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Oil Industry: IOCs and NOCs - Views on News from Equitymaster
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  • Sep 9, 2011

    Oil Industry: IOCs and NOCs

    Though Crude Oil has been known for its use since ancient times, the commercial production of Crude Oil can be traced back to latter part of the 19th century (1860s) in the USA. This was in Pennsylvania where the Crude was found just 70 feet under the ground. The production was 3 million barrels / day (b/d) in 1863 and the use of Oil was for illumination. Presently, Oil is the most important fuel without which life can come to a standstill. It is therefore not surprising that the global production of Crude Oil now exceeds 80 million b/d.

    The companies that own this resource can be largely categorized as International Oil Companies (IOCs) and National Oil Companies (NOCs)

    IOCs are those companies that have their operations in multiple countries and are not nationally owned. This basically means that IOCs are large private companies. Some of the biggest names include Shell, BP, Royal Dutch, Exxon-Mobil, and Chevron among others. Most of these companies are extremely large in size and have a long history (more than 50 years) of existence.

    NOCs are those companies that are owned by the governments of the resource rich countries. The list in this case includes countries like Iran, Iraq, Kuwait, Saudi Arabia, Venezeula, Nigeria, and Libya. As the dependence on Oil increased over the years, these countries nationalized their Oil assets. More than 40% of the total world crude oil production now comes from the Middle Eastern countries. These NOCs and therefore the countries controlling them have become extremely influential in today's globalized world.

    IOCs vs NOCs

    Before 1970s, major middle-east countries allowed the IOCs to have exploration and production (E&P) rights. IOCs invested in E&P activities and found huge amount of oil. The benefits were shared by IOCs in the form of royalty payments to the respective countries. However, as the price and importance of oil increased in the world economy, the Middle Eastern countries (like Saudi Arabia, Iran, Venezeula, Iraq and Mexico) abruptly nationalized their oil reserves and transferred the assets to the NOCs. With this, IOCs lost E&P control over these assets in Middle Eastern countries.

    In 1960s, the power had shifted from IOCs to NOCs and few large NOCs colluded to establish the Organisation of Petroleum Exporting Countries (OPEC). OPEC was established to co-ordinate and unify the petroleum policies for member nations. In the next article, we will discuss OPEC in further detail.



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