With oil prices dropping below $30/bbl, the depth and duration of the current low price environment is taking a major toll on OPEC members. Despite adjusting their budgets and cutting popular benefits like fuel subsidies, member states are running significant deficits, and the lack of cash flow is starting to drag their economies into recession.
Whilst this may look like a financial ‘own goal' to some, it also represents a huge opportunity for OPEC national oil companies (NOCs) - and others - to recast themselves on more commercial lines. Using this opportunity to trim costs, to integrate and to streamline operations will leave these companies far more competitive and 'match fit' once prices do resume a more sustainable trajectory. This will benefit not only the NOCs but also their biggest shareholders – the national governments.
News that Saudi Aramco is looking at a possible IPO certainly got the attention of the markets. Floating a stake in arguably the world’s biggest company would be a huge move and could release a massive amount of cash to the Saudi government. But before Aramco could be floated – especially on major stock markets – it would require a lot of sunlight on the company’s operations. Saudi Arabia has traditionally been quite secretive about the performance of Aramco, which is not only responsible for most of the state’s income, but also sustains the House of Saud, which is large, diverse and said to be talking about its future direction, its leaders and their plans for reform.
Our goal here isn’t to dissect the politics of the Kingdom or to speculate on the possibility of such an IPO, but rather to note the real potential of re-aligning OPEC NOCs along more conventional and transparent business lines. Transforming NOCs into market-focused entities will not be easy. It means setting aside the politics, bureaucracy, patronage networks and “business as usual” mentality that frames many such companies. Realising the real value of NOCs requires their costs to be controlled, supply and investment decisions taken with reference to market rates of return and their workforces structured and upskilled for the challenges of tomorrow. Just getting in shape for an IPO would provide new direction and vigour for the NOCs, with clarity on social, financial and environmental objectives – the so-called “triple bottom line” that are the real benefits NOCs bring to their stakeholder governments and populations.