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| Volume XIV, Fall 2007, Number 3 |
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BOOK REVIEW
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Oil Titans: National Oil Companies in the Middle East.
by Valerie Marcel and John
V. Mitchell. Brookings Institution Press, 2006. 322 pages. $22.95, paperback; $52.95, hardcover.
Julia Nanay
Senior director, PFC Energy
Valerie Marcel's timely book Oil Titans brings insight into the culture of five of the more
traditional national oil companies (NOCs) from the Middle East and North Africa: Saudi Arabia's
Aramco, the National Iranian Oil Company (NIOC), the Kuwait Petroleum Company (KPC), the Abu
Dhabi National Oil Company (ADNOC) and Algeria's Sonatrach.
These five NOCs represent some of the most important producers in the Organization of
Petroleum Exporting Countries (OPEC) and hold a sizable portion of the world's current and future
oil and gas resources. With over 600 billion barrels of oil reserves, or 50 percent of the world's total,
they account for 25 percent of current output. While OPEC quotas cap their production, state
interference, corruption, cronyism, underinvestment, a reluctance to cooperate with international oil
companies (IOCs), and the less-than-optimal application of new technologies have combined to
retard the potential of some of the companies in question. Underinvestment during periods of low
oil prices is expected, but during the last three years of prices exceeding $50 per barrel, some of
these producers have continued to move much too slowly in investing in new fields.
Basing her analysis not on desk work but on interviews with a range of people inside these
companies, Ms. Marcel offers a unique approach to educating the reader about the inner workings
of what are arguably some of the world's most important oil firms. Between 14 and 36 people were
interviewed in each company, including the younger generation and women who were not part of
the early decisions to create these national champions.
Ms. Marcel's access was unique but controlled. Those she interviewed were likely to have
been vetted by senior management. At the same time, getting people to speak candidly on the
record would have been difficult under any circumstances. Since NOC managements were provided
summaries of the interviews and given a chance to comment prior to the book's publication,
the resulting picture of each of these companies has been shaped by the NOCs themselves. A more
complete picture could have been drawn if existing and former employees had been asked to
comment anonymously and if IOCs had offered off-the-record, unattributed views on what they see
as the pluses and minuses of these NOCs.
In the end, the book is more academic than analytical. It doesn't provide a complete picture of
the challenges these companies face. Rather it reflects on the backgrounds of these companies and
addresses selective issues raised by those interviewed.
Ms. Marcel helps us to understand how the formation of Aramco from the Arabian-American
Oil Company occurred. It was a slow process that ended in 1988 with the creation of Saudi Aramco.
Foreign managers have always had a role in building the company and maintaining it, and the
legacy of U.S. influence remains. Aramco has considerable operational autonomy from the state
and has managed to keep a monopoly on oil production, fending off a challenge in 1998 to open the
sector to IOCs. IOCs eventually had to settle for the gas sector's opening earlier in this decade.
Over the last three years, Aramco has had to defend itself against accusations, most notably by
Houston investment banker Matt Simmons, that it was overestimating its oil reserves and future
production capacity. The debate has forced Aramco to adopt greater transparency with respect to
field data and production plans.
Algeria expropriated IOC assets more swiftly and with greater hostility, following a bitter war of
independence from France. Sonatrach was created in 1963, a year after Algeria negotiated independence. Today, its oil reserves are limited, and its future lies more with gas. Like Aramco, Sonatrach
has considerable operational autonomy from the state. It overcame its historical antipathy toward
France to rely on French companies along with a wide range of other IOCs to develop both its oil
assets and what is arguably one of the world's most advanced gas industries, a source of both
pipeline and LNG supplies to Europe and elsewhere. Still, what troubles Sonatrach is its lack of
attention to exploration. Ms. Marcel's interviews revealed that only 40 percent of the country has
been explored, and that 70-80 percent of oil discoveries were made prior to nationalization. NOCs
generally - and Sonatrach is no exception - are reluctant to risk funds on exploration and do not
offer adequate enticements for IOCs to meet this challenge either.
NIOC was formed in a hotly nationalistic and competitive environment, with the overthrow of
the shah in 1979 exerting a profound effect. Its roots in the Anglo-Iranian Oil Company have
continued to hinder its ability to deal rationally with foreign oil companies and left it with a deep
mistrust of UK companies, in particular, British Petroleum. It is more xenophobic and doggedly
self-reliant than any of the other NOCs in this group, stemming from the Iranian regime's isolation
by the United States. Battered by more than a decade of U.S. sanctions and suffering from many
decades of oil-and-gas-sector mismanagement, NIOC has been unable to raise production and
could soon see a drop in its output. To reverse this trend, NIOC needs access to Western oil-field
management techniques and to technology for enhanced oil recovery (EOR) for its existing old
fields. It also needs LNG technology to create a modern gas-export industry. As in Kuwait, NIOC's
activities are ring-fenced by the parliament, which has limited the company's maneuvering room
and hindered commercial relations with IOCs. As tensions grow between Iran and the United
States and Iran's Arab neighbors in the Gulf, NIOC's problems are likely to multiply. Among the five
NOCs that Marcel studied, it is the most vulnerable to internal and external political pressures and
has been held back the most because it has not dealt more extensively with IOCs.
KPC's history is also steeped in British intrigues, with the Kuwait Oil Company (KOC) tied in
the past to BP. Kuwait nationalized its industry abruptly in 1975. While it never had the level of
hostility to UK interests that Iran has exhibited, the Kuwaiti parliament has blocked serious foreign
involvement of any kind in the country's oil and gas sectors. KPC today is still marked by the
trauma of the 1991 Gulf War, which some allege was brought on by overproduction of oil by KPC.
Until the recent removal of Saddam, Kuwait feared a second invasion. The 1991 war led to an
exodus of Palestinian and Algerian mid-level managers and engineers that has left an enduring
skills gap. It also left a legacy of mistrust by society of the government. The subsequent friction
between parliament and KPC has tied the hands of the NOC and bred resentment by KPC managers
and staff toward the parliament's interference in their decision-making processes.
In Algeria and Abu Dhabi, IOCs have access to equity reserves, and NOC-IOC relations are
much smoother. Abu Dhabi doesn't share the mistrust of IOCs reflected to varying degrees in the
other countries. Abu Dhabi's oil industry was never fully nationalized; IOCs have worked with
ADNOC extensively. ADNOC has mastered the development of its resources through partnerships
that bring together several foreign companies in each project, providing what ADNOC sees as best
practices, which do not limit it to the input of just one company. Its strategy of diversifying foreign
partners seems to have paid off, as it has moved forward as both a significant oil producer and an
important LNG exporter. Unfortunately, like Kuwait, it suffers from a shortage of locals to fill midlevel
management slots. The expected retirement in the near term of managers from the Indian
subcontinent will leave a vacuum at the top. In both Kuwait and Abu Dhabi, the new generation is
said to be driven more by ambition and a desire to make money than by work. Often young people
want to be installed as CEOs without taking the necessary steps to reach that level.
The book does reveal the culture of these companies and explain their historical backgrounds,
offering insights on why they are what they are today. These aspects are well researched and laid out. Anyone who deals with these or any NOC today needs to understand their histories and
backgrounds. Ms. Marcel's aim is not to delve into controversial issues and question marks; the
work is more descriptive than critical or prescriptive. What she describes is a culture of long-term
thinking by these NOCs, which fail to see the need to act now on some of their serious shortcomings.
While IOCs are usually accused of short-term thinking, NOCs are not prepared for major
short-term changes. Many are not developing the necessary competence.
The role of NOCs, as described by Ms. Marcel, is to be guardians of their nations' resources,
but this has its dangers. NOCs are not proactive and don't adequately address the immediate
needs of developing their oil and gas industries. Tensions arise between the business sense of
some NOC managers and the state and its ministries. The NOCs often have opportunities but lack
funding. Among the five examined in Ms. Marcel's book, Aramco is the least burdened by these
concerns.
Ms. Marcel has succeeded in identifying some of the different drivers among the generations
within these NOCs and what is holding the companies back from progressing more efficiently. She
provides a useful handbook for understanding five of the world's most important national oil
companies.
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