Direct and indirect management of petroleum resources

1. Direct and indirect management of petroleum resources Valery Kryukov and Arild Moe Strategic Forum Moscow, 23 september 2008

2. Main issues • What have been the main elements in state policies in the petroleum sector in Russia and Norway? • How has direct and indirect state management been balanced?

3. Forms of control • Ownership – direct (extreme case USSR) • Regulatory framework – indirect (extreme case USA) • Norway: Flexible combination • Russia: Unclear balance

4. Privatisation and de-privatization of the Russian oil industry • Principal decision political • But speed and the way privatization was carried out determined by narrower goals • Initial goal: restructurization and creation of more efficient industry • Later dominant goal: revenues to the state budget • Deprivatization from 2003 onwards • Alternative to a resources management system? • But also other reasons...

5. Composition of ownership in the Russian oil industry 2004 - 2007

6. Norway’s experience • Starting point: Foreign companies • Establishement of a Norwegian oil industry • Statoil - 100% state owned • Hydro - 50% state owned • Saga Petroleum - private • Saga sold to Hydro: Initial consolidation of sector – • Part privatization of Statoil: Increased efficiency, sharing of risk • Fusion of Statoil and Hydro: Consolidation of sector in light of mature continental shelf + international challenges • StatoilHydro 62.5% state owned • Creation of Petoro (100%) – State’ direct financial interest in petroleum licenses • Separate from state oil company

7. State representation on the boards of directors Russia: • From professionals to high level officials • 2008: A return to professionals? • Weak stimulus to increased efficiency Norway: • State represented by independent people on board of StatoilHydro • State may be represented in license committes • Capacity issue

8. Development of Russian reserves • Post-USSR: Huge reserve base • Developed reserves transferred to users (companies) • No incentive for companies to explore for new discoveries • Only additional exploration in fields in production and in their vicinity • Crisis in prepared reserves building up – visible 2004-05 • Reasessment of policy

9. How to increase exploration? Stimulation of private companies and investors: • Finder’s rights • More flexible system for transfer of licenses • Access to information Increased state activity: • Increased budgets • New state exploration organization • From tenders to auctions • From annual plans to long-term program

10. The Russian licensing system - changing • From flexible annual plans to inflexible program approach • Results unsatisfactory – return to application • From license (investment) competitions to auctions • Results unsatisfactory - return to competitions • From public process on regional and federal level to closed administrative process on federal level • Offshore resources removed from competition altogether Licensing not used strategically, but as a way to allocate assets.

11. Norwegian licensing strategy – a flexible programme approach • Stated goal: • ”increase the attractiveness of the Norwegian continental shelf for established and new players that can contribute to efficient exploration” • Ministry proposes opening of areas for licensing • Overall consideration of resource potential and impact on society • Consultation between companies and authorities • Nomination • Oil companies suggest blocks for licensing • Ministry announces blocks available for application • Companies apply Balanced state/company interaction

12. License conditions - Russia • A certain production level within a certain time after start-up • No room for adjustments according to changing geological or technical conditions • No clear criteria for revoking of license • License violation widespread Results: Uncertainty, unpredictability

13. Licensing terms - Norway • License period • Work commitments • Plan for development and operation • Cooperation agreement (within license group) • Room for adjustments

14. State control of trunk pipelines: Stimulus or hindrance for resource users? • Main issues for determining profitability for new entrants to oil production: • Access to trunk pipelines in the production areas, or • The possibility for a company to build and use its own pipelines • Access to selected markets, especially exports, but also to lucrative domestic markets in terms of volumes and price • Outlets for associated gas

15. Russian pipelines • Trunk pipeline transportation monopolized: • Trunk gas pipelines – Gazprom 100% • Trunk oil pipelines – Transneft 90% • Oil product pipelines – Transnefteprodukt 30% • State ownership of trunk pipelines presented as important for the functioning of the economy • Pipeline companies have their own interests and priorities • Separate government commission granting access to oil pipelines abolished 2002 • General impression: Regulatory powers transfered to the operators • But new regulation of independents’ access to Gazprom pipelines under consideration

16. Norwegian pipelines • Initially gas pipelines controlled by state oil company (Statoil). Combined with de-facto gas exports monopoly (GFU) • Smaller (foreign) companies complained about access • Gas transportation transferred to new independent operator – Gassco - providing equal access. Combined with dissolution of export monopoly. • Pipelines owned by partnership of oil companies • Combination of indirect and direct measures

17. Resource data - in whose interest? • Access to information reduces the investment risk and facilitates rational development of resources. • Norwegian system: Collection and sharing of data to give resource users equal opportunities • Russian data management has a different main purpose: control over the fullfillment of license conditions

18. Taxation • Very powerful instrument in resources management. • Differentiated taxation can encourage resource users to enter new areas • Various schemes can be used to reduce the investment risk

19. Taxation systems – main characteristics Russia: Fiscal orientation – maximization of state revenues • Simplicity – easy to apply and administer • Absence of considerations for the specifics of hydrocarbon exploitation – deteriorating production conditions in existing fields • Adjustments based on selected criteria Norway: Fiscal objectives, but also encourage investment • Taxation depending on market developments: oil market, equipment market, service market • But also negotiations about marginal areas • Negotiation power changes over time

20. Preconditions for a more flexible taxation system • An objective picture of costs • Consideration of the special characteristics of each field is impossible without a market determining costs • a market for equipment, technology and services • But development of this market is hurt by the monopolization in the petroleum industry

21. The basis – technical regulations • Russia had a detailed standard system (GOST) • Development plans presupposes use of existing, sometimes outdated technologies • Complicated to introduce new technology • Supposedly possible to calculate costs • 2002: Law introducing a system of technical regulations covering only safety aspects • Leaving the rest to the market • 2008: Proposed new ”Law on standardization” • A return to the Soviet GOST model? • Norway: Safety standards – Elsewhere technologies determined by resource user to achieve stated goals

22. Russia: Extended state participation • The state is governing through regulatory agencies on one hand and • participating in commercial enterprises on the other • But also quasi governance through state controlled companies, by letting them take on regulatory functions • Neglect of impact on other economic sectors • Increasing monopolization • No cost concern – alliances with ‘friendly companies’ • Non-public character of decisions

23. Norway: Increased flexibility • Access to resources • Access to infrastructure • Taxation • Public character of development decisions • Will increased dominance of one company (StatoilHydro) on Norwegian shelf be counterbalanced?

24. Direct and indirect management • Clear delineation of methods depends on clear determination of goals • Russian policies pursuing several competing goals, Norwegian goal hierachy simpler • No objective balance direct/indirect • Depends on circumstances over time • Different countries – different models; but similar challenges – similar solutions

25. Thank you for your attention!