When should national oil companies have subsidiaries?
by Trung Ghi, Amer Hage Chahine, Saurabh Shekhar
June 2018
Rationales for establishing subsidiaries in national oil companies and how these NOCs can manage their existing subsidiaries more effectively – should they merge subsidiaries into business units or privatize them?

National oil companies (NOCs) are becoming ever more influential in today’s oil and gas environment, dominating production output and expanding their footprints beyond their local boundaries. With this growth and increase in influence, many NOCs have expanded their organizations over the years, creating subsidiaries and other holding companies, all of which were meant to ease management of resources, technology, and people. Due to their inherent challenges in managing large organizations, as well as external challenges such as the recent changes in market dynamics (new-player entrants, non-conventional plays, etc.) and long-term low oil price, NOCs are reconsidering their organization structures and aiming to become more agile.

NOCs can be organized in business units, or have separate legal entities (subsidiaries) to manage the operations. For instance, Saudi ARAMCO organizes itself mainly through business units and has very few subsidiaries, while other companies, such as Kuwait Petroleum Corporation (KPC), Abu Dhabi National Oil Company (ADNOC), Qatar Petroleum (QP), and PETRONAS have between eight and 37 subsidiaries. Each company has a different number of subsidiaries, with varying allocations of activities. However, establishing subsidiaries should not be ad hoc, but based on well-defined criteria. In this viewpoint, Arthur D. Little highlights how NOCs can decide whether they should create new subsidiaries and what to do with existing subsidiaries. There are multiple options for existing subsidiaries, ranging from merging them into business units, to privatizing them, to maintaining the status quo.

Criteria for establishing a subsidiary in oil and gas

In our recent study on organizational restructuring, we analyzed a number of NOCs across all regions. The underlying conclusion was that NOCs had created subsidiaries and sub-subsidiaries based on their business requirements and/or political reasons – not on standardized parameters, as companies had done in many other sectors. NOCs were looking for benefits from the establishment of subsidiaries, such as independence, agility, less bureaucracy and more business focus. However, these benefits can also be achieved through existing business units with better processes, systems, and appropriate delegation of authority to the different functions.

Four parameters warrant the existence of subsidiaries within the oil and gas sector. However, not all these parameters must be met in order to establish a subsidiary – one parameter is enough.