ISES 2013 - Day 2 - Nadine Bret Rouzaut (Director, Centre for Economics and Management in IFP School) - Resource Management
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This document discusses resource management and local content creation in the oil and gas industry. It provides data on world energy consumption and reserves. It then examines the relationships between host countries, national oil companies, and international oil companies. There are tensions between maximizing profits, developing local industries, and avoiding the resource curse. Effective local content policies can provide economic benefits but also pitfalls if not properly implemented and monitored. The experiences of countries like Norway and companies like Petronas and Petrobras are examined as examples. The conclusion calls for further dialogue to develop best practices in local content frameworks.
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ISES 2013 - Day 2 - Nadine Bret Rouzaut (Director, Centre for Economics and Management in IFP School) - Resource Management
- 1. ISE, Fuel the Future of Energy, Trondheim, June 14, 2013 Nadine Bret-Rouzaut Director, Center for Economics and Management nadine.bret-rouzaut@ifpen.fr Resource Management how to maximize the triple bottom line: people, planet & profit A focus on oil
- 2. 1 World commercial primary energy consumption Source : BP Statistical Review nuclear et hydroelectricity Electricity 12% Mtoe Oil 34% Coal 30% 0 1 000 2 000 3 000 4 000 5 000 6 000 7 000 8 000 9 000 10 000 11 000 12 000 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 1 Gas 24%
- 3. 2 World reserves (109 toe) - 31.12.2011 Source : BP Statistical Review, CEA, IFP/DEE (1) Quantities which can be recovered for less than 80 $/kg (2) Quantities which can be recovered for less than 130 $/kg (3) Present technology (Pressurized Water Reactor) (4) Recoverable – Included in Liquids (5) R/P: Proven Reserves/Production ratio R/P = 57 (5) R/P = 63 R/P = 121 R/P = 80 Yet to be discovered Probable In place Possible 2800 ProvenProven 32,9 (1) 14,5 (2) Proven 460 577 188 120 234 125 140 Enhanced recovery 80 (4) Non Conventional Oil Liquid Hydrocarbons Natural Gas Coal & Lignite Uranium (3) 2
- 4. 3 3 Petroleum trilogy and reservoir characteristics RESERVOIR ROCK A rock in which hydrocarbons accumulate over time. Porous and permeable rock (e.g. carbonates or sandstone). RESERVOIR ROCK A rock in which hydrocarbons accumulate over time. Porous and permeable rock (e.g. carbonates or sandstone). SEAL ROCK A barrier such that hydrocarbons cannot migrate beyond the reservoir. Impermeable rock (e.g. shale or salt). Its continuity is critical. SEAL ROCK A barrier such that hydrocarbons cannot migrate beyond the reservoir. Impermeable rock (e.g. shale or salt). Its continuity is critical. POROSITY & PERMEABILITYPOROSITY & PERMEABILITY There must be enough POROSITY to accommodate a significant volume of oil and/or gas … There must be enough POROSITY to accommodate a significant volume of oil and/or gas … … and enough PERMEABILITY to facilitate fluid flow throughout the reservoir rock … and enough PERMEABILITY to facilitate fluid flow throughout the reservoir rock SOURCE ROCK A rock rich in organic matters which generated hydrocarbons. SOURCE ROCK A rock rich in organic matters which generated hydrocarbons. 3
- 5. 4 STATE PRODUCTION COSTS RENT OIL COMPANY OIL RENT REVENUES – COSTS OIL RENT REVENUES – COSTS Economic Rent Size ? % ?
- 6. 5 5 Different Stakeholders Government level Energy Ministry Ministries for Finance, Environment, Safety, etc. Oil & Gas Companies National Oil Company (NOC): Saudi Aramco, Petrochina, Gazprom Majors/Global Players: ExxonMobil, Shell,BP, Chevron,Total Integrated Corporations: ENI Independents (operate exclusively in the upstream): Apache, Anadarko, Cairn, Chesapeake, Denbury, Maurel et Prom, Perenco, Premier, Tullow, ... Services and Equipment Companies (Contractors): supliers of products (drill bits), services (drilling, pumping services), engineering and construction (production facilities) Schlumberger, Halliburton, Baker Hughes, Weatherford, etc. Finance and Insurance Institutions, Trading & Marketing Organizations Professional Organizations representing the industry Local population and local industries
- 7. 6 6 Subsoil Laws & Regulations (Mining Rights) & Petroleum Agreement JV NOC IOC a State / Government Services & Equipment Companies IOC b Operator Relations between the Stakeholders Independent cy
- 8. 7 Leading Oil and Gas Company 7
- 9. 8 Host country NOC Oil companies IOCs Historically competitive edge of IOCs over NOCs but the gap is closing Publicly floated companies with access to stock markets Strong R&D International focus; JV with NOCs and other IOCs; International workforce Capacities of management of giant & complex projects + access to the downstream markets (gas) State-backed Petrobras, Rosneft & Petrobras raised $27G of debt in first half 2012 Mainly Conventional Oil using standard technology Petrochina, Petrobras, Sinopec, Lukoil & Statoil invested $5.3G in 2011 Domestic focus with IOCs in own country with National workforce only NOCs become more and more international
- 10. 9 Capture of the Rent Local value creation Investment in the resources Host Country Concerns IOCs Concerns Development of the resources Budget balanced Development of the country (Oil recourse, Dutch desease) Access to Reserves Profitability Leadership in Project Managt & Technology, Talents The NOCs and IOCs: Competition & Cooperation Environmental, Social issuesLong Term Sustainability
- 11. 10 Capture of the Rent Local value creation Investment in the resources Host Country Concerns IOCs Concerns Development of the resources Budget balanced Development of the country (oil recourse, Dutch desease) Access to Reserves Profitability Project Management Leadership Technology (R&D), Talents The NOCs and IOCs: Competition & Cooperation Environmental, Ethical issuesLong Term Sustainability
- 12. 11 Chinese NOCs Indian NOCs Russian companies Middle East companies Petrobras Petronas 2003 Source: Bruno Weymuller – November 2010 Internationalization of the NOCs (1)
- 13. 12 June 2010 Chinese NOCs Indian NOCs Russian companies Middle East companies Petrobras Petronas Source: Bruno Weymuller – November 2010 Internationalization of the NOCs (2)
- 14. 13 Accessibility for the IOCs Producing governments can either: Finance an adequate upstream investment program themselves through their NOC (Saudi Aramco) Create the right conditions for IOCs to make the necessary investments in upstream (Qatar) 0 50 100 150 200 250 300 Oman India Azerbaijan Norway Kazakhstan Brazil Algeria Mexico Qatar China US Nigeria Libya Russia Venezuela UAE Kuwait Iraq Iran Canada* Saudi Arabia Bbbl Conventional Proved Reserves (1/1/2009) * Canada including extra-heavy oil Closed Limited Open Source: OGJ, Total
- 15. 14 Capture of the Rent Local value creation Investment in the resources Host Country Concerns IOCs Concerns Development of the resources Budget balanced Development of the country (oil recourse, Dutch desease) Access to Reserves Profitability Project Management Leadership Technology (R&D), Talents The NOCs and IOCs: Competition & Cooperation Environmental, Ethical issuesLong Term Sustainability
- 16. 15 Trends Increased State equity to majority stake to Expropriation /"Nationalization" Venezuela, Libya, Bolivia, Argentina, Ecuador ... Increase of the tax rates New terms for new licences or contracts: more flexibility in relation with the volatility of the price of oil Preference for NOCs in open tenders For the Host State: a “fair” petroleum agreement
- 17. EXXON MOBIL, SHELL, CHEVRON, BP, TOTAL Upstream net operating income / Overall net operating income 16Source : Companies, March 2012 Weight of E&P in IOCs' profits
- 18. 17 Capture of the Rent Local value creation Investment in the resources Host Country Concerns IOCs Concerns Development of the resources Budget balanced Development of the country (Oil course, Dutch disease) Access to Reserves Profitability Leadership in Project Managt & Technology, Talents The NOCs and IOCs: Competition & Cooperation Environmental, Social issuesLong Term Sustainability
- 19. 18 Trends Resource curse: State with abundant natural resources have been found to underperform states that have no natural resources in a large number of studies (Auty, 1993; Gelb, 1988; Sachs & Warner, 1995, etc.) Dutch Disease (named after the troubles in the Netherlands in the 1960s) rising resource exports push up the value of the country’s currency which makes its other exports less competitive Sudden flow of revenues: risk to invest in wasteful projects Political downsides: increase of corruption Oil wealth can trigger conflicts Resource Curse / Dutch Disease
- 20. 19 Local value creation Problem of Definition Problem of Scope Problem of Measure Local content: local employment, the use of local goods and services and transfer of technology and know-how A variety of local Content Development models are been pursued in different geo-political regions of the oil and gas world
- 21. 20 Definitions Definition of Local content tends to be either Ownership-based: "because only indigenous owners have a real interest in maximizing the use of indigenous workers and resources" Local content is the amount of added value in terms of goods and services provided by Angolan-owned companies to the oil sector (1) Incorporation (100% ?/ above 50% ? of the capital) / Legal subsidiary /Main Office ? Value-added based: value added by activities which take place in the country (disregards the ownership of the company) Nigerian content: "quantum of composite value added or created in the Nigerian economy through the utilization of Nigerian human and material resources for the provision of goods & services to the petroleum industry within acceptable quality, health, safety and environmental standards in order to stimulate the development of indigenous capabilities" (2) (1): Chevron in Angola, Global Local Content Summit for Oil & Gas, London, 2006 (2): www. nnpcgroup.com/faq.htm
- 22. 21 Scope: what could be covered under local content ? Pure local content Recruitment of Local employees Training & Education programs Local equipment & services Transfer of Technology and Knowledge (R&D) Beyond local content Support of Local communities Infrastructure development Medical assistance
- 23. 22 Measure Specific Target: % for local content and personnel, for example Russia: 70% minimum of contracts to go to domestic enterprises and 80% of the personnel Vague Target on local-content requirements, for example Kazakhstan: Rules simply call for maximum Kazakhstani involvement: stipulation that allows the government to block deals that do not involve local enterprises Libya (Epsa-4 (E&P Sharing Agreement): "the operator shall at all times give priority to Libyan contractors, local supplies, equipment and services, and hire only Libyan nationals, except in cases where specialized technical personnel are required and not available among Libyan personnel What are the measures ? Value of investments in the oil & gas sector ? Employment of local staff ? Evolution of professional qualifications, etc. ?
- 24. 23 A template for evaluating & monitoring local content Source: IPIECA, Local contant strategy, 2011
- 25. 24 Potential Benefits Cost Reductions Lower Labor Costs (local personnel instead of expatriates) Lower Transport Costs (goods & equipment bought closer to operations areas) Logistics improvements Increased availability of staff Shorter delivery times Faster substitution of spare-parts Better operational efficiency Enhanced Reputation Contribution to local development and support of local communities to keep or enhance the social cohesion Establishment of a network of partners Good knowledge of the local business environment Transfer of knowledge & Technology
- 26. 25 Gap between the content demanded and the ability of the local firms to provide (content, productivity, at the contracted cost) Lack of stability of the Government policies towards the industry & Lack of an Authority to enforce, measure and monitor local content policies and compliance to the rules Cost overruns, that cannot be passed on to the client Local contractors sometimes under- perform necessitating supply from overseas Infrastructure can be inadequate Delays in sourcing materials mean delays in operations and so delays in revenues Job created can be neither competitive nor sustainable If challenging technology is needed not possible to involve local contractors Corruption Potential Pitfalls
- 27. 26 The Norwegian Local Content Experience Petroleum activities In the early 60s: no indigenous oil industry today: oil & gas 22% of GDP 67% of exports Oil Company Statoil, Oilfield Services Companies: PGS, Subsea 7, Seadrill, Aker Solutions, etc. are globally competitive But this experience cannot be transferred as such in another country because Norway is Developed country/small population Strong commitment of the government The aim was to share 75% of the goods and services by creation of bridges of co-operation Educated population High scientific competence / Skilled workforce Shipbuilding industry Entrepreneurial culture Private manufacturing industry
- 28. 27 Most NOCs are now transforming themselves PETRONAS Founded in 1974 Is working with ExxonMobil and Shell, both long term PSC holders in Malaysia Revenues: $75 billion By 2009, local suppliers held 75% of all contracts awarded PETROBRAS Launched in 1953 Started Exploration only after the first oil shock in 1973 Developed breakthrough technologies Revenues: $140 billion Due to the “Petrobras effect” Brazilian companies have increasing presence in drilling contracts & offshore infrastructure
- 29. 28 Conclusions A dialogue mechanism both at country level and international level has to be developed to share experiences and practices among stakeholders (NOCs, IOCs, International service companies, Government, Labor and Economics development actors) A further step could be to develop guidance on local content frameworks to support cross-sector development to increase economic diversification.