The Risk of National Oil Companies (NOCs) to Energy Investing

Energy investors should exercise extreme caution when investing in foreign governments. A national oil company is an oil company owned by a national government. Although a few of them are traded publicly, the majority stake is owned by the government, and you can bet they’re the ones calling the shots.

This table shows you a list of the 20 largest oil and gas companies by reserves.

Largest Oil and Gas Companies by Reserves
Company Country Total Reserves in Barrels of Oil Equivalent (boe)
Petróleos de Venezuela Venezuela 327 billion
National Iranian Oil Company Iran 315 billion
Saudi Aramco Saudi Arabia 260 billion
Qatar General Petroleum Corporation Qatar 178 billion
Iraq National Oil Company Iraq 135 billion
Abu Dhabi National Oil Company United Arab Emirates 128 billion
Kuwait Petroleum Corporation Kuwait 112 billion
Nigerian National Petroleum Corp. Nigeria 69 billion
National Oil Company Libya 55 billion
Sonatrach Algeria 39 billion
Gazprom Russia 29 billion
Rosneft Russia 22.8 billion
PetroChina China 22.4 billion
BP Corporation United Kingdom 17.8 billion
Egyptian General Petroleum Corp. Egypt 17.5 billion
ExxonMobil Corporation United States 17.4 billion
Petróleos Mexicanos (Pemex) Mexico 13.3 billion
Lukoil Russia 13 billion
Royal Dutch Shell Netherlands 12.5 billion
Petróleo Brasileiro Brazil 12.5 billion

In total, the companies in this table own approximately 88 percent of the world’s oil reserves and more than 40 percent of daily production. The figures get slightly better for the natural gas industry, where the top national oil companies (NOCs) account for 54 percent of reserves and 37 percent of daily production.

Furthermore, about 60 percent of the oil traded around the world comes from the national oil companies of the Organization of the Petroleum Exporting Countries (OPEC).

Just because a country is rich in reserves doesn’t necessarily mean it will close the door to outsiders. Contracts can still be made with foreign oil companies to develop assets. You’re most likely to come across one of these four types of contracts:

  • Concession agreements can be struck with a government to give a company the right to operate in a specific area. They typically spell out the rules under which the foreign company will develop the country’s oil and/or gas resource in question during a specific time frame.

  • Production-sharing agreements (commonly referred to as PSAs) are contracts that offer each party a certain percentage of production. These contracts usually last between 25 and 40 years, or sometimes even longer. The oil company will invest its capital in return for control of the field and a portion of its revenue.

  • Joint ventures, or JVs, are made between two parties to combine resources for a specific project. They can sometimes be beneficial for a country without the specific technology to develop a play. An example is the deal between Rosneft and ExxonMobil to develop tight oil projects in western Siberia. Russia’s goal is to utilize drilling and completion technology that ExxonMobil uses through its North American shale activity.

  • Technical service agreements (TSAs) outline specific services done by a company for a national oil company. The foreign company typically doesn’t receive any revenue from production but instead is given a fixed fee per barrel.

A fifth type of contract used by governments is called a unit agreement. It occurs when the government offers a contract among several companies that hold contiguous leases over a specific reservoir. It typically assigns one company to be the operator over all activities and usually commits the parties to aggressive exploration and development of the area.

Always use extreme caution when dealing with investments in foreign governments. Many of these oil- and gas-rich countries don’t take kindly to outside oil companies making a profit from their resources, and things can turn ugly in the blink of an eye.

In 2007, then-President Hugo Chavez nationalized Venezuela’s oil and natural gas assets. This included every ship, rig, and piece of equipment still in the country after May 1. In addition to forcing all foreign oil companies out of the country, Chavez offered monetary compensation for the seized assets at a much lower price than they were worth.

This change led to long, drawn-out court battles between Venezuela and companies not willing to take the offers. ExxonMobil, for example, was seeking more than $10 billion from the Venezuelan government and was awarded a mere $900 million in a court decision in early 2013. Venezuela agreed to pay just $255 million of the amount.

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