Oil and Gas Where is the Value Added? How Do You Get it?

Extracting from an Extractive Industry Maximising Local Value in the Trinidad & Tobago Energy Sector Oil and Gas Where is the Value Added?How Do You Get it? Anthony E. Paul Managing Director, Caribbean Energy Specialists tony1paul@gmail.com Dakar, 7th Feb, 2008

Contents • CONTEXT • The Premise • Where we started • The Vision • Energy Vision 2020 • Energy Sector’s role in national development • Policy Development • Strategies • Current Status • Summary & Lessons Learnt

USA T&T Venezuela Eastern Venezuela Basin – one of most prolific in the world Ideally situated for accessing major/high value markets Trinidad & Tobago - Location

Oil & Gas Production History & A Conservative Forecast - 2023 ALNG IV Ministry of Energy & Energy Industries

Context • The Premise • Past experiences • The “Plantation Economy” • “Resource Curse” • We have another chance to get it right • For ourselves • For future generations

Context • Where we started • E&P • Big natural gas discoveries (1990s) • Major field developments • Increasing production and operations • Downstream • Natural gas industry growth • LNG • Chemicals • Services Growth

Future Field Developments (Conceptual) Leverage Upstream Opportunity Sustained and Continuous Upstream Growth , underpinned by great exploration success story – Natural Gas is DIFFERENT

Major Upstream Third Party Service sub-sectors & spend - Some Services enable transfer to other sub-sectors and industries

Because of its scale and scope, the energy sector will continue to be a major driver for economic development, while providing a platform for significant development of: • People, • Enterprises • The Capital market and • Innovation and Technology These are key ingredients in achieving the “Vision 2020” goals. This allows us an opportunity to use the energy sector as an agent for sustainable development and diversification. The energy industry is the primary driver of economic activity in T&T, accounting for an average of 36.6% of the country’s GDP over 2001 to 2005 (based on constant 2000 prices). For 2006, this has risen to 45.1% Trinidad and Tobago has embarked on an ambitious and far-reaching programme to achieve widespread and sustainable development by the year 2020. The Energy Sector Plays a Major Role in T&T’s Development

Increasing Local Value-Add – The Trinidad & Tobago Framework • Local Value-Add building blocks: • Human Capability – employment, training, development and internationalisation • (making globally competitive) of Trinidad and Tobago nationals in: • Operations skills - technical, operational and managerial capability. • Strategic business skills - commercial, analytical, business development and leadership capability.. • Enterprise Capability – improving the value-add, know-how and innovation capability of local businesses and institutions, by developing and enhancing: • governance • access to and adoption of best-in-class business practices, knowledge, tools, technology, processes and standards • market share and reach (locally and internationally)· • level of local control and ownership • transferability to government, education & other sectors • Capital markets – encouraging the growth of the use of the local capital market through its role as: • A source of debt and equity financing. • A mechanism for: • i. increased levels of in-country profit retentionand • ii. public trading of Trinidad and Tobago businesses, to: • - promote good corporate governance and • - wider wealth distribution. Source: A.E. Paul 2003

Vision • To be an integrated and fully developed energy sector that is a key driver of a sustainable and flourishing local and regional economy while attaining global competitiveness in all of its sub-sectors by 2020. • sustainable, operating transparently with the full support of the government, through effective governance • will include locally owned and managed energy-based companies … throughout the complete value chain … both local and global • Trinidad and Tobago will : • become the regional financial and energy trading centre, supported by • a strong and vibrant capital market • world-renowned educational institutions • a technology hub that stimulates innovation and entrepreneurship • a strong public-private sector partnership.

Vision 2020 – Energy Sector Goals • Optimise exploration and production (pace & volume) • Maximise wealth creation, capture and distribution • Development of human capital • Robust & respected institutions and regulatory framework • Transparent governance • Competitive and sustainable local energy companies • Industrial development and diversification to high value-add service industries • Protection and enhancement of the natural environment • Sustainable investment in social capital

LOCAL CONTENT POLICY - Value Maximization Government & Country can Maximize Value from Resources through: • Fiscal Measures • Taxation and Royalty Policies • Government Expenditure • Non Fiscal Measures • Local Participation • Local Content • Local Capability Development • transfer of technology and know-how form international partners • capabilities that can be transferred to other sectors • cluster developments with other industries that have a natural synergy with the energy sector (e.g. ITC, Education & Maritime)

Local Content and Participation Policy Statement To achieve the goal of maximum local content and participation in the energy sector, all participants will be selected, engaged and managed in a manner that: • Identifies WHERE to enable local value added opportunity capture, by • selecting specific goods and services for focusing efforts • Determines HOW to enable delivery of maximum local value-added by: • Managing the pace and scheduling of the programme of sector’s activities • Targeting local capability development by increasing in-country activities • Giving preference, • firstly, to locally owned, controlled and financed enterprises, • then to those that demonstrate a clear culture, commitment and capacity for maximizing local value-added, participation and capability development consistent with T&T’s aspirations and vision • Focusing on improving local skills, business know-how, technology, financing, capital market development and wealth capture and distribution, • Ensures DELIVERY of Maximum Local Value Added by: • Setting targets • Measuring and reporting • Establishing benchmarks, targets and opportunities for improvement and • the transfer of best practices .

Managing The Resource To Maximise value Roles & Responsibilities of Stakeholders (Illustrative) • FIRMS • Ministers & Ministries • CEOs • OWNERS • Country • People • LEADERS • Parliament • Cabinet • MANAGERSState Companies • Private Companies • SUPPORTING AGENCIES • Regulators • Capacity Development Institutions • Service Companies • VISION • POLICIES • Legislation • OBJECTIVES • Development • Poverty Reduction • Sustainability • Wealth Creation • ACTIONPLANS • OPERATING • REPORTING • IMPROVING • Terms of Engagement • Contracts • Regulations • STRATEGIES • Priorities CIVIL SOCIETY

Training and Skills Development Programmes and Institutions - From the bottom up

UPSTREAM ACTIVITIES SUBSURFACE SERVICES LOGISTICS –BOATS MAINTENANCE ENG. & CONS. FABRICATION RIGS/WELLS CHARACTERISTICS $ upstream spend Job creation potential Cyclical nature Gas/Oil price sensitivity Value-added skill content Innovation potential Technology potential Knowledge transferability Non-energy transferability JV attractiveness High Moderate Low Some upstream activities are better positioned than others in their ability to achieve SD’s multiple strategic aims Deep Analysis of the value chain to identify sources of value

UPSTREAM SUB-SECTORS High Sustainability sectors High impact sectors SUBSURFACE SERVICES LOGISTICS –BOATS ENG. & CONS. FABRICATION RIGS/WELLS CHARACTERISTICS $ upstream spend Job creation potential Cyclical nature Gas/Oil price sensitivity Value-added skill content Technology potential Knowledge transferability Non-energy transferability JV attractiveness Fabrication, engineering and construction and drilling/well services are upstream activities which have high potential for broadly achieving LC&Pmultiple aims MAINTENANCE Innovation potential High Moderate Low

Current Status What’s been happening since • Aggressive Exploration • Nearshore, including Deep drilling, • Land (deep & shallow), • Deep water • Heavy oil & tar sands • Major downstream developments • Natural Gas • Chemicals, Metals, Power, LNG • Oil • Refining (upgrade/expansion) • Marginal and heavy oil field development • New Contracts (Production Sharing Contracts and E&P (Tax & Royalty) Licences) align with value-added policies and include: • local content and participation policy • Training and development & Research and development requirements

New Production Sharing Contracts (2006)Policy Objectives • Encourage greater exploration and development activities • Encourage diversification of investors • Ensure availability of supplies for domestic and export markets* • Ensure new revenue stream for future generations • Maximise Value Capture for T&T • Maximise Revenue to State • Increase Local Value-Add • * Government participation in the full value chain • Contract Re-opener Clauses

Availability of Supplies for Domestic and Export Markets GOV’T to advise of its preferred marketing arrangements GOV’T to develop separate marketing arrangements for its Share Contractor to include an analysis of marketing options, including supplies to existing or potential projects in the internal market. Contract Terms Source: MEEI, Nov 06

What Are We Doing?Local Value-Added Building Blocks- Institutions, Policies & Procedures • People Development • Capacity building • Universities – UWI/UTT • Technical schools • High school programmes • Primary school curriculum • Pre-school • Community engagement & enhancement • Media training • Civil Society Network • Enterprise Development • Local Content & Participation • Business Support – Centre for Energy Enterprise Development • (www.ceedtt.com) • Diversification • Deepening & broadening in energy • Downstream vs. LNG • Oil vs. Natural Gas • Other value chain activities (shipping, trading, distribution, etc.) • Building other sectors • From energy (e.g. services, training) • Clusters alongside energy (e.g. ITC, maritime) • Innovation & Technology • UTT • eTecK • Downstream Industries w. technology focus • Capital Market/ Revenue Stabilisation • Funds – • Private Equity & Mutual • Stabilisation & Heritage • Trading & Distribution • TTLNG

Learnings:Setting up a fair and realistic local content policy, adapted to the existing skills base is a necessary, but not sufficient condition. • Have a very high level champion • Think Strategically, Act Practically • Analyse, Analyse, Analyse • Focus on services • Disaggregate • Be Selective, based on strategic value • Engage early in the life cycle and contract for it (do not make it optional) • See Capability Development as an investment • Take a business-like & business-friendly approach It should be desirable,but achievable) • “Do it in Country” first. “ Do it with locals”, will come next. • The question to be asked: • is not: “what can we do with existing local capability?” • Rather: “what can we build with existing and projected demand, so as to enhance local capability and allow us to capture more value in the future? • ID current capability and gaps • Set Targets • Build capability • strengthen or build institutions, • set and maintain high standards • Don’t remain static (monitor, change and improve) • Regulate local content and knowledge and technology transfer – it doesn’t work if it’s an option to the IOCs and International service companies. • Pick partners who support your strategy and will help deliver it • Measure performance, Report it, Learn from it, Build on it. • Involve (Engage & Empower) Civil Society from the Outset.

Business As Usual / Status Quo Extraction from Extraction Cohesiveness SOCIAL INTERVENTION UTOPIA • Export orientated of value-add services • Low cost labour provider to high productive and value provider • Diversified economy • Leader in energy skills • Re-distribution of wealth • Government re-distribution and intervention • Steady growth of basic services only • Basic skill sets and low cost • Cheap workshop for other countries Social Input-Output Focused Value-Focused Economic Economic • Steady growth of basic services only • Basic skill sets • Few large players dominate all industries • Socio-economic inequality • Cheap workshop for other countries • Export orientated of value-add services • Low cost labour provider to high productive and value provider • Diversified economy • Leader in energy skills • Wealth not translated through society Social PARADISE LOST GOLD RUSH Fragmentation Socio-Economic Scenarios

Oil and Gas Where is the Value Added? How Do You Get it?