NOC should be. 

From NOC to NEC – The leader of the pack

Nearly every NOC considered has undertaken a degree of renewable-based energy provision, either as low-carbon power for their traditional oil and gas, or for direct power generation. In both cases, the NOC has done so with an acute awareness of the need to diversify supply. A large uptake in renewable generation is beneficial in its capacity to shift residential electricity demand to low-carbon sources, in turn concentrating decarbonisation solutions toward the more pressing industrial or manufacturing emissions.

In this new world, there have been a number of NOCs that are boldly reimagining their role as energy providers, among the most ambitious of them is Ørsted A/S – formerly the Dansk Olie og Naturgas A/S (DONG Energy). In their previous incarnation as Denmark’s NOC, DONG was producing over 100,000 barrels a day, owning 570 million boe in reserves and accounting for a third of Denamrk’s GHG emissions. In 2009, a plan was formulated to flip the company’s generation capacity from being 85% fossil fuel generation and 15% renewable. By 2017, DONG had sold much of their oil and gas assets to INEOS and midstream assets to Energinet.dk (the Danish independent national tranismission operator).

Just four short years later, Ørsted is now considered the global leader in offshore wind production having developed and 30% of total global installed offshore wind capacity, owning 12GW of the global total of 34.4GW. Interestingly, while oil-committed NOCs were facing strict cost-cutting measures to survive the Covid demand slump, Ørsted increased their profits by 4% from 2019 with EBITDA from renewables increasing by 14%.

The case of Ørsted may not be repeatable across the world but their leadership and courage to be a first-mover in the energy pivot has reaped rewards from the former NOC, now with over 90% of capacity renewable-based generation – can only be called a National Energy Company. Denmark’s 2050 energy roadmap can realistically expect full renewable electricity generation by 2030.

Of the OPEC+ members, only Saudi Arabia and the UAE have led the shift from oil and gas explorers to diversified energy developers by investing in renewable technologies and projects via their state-owned investment bodies, Public Investment Fund (PIF) and Mubadala, respectively. These state-owned investment funds have encouraged joint ventures between their NOCs and IPPs to facilitate rapid change and renewables uptakes. Mubadala has similarly backed Masdar, the state-owned renewable energy developer to build Masdar City, a project similar to Saudi’s NEOM mega-project. While ADNOC has grown it's renewable capacity 400% between 201-2020 and will double once more to 2030.

While a JV between Aramco and the Saudi Arabian Power Company (SAPCO) and Aramco-owned ACWA Power called Sudair Solar, has secured a 25-year offtake lease at $12.40/KWh, among the cheapest solar in the world. If a primary objective of a NEC is to secure cheap electricity for the population, NOCs can do well by embracing renewables.

Future of the NEC

Naturally, market conditions will not be as favourable to other NOCs wishing to make such a radical shift in their business model as Ørsted had. What it does indicate however, is that a diversification of energy assets with a large number of renewable generation secures electricity supply to a population and allows for oil and gas demand to be used more efficiently.

The case of Denmark and Ørsted may not appear as a blueprint for other states, but there are aspects that should be taken into account. For instance, African and South American nations lie within the most preferable conditions for renewable generation but the reality is they may not be able to develop capacity alone. The oil sector’s experience of joint ventures is what could prove most useful in inducing more rapid changes. NOCs and their state mandates are risk-averse by nature, as such any shift must consider the risks of energy shortages, therefore encouraging NOCs and IPPs to work together may achieve these goals.

Chile is a third-world leader in this regard, a long-term sectoral liberalization led to the development of the world’s largest unsubsidized solar farm (when built in 2013), with electricity auctions securing some of the lowest KWh prices for solar anywhere on the planet. The state-owned oil company, ENAP, has been encouraged to compete and move into renewables with their first 10MW wind farm.

While China’s CNOOC has begun it’s expansion into offshore wind generation, spending 5% of their annual budget on clean energy projects and expecting returns of 10% – in-line with oil and gas returns. By 2050, their expectation is that half of their revenue will come from new energy investments

Conclusion

It may seem as if the NOCs time as pure O&G players may be limited, but they are certainly not leaving the game. Oil and gas will remain central to energy security throughout the developing world and across much of the developed world, in industrial settings at the very least. What can be said with some certainty, is that a diverse energy mix that includes significant renewable generation is crucial to the mandate of NOCs to supply affordable and consistent energy to their population.

As oil and gas prices rise, it becomes attractive for NOCs to maintain their position and profit for the betterment of their economies. They must be careful in this approach as issues may arise if restrictions on oil and gas finance and investment continue to expand.

However, the costs of renewables will continue to fall, and as they do, NOCs may take a few notes out of Ørsted’s book to see that if repurposed correctly, the returns on investment can be just as promising as the more volatile oil and gas markets. . As the biggest and more developed nations ramp up their installed renewable capacity, the number of pure-play NOCs will steadily decline over the next half-century. Soon the NOCs of this world will quickly and quietly become NECs, at this stage it seems an inevitability.