Beyond Business as Usual: National Oil Companies and the Energy Transition, with Andrea Furnaro and Patrick Heller

Notable Quotes

• An introduction to national oil companies: “National oil companies, or NOCs, are oil and gas companies, but their principal owner is a national government or the state. That’s the key distinction from international oil companies, which are primarily owned by private shareholders.” —Andrea Furnaro (5:21)
• The business-as-usual approach is not a neutral option: “NOCs are planning about $2 trillion in new upstream oil-and-gas investment over the next 10 years, and about a quarter of that—so, a little bit more than $400 billion—won’t even break even if the world moves away from fossil fuels at the mid-scenario pace that the International Energy Agency had projected. That’s a huge amount of public revenues that are going into projects that ultimately won’t return a profit, so therefore won’t pay dividends to shareholders—and in this case, the shareholders are ultimately the citizens. We’ve been trying for a while to highlight this idea that NOCs, like other companies and like other governments across the world, need to be as proactive as possible in thinking about, ‘What are our business risks?’” —Patrick Heller (10:08)
• Change is motivated by opportunity rather than risk: “I think the step that we are trying to take in this work is to pivot or build on that risk orientation to look more toward … What kinds of questions can government leaders and NOC leaders themselves ask in order to structure their own plans for their own evolutions? That was first prompted … by an intellectual recognition that just talking about risk is not very motivating to leaders. It’s not very politically saleable, and opportunity is the real driver of change.” —Patrick Heller (11:35)
• Diversification as a business strategy reduces transition risks: “In many low- and middle-income countries where we work, NOCs concentrate significant engineering, technical, and organizational capacity. The objective is not to let all that capacity go to waste with the energy transition.” —Andrea Furnaro (18:59)

Top of the Stack

• “National Oil Company Transformation: Strategic Choices for an Uncertain Energy Future” by Andrea Furnaro, Giovanni Tagliani, Patrick Heller, Ana Carolina González, Tengi George-Ikoli, Fernanda Ballesteros, and Nicola Woodroffe
• “Facing the Future” by Andrea Furnaro and David Manley
• Jane documentary film
• The Secret Agent film

The Full Transcript

Daniel Raimi: Hello, and welcome to Resources Radio, a weekly podcast from Resources for the Future. I’m your host, Daniel Raimi. Today, we talk with Dr. Andrea Furnaro and Patrick Heller from the Natural Resource Governance Institute. Along with several coauthors, Andrea and Patrick recently published a report that provides a five-step framework for how national oil companies—oil and gas companies run by governments—can navigate an uncertain future. Whether the energy transition unfolds slowly or quickly, these companies will need to plan and adapt in a variety of ways, and each company’s situation is unique. I’ll ask Patrick and Andrea to describe the general approach that can guide different companies, then we’ll talk specifically about a few examples. Stay with us.

Okay, Andrea Furnaro and Patrick Heller, welcome to Resources Radio.

Andrea Furnaro: Thank you.

Patrick Heller: Thanks so much. Great to be here.

Daniel Raimi: It’s really great to have you. I’m really excited to talk about the report that you coauthored with a variety of colleagues today. But before we get into talking about national oil companies and transformations of those companies, I’d like to ask you both the same question we ask all of our guests when they join us for the first time, which is to help us understand how you got interested in working on energy issues, whether you had some connection early in life to the energy industry or whether it came about later. So, maybe, Andrea, let’s start with you.

Andrea Furnaro: Yeah. Wow. I mean, there are different reasons why I became interested in energy issues. I didn’t have any connection with the topic personally, but I think that, when I was doing my graduate studies, I was looking for a research area that was closely connected to major global challenges, and energy clearly sits at the center of so many of them. So, I think that was a very important reason. The second maybe important reason is that energy is a very strong field for comparative international research—there is always something new that I have learned from each new country or city or company that I have studied. Well, of course, building on previous insights from other cases. So, I think that comparative capacity has always been super exciting for me.

And maybe the last and one of the most important reasons, which is perhaps more intellectual, is that as a political economist, I’m interested in understanding how capitalism works and doesn’t work. And fossil fuels have historically been one of its foundations. So, this is a research area that provides such a rich entry point for thinking about socioeconomic relations and how they evolve—often through crisis. So, yeah, it’s a very rich area for this type of research.

Daniel Raimi: Really interesting; thank you. Patrick, how about you?

Patrick Heller: Thanks so much, Daniel. Great to be here. And like Andrea, I think my point of entry into energy issues was completely unplanned. During the early stages of my career, I was working in various places in Africa, including in Angola, and that work led me … The work I was doing was not related to oil, it wasn’t related to energy per se, but working in that country and then at every subsequent step along the way, I kept seeing in places that are oil producers, the way in which the industry is managed is so often, so closely, so deeply intertwined with everything about the way those economies function and everything about the way the political systems function, that I found more and more the deeper I got into it, understanding and trying to contribute to the governance of the oil economy, and then ultimately to how these countries use energy itself, was almost unavoidable.

And so, I felt I was pulled into it without any sort of planning. But for the last, I don’t know, 15+ years, my focus, and our focus as an organization, at the Natural Resource Governance Institute have been on what it means to manage this part of the economy and this part of the energy system effectively and in the interest of people.

Daniel Raimi: Yeah, super interesting. And today, we’re going to talk about exactly that topic, but in the context of a changing energy system. And the title of the report that we’ll have a link to in the show notes is, National Oil Company Transformation: Strategic Choices for an Uncertain Energy Future.

Before we talk about exactly what that means and the work that you lay out in the report, I think it’d be helpful, Andrea, if you could just define for us, What do we mean when we use that term, “national oil company”? How does a national oil company differ from some of the other big oil companies that people have typically heard of, like ExxonMobil or Chevron or whatever?

Andrea Furnaro: Right. So, the definition is quite simple. National oil companies, or NOCs, are oil and gas companies, but their principal owner is a national government or the state. And that’s the key distinction from international oil companies like the ones that you mentioned, which are primarily owned by private shareholders. So, the main difference is really ownership.

And if we look at scale, NOCs today produce around half of global oil and gas, and that share is expected to increase to nearly two-thirds by 2050. So, they’re really, really at the core of how the global energy systems work. So, in addition, NOCs are particularly important in low- and middle-income countries, where it’s important to keep in mind that they often play a central role, not only in fiscal revenues, but also in energy security, in employment, and in many other broader development strategies in these countries.

There are exceptions, such as Norway, which is, of course, a high-income country with a major national oil company, Equinor, which is also a very competitive energy company globally. And again, on scale, at the same time, some of the largest oil companies in the world are NOCs. Saudi Aramco is the clearest example, which is the largest oil-producing company globally. Well, and of course it’s important, and we always repeat this idea, that we should not be treating NOCs as a single category because there is a lot of variation between them.

Some are highly commercialized and actually behave in many ways like international oil companies. This is particularly the case, I will say, for partially privatized NOCs, like Ecopetrol in Colombia or Petrobras in Brazil, where private shareholders play a key role in shaping decisionmaking, of course, alongside the state. But now, I always find it surprising that when people ask me what I have been working on recently, and I say national oil companies, their reaction is often a bit like, “Oh, that sounds very niche. Why is that important?” But as I just said, these are really dominant players.

And probably there are many reasons why they have been maybe less visible, I think, in mainstream discussion. I will say especially within the climate community, I think energy experts in general understand the relevance better, and I think we could have a whole separate conversation about that—the why. But the key point is that these are massive companies that together control more than half of the world’s oil and gas.

Daniel Raimi: That’s great context, thank you, Andrea. Patrick, let me ask you the next question, which is basically pulling straight from the report. So, early on in the report, you and your coauthors write in big bold font, “Business as usual is not a neutral option for NOCs.” So, why is business as usual not a neutral option today?

Patrick Heller: Yeah. Well, maybe to start with, I mean, as I know you’ve covered quite extensively on your show, business as usual in the face of a necessary but really uncertain energy transition is sort of not a neutral option for anyone. But in particular, one of the things we’ve found over the course of the last several years is that in a lot of instances, NOCs and the governments that are their shareholders have traditionally thought of, okay, let’s just continue in the future the way we have done things in the past. And we thought it was really important to highlight that actually as these economies and these countries (which are today very dependent on fossil fuel extraction and fossil fuel energy use) look to the future, it’s critical not to have blinders on.

And it’s critical to wrestle with the implications of the global energy transition with all of its uncertainty about how fast or slow it will be, how bumpy it will be, in what ways it will be bumpy—but to keep blinders on and ignore the reality that the shape and pace of the global energy transition will have huge implications for NOCs themselves, their own strategic viability, but also more fundamentally for their countries—to keep those blinders on is to create really significant risks for citizens in the countries and for the companies themselves.

So, we’ve been working for a while to highlight the risks that NOCs are facing and the risks that they can bring their economies down with them. We did some analysis a couple years ago that found that, worldwide, NOCs are planning about $2 trillion in new upstream oil-and-gas investment over the next 10 years, and about a quarter of that—so, a little bit more than $400 billion—won’t even break even if the world moves away from fossil fuels at the mid-scenario pace that the International Energy Agency had projected.

And so, that matters, because that’s a huge amount of public revenues that are going into projects that ultimately won’t return a profit, so therefore won’t pay dividends to shareholders—and in this case, the shareholders are ultimately the citizens. And so, we’ve been trying for a while to highlight this idea that NOCs, like other companies and like other governments across the world, need to be as proactive as possible in thinking about, “Okay, what are our business risks? If we look across our oil and gas portfolio, what are the chances that different projects of ours will or won’t break even under different scenarios? What does that mean for how we are investing what are, at the end of the day, our public resources?”

So, we’ve had that sort of risk orientation in our work for a few years and really trying to measure and name it, and have conversations and draw attention to it. I think the step that we are trying to take in this work is to pivot or build on that risk orientation to look more toward, “Okay, what does the future look like and how do these companies evolve? What are the prospects for them to transform themselves in a more forward, more future-looking way? And what kinds of factors, what kinds of questions can government leaders and NOC leaders themselves ask in order to structure their own plans for their own evolutions?” That was first prompted, to be honest, by a sort of intellectual recognition that just talking about risk is not very motivating to leaders. It’s not very politically saleable, and opportunity is a real driver of change.

But second, it was driven by the conversations we’re having with leaders from NOCs themselves and from governments. And I think we’re seeing over the last couple of years a subtle but meaningful shift—not among all, but among some leaders of key companies who are starting to say, “Okay, the economy and the global energy system are evolving in various ways: How do we get at the forefront of that? And how do we position ourselves so that we’re not just chasing the past, but trying to organize ourselves for the future?” And the idea of, all right, it’s not business as usual, what is it or what can it be, is what really motivated us to dive in to build this framework that animates this report.

Daniel Raimi: That’s all really useful and helpful. Just one piece of context, and correct me if I’m wrong, but I think when you refer to the IEA middle scenario, you’re referring there to what’s called the announced pledges scenario … This is for the energy-scenario nerds out there. And under that scenario, the IEA basically assumes that countries do everything they say they’re going to do under the Paris Agreement. Is that about right?

Patrick Heller: That’s right. And I think one of the things that we always share with the NOCs and governments that we talk with is that any scenario is contestable and uncertain. So, we use the announced-pledges scenario just as you indicated, as a sort of, “Okay, we don’t know what the future’s going to look like, but this is a credible grounded approach to reflecting on what the future might hold.” And then planners can look in either direction, right? What does a more rapid energy transition scenario look like? What does a more moderate or slower energy transition scenario look like? And how do you assess your own future in light of that?

And so, we’re always kind of careful to caution that nobody (least of all us) is capable of saying, “Here’s exactly what the future holds. But I think what we’re trying to do is to ground a set of conversations in a range of realistic scenarios that can help policymakers chart a course grounded in data analysis amid the radical uncertainty that they all face.

Daniel Raimi: Right. That’s really helpful, thank you. So, let’s move on now to the framework that you all provide in your report to help NOCs inform their decisionmaking as they navigate the energy transition. Andrea, can you tell us what the five big steps are, to get us started? And then we’ll talk about some examples after that.

Andrea Furnaro: Yeah, sure. So, maybe let me start by saying that in this report, we really try to avoid being prescriptive, and I think this is aligned with what Patrick said, that an only risk-based approach will not work nowadays. And I think a very prescriptive approach will have the same type of challenges.

So, NOCs operate in very different contexts, so the goal is not to propose a single optimal pathway for all NOCs. Instead, the framework that we introduced in this report is meant to promote and structure dialogue among the key stakeholders that we believe can shape the future of NOCs. And at the center of this framework is a five-step process.

The first step is about defining national policy goals for the NOC. So, NOCs are state-owned companies, and their existence is usually justified by the public objectives they are expected to deliver, whether that’s public revenues, energy security, industrial development,and so on.

NOCs often have very explicit mandates in these areas, so our first call in this framework is for governments to clarify what role they actually want their NOCs to play in a changing energy system. And the reason is because without that clarity, it’s very difficult to have a coherent transformation strategy.

So, the second step is in line with what Patrick was explaining before, assessing transition risk and opportunity. And here, the scenario is different from that of any kind of private company. So, this needs to go beyond looking at the company alone and instead consider both NOC-level and national-level exposure under different future energy scenarios. And again, the aim here is not only to understand risk, but also to identify realistic diversification opportunities.

Then, the third step is defining strategic direction, and essentially, this means how far transformation should go and in what direction. And by direction, I mean both the extent to which an NOC reduces its exposure to oil and gas, including, I don’t know, potentially scaling down parts of its operations, and the extent to which it invests in new areas of business beyond oil and gas. One particularly interesting example here is the former Danish national oil company, which we also wrote a separate briefing on last year, and illustrates a much more fundamental strategic shift can look like for an NOC, where a company really moves away from its traditional oil-and-gas base and repositions itself in this case to a wind company.

So, of course (and this is something we are very explicit in the report about), this is far from an obvious or universal path for oil NOCs, right? Denmark had very specific advantages, including a highly developed offshore wind sector and of course access to capital. But at the same time, that doesn’t mean that diversification is not relevant elsewhere. So, for example, in many low- and middle-income countries where we work, NOCs concentrate significant engineering, technical, and organizational capacity. So, the objective is not to let all that capacity go to waste with the energy transition. And that’s why this third step is to really promote the assessment of these potential directions of travel.

The fourth step is about institutional setup and governance, and this includes things such as how states organize ownership, oversight, and coordination of different entities. So, for example, when countries have both national oil companies, but also state-owned electricity companies, how should they coordinate and organize in this transformation process?

And finally, the last step, step five, focuses on just transition and responsible exit—that includes workers, communities, environmental liabilities, and I mean all the practical realities of the commissioning and asset transition.

Daniel Raimi: That’s great. Super helpful. So, now that we have those five big pillars in place, let’s talk about a couple examples. And you already mentioned Denmark, which is great. Let’s use Saudi Aramco maybe as an illustration of what you all define as a lower-risk NOC. So, how would the five-step framework guide the types of decisions that a company like that might face during the energy transition? And Patrick, maybe can you start off just by explaining to us why you classify Saudi Aramco as a lower-risk NOC?

Patrick Heller: Yeah, thanks very much. So, one of the drivers of our kind of risk analysis (or I will say the baseline risk analysis that we do) is essentially, What is the cost to get the oil and gas out of the ground, and how much of it does a particular company hold and control?

One of the factors that guides a lot of our analysis is, I think, every oil company across the world, or most of them, and certainly most of the NOCs, all say, “Oh, even as the world reduces its consumption of fossil fuels, we’re going to be the last ones standing.” And most companies aren’t actually going to be the last ones standing.

Saudi Aramco actually has a pretty good chance to be one of the last ones standing: Huge reserves, easy to get the hydrocarbons out of the ground at low cost. And so, in one sense, and again, in line with the sort of baseline scenarios, they are likely to continue to produce oil and gas for a long time. Their risk of projects that don’t break even, even as global demand declines—those risks are a lot lower than for a company like NNPC or the Nigerian NOC, for example. And so, Saudi Aramco fundamentally does have lower business risks than a lot of other NOCs.

Now, one of the things that I want to be clear about is that doesn’t mean that Saudi Aramco and the kingdom of Saudi Arabia are not facing significant risks, and in particular, one of the things that is a real long-term challenge for the big Gulf oil-producing countries is the degree of national economic dependence on the oil and gas sector. And we’re seeing it in the crisis in the Middle East today, that their ability to get their oil to market is under threat as a result of the war. And that kind of has ripple effects across the economy that are relatively more manageable in the short term, including because a lot of these governments have built up sizable economic reserves.

But over the longer term, even if Saudi Aramco continues to make a profit, there is a risk to the kingdom that those profits will be lower, and that the economic system which relies on certain assumptions about fiscal revenues coming in, if those revenues go down over time, it imposes certain pretty fundamental challenges. And so, the need for structural reform, in which the NOCs themselves will play a role, exists everywhere, including among companies whose business risks per se are relatively smaller.

Now, just to get back to the framework and to say that—so, for these companies whose ability to continue to produce oil and gas over the long term is relatively less threatened, one of the things that we are encouraging the companies and their governments to do is to reflect upon, one, how they can make their capital allocation and their business decisionmaking as efficient as possible—again, in order to be as sustainable economically as possible over the longer term.

Two, emissions reduction associated with their own ongoing production, so that we’re seeing a lot of NOCs, including several of the big Middle Eastern companies, make pledges around how they can reduce methane emissions associated with their production, which is an economic benefit to them as well as a climate benefit.

And three, beginning to think in as analytical and data-driven a way as possible about whether and what a diversification pathway for the company itself might look like over the longer term. And we’re seeing with Saudi Aramco and several of the other low-cost NOC oil and gas producers, that they do have a little bit more leeway, right? There’s an advantage that they have—let’s say, a greater margin of error to some extent to begin to explore whether they may have comparative advantages in production of solar energy or other kinds of clean energy, or whether it may make sense for them to deepen their investments in other sectors.

As a mode of diversification and kind of future-proofing for the company, but also fundamentally in order to support diversification and future-proofing for their national economy more broadly. I want to caution that this won’t make sense in every instance, and there are some risks that NOCs experimenting can result in more wasted money if there are not strong governance and accountability provisions built into the ways in which they’re doing it. And so, one of the things we do in the framework is to try to just lay out a set of questions to ask in determining, “Okay, how do we as an NOC, how do we as a government, think about whether diversification of the company’s own investments is likely to be in our strategic interest over the long term?”

Daniel Raimi: That’s great, that makes a lot of sense.

Andrea, can you give us an example of another country that might be at slightly higher risk in an energy transition? I think one of the companies that you identify is Pertamina, which is Indonesia’s national oil company. What does your framework sort of say about the pressures that a company like that might face? And what would acting on some of your five steps look like for a company like Pertamina?

Andrea Furnaro: Yeah, so Pertamina in Indonesia, I think, is a super interesting example. We haven’t done dedicated research on Pertamina, but it’s a case that I’m always trying to follow, by reading the news and seeing what type of decisions they’re announcing. Because as you are saying, this is a very exposed NOC in terms of transition risk.

Our earlier analysis showed that, as we were discussing before, a significant portion of upstream investment will not break even in announced pledge scenarios. So, this is a very challenging case. And I think from the perspective of step two in our framework, what is quite interesting is that Pertamina is also very self-aware, which is rare.

We wrote another report a couple of years ago, called Facing the Future, where we found that Pertamina had actually publicly recognized this risk. And this type of explicit recognition of transition risk, as I said before, is quite rare. However, what we often find is that there is a gap between acknowledging that risk and actually shifting investment behavior. And I also think that what makes Pertamina a super interesting case is that it sits in this intersection between high risk and also high opportunity, in a certain sense. So, Indonesia, as you may know, has a very dynamic industrial policy related to energy transition because of its nickel reserves and also its ambition around batteries and the EV supply chain. So, looking at our framework, which step one is about national policy goals, Pertamina is clearly part of Indonesia’s broader industrial strategy, including these ambitions around batteries and electric vehicles.

So, what is less clear is whether there is a well-defined long-term vision for Pertamina itself, and what role it should play in this changing energy system. Well, Pertamina has also expanded into geothermal energy, which is interesting because it builds on capabilities it already has in drilling and subsurface operations. So, there are really promising building blocks, but the broader transformation pathway that we try to highlight in this framework still remains somewhat unclear, I would say.

Daniel Raimi: Really interesting. Well, Patrick and Andrea, this has been a fascinating conversation. I would love to ask you tons more questions about lots of different companies and dig into the details about their potential strategies, but we are at time.

So, I would love to ask each of you now to recommend something that you think is really great and that you think our audience might enjoy. It can be related to our topic of today, or it can be something else entirely. So, Andrea, why don’t we start with you? What’s at the top of your literal or your metaphorical reading stack?

Andrea Furnaro: Yeah, so I would recommend, I think It’s a quite famous documentary that I just watched last week, which is Jane, about Jane Goodall, who (maybe you know) spent most of her entire life studying chimpanzees.

Daniel Raimi: Great recommendation. Thank you, Andrea.

Patrick, how about you?

Patrick Heller: So, a movie I just watched last week is The Secret Agent, the Brazilian movie that came out last year, which overall is about political persecution in the 1970s in Brazil. I don’t want to spoil it too much, but I will say that a state-owned company ends up,as the movie advances, playing a central role. And at the end of the day, it’s a great movie overall, but among many other things, it’s an illustration of how decisionmaking by state-owned companies can be grounded in self-interest, in institutional interest, and can drive a lot of outcomes that without the proper governance and oversight are catastrophic on a national and individual level. So, I highly recommend it. That’s not mostly what it’s about—it’s not a boring movie, but it’s a key plot point in it, and of course, it’s what I gravitated toward right away.

Daniel Raimi: Totally. That’s great. Well, we will of course have links to both of those recommendations in the show notes, so people can go check them out. And of course, we’ll encourage people to check out your report from the Natural Resource Governance Institute, which we’ll have in the links, as well.

So, one more time, Patrick and Andrea, thanks so much for joining us on the show.

Patrick Heller: Thanks so much, Daniel.

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