National oil companies: Why some thrive and others struggle

Al Majalla looks at the different experiences of oil companies in the Arab world and explains why some succeeded and others struggled

AFP

A handout picture provided by Energy giant Saudi Aramco, Saudi Arabia's state-owned oil and gas company, shows its rigs in HSBH field north of Dhahran in the eastern province of Saudi Arabia on March 20, 2018.

National oil companies: Why some thrive and others struggle

Amer Ziab Al-Tamimi

last update on 11 Feb 2024

National oil companies rose to prominence in the economies of the Arab World in the 1960s and the 1970s, when governments took full control of them from the Western multinationals.

The process was handled in a range of ways. The companies developed along different lines as they ran the production in the sector, which kept the world moving and its output growing.

Al Majalla looks at the different experiences of oil companies in the Arab world and explains why some succeeded and others struggled at a formative time for an industry crucial to the Middle East and the wider world.

Kuwait and Saudi Arabia

In Kuwait, nationalisation occurred in 1975. The process was led by Abdullah Al-Nibari, a member of the National Assembly, who used detailed explanations to convince the government and the legislature to take action.

It was carried out via a proposal that initially gave the government 60% of KOC, previously owned by Gulf Oil and British Petroleum (BP).

In Saudi Arabia, oil was being pumped by Aramco. It was set up in 1933 in a deal between the government and Standard Oil of the US, and production started in 1938 after oil was found in the desert.

Saudi Aramco engineers walk in front of a gas turbine generator at the Khurais oil field during a tour for journalists in 2021.

In 1973, the Saudi government bought 25% of Aramco, and in 1974, it increased its share to 60%. The company became fully owned by the government in 1980.

Renamed Saudi Aramco, it emerged as the most successful national oil company in the Arab world. It has professional capabilities that are hard to find in many Arab national oil companies and has technological capabilities and scientific expertise on par with global industry giants.

Like other successful firms in the sector, it has been able to improve production capacities and expand upstream and downstream investments. It has worked to qualify national personnel through training, scholarships abroad, and cooperation with experts from international companies.

Kuwait’s story has been different. The reasons are varied, but some identifiable patterns exist behind what works and what does not.

Many of them have been defined by Dr Majid Al-Moneef, a distinguished Saudi economist who headed institutions related to the oil sector.

In his book, Oil Between the Legacy of History and the Challenges of the 21st Century, he discusses oil economics since the middle of the 19th century and reviews the factors that led to the emergence of national oil companies and the degrees of success and failure of each.

Saudi Aramco is the most successful national oil company in the Arab world and has technological capabilities and scientific expertise on par with global industry giants.

Cost control and output expansion

One of the main factors defining success was the ability to control production costs, a key necessity to keep the price of their exports competitive on international markets.

When recruitment and staffing costs become inflated in nationalised oil companies, the opposite happens. That has spread through some companies.

Output expansion is also important, with more sophisticated refineries helping boost production and make more complex oil products with deeper added value. Some firms also set up subsidiaries in oil-related fields to produce petrochemicals and fertilisers. They also established transportation and distribution companies.

Stock market boost

A major difference relates to the stock market and how it can ease access to capital and attract partnerships from within the wider global industry. This can keep companies developing.

Shares in Aramco have been listed since December 2019, when the Saudi government sold off a 1.5% stake in the firm for around $25.6bn.

The global scale of the deal opened up foreign investment into the country and highlighted the openness of its economy. In turn, that helps attract partnerships and staff from the global industry.

The stock market plays an important role in easing access to capital and attracting partnerships from within the wider global industry.

National differences

Kuwait established Kuwait Petroleum Corporation (KPC) in 1980. The firm was entrusted with the ownership and supervision of various oil companies operating in Kuwait after the nationalisation of the industry in the mid-1970s.

That included KOC, Kuwait National Petroleum Company (KNPC), companies operating in the petrochemical sector, and Kuwait Oil Tanker Company (KOTC).

KPC also became responsible for companies established later, including oil companies operating outside Kuwait.

Since the sector in Kuwait is wholly state-owned, it is also state-run, directly by government ministers. Several of them have faced accusations of prioritising political concerns over effective business management.

This can leave state-run oil firms prone to overstaffing. That significantly increases costs and erodes competitiveness. Like other parts of the government, thousands of Kuwaitis are employed after pressure from National Assembly members.

Ballooning salary and wage allocations have raised production costs to $13 per barrel in 2023, up 17.9% from 2022.

Andrei Cojocaru

Wartime origins and the impact of invasion

Oil was discovered in Kuwait in 1939, and production began in 1946, after the end of World War II.

The country has played an important role among exporters, co-founding OPEC in 1960. However, its industry was left devastated by Iraq's invasion of Kuwait in 1990. More than 700 oil wells were destroyed or set ablaze.

After liberation, the country revived the sector, generating enough revenue to cover its spending requirements. However, attempts to harness the expertise of foreign companies and forge partnerships with them to develop Kuwait's northern fields failed.

National Assembly members opposed the project in the 1990s. Kuwait's old oil fields faced technical problems, so international oil companies had to be hired to repair them.

Kuwaiti production is in decline not only because OPEC decided to cut production but also for technical reasons. Output currently doesn't exceed 2.5 million barrels per day, while attempts are underway to develop the capacity of oil refineries and raise the daily rate from 1mn bpd to 1.4mn bpd in the coming years.

There are projects to produce natural gas, especially from the Durra field, but a dispute over it with Iran needs to be addressed first.

Kuwait's oil sector is wholly state-owned which has led to accusations that it prioritises political concerns over effective business management. This can leave state-run oil firms prone to overstaffing.

Management technique

The experience of the national oil administration in Kuwait isn't unusual. Other Arab countries, including Iraq and Libya, have hit similar pitfalls.

Managing the oil sector requires objective management to ensure that the industry can secure the best results from oil production operations, refinery works, petrochemical activities, and other oil and gas-related companies.

While nationalisation was a move against the unequal structure of the industry in its early days, it should not prevent modernised partnerships with the international oil companies of the present day.

Proper international agreements and partnerships over technological expertise and marketing for all parties in a well-run sector within open economies represent the best of both worlds.

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