“Many developing and emerging economies try to take advantage of the natural resources available in their countries to boost development. National Oil Companies (NOCs) that pursue the Extraction (upstream), Refining and Marketing (Downstream) of oil and natural gas resources are a clear example of this and the role these NOCs play is significant in many regions around the world,” Deloitte in a report said.
A new Deloitte whitepaper, ‘Connecting the bright spots: key components of an oil and gas governance framework’, puts forth the establishment and implementation of a governance framework as the common and essential element for all National Oil Companies (NOCs) to ensure maximal results.
“Regardless of the type of NOC set-up, (entirely public, Joint Ventures, or other operating models), they share one element that is common and essential to them all to ensure maximal returns are realized, which is establishing and implementing a governance framework. This Corporate Governance framework should help overcome certain obstacles and yield many benefits” Rami Wadie, partner, enterprise risk services at Deloitte Middle East, said.
“Without proper governance, NOCs can face significant challenges in many areas, both external and internal to the organization. As is evident across the region, many of the NOC’s are going through leadership and management style change which requires strong and well established governance practices to ensure consistent, controlled and continued operations,” he added.
Deloitte experts find that a governance framework that provides transparency and evokes confidence in the controls instituted across the NOC will also provide benefits across the spectrum, as follows:
Funders and investors will be more confident that their capital will be employed to the best interests of the organization, leading to lower risk and better returns for them.
Internal issues will also be addressed through stringent standards enforced through proper organizational design, delineation of authorities, and detailed policies and procedures that safeguard the well-being of the NOC as a whole.
The Deloitte whitepaper lists the external challenges associated with lack of governance to include difficulty in sourcing funding and attracting investment and a distorted view of earnings and balance sheet performance. When addressing internal challenges, the whitepaper finds they include system inefficiencies in all aspects such as capital deployment, organizational performance and operational issues as well as adverse effects on the NOCs sustainability and social responsibility.
A thoughtfully planned and successfully implemented governance framework can reverse the above-mentioned problems as per Deloitte’s whitepaper. It further highlights the characteristics of an effective governance framework with these elements include values: set the purpose of the organization and must be clear and understandable; operating model: provides an explanation of the distinction between operational and functional roles; management system: includes the set of hierarchically structured policies and procedures for the organization; governing bodies: provide oversight for the whole governance framework, from the top level board of directors’ charter down to executive and non-executive roles and responsibilities
Once the governance framework is developed, Deloitte experts list six critical success factors for effective implementation. These are: A compelling case – preparing, agreeing and communicating the benefits for the business, the individual, employees and other stakeholders; Awareness of key challenges – where will pushback come from, where will apathy exist; A strong and consistent message from all levels of leadership and management; Time – for awareness and understanding to embed across the region; Two way communication – process of communication and engagement and a plan – definitions of success, priorities, review points to assess progress and transition to on-going business environment.
“These six elements also rely heavily on the involvement and engagement of stakeholders who understand and support the values of the organization,” Wadie, added.