National Oil Companies: when financial communications plays a genuinely strategic role

There are two big oil IPO stories circulating through global media at the moment: Saudi Aramco & DONG Energy. What links these two transactions is the sovereign element – and this raises a communications challenge.

National Oil Companies are not designed to run in the same way as the global oil majors we’ve all heard of. Shell, BP, Exxon etc are all designed to facilitate combined equity growth / yield by hitting quarterly profit targets and report profit when calculated through reserves replacement – finding oil as well as producing it, to ensure the core valuation of the company remains constant.

NOCs are different. They are designed to extract long term benefit from the natural wealth of the sovereign. Long term value creation is the name of the game. Short term profits are often eschewed for strategic gain. Reserves are often so massive as to not need replacement in the same way.

Communicators have to explain this contrast in a positive context. Financial communications is essentially a process of providing context to a process of comparative analysis. “Why should I invest in Aramco rather than Exxon?” “How is DONG valued compared to Conoco?”

Our role is to disrupt standard practice and demonstrate that NOCs should not necessarily be compared to other companies, but should be understood on their own terms. Aramco to Exxon is essentially a false comparison due to their fundamentally contrary strategic drivers.

The other thing to remember is that the IPO creates a prism for a much wider audience. Global regulators, diplomats, politicians, media and business partners take more notice when an NOC goes public, due to the increased transparency (although DONG is typically Scandinavian in its transparency) An IPO is a brilliant opportunity to introduce the corporation, its people, operations, strategy and ethos to a global community of stakeholders that will influence the long term success of business strategy.

The core communications challenge of an IPO is not therefore financial; it’s more about strategic identity – demonstrating why NOCs should not be compared to the dominant IOC model but judged on their own terms.

That’s before we get to the geopolitical angle and role of resources liquidity / volatility in foreign policy, but that for another blog.

https://next.ft.com/content/be1011a8-1697-11e6-b197-a4af20d5575e

“Myopia caused by dollar signs in the eyes is a contagious condition. Still, it is sensible to question how realistic the Saudis are about this float. If Aramco wanted to list shares in London as depositary receipts, it would need to go halfway towards meeting UK governance standards. “Comply or explain” does not sound like a very Saudi Arabian concept.”

The article above shows that Aramco and the wider Saudi communications establishment still have a little further to go in terms of educating their audience. This is a classic case where “classic” finacnial communications needs to be tempered with a more strategic understanding of both the energy industry and the perception of the sovereign accross a range of audiences.

The Saudi PR offensive is a really exciting development. The challenge for those managing it is to take a wide range of views into account, and also to consider long term reputation drivers as well as messages that will drive positive coverage in the short term.

Advertisements

Saudi Aramco: when IPO communications is about more than just $

The recent announcement in the Economist of the potential for a Saudi Aramco IPO got the energy, capital markets and communications community in a bit of a flutter. After waiting for the dust to settle, and a bit more information to come out of the Kingdom (eg this won’t be a full IPO of the holding company), I’ve attempted to put my thoughts on the matter into some sort of cogent order.

As you might know, I’ve advised 4 national oil companies, a number of energy ministries and some sovereign state; so I have a certain amount of experience around this subject, but cannot claim any sort of inside knowledge and understanding. I could be as wrong or right as the next commentator.

An unusual announcement:

The recently announced intention by Saudi Armaco to consider some sort of IPO is, as has been noted by an anonymous banker in the FT, rather against usual practice. (behind paywall) https://next.ft.com/content/5b6ac53c-b875-11e5-bf7e-8a339b6f2164
Bankers would have us believe that it’s in the reputational interest of the client to keep quiet until a transaction is all but guaranteed. Whilst I remain agnostic on this, as the reputational risk is far greater for the investment banks than it is for the corporate; the greater control exerted by the primary advisor to IPO over the last decade or so means that corporate actors and their communications advisors today rarely get the luxury gauging market reaction through a bit of strategic communications. The news about Saudi Aramco considering an IPO is therefore very rare.

 

Consider the motivation:

This discussion is derived from an exclusive interview in the Economist (paywall) http://www.economist.com/news/briefing/21685475-possible-ipo-saudi-aramco-could-mark-end-post-war-oil-order-sale , not with Saudi Aramco, but with Kingdom’s deputy crown prince, Muhammad bin Salman. We must therefore consider this news through a wider prism than a normal IPO. Corporate and financial considerations will be central to the campaign, but the needs of Saudi Arabia itself are interlinked.

Consider the current reputational challenges that KSA faces. Geopolitical conflict in Yemen and beyond; low oil prices and their consequent internal financial challenges; a lack of consensus within OPEC to Saudi production targets and finally the fundamentally cultural perception challenges when Saudi politics and society are viewed in Europe or North America.

The Kingdom took the brave decision to go on the front foot and tell their story directly. I’m sure there will be been long negotiations between the Economist and the Kingdom as to what areas were “fair game”, but that doesn’t change the fact that this was both a serious coup for the Economist and a brave and rare decision by the Saudi leadership to make a balanced on the record statement of belief and positive intent. The long interview with Prince Salman shows that there is another way to look at the myriad of dynamics in which the Kingdom is involved. Whether you agree or not, the article is persuasive that the Saudi point of view is worth considering.

 

The Sovereign / parastatal reputational connection

Sovereign states have every right to use their operational and financial assets as communications exemplars to enhance their reputation. Even Aramco’s harshest critics admit that it’s incredible that such a massive, complex corporation manages to run as effectively as it does. It is very much a potential jewel in the crown of Saudi global communications; an example of the way Saudi Arabia has developed both in corporate but also technological and financial terms.

This status would only be enhanced by the transparency and corporate rigour necessary to list equity on any stock market, including the Tadawul (Saudi Stock Exchange). In fact a listing on the Tadawul would be perfect, as it would enhance global interest and liquidity in the Saudi Stock exchange – raising the global profile of another Saudi institution, and demonstrating the continuing development of the modern Saudi state.

 

A PR Stunt or combined value narrative?

Matching the needs of the Saudi Arabia, the NOC and wider stakeholders = Great PR
So the big question here is whether this all a “PR stunt” designed for short term gain? In general terms, it depends on the commitment of the State in question (in this case Saudi Arabia). Good PR demands true operational commitment. For a narrative to resonate, there has to objectivity. For Saudi Arabia to truly enhance its reputation through an IPO of one of the most important companies in the world, it has to be genuinely committed to the success of the IPO and provide ongoing growth to the stock – or at least guarantee yield.

If this is part of a reputation enhancement campaign for Saudi Arabia – and Aramco probably doesn’t need new capital – investors have no reason to be concerned. Their interests and those of the Kingdom are in fact intertwined.

By choosing to IPO Saudi Aramco, the Saudi political leadership may well have created a positive ongoing narrative that will allow it to continually present a successful, modern, innovative face to the world. Assuming the listed vehicle is commercially successful, everyone’s a winner.

Energy Communications in 2016 – Paddy’s Crystal Ball

The energy industry in a post COP21 environment: a view on 2016

(written in partnership with my colleague Daniela Stawinoga-Carrington)

The last minute agreement at COP21 in Paris has been hailed as an “outstanding achievement for French diplomacy” and “an end to the fossil fuel era”. Apart from a very vocal but tiny minority, we all accept that the world is heating up due to human activity and unless carbon intensive practices are constrained in some way, life will become intolerable for billions of people around the world. Something clearly must be done. 2016 could be the first year that the energy industry, as one of the major carbon emitters, is forced to genuinely re-evaluate its business model, and the way it communicates across all channels and audiences.

However, it’s worth stepping back from much of the supportive editorial coverage the Paris Agreement has driven. It has been noted that much of the cheering and hugging on the floor at COP21 was actually being done by journalists, who appeared to forget their role as objective observers. Many environmental journalists are advocates as much as analysts – they start from the point that “something must be done” as opposed to “what is happening?”

There is a perfectly acceptable view put forward by different sections of the commentariat that whilst COP21 shows a significant amount of international support there is no legally binding mechanism and limited policy or commercial rationale to fundamentally transform international industrial paradigms.
So what will happen in 2016?

1. Coal to get a kicking
Spend a few days in a coal fired city wearing glasses or contact lenses and everyone will understand the basic truism that coal fired powerstations are a bad thing not only for the environment in a carbon sense, but also for the lungs of anyone breathing in various pollutants. The health effects are crucial here. Carbon is a long term problem that can be put off by policy makers. Hospitals filled with asthma and emphysema patients and the wider societal and economic effects are a major challenge for today – across all markets, but particularly in APAC.

2. Gas to try and differentiate itself from “fossil fuels”
Gas has been fighting hard to break away from the “fossil fuel” tag beloved by the environmental lobby. Gas will look to use its inherent advantages over coal and oil (it burns much cleaner) whilst also making the case that it can be the best partner for renewable energy. It’s also worth noting the significantly enhanced percentage of revenues generated by natural gas by companies such as Shell & Exxon. Oil companies are becoming gas companies, thereby enhancing the likelihood of enhanced gas advocacy.

3. Renewables to try and hold on to the COP21 feel good vibe
Renewables now have their big chance to force policy makers and investors to take them more seriously than may have been the case up till now. Get ready to see the ongoing references to “promises made” at COP21 as the renewables industry looks to both capture the optimism of the Paris Agreement and turn it into an issue of trust with policy makers and investors alike. “#COP21promise” anyone?

4. Fear grips the oil industry
Will oil hit $20 a barrel as some predict? As Saudi Arabia keeps pumping and Iran is set to start production again after the end of sanctions, the oil industry is likely to continue having to deal with a glut of supply and a low-price environment. 2016 is likely to see more job cuts and projects being shelved for companies to even have a chance to maintain dividend. Topped by the latest COP21 “the end of fossil fuels” agenda and the clearly needed re-evaluation of the energy industry’s business model, makes for challenging times for communicators.

Finally two major issues for consideration. Money & technology. Without major technological leaps forward, “green” energy is often significantly more expensive than the alternative or is simply not an industrially viable competitor. In an era of constrained capital, the environmental lobby will have to work very hard to convince policy makers, industrial executives and finally the average consumer that higher bills are an acceptable price to pay for cleaner energy.

It’s not impossible. It’s happened in Germany – all be it with some major compromises. What is certain that COP21 has the potential to change the game for energy communicators the world over.

The 11th commandment, the trading floor and energy companies

I love this story.

torygraph

http://www.telegraph.co.uk/finance/newsbysector/energy/10223990/BP-blames-trainee-error-as-it-faces-29m-penalties-in-US-gas-market-fixing-case.html

Probably because it involves an awful lot that’s relevant to my current position, but also my wider career, and what it tells us about the inherent conflict between the mentality of the trading floor and the Integrated energy company.

Firstly the trading: As some of you might be aware, I started off as a kid running errands on trading floors in the City, and even got to do a bit of trading (treasury derivatives, forex etc) before it all became apparent that it wasn’t for me as I wasn’t particularly (eg at all) suited and finally I would always be my Dad’s son. I love being my Dad’s son, he’s taught me a lot of important stuff and is probably my best mate, but Johan Cruyff and Jo Frazier’s kids probably both wished they hadn’t tried the same thing that made their surname famous. At least I didn’t get knocked out.

Then there’s the energy side. My MA might as well have been called “how to invade sovereign states and steal their resources”. I have spent the last 13 years advising energy and resources companies on their communications, with particular focus to capital markets exposure. This is the life I’ve chosen and I’ve loved it, even the weeks in Almaty, Eastern Europe and bits of Africa drinking myself towards an early grave; the late nights and early starts, trying not to fall over my own feet at London Bridge. There’s always something going on, which always has 5 different aspects to it. Oil, money, geopolitics, human weakness. So that’s 4. Sue me

As with one of my favourite literary characters, “Where love and need are one, and the work is play for mortal stakes etc” (sorry)

Consider the absolute joy with Emily Gosden has written the story and a number of energy journos were discussing it on twitter yesterday. It’s just a great story; globally famous energy firm getting screwed by a regulator because of a gobby junior trader. It’s almost cinematic; exposing the dangerous fault line between highly regulated industries that are also household names, and the cult of the trading floor, where speculative and risky behaviour is still (correctly) rewarded with cart loads of wedge.

Hang on, hasn’t Michael Douglas and the Sheens already done this?

Anyway, where was I?

The way I see it, there’s a few things to consider here. I am constantly joking about the 11th Commandment. “Don’t get caught”. In my experience it’s incredible how much corporate life is governed by the 11th commandment. Potential conflicts, breaches of regulation, deliberate obfuscation, out right lies, working for the devil. All of them appear to be acceptable if you can get away with it.

The great unwritten rule, but god forbid if you get caught. Like jumping at 20,000 ft without a parachute, or going down in the Barents in January, you are, entirely justifiably, screwed.

Some of the most successful traders I’ve known or heard about sailed very close to the wind; went right up to the line. Some of them probably went up to the line, laughed out loud and kept on going, and gave the appearance of being carefree. However, I bet they only went so far. There will always have been an escape route, because they were great traders and could immediately and instinctively manage risk.

But plans are only as good as the weakest link and in this situation there are two. Whilst BP maintain their innocence and this has to be accepted until the legal process is completed, the first problem is that BP had already copped to something similar before re propane prices The second is that enthusiastic young traders need VERY careful managing and need to understand where not only they but their institution fits in the wider corporate animal.

Trading floors are all about risk incentivisation. This is great if you’re a boutique, or part of a wider organisation where remuneration is directly linked to personal / departmental p&l, but what happens if your job is primarily to hedge against and manage the exposure of a wider corporate beast that has a very different mentality to that of the floor?

So we come to the nub of the issue. How do IOCs maintain top quality trading floors, with top quality traders, but also manage to maintain their essential corporate conservatism?

Whilst many IOCs give the impression of being prepared to take significant risks on multi billion investment programmes in funky parts of the world, they are actually instinctively conservative, with procedures for everything. They wait for wildcats to go and find the oil, then buy them out, whereby massive capital and operational punch will turn the oil into millions of dollars of income. Procedures are in place across the entire organisation for a few reasons.

The first is physical safety. Piper and Maccondo demonstrates what happens if a firm is anything less than rigorous in its safety procedures. Conservative is vital in such a potentially hazardous environment.

The second is about reputation and its maintenance, about “Permission to Operate”. In an independent firm, decisions are taken quickly, statements are drafted, operations are managed, because the timetable to monetization is so short. It’s all about quick growth to pay off investors and onto the next project. For the big boys however, it’s about maintaining the ability to drive income from a supergiant fields for decades. This means everything takes a long time to make sure they’ve got things right. I’ve waited a month for one of the big boys to agree wording on a press release on a deal that was an open secret in the industry, for fear of getting it wrong.

So how do the big boys manage this conflict? Firstly there’s remuneration. It’s one of the few jobs that is applicable with investment banking; largely because you can easily move from Chevron to Deutsche, doing the same job. Cash is, as we all know, a flexible tool.

Then there’s the process of indoctrination, or as my colleagues call it, “internal communications”. Trading floors are pummelled with information about their place in the world and that place is to make lots of money and not to come to anyone’s attention.

That’s right; the big energy firms follow the 11th commandment as well. Trading arms are balance sheet significant to all the major IOCs, but how often do the general public hear about them? How often are they in front of investors? Sometimes it’s just easier to pull a veil over an issue.

And that’s why we won’t hear about much of what goes on at BP IST or Shell Trading or the others until another actor gets involved like a regulator. Or there’s another Enron. Or an independent trader that is a counterparty to the big energy brands dumps toxic waste off West Africa. Obviously traders want to make sure that their positions are confidential for commercial purposes, but I reckon it’s got nothing to do with them.

Just because the job is vital to the commercial health of a company, it doesn’t mean that it should ever get the light of day. “Sit in the corner, shut up and make us and yourself a lot of money” is often the SOP.

This lack of transparency is the final ingredient in the story. There’s something secretive and mysterious about trading floors for those that haven’t worked on them. It adds to the joy of journalists like Emily that get a great story.

But for BP, Shell, Total etc, the story is simple; “these aren’t the droids you’re looking for, move along.”

IOC head of comms, deputy head of comms with a trader just visible behind them

IOC head of comms, deputy head of comms with a trader just visible behind them

What BP and Shell can’t tell you; yet another oil crisis has nothing to do with the man in the street

Another week, another crisis for big oil. You might all have noticed that BP, Shell and other supermajors are in the news for “fixing the price of petrol”.

As someone that has spent a lot of my life advising natural resources firms I find this fascinating. i found the initial media coverage particularly strange as it appears to betray pretty much total lack of sophistication shown by a number of commenting parties. Which is strange as I deal with these people all the time, and I wouldn’t have expected them to drop the ball like this.

This first thing I’d like to suggest is that is very much not about fixing petrol prices. Whilst there clearly is a correlation between the price of Brent crude and the unleaded that we put in our cars, the price differentials under investigation are of such small value, and of a frequency that should not be influential on the “petrol” price we pay which is based on long term predicted averages.

This is about oil traders making a few more million in profit at the institutional level across capital and energy markets. They are trading a product that has to go through a transformational process, both industrial and monetary before it turns into petrol.

So why all the noise and why, if I’ve read all this right, have the media taken this line and why have the oil companies let them?

Well what’s actually happened is that the European Commission has indeed raided a number of big oil firms and a price reporting agency due to “concerns that the companies may have colluded in reporting distorted prices to a Price Reporting Agency to manipulate the published prices for a number of oil and biofuel products”. This is the official line from the Competition Commission website and its the specific institution that will have scared the bejesus out of various comms people.

The competition commission is the organisation that successfully went after Boeing and Microsoft and is also hunting for a Russian bear. They don’t go public till they think they have a very good case.

This means that the best communications practice is to keep your head down, make a generic “helping with enquiries” statements and say “no comment” an awful lot.

It was pretty much the same on the EC side. They did distribute a generic press release about the raids, and Brussels can be a bit leaky, but what normally happens in these situations went on as usual. All sides make official factual statements and then get in their bunkers, for risk of prejudicing either the investigation on the EC side, or any legal process on the other side.

This leaves an awful lot of space for conjecture and opinion to develop, and this is where the misconceptions have developed. Nature abhors a vacuum.

Normally, if there’s an issue or crisis (say an industrial accident) or a secret corporate action (acquisition or find raising) people like me are used by our clients to have “off the record” conversations at arms length with the media, investors, and wider stakeholders such as political figures. The whole thing is deniable and done at arms length, but generally these lines are intellectually acceptable and help the target come to a balanced conclusion on the situation.

This perception management approach is of course very much down to institutional and personal style. One of these firms is very well known to be deeply conservative in its comms and legal approach and has been out communicated on a number of confrontational situations in the past, but another is as aggressive as it gets when it comes to multi billion international corporations.

It would however appear that any briefing has been pretty ineffectual, as the worst thing that can happen for an oil firm is for a corporate issue to become consumer. As ever, it’s the connection to the “man in the street” that can really kick off the pressure on a corporation and its comms team. The media cares more, as do the politicians and regulators that you don’t want to annoy.

As I say, I think the commentariat has got this entirely wrong. It has taken what could be a very significant issue for the European and global crude oil markets and its major participants, with potential billion dollar repercussions for some of Europe’s largest firms, which is in of itself a very important business story and it has tried to make it a consumer story. This is because in some cases, it provides “relevance” to readers / watchers / listeners that aren’t interested in trading regulation. In part however, its because general commentators don’t know any better and are following the pack. If BBC Today says its about petrol prices, who are we to argue?

So what’s the solution?

Well as an ex very junior forex trader, I’d say “don’t get caught”. All markets are manipulated in criminal ways. This is wrong, buts its the way of cap markets life. It’s the regulators’ jobs to catch and stop criminal activity and if criminals get caught, they deserve to have to book thrown at them.

As a fairly experienced comms advisor however, I’d get someone deniable to have a quiet word with the external contacts that matter. They should do their level best to make sure that when the EC comes back to this issue, all the vital external contacts see this as a matter of “regulatory governance of a small number of commodity traders.”

Communications should work hard to make the issue dull, take it away from the consumers and demonstrate a long term commitment to corporate governance.

There you go, you’ve already forgotten then is potentially a multi billion dollar fraud hadn’t you?