Wood Mackenzie

With different decarbonization pathways in play, how are NOCs holding up against IOCs?

As the world amasses more green policies to tackle climate change, bankrolling net-zero aspirations is no easy feat. This is demonstrated by the evolving courses of action that National Oil Companies (NOCs) and International Oil Companies (IOCs) have taken in hot pursuit of the transition to low-carbon and green sources. Wood Mackenzie, an energy intelligence group, points out that these oil and gas players are making progress at a different pace, as there are multiple roads to a carbon-free and sustainable world.

Wood Mackenzie

As oil and gas companies up the decarbonization ante with new pieces falling into place in the energy transition puzzle, Simon Flowers – Chairman, Chief Analyst and author of The Edge – emphasizes that arranging all the parts to fit the emission reduction narrative is not just a matter of decarbonizing the value chain and diversifying into low-carbon technologies.

Flowers underlines that NOCs and IOCs also need to ensure their portfolios and balance sheets can weather the market volatility that will inevitably be part of the transformation process, by reaching “a position where they can make money at the low point of a cycle as well as the high.”

In a bid to determine which players are headed in the right direction, Wood Mackenzie introduced its  Corporate Resilience and Sustainability Index, CoRSI, in late 2021, initially covering the oil and gas sector’s largest IOCs. There are three CoRSI pillars: platform (financial position and scale); portfolio (legacy business cash flow and risk); and transition (carbon exposure and transition strategy).

The energy intelligence player has also added eight NOCs to the CoRSI, which together account for 16% of global liquids production and 8% of gas. The resilience index benchmarks NOCs on their ability to deal with near-term shocks; while the sustainability index is a longer-term assessment of their ability to navigate the energy transition.

As a result of this addition, Flowers obtained views from Luke Parker, Vice President, Corporate Analysis, to glean more insight into the way NOCs’ transition efforts are shaping up compared to IOCs. When asked about the fairness of pitting NOCs against IOCs on resilience and sustainability metrics, Parker adamantly says that this is the right approach, as “there is more than one route to resilience and sustainability.”

NOCs vs. IOCs

Parker explained his views in more detail by saying: “The NOCs may be different beasts in terms of strategy and portfolio – generally operating within the constraints of a strict government mandate, and overwhelmingly concentrated in their home countries. But they are exposed to the same risks, their outlook determined by much the same factors, and ultimately they will be judged on the same metrics.

“The eight NOCs now included in CoRSI from WoodMac’s Corporate Service are the most IOC-like among the wider NOC peer group in terms of structure, ambition and disclosure. There is huge value for NOCs in understanding how they compare with IOCs, and vice-versa.”

Furthermore, Parker also confirmed that NOCs had scored “quite favorably as a group, though individual company scores vary widely.” Even though the NOCs’ peer group average score is below the oil majors, he underlines that it is still similar to the best of the rest of the IOC peer groups. While noting that NOCs’ resilience score was second only to the oil majors, Parker confirmed that recent high oil and gas prices had strengthened balance sheets and cash flow.

“NOCs’ sustainability ratings on average are weaker than the majors’ and versus other peer groups, though scores vary. The leading NOCs, including Petronas and Saudi Aramco, rank alongside the majors on measures of portfolio sustainability; but transition ratings across the NOC group are low – few have made much progress on decarbonizing portfolios or diversifying into low-carbon. The NOCs have been relatively slow to act on the risks posed by climate change and the opportunities presented by the energy transition,” added Parker.

Source: Wood Mackenzie
Source: Wood Mackenzie

When asked to name NOCs that stand out from the crowd based on resilience and sustainability, Parker puts Saudi Aramco on the top of the list, alongside companies like Chevron, Repsol, and Shell. According to him, CNOOC, Petrobras, and PetroChina also score highly on resilience, on par with the majors and leading independents.

As cogs continue to turn in the energy transition machine, Parker claims that all NOCs are increasingly committed to strengthening resilience and sustainability with many of them taking steps to high-grade and diversify upstream, downstream expansion, and integration, tackle operational emissions, strengthen governance and targets, and move into CCUS, hydrogen, and renewables.

“Any government’s ultimate expectation will be that its NOC maximizes the value of the country’s oil and gas resources and pays its dues to the shareholder. But the current elevated levels of cash generation from firm oil and gas prices should allow NOCs to invest, pay dividends, and strengthen their CoRSI credentials for resilience and sustainability,” concluded Parker.