Oil and gas & development

1. Oil and gas & development VI study tour by students from Russia Claudine Sigam & Rachid Amui UNCTAD, Special Unit on Commodities Claudine.sigam@unctad.org Rachid.amui@unctad.org

2. Outline Part 1 • Introduction to oil and gas – formation, reserves distribution, production, trade flows Part 2 • The future of oil and gas Part 3 • The importance of oil and gas in development; • The challenges facing the oil and gas industry • Addressing the challenges Part 4 • UNCTAD and oil & gas development

3. Part 1 Introduction to Oil and Gas – formation, reserves distribution, production, trade flows

4. Crude oil, natural gas: How are they formed? • Decomposing buried organic material over millions of years through the action of micro-organisms • Overlying layers of sand and silt compress lower layers into sedimentary rock; • Heat and pressure at depth slowly converts buried organic material into petroleum • Petroleum formed deposits may consist mainly of larger (heavy) hydrocarbons, which have the thick, nearly solid consistency of asphalt. • Over time formed petroleum matures, and as the breakdown of large molecules continues, successively “lighter” hydrocarbons are produced. • In the final stages, most or all of the petroleum is broken down further into very simple, light, gaseous molecules—natural gas. • Some natural gas deposits may form from deposits of plant material buried in sediment without association oil

5. Uses of crude oil and natural gas Crude oil • Input for refineries – production of gasoline, heating oil,diesel fuel, jet fuel, Asphalt • Petrochemical feedstock (products derived from petroleum) – manufacturing of chemicals, synthethic rubber, plastics Natural gas • Power generation • Industrial, residential and commercial use • Vehicle use • Fuels (Gas to liquids) • Field operations

6. Oil reserves from 1980 to 2009

7. Crude oil reserves - end of 2009 Data Source: BP Statistics

8. Regional oil production ‘000 bbls Data Source: BP Statistics

9. Oil Production – Europe and Eurasia Data Source: BP Statistics

10. Natural gas reserves from 1980 to 2009 Data Source: BP Statistics

11. World gas reserves – end of 2009 (tn m3) Data Source: BP Statistics

12. Regional gas production bn m3 Data Source: BP Statistics

13. Gas production – Europe & Eurasia Data Source: BP Statistics

14. Oil trade movements in 2009 (mt) Source: BP Statistical Review 2010

15. Natural gas trade movements (bn m3) Source: BP Statistical Review 2010

16. Part 2 The future of oil and gas

17. According to BP forecasts “global demand for energy is expected to increase by 50% between now and 2030. Eighty-five percent of the energy to meet this demand is expected to come from fossil fuels”

18. Primary energy supply* in 2008 Source OECD/IEA

19. World primary energy consumption Source: Statistical review of world energy 2010

20. Global oil demand growth2009/2010/2011; ‘000 bbls/day Source: IEA Oil Market Report 2011

21. Oil Supply Source: IEA Oil Market Report 2011

22. Reserves/production ratio: crude oil, natural gas and coal

23. Oil production profile Source: www.peakoil.com

24. Part 3 Oil and Gas and Development

25. The importance of oil and gas to development • Fiscal linkages: Provides an important share of the export earnings in dependent countries, up to 90% for some countries • Generates financial revenues through royalties taxes etc. • Forward and backward linkages: Industry creates jobs & Can create linkages with other sectors of the economy • Environmental linkages: Theuse of natural gas as energy source can help reduce greenhouse gas emissions and combat global warming • Natural gas can be used to replace inefficient fuels • Consumption linkages: Can influence savings levels and therefore investment – eg. Infrastructure development, education, health etc.

26. Challenges facing developing countries • Environmental issues surrounding the exploration and production of oil and gas; destruction of ecosystems; biodiversity; gas flaring etc. • Dutch disease : i.e. Currency appreciation resulting from a sharp rise to inflow of foreign currency; • Resource curse – conflict, governance, low human development etc. • Price volatility: volatile and uncertain revenue flows complicates not only fiscal management, but also budgetary and long-term planning; discourage investment; etc. • Increasing local participation in the sector & creating linkages with other sectors

27. Addressing the challenges (I) Environment • Make oil companies more responsible – Step up regulations against gas flaring and venting to meet international standards • Leveraging on technology to capture and store carbon dioxide eg. In Salah project in Algeria • Investing in infrastructure to valorise the wasted gas & providing incentives such as infrastructure sharing for gas transportation, distribution, export Dutch Disease • Channel revenues into developing physical and human capital • Sterilize revenue inflows that can not be absorbed – eg. foreign investments, stabilisation funds, funds for future generations

28. Addressing the challenges (II) Resource Curse • Direct benefits of oil revenues to citizens • Involve principal stakeholders in developing plans for the use of resource revenues to invest in development and poverty reduction • Strong civil society • Transparency – EITI, PWYP • Build institutions for managing resources

29. Drivers of price volatility • Tight market • Low supply capacity to match rising demand • Supply disruptions; eg. transportation problems - shipping, pipeline; Geopolitical events; adverse weather conditions • Speculation • Low stocks • Poor information available to traders on key parameters – production, exports, stocks

30. Addressing the challenges (III) Price volatility • Market based mechanisms – use of financial instruments such as futures, options, swaps, • Stabilisation funds • Long term fixed-price contracts • Supply management schemes eg. OPEC • Consumer producer dialogue – control supplies to the market • Investments

31. Addressing the challenges - Constraints facing local participation (I) Constraints facing local participation Inadequate skills to deliver services required Availability of services unknown to local players - short lead time in preparing for bids Lack of transparency in awarding contracts Slow and inefficient pre-qualification and certification procedures; Small, poorly structured indigenous companies competing against IOCs and foreign major contractors Competition from well financed and efficient, larger and foreign firms Lack of depth in local financial markets to support oil and gas projects Local entrepreneurs have little access to longer-term finance and often have to use short-term facilities to invest.

32. Addressing the challenges - Constraints facing local participation (II) Disadvantages in export markets - inability to gain marketing knowledge and supply goods on time and with sufficient quality. High cost of fabrication in host country as against fabrication overseas due to: eg. In Nigeria high custom duty (>40%) paid on materials to be used for fabrications in-country as against 5% on fabricated items. Lack of materials such as steel which constitute 75% of construction industry (The existing steel plants were not targeted at the O & G sector)

33. Addressing the challenges (IV) Boosting local participation • Understand the strengths and weaknesses of local enterprises to ensure policy responsiveness • Promote programmes to upgrade and train local companies so as to enable them to meet the quality requirements and standards of large energy companies as well as training and seminars for entrepreneurs on business development and management • Create institutions that focus on R&D and Set up long-term plans to support and finance R&D. • Encourage & provide tangible benefits for oil and gas companies to hire and train young graduates - eg. tax rebates or even royalty changes

34. Addressing the challenges (V) Boosting local participation • Encourage business to communicate opportunities & requirements clearly • assist indigenous firms through matchmaking and local content development fairs to identify opportunities • Enhance access to credit to local entrepreneurs through innovative financing mechanisms, e.g. the creation of a local content support fund, guarantees for bank loans, structured finance • Government support for a supplier finance facility. This can be set up in partnership with banks and NOCs.

35. Addressing the challenges (VI) Boosting local participation • Local content with policies should aim at boosting local competence • Develop legal, and regulatory frameworks essential to the development of innovative financial instruments, including venture capital, small equity investments, leasing • Innovative structures are needed to guarantee financing to local entrepreneurs • Strengthen the capacity of financial institutions to evaluate local entrepreneurs creditworthiness in a cost-effective manner, • NOCs should build and maintain long-term, mutually beneficial relationships with IOCs – IOCs can share responsibility for local content development – offer guarantees to loans etc.

36. Examples of how local participation has been increased • Brazil - Petrobras maintained an active involvement in the industry from its formation and acquired technology in deep water drilling through international expertise. • Malaysia - Formed partnerships with international oil companies; Local industry gained best practice, management skills and cutting edge technologies used by oil companies. • Norway - openness towards international companies combined with a strong focus on national value creation. Technology agreements were signed to fund R&D and existing capabilities and competitive strengths were leveraged.

37. Potential benefits to resource owners • Substantial job creation • Positive impact on GDP and economic growth • Creation/stimulation of other industries related to the Oil and Gas industry e.g Insurance, Transportation, Catering, Medical, Telecoms etc • Increased technical skill and managerial competencies • Enhanced sophistication of local financial markets • Rapid transformation of oil and gas sector, integrating oil and gas exploration, production and distribution activities • Reduced costs of services, enhanced reputation of oil company, integration with local communities, quicker response time using local entrepreneurs - deeper knowledge of operating environment,

38. Part 4 UNCTAD and Oil and Gas

39. UNCTAD and oil and gas development • Policy advice for local content development • Promote Public-Private dialogue and cooperation • Provide/facilitate technical assistance that will improve the ability of African banks to provide financing to small and medium enterprises • Provide a forum to exchange experiences and best practices on local content development and finance • Dissemination of information - best practices , financing schemes and procedures to local entrepreneurs • Offered training to GAIL India on mitigating price risks using market based tools to hedge exposure

40. Oil and gas conferences

41. Learning resources • Transparency: www.eitransparency.org • Prce risk mamangement: UNCTAD training materials • Local content: Extracts from presentations at oil and gas conferences (CD ROMs) Statistics: • British Petroleum Statistical Review of World Energy 2010 http://www.bp.com/ • Energy Information Administration: http://www.eia.doe.gov/ • International Energy Association: http://www.iea.org/

42. Thank You