The Petroleum Industry and the Economy

1. Conference on the Economy 2008 The Petroleum Industry and the Economy Some thoughts on meeting the challenges of the 21st Century Gregory McGuire

2. Presentation Outline • Introducing the Works of Trevor Farrell • Assessing the Current Context • Farrell’s Themes and Industry Evolution. • Ideas on the Future

3. Farrell’s Major Concerns • Planning Capability in the Energy Sector • Engaging MNC and Technology Acquisition • National Ownership • Technological Capability and Industrial Policy

4. Some Early Conclusions of Farrell • Oil industry has failed to provide Trinidad with the development one might have expected.(1974) • Failed to play role of dynamic sector –weak productive linkages with rest of the economy • Venturing downstream (Plastics etc) remains a option to be explored

5. Some Early Conclusions of Farrell • Resource based industrialization was misleading because : • Supply side approach to the definition of what is to be produced • Static comparative advantage is easily lost.( 1988) • Planning is a poorly developed function in the Caribbean (1980)

6. Some Early Conclusions of Farrell • A technological capability still does not exist over a whole range of activities necessary for running the oil industry .( 1979) • The country clearly had the worst of the deals in the two petroleum nationalizations of the early seventies due inpart to psychological weaknesses of negotiators and poor planning. ( 1976)

7. Some Early Conclusions of Farrell • In the development of the JV at Point Lisas the local strategy was too narrowly focused on getting the plants built rather than acquiring technological capability. ( 1986)

8. Assessing the Context International and Local

9. Current Global Trends and Issues • Developed world not driving demand growth but could drive demand destruction • Reduced Transnational Company role in favor of National Oil Companies • Emerging supply sources give no assurance of supply stability • Increasing commoditization of gas and LNG

10. Demand growth no longer driven by developed economies

12. The Power of NOCs Source: Frank Kuijlaars- Oil & Money 2007

13. Supply Dynamics Three of five largest decrease came from OPEC .Suggesting initial attempts to stabilize prices.

14. LNG Commoditization

15. Oil Prices Which way ?

16. Rising Oil Prices Demand from Non OECD countries and market psychology have been the principal drivers.

17. Back to the Future

18. Oil Prices : Which Way ? • Declining Economic Growth : OECD & Non OECD • New supply sources: Brazil, Heavy Oil Tech. • Convulsions within OPEC • Bearish market psychology • Fuel Switching • Peak oil theory losing steam • Declining Non -Opec Supply . • New supply sources mainly in non “friendly” areas. • NOC vested interest

19. Oil Prices : Which Way? • Some Critical EWS • Real oil prices have climbed back to 1982 levels • IEA, EIA and OPEC have all lowered demand forecasts for 2009 • Short term supply disruptions e.g. Ike and Gustav Nigeria, Georgia have had no discernible impact on prices. • China is not imported gasoline for two months; instead exported surplus stock.

20. Rising Gas Prices

21. Gas Price Forecast This forecast was produced before the current crisis. Henry-Hub prices this morning quoted at 6.75/mmbtu lowest level in four years.

22. What does this mean ?

23. Local Industry Context

24. The Big Picture • Resumption of long term decline in Crude oil production • Significant slowing in the rate of gas utilization and production • Decline in both exploratory and development drilling over last two years.

25. The Big Picture • Refining at the cross roads. • Upgrade project • Costs • Markets • Long overdue modernization

26. The Big Picture • World class primary petrochemical business. • World class LNG business. • Limited national participation in value chain • Only initial steps at downstream expansion led by local private sector.

27. The Big Picture • Industry growth slowed by rising capital costs, market uncertainly and tougher local terms. • Stagnation at the national enterprises. • Massive expansion in skill training to match requirements of the industry.

29. Long Term Production Decline

30. Refinery Output Still a relatively high percentage of low value fuel oil .

31. Gas Consumption 1995-2006

32. LNG Dominates Gas Utilization

33. Farrell’s Themes Planning and the Energy Sector

34. Successful Planning – Farrell’s Six Preconditions 6. Quality Information 2. Cadre of Skilled people 5. Willingness Of Policy Makers to plan • Effective • Organizational • Apparatus 4. Sophisticated Understanding of planning 3. Effective Control Over Energy Sector

35. Approach: AFROSIBER • Nine Point Planning Methodology • Assess Context • Forecasting • Resource evaluation • Objectives • Strategies and Implications • Balances • Execution • Review

36. Assessment • Planners were mainly project managers concerned with getting the physical plant off the ground. • A handful of people were entrusted with the responsibility for projects were not enough to do the kind of planning required. • Planners did not have the level of information required and relied on the information provided by technology supplier.

37. Recent Approaches • Vision 2020 Energy met criteria of skilled cadre, and information requirements . • Widening Gap between plan and what is being implemented. • Organizational Apparatus remains basically the same as 30 yrs ago, with the same personalities.

38. Farrell’s Themes Engaging MNC’s and Technology Acquisition

39. Philosophy • Major concern ; the level of benefits the country receives from MNC’s in the form of Technology Acquisition and Value Added. • TNC’s don’t willingly transfer technology . Host Governments need to develop the national capacity to acquire required technology.

40. Assessment • It is clear that the areas where the country has developed a capability have been only those areas which the companies needed to develop locally st to carry out their activities. • Technological capability still does not exist over the whole range of activities necessary for running the industry .

41. Current State • The relationships with ANLG suggest that technology acquisition is still not a specific item on the agenda and that weaknesses in dealings with the Multinational persist. • PM’s cry for a better deal from ANLG

42. Farrell’s Themes National Ownership

43. Philosophy • We cannot plan for what you could not control. • Multinationals run the business in their own interest • This is so even when they are engaged in a JV arrangement • The primary aim of Nationalization is to create a national vehicle to build national technological capability in the sector.

44. History and Performance • Nationalization and national ownership in sector since 1969. • Features: • Rescue Nationalization • Cosmetic Nationalization • Direct Investments • Process reversed during the 1990’s with privatization of bulk of direct investment assets

45. Assessment • An effective and meaningful genuine nationalization would possess the following features: • Effective local control of the nationalized properties • The actual exercise of such control for the furtherance of development goals • The targeting of areas of real economic significance

46. Assessment • Farrell study highlighted breath weaknesses: • Major projects and construction • Research and development • Economics and Planning Transportation • International marketing

47. Assessment • Farrell study highlighted Depth weaknesses: Exploration and Marine production • Petrochemicals • Genaeral administration • Purchasing • Information and Data Processing

48. Assessment • in a 1979 study of industry Farrell concluded : • Nationalization is unlikely to work even in the short run unless ways are found for tackling the basic skills deficits in the are of the critical functions

49. State of the National Enterprise Fully Owned, • Petrotrin • National Gas Company • National Energy Corporation Equity • Tringen • PPGPL • ANLG – Train 1 and 4

50. State of the National Enterprise THE CASE OF PETROTRIN