A Litany of Problems for Western Energy Majors May Not Spell Opportunity for Gulf National Oil Companies

Robin Mills

AFP Photo

Saudi Aramco’s IPO is wending its way toward its dénouement, and the world’s largest petroleum conference is taking place this week in Abu Dhabi. Major international oil firms, on the other hand, are reporting slumping profits and investment. These events suggest a sharp divide between Middle East state-owned energy giants and their investor-owned Western counterparts. But in fact, both face challenges. And while some might sense an opportunity for the large state oil firms to take over assets and market share from the Western majors, they may not have sufficient resources to do so.

Let’s start with the majors. Shell, BP, Total, Chevron and ExxonMobil reported sharply lower earnings in the third quarter, a result of relatively low oil prices and the collapse in prices of natural gas in major European and Asian markets. American shale fields, once the province of buccaneering wildcatters, are now becoming that of the supermajors – though they have yet to convince investors they can produce sustainable cashflow where their predecessors failed. Meanwhile, their traditional bread-and-butter – giant projects in remote locations – is being viewed with skepticism, too. ExxonMobil’s share price is down 12 percent since April, despite having opened up one of the world’s most promising new oil prospect, off Guyana; investors want fast, low-risk paybacks.

The European majors, including Shell, BP, Total and Equinor, face a further pressure not yet really felt by the Americans – the demand to act on climate change. There is growing attention to “stranded assets,” the idea that future restrictions on carbon dioxide emissions will make much of their current oil and gas business unprofitable. This fear is overstated for now. Nevertheless, some investors have withdrawn from the sector entirely, while most demand a clear plan for these businesses to become “climate-compatible.”

So, with all the difficulties with fossil fuel, European firms are entering new businesses: offshore wind, solar power, electricity retailing, electric-vehicle charging and battery development, for example. (Shell’s purchase this month of the French floating wind power developer, Eolfi, is the latest development.) It remains to be seen if the oil companies’ skills can transfer to these new businesses. Still, each will have to make a giant acquisition to build a really material low-carbon business. These are clearly not easy times for the majors.

Meanwhile, the giant national oil companies (NOCs), such as Saudi Aramco, ADNOC, Kuwait Petroleum Corporation and Qatar Petroleum, face a two-fold challenge. They are called upon to support their countries’ transformation plans, to move to a post-oil economy. And they, too, must confront challenges related to the climate crisis.

The NOCs, usually the best-run entities in their home countries, and with formidable capital, have sought to generate more value beyond simple extraction and sale of hydrocarbons. All are expanding their downstream business – the processing, transporting, trading and marketing of oil and gas. They are building giant integrated refineries and petrochemical complexes, particularly in joint ventures to access fast-growing Asian markets, initially China and now India.

In the upstream sector, they are focusing on gas, mostly to meet domestic needs. Aramco, additionally, has invested in US liquefied natural gas as part of its plans to build an international portfolio. Qatar, the world’s largest LNG exporter, is pressing ahead with plans to expand capacity by 40 percent.

By and large, then, the NOCs don’t have the same difficulties with fossil fuel that their Western counterparts are experiencing.

But what about the much-taunted diversification away from fossil fuel? True domestic diversification beyond oil, in fact, has been halting. The NOCs face tension between investing in their core businesses and funding the reinvention of their host countries. This tension is most apparent in the long-running saga of the Saudi Aramco IPO.

Aramco had historically been a technocratic island of excellence, managing the kingdom’s vast oil resources efficiently. But that changed with the announcement of the IPO in 2016, ironically intended to bring about more transparency and a commercial mindset. In 2018, Aramco was instructed to buy the Public Investment Fund’s 70 percent stake in Saudi Arabia Basic Industries Corporation, more commonly known as SABIC, for a price Aramco considered to be inflated. The shares have dropped about 30 percent since then.

In September, the respected Aramco long-time executive, Khalid Al Falih, was replaced by Prince Abdulaziz bin Salman as oil minister, and by the chairman of the Public Investment Fund (PIF), Yasir Al Rumayyan, as Aramco chairman.

Aramco is now guaranteeing hefty dividends to boost its valuation in the forthcoming IPO, which will initially be limited to the local stock market, and to maximize the transfer of money to the PIF. The PIF, in turn, is expected to spearhead the kingdom’s transformation by building the futuristic city of Neom and taking stakes in tech firms such as Tesla, Uber and, via the Softbank Vision Fund, the infamous WeWork. Such then is the vision of the old economy funding the new. But for Aramco, this plan may limit its ability to continue investing in its core business, especially if oil prices fall.


NOCs may seek to be “last one standing,” as carbon limits and falling oil prices drive out their high-cost international competitors. But that itself requires heavy investment, and still faces climate-crisis constraints. As the majors, especially European firms, gradually step away from oil, the space might open for bold acquisitions by the NOCs. But they can only bridge the gap if their host governments simultaneously wean themselves off petrodollars.

Robin Mills is CEO of Qamar Energy, and author of “The Myth of the Oil Crisis.”