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EY’s Petroleum Society Maturity Index

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EY’s PSMI helps the National Oil Company and the State to move toward economic transformation by improving the role of NOCs

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EY’s Petroleum Society Maturity Index

  1. 1. EY’s Petroleum Society Maturity Index
  2. 2. Page 2 EY’s Petroleum Society Maturity Index Source: OPEC Revenues Fact Sheet, EIA Oil exporting countries are transforming their economies 1 Governments have been forced to make steep cuts to investment and, critically, to subsidies and social welfare programs following the drop in oil price. 2 Several countries are exploring the sale of stakes in National Oil Companies (NOCs) to raise revenues. 3 NOCs are developing plans to expand along the oil and gas value chain and into other sectors to reduce dependence on revenues from oil and gas. decline in OPEC’s oil export revenue between 2014 -16 55%
  3. 3. Page 3 EY’s Petroleum Society Maturity Index NOCs’ traditional four phase approach is less than optimal ► The NOC is established through mandate from the government. ► Joint ventures are normally formed to leverage external expertise and technology. ► The focus is on exploitation of the domestic resources. ► NOC/State focus is on building local capability to take greater control of domestic production and a greater share of revenues. ► Processes are formalized and leading practice asset management methodologies are applied. ► Vertical integration is applied to refining/LNG/petrochemicals. ► NOCs start to participate internationally through joint ventures, acquisitions or market entry. ► In order to operate in foreign markets, contracts and agreements are formed with international companies. ► NOCs internally develop and foster new talent. ► R&D facilities are established to increase technological innovation. ► Synergies are created with companies that are technology and innovation leaders, allowing the NOC to emerge as an International Oil Company. Phase 1 Establish foundations Phase 2 Gain greater control over production and build local capability Phase 3 Internationalize to diversify portfolio and strengthen relationship with end-consumer Phase 4 Expand and diversify capabilities ► The traditional approach needs to be adapted to achieve reduced resource dependence and increased sustainability ► A cohesive overview of the domestic economy is required for NOCs to balance national and commercial objectives, achieving economic transformation
  4. 4. Page 4 EY’s Petroleum Society Maturity Index NOCs play a pivotal role in the transformation of national economies Petroleum society maturity and overall economic benefit Sell-off Production Refining/LNG Petrochemicals OFS ecosystem Intellectual capital Petroleum society maturity Short-term only Dependent on resources Sustainability Economicimpact sustainability Low High Resource development Value addition Economic transformation
  5. 5. Page 5 EY’s Petroleum Society Maturity Index Economic transformation through EY’s Petroleum Society Maturity Index (PSMI) ► EY’s PSMI helps the NOC and the State to move toward economic transformation by improving the role of NOCs ► PSMI is composed of five indicators that track development of economies as they move along the value chain Petroleum society maturity development indicators Resource development Value addition Economic transformation Declining reserves, no energy stability High reliance and consumption Alternatives to oil, gas, efficient consumption Energy NOC or government subsidized posts Develop and employ more nationals World-class national workforce Society Importing international suppliers Increasing capability of domestic suppliers Diversified competitive exporting industries Enterprise Importing international expertise Oil and gas domestic technology Knowledge economy exporting IP Intellectual capital Sell-off resources to bring in cash Additional cash from domestic value chain Growing GDP from a diverse economy Economy
  6. 6. Page 6 EY’s Petroleum Society Maturity Index The example below illustrates EY’s PSMI to understand the current state of a country’s economy ► All three countries (A,B,C) have substantial oil and gas reserves and derive significant revenue from exports of oil and gas. ► Country A is clearly the most developed along the transformation. ► Country B is progressing well through the journey but needs to continue to develop across 4 of the 5 indicators to deliver the most value to the national economy . ► Compared to country A and B, country C needs to develop a plan to lower dependence on revenues from oil and gas, improve quality of its exports, train labor force, and optimize the energy mix. Enterprise (export quality) Economy (economic independence from oil and gas) Intellectual capital Energy (energy independence) Society (youth employment rate) Country A Country B Country C EY’s Petroleum Society Maturity Index
  7. 7. Page 7 EY’s Petroleum Society Maturity Index EY’s PSMI can assist NOCs set the path for transformation Today’s NOC model is no longer fit for the future; generating value must take priority over generating volume NOCs must change how they define their role and contribution to the national economy in order to maintain their critical position within the industry and their countries NOCs need to commercially allocate capital, measure it and obtain reasonable returns NOCs that embark on the journey of transformation to become “commercial NOCs” will maximize their potential enterprise value and contribution to their country To aid this transformation, EY has identified eight critical aspects NOCs need to address to maximize their earnings and contribution to the State. Read more at ey.com/oilandgas/nocs
  8. 8. Page 8 EY’s Petroleum Society Maturity Index ► Building and recommending a robust plan for evolution of NOC that will serve as key contributor to the country’s GDP ► New “commercial NOC” will fulfill both national objectives and the profitability expectations of key stakeholders of the entity Balancing national vs. commercial objectives1
  9. 9. Page 9 EY’s Petroleum Society Maturity Index ► Partial privatization of NOCs will raise their potential enterprise value and overall contribution to their country ► Improving capital structure through a mix of external commercial finance, equity investors and free cash flow from operations Meeting funding needs through a mix of external finance and internal cash flow2
  10. 10. Page 10 EY’s Petroleum Society Maturity Index ► Utilizing technology and digital approaches throughout the value chain ► Harness the power of data to improve efficiency and productivity ► This will help the NOC to retain its status as one of the low-cost producers ► Effective monetization of options developed through R & D Implementing enabling technology to drive better commercial decisions3
  11. 11. Page 11 EY’s Petroleum Society Maturity Index ► NOC is fully integrated to capture and maximize income in the entire oil and gas value chain ► Improving mix of both backward and forward integration based on comparative advantage of the domestic economy Exploiting the value chain opportunities through better coordinated vertical integration4
  12. 12. Page 12 EY’s Petroleum Society Maturity Index ► Renegotiating certain elements of the contract with the state and the oil and gas regulator to assist the NOC to act as “commercial NOC” ► Will facilitate optimal allocation of capital that will enhance its long-term value ► Improvement of the current tax regime Clearly understanding the autonomy required by the NOC to operate at its fullest commercial extent5
  13. 13. Page 13 EY’s Petroleum Society Maturity Index ► Will increase productivity and efficiency and lower costs ► The transformed NOC will have well-developed centers of excellence in key locations, and its staff will be able to participate in market-leading training programs Improving people capabilities and skills development to operate in a commercial mind-set6
  14. 14. Page 14 EY’s Petroleum Society Maturity Index ► To secure demand/supply and access to technology ► Aligning internationalization strategy with broader corporate strategy will improve portfolio risk management and diversification Internationalization through investments in major high-growth potential markets7
  15. 15. Page 15 EY’s Petroleum Society Maturity Index ► Developing core portfolio of investments in other sectors to diversify revenue streams Maximizing revenue potential through targeted investments and the diversification of revenue streams8
  16. 16. Ioana-Andreea Ene +47 51 70 66 92 andreea.ene@no.ey.com EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. How EY’s Global Oil & Gas Sector can help your business The oil and gas sector is constantly changing. Increasingly uncertain energy policies, geopolitical complexities, cost management and climate change all present significant challenges. EY’s Global Oil & Gas Sector supports a global network of more than 10,000 oil and gas professionals with extensive experience in providing assurance, tax, transaction and advisory services across the upstream, midstream, downstream and oil field subsectors. The Sector team works to anticipate market trends, execute the mobility of our global resources and articulate points of view on relevant sector issues. With our deep sector focus, we can help your organization drive down costs and compete more effectively. © 2017 EYGM Limited. All Rights Reserved. EYG no. 01737-174Gbl BMC Agency GA 0000_10250 ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com/oilandgas For questions, please contact: Alexey Kondrashov +971 56 416 2251 alexey.kondrashov@ae.ey.com Adi Karev +852 2629 1738 adi.karev@hk.ey.com Andy Brogan +44 20 7951 7009 abrogan@uk.ey.com Paul A. Navratil +9712 4174400 paul.navratil@ae.ey.com

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