Non renewable natural resources: Oil and gas

1. Non renewable natural resources: Oil and gas

2. Outline Part 1 • Introduction to non renewable energy resources – formation, reserves distribution, production, trade flows Part 2 • The importance of oil and gas in development; revenue generation, environmental issues, job creation, etc. • The challenges facing Africa in the oil and gas industry • Addressing the challenges Part 3 • UNCTAD and oil and gas development in Africa

3. Non renewable resources – what are they? Energy resources that cannot be replaced over a short period of time eg. crude oil, natural gas, coal, and uranium

4. Crude oil, natural gas, coal: 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. • As the 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 • The inputs to coal formation are similar to oil and gas. Layers of dead plants in swamps are overladen by sediments and over time the heat and pressure helps turn the organic matter into coal

5. World oil reserves - end of 2008 Data Source: BP Statistical Review 2009

6. Historical oil reserves from 1980 to 2008

7. Oil reserves without Middle East

8. World crude oil production

9. Gas reserves from 1988 to 2008 9 Data source: BP

10. World gas production

11. Africa oil/gas production (1997 – 2008)

12. Source: USGS

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

14. Peak oil Source: peak oil website

15. Oil trade movements Source: BP

16. Natural gas trade movements Source: BP

17. Outlook for oil demand Source: IEA Oil Market Report 2010

18. OPEC Crude oil supply Source: IEA Oil Market Report 2010

19. Oil supply growth non-OPEC Source: IEA Oil Market Report 2010

20. Price volatility in oil markets

21. The importance of oil and gas to development • Provides an important share of the export earnings of developing countries, up to 90% in Africa • Generates financial revenues through royalties taxes etc. • Gas can be used to replace inefficient fuels • Can create jobs & Can create linkages with other sectors of the economy • Infrastructure development

22. Challenges facing developing countries • Environmental issues surrounding the exploitation of oil and gas; destruction of biodiversity • Greenhouse gases arising from Gas flaring and use of fossil fuels • Dutch disease : i.e. the negative impact on the economy resulting from a sharp rise to inflow of foreign currency; • High price volatility • Increasing local participation in the sector & creating linkages with other sectors • Resource curse – conflict, governance, low human development etc.

23. 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 • Sterilize revenue inflows that can not be absorbed – eg. foreign investments, stabilisation funds, funds for future generations • Revenues that can be absorbed should be channelled into physical and human capital Governance • Strong civil society • Transparency – EITI, PWYP • Strict lending guidelines eg. IFC rules, Equator principles

24. Addressing the challenges (II) Volatility • Market based instruments – futures, options, swaps, • Stabilisation funds • Long term fixed-price contracts • Buffer stock schemes

25. Addressing the challenges - Constraints facing existing and new local players (I) 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.

26. Addressing the challenges - Constraints facing existing and new local players (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)

27. Addressing the challenges (III)– 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 • Advertise opportunities & 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.

28. Addressing the challenges (IV)– 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, for example through the use of credit scoring techniques • 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.

29. 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.

30. Potential benefits to resource owners • Substantial job creation • Positive impact on GDP and economic growth • Creation/stimulation of other industries on the supply chain of 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,

31. 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