Middle East NOCs: Taking back control of profit margins

Nov 09, 2017
5 min read
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By: Arash Dara, Middle East Lead, Accenture Trading Investments Optimization Strategy (ATIOS) Group


 The oil market will continue to be an uncertain and increasingly challenging environment for both corporate and government players to navigate. Whilst China imported 8.55 million barrels per day in the first half 2017, up 13.8 per cent from the same period in 2016, making it the world’s biggest crude importer (EIA STEO Repot), and despite the extension of the production cuts agreement by OPEC and non-OPEC exporters in a bid to boost the price, the market is having difficultly picking up.

According to the IEA, the market could stay oversupplied for longer than expected due to rising production and limited output cuts by some OPEC members, notably Libya and Nigeria, who were exempt from the production cuts.

Compounded with resurgent US shale operations, the global fuel glut is taking longer than anticipated for exporters. Oil inventories in industrialised nations remain substantial. OECD stocks are 170 million barrels above the five-year average. Analyst expectations believe the price environment will not significantly improve, continuing to apply pressure and squeeze margins on many upstream focused NOCs.

The macro-environment is out of their hands, but what they can control is their operations. As stewards of national resources, NOCs  need to harness the maximum potential of the hydrocarbons they have access to. At the same time, they must look beyond those resources to remain competitive, improve margins and reduce costs. To succeed in this new world of lower for longer, NOCs will need to be both agile and adaptable, connected and collaborative. This means reshaping their companies across four dimensions:


NOCs need to utilise enhanced digital technologies to help them manage through the low oil price environment. An example of this is advanced analytics, which are enabling upstream oil and gas companies to reduce costs, better manage operations and mitigate risks. In a recent Accenture O&G survey, Analytics was identified as one of the largest opportunity areas where digital can help transform oil and gas companies, yet most respondents felt their company did not have sufficiently mature analytics capabilities to realise the full value.

International assets, if any, to pursue

NOCs could also look to international assets for economic reasons, that is, if the NOC has an undisputed production advantage that makes the return on international assets exceed whatever handicap the NOC faces at home. If NOCs have the liquidity and foresight, the purchase of international assets that others may be looking to sell as noncore properties to generate cash, or the acquisition of distressed competitors that have strategic value, could pay off in the long run in this buyers’ market.

Saudi Aramco has been diversifying their portfolio for years and continue to do in the lower oil price environment. Aramco recently invested US$7 billion into a Petronas oil refinery and petrochemical project in Malaysia’s southern state of Johor, and has signed US$50 billion worth of deals with U.S. companies during U.S. President Donald Trump’s visit to Saudi Arabia.

 Diversification from upstream further into the oil and gas value chain

NOCs have a far greater exposure to the upstream business than IOCs, which leaves them more vulnerable during commodity price down cycles. In the  latest downturn, refining and midstream businesses posted healthy margins. Most NOCs currently don’t take advantage of this opportunity as much as the majors. A balanced portfolio provides stability and helps mitigate risk in a volatile price environment.

Abu Dhabi is balancing growth and cashflow. It is more than tripling its domestic petrochemical output by 2025 and ADNOC have recently been turning their attention to the issue, stating better infrastructure requirements to link producer to end user. They’ve also signed an exclusive agreement with Penthol, a global organisation in the supply and distribution of oil products and petrochemicals, to be the exclusive seller of ADNOC’s Group III base oil in US.

 Potential participation in the new energy system

With alternative energy types and business models poised to assume a greater role in the overall energy sector, NOCs will need to at least consider the question of whether they should play beyond hydrocarbons. The shift may also be driven by national policies focused on reducing the host country’s carbon emissions, but a move from black to green will also offer opportunities to build on a growing market, and provide a long-term buffer for the slowing demand for oil.

Saudi Aramco is also making great  strides in this area, currently mulling roughly $5 billion in renewable energy investments and has recently signed partnerships with ADNOC and Masdar to collaborate on sustainable development and renewable energy to yield advancements in clean electricity generation and carbon management. Some NOCs may feel powerless to the  price of oil and its impact on profitably, but they have an opportunity to take control of their operations, and push through innovative technologies and processes, increasing profit margins in this uncertain environment and positioning them at ever greater advantages for upturns.