Catching-up with supermajors: the technology factor in building the competitive power of national oil companies from developing economies

Abstract

The paper investigates the role of technology in the growing competitive potential of state-controlled national oil companies (NOCs) from developing countries. The technological development of NOCs is analyzed in the context of their increasing rivalry with supermajors, which have dominated the global oil and gas industry for decades. The author reveals the main features of NOCs’ catch-up development amid the dynamic changes in the competitive landscape of the global oil industry. These trends were analyzed against the background of the current phase of the oil industry’s technological evolution. The paper concludes that although rapid technological growth did become a key strategic priority of many NOCs, only very small group of them managed to achieve equal footing with traditional industry leaders. For the majority of the remaining NOCs, the existing limitations related to the policy of their home state did not allow them to narrow the technological gap with global supermajors.

Keywords:

• Catch-up development
• technology factor of competition
• national oil companies (NOCs)
• international oil companies (IOCs)
• supermajors

JEL CLASSIFICATIONS:

• O32
• O38
• L1
• L71
• F23

Acknowledgements

The arcticle was prepared within the framework of the basic research program at the National Research University Higher School of Economics (HSE) and supported within the framework of a subsidy by the Russian Academic Excellence Project '5-100'.

Notes

¹ Broadly speaking, the group of NOCs also includes state-controlled oil and gas companies from some developed market economies (e.g. Statoil from Norway) and from so-called transition (or former centrally-planned) economies (e.g. Gazprom and Rosneft from Russia). However, given that the home economic environment for these NOCs’ technological development is so much different from a developing economy, they are not the primary subject of research in this paper.

² The term ‘supermajors’ has been widely used to define the top players in the global oil and gas business – giant Western oil and gas corporations characterised by the largest capitalisation and a global scale of operations. Typically this group comprises the present-day successors to the notorious ‘seven sisters’ – the members of the international oil cartel that enjoyed almost absolute control over the world oil and gas sector until the energy crisis of the 1970s. Following a series of global mergers and acquisitions of the 1990s, just four supermajors remain as the inheritors of the ‘seven sisters’ - ExxonMobil, Chevron, Shell, and BP.

³ It would be worth noting that these views are also very typical in relation to all natural resource-based industries. For example, Bell and Figueiredo noted the scarcity of research on innovation capability building in latecomer natural resource-related firms and industries that ‘has given rise to negative and common generalizations’ in this area, referring in particular ‘to the absence of knowledge generation activities and technological learning and, consequently, the absence of innovative capabilities’ (Bell and Figueiredo 2012, 36).

⁴ ‘While the technological environment’, wrote Song, ‘serves as an important boundary condition for catch-up, firm-level factors, such as learning strategy can also be important boundary conditions for catch-up. In the catch-up process, laggards follow moving targets, as technological leaders are always moving on to new innovations … Thus, to succeed in catch-up, they must develop appropriate strategies for time-compressed learning so that they can move faster than industry incumbents’ (Song 2016, 16).

⁵ In 2016, China alone ‘delegated’ 130 companies in the ‘Global Innovation 1000’ firm ranking (compared to 123 in 2015), published annually by Strategy& (strategy consulting arm of PwC). About two thirds of these companies were State-owned (PwC China 2016).

⁶ With regard to sector definition, the concept is based on the approach of F. Malerba (2004), who defined it as a set of activities unified by linked product groups for a given or emerging demand and share a common knowledge.

⁷ The examples of the technological units, doomed to ‘optimization’ right after mega-mergers, include reputable R&D centres of such well-known US companies as Amoco, Arco, Mobil, and Phillips

⁸ Several of the largest NOCs with huge R&D budgets (e.g. Saudi Aramco from Saudi Arabia, Malaysia-based Petronas, etc.) do not disclose regular reporting on their R&D expenditures. Meanwhile the European Union statistics are widely used as a source of relevant data but also turn out to be not very representative in this area, since they cover only a very limited list of NOCs from developing countries

⁹ PetroChina is the listed arm of China National Petroleum Corporation (CNPC).

¹⁰ As most industry experts believe that USA remains the major innovation centre of the global oil and gas sector (Perrons 2014, 309), the American patenting statistics seem to be particularly representative for measuring NOCs’ achievements in this field.

¹¹ Taking into account the significant reduction of oil and gas companies’ investments in exploration after the sharp drop in oil prices in July, 2014, a further decline of newly discovered conventional reserves in the foreseeable future seems to be practically inevitable.

¹² It is worth noting that if we take into account the newly discovered unconventional reserves (first of all in low permeability shale reservoirs), the total oil and gas reserves started to grow rapidly in recent years – from 5.5 billion barrels average annual increase in 2001–2006 to 7.9 billion in 2007–2011. However, out of the 40 largest deposits (with reserves in excess of 500 million barrels of oil equivalent) discovered in 2006–2011, 28 (or 70%) were located in countries with active NOCs (Leis, McCreery, and Gay 2012, 2).

¹³ As Shuen, Feiler, and Teece wrote about emergence of such ‘ambidextrous’ models in the oil and gas industry, ‘one of the challenges supermajors and large NOCs are facing is that in today’s business environment, mature assets (e.g. continental and deep-water ones) and new ones (e.g. unconventional) alike become strategically important … Competencies, structures, and cultural specifics which determine success of mature and innovative business ventures are quite different, and occasionally turn out to be controversial’ (Shuen, Feiler, and Teece 2014, 11).

¹⁴ An important instrument for this strategic course was created by the approval in 2003 of the so-called local content policies for the oil and gas sector. In a 10-year period these policies generated 875,000 jobs, with the local content ratio growing from 57% to 75%. The programme was rolled out around the country through the participation of over 80 educational institutions in 17 states of Brazil (Pangalos 2016).

¹⁵ Participants of the Petrobras’s innovation ecosystem included local and foreign universities and research centres such as the Alberto Luiz Coimbra Institute (COPPE) at the Federal University of Rio de Janeiro, the Pontifical Catholic University of Rio de Janeiro, University of Oklahoma (US), Chalmers University (Sweden), the Imperial College (UK) and UK National Engineering Laboratory; oil production equipment manufacturers such as Consub, Cameron, ABB-Vetco Gray, Flexibras, Coflexip, Bornemann, Leistritz; service companies such as GVA (Sweden), Smedvig, Kvaerner (Norway), Fluenta (UK); and even major Western oil (Shell, BP, Statoil, Marathon Oil) and electrical engineering (Westinghouse) corporations.

¹⁶ The first technology relates to one jointly developed by PETRONAS and MIT, the Intelligent Circulation While Drilling (iCWD) which is the industry’s first intelligent drilling valve system that provides remote-controlled operations with Agile Activation, an intelligent system that activates and communicates with downhole tools. The second case relates to a unique adsorbent (HycaPure^TM Hg), which can remove the full range of elemental, inorganic, and organic mercury species from gas streams in a single treatment.

¹⁷ INTEVEP stands for Instituto de Tecnología Venezolana para el Petróleo.