Global trends and developments in the oil and gas industry

1. Global trends and developments in the oil and gas industry Willy H Olsen Advisor to INTSOK, Norwegian Oil and Gas Foundation Associate Fellow, Chatham House Member of the Governing Board, Revenue Watch Institute Budapest 26th July 2007

2. High Colombia Norway Venezuela UK Nigeria China Iran Malaysia Russia Algeria Kazakhstan India Angola Libya National interest Russia UK US Indonesia Equator Bolivia Brazil Low High The new “resource nationalism” Commercial interests

3. President Lázaro Cárdenas’ became a national hero in 1938 • Mexiconationalizedthe oilindustry • Pemex was born Resource nationalism has long historic traditions • “I went and I sold my chickens at the market to help pay for the machines that we would need to drill for oil,” she said. • “I was 13 at the time, but even then I understood the significance of our oil and our need to defend it.” • Guadalupe Alvarado Soto, a young orphan did her part

4. The questions asked in many oil and gas producing countries… • Are we paid a fair value for our resources? • Who should reap most of the windfall gains from increases in energy prices? • Should foreign oil and gas companies get a fair return on their capital, or a supernormal return? • Have the foreign investors fully lived up to their commitments??

5. Government Take Company Take Total revenues Abandonment Cost ProductionCost Development Cost Exploration Cost Governments looking for more value • More national control • Tougher fiscal terms • Transfer of technology • National industrial policies • Local content • Domestic use of gas • Downstream linkages • Strategic partnerships Government Take Total revenues Company Take ProductionCost Development Cost

6. Venezuela's oil minister, Rafael Ramirez, is a close ally of President Hugo Chavez Chavez - the driver of the new age of resource nationalism • Chavez has “re-nationalized” the oil industry in Venezuela • Increasing oil taxes and royalties • Changed the contracts with the IOC • The national oil company no longer operates at arm's length from the government. • PDVSA in control and has a central role in the social development programs known as “misiones” • “Oil belongs to the people”

7. Popular support for nationalization • Limited positive impact from the petroleum resources • Strong national feeling of “being raped” by the foreign oil companies • Renegotiation of export prices and contracts, increased taxes • Brazil and Petrobras is worst affected • Bolivia could be undermining its gas exporting potential

8. Britain is among the most greedy Mrd dollar

9. Adding value from local content • Many oil producing countries want more jobs, competence. transfer of technology, more local value creation • They start “Local content programs” • Angola, Nigeria, Algeria, Libya, Brasil, Venezuela, Russia, Kazakhstan, Iran, Saudi Arabia…… • Difficult to implement in a heated market • And few thinks of the pitfalls

10. 12 Billion Dollars AVERAGE ANNUAL UPSTREAM SPEND 9 Billion Dollars ANNUAL NATIONAL BUDGET Local service providers Local fabricators & contractors Operator’s spend outside Nigeria 75- 80% Multi national contractors spend outside Nigeria Source: NNPC This is not a sustainable situation Nigeria has established high targets

11. “We do not need the money. Sonatrach is flush with money. If it is just a question of depleting reserves, that is not necessarily what we need" • Algeries energiminister Chakib Khelil

12. NOCs but IOC access Russian companies IOC access NOC reserves – no IOC access? Source: PFC Energy Politics – more than geology is restricting IOC access Source: PFC Energy 2005 data

13. West Africa’s doors are still open • West Africa is providing huge opportunities and has become a magnet for the international oil companies • IOCs will invest 50 billion dollars over the next 5 years • The rules of the game have changed beyond recognition • IOCs are meeting competition from national oil companies offering a package of diplomatic, political and economic support in return for oil assets • And smaller independents are moving into untested waters

14. 1972 2005 The Seven Sisters share 53 million barrels per day - total global production More than 80 million barrelsper day current production This used to be real “Big Oil” 2005 The seven sisters: Exxon, Mobil, Gulf, Shell, Chevron, Texaco, BP

15. The wave of nationalization changed the IOCs – the case of BP BP merged with Arco and Amoco in the late 1990s

16. BIG OIL 2007 New BIG OIL The new face of the oil industry

17. NOCs controlling the reserves Oil and Gas Reserves

18. Among the most valuable companies Saudi Aramco “the most valuable”company in the worldGazprom is “undervalued” onthe stock market Billion US dollar Source: McKinsey - FT

19. Super-majors still in the top ten Oil productionworking interest basismill barrels per day Mill barrels/day Source: Wood MacKenzie, The Observer

20. Many have got private shareholders • Developments since 1987 • She began the process in BP BNOC,British Gas,

21. Challengingthe majors And they compete with the IOCs

22. Monopoly Working with IOC Awarding licenses Privateshareholders Saudi Aramco ADNOC Petronas Statoil Pemex Qatar Sonangol Petrobras NNPC Libyan NOC Rosneft Sonatrach Petrovietnam Gazprom Libyan NOC Perupetro INA PDVSA ENH, Mozambique Chinese NOCs NNPC KMG E&P Sonangol No national oil company is identical

23. Pre 1960s 1960s to mid 1970s • Resource nationalism • Self-sufficiency • Labour laws • Ensure national control • Gain higher rents • Industrial strategies 1980s 1990s post 2000 • Nationalization was slow in Saudi Arabia • Reorganizing ministries into companies NOCs history influences behavior

24. NOCs are not IOCs • NOCs have important national goals that go beyond the maximization of return on capital to shareholders • Oil wealth redistribution to society at large • Wealth creation for the nation • Industrialization and economic development • Assurance of domestic fuel supply • NOC’s national priorities may interfere with the firm’s ability to maximize the value of oil resources, • For most NOCs, the aim is not to become a fully commercial company • Replicating Exxon is not an option

25. But they need better governance • The situation for many • Unclear mission and role • Low transparency • Lack of accountability • Inadequate budget procedures • Fund confiscating • Implications • Low performance • Financial problems • Problems to participate in Joint Ventures • Principles of good Governance • A clear mission • A professional Board • Good management structure • Published audited accounts • Transparent and accountable

26. The new IOC – NOC relationship • NOCs used to need IOCs investments, capital, management practices and technology • Do they still in a high oil price environment? • IOCs need access to reserves to growth • NOCs have the upper hand • NOCs – IOCs are struggling to find the right partnership • Influenced by past experience – and trust?

27. Governance must be improved

28. The perspective has to be long term • The hydrocarbon sector is seldom just an episode • Petroleum resources may last for generations • But they will never last for ever • Policies have secure sustainable developments • Legislation and regulations should have a long term perspective

29. Invest in human capacity and capital

30. Saving for future generations The value of the NorwegianPension Fund - or Petroleum Fund Billion NOK Norway is converting resources below ground to resources above ground

31. Gabon never looked beyond oil

32. How will Ghana handle is new find? • Ghana is continuing to celebrate • The US oil minnow Kosmos Energy has made an oil discovery • President John Kuffour said the discovery could make Ghana an "African tiger". • "Even without oil, we are doing so well... “ • “With oil as a shot in the arm, we're going to fly," he told the BBC. • "My joy is that I'll go down in history as the President under whose watch oil was found to turn the economy of Ghana around for the better"

33. Requirements in petroleum sector • Petroleum sector legislation • The contractual systems, concession or PSA • The institutional structure and capacity • The role of the ministry • The role of the national oil company • Regulator or not • Local content legislation and regulations • Revenue management systems • Transparency and accountability

34. Fiscal policy - protect and promote • Fiscal policy has a dual role: • It must protect against excess volatility and overheating • Resource rents must be used to promote development. • Successful countries often concentrate spending on • Physical infrastructure • Building trade capacity • Investing in human capital

35. Who makes the final decisions? • The roles and responsibilities of the Minister of Oil and the NOC leadership are often unclear • Who should be responsible for negotiating with IOC? • How is the budgets allocated? • Are the results audited and made public? • Clarity of roles is a fundamental governance issue

36. Policy • Examples • Norway • Brazil • Colombia • Nigeria • Algeria • Indonesia • Madagascar Ministry IOC IOC IOC IOC Directorate Nationaloil company IOC IOC Regulator Business Separating roles and responsibilities

37. Pre law 2001 Pertamina filled most roles NOC, a regulator and supervisor Pertamina had the monopoly Downstream Upstream Contracting with IOCs through PCS Pertamina was the custodian Collecting rents on behalf of the government Indonesia changed the NOCs role • Post law 2001 • New regulatory bodies • BP Migas upstream • BHP Migas downstream • Pertamina “just another player” • No monopoly • Custodian role conducted by the regulatory bodies • Pertamina aiming for private shareholders

38. Law #22/2001 New competitors New regulatory bodies New challenges Pressure for PerformanceProfits Dividend Subsidy and distribution fee changes Need for transparent and clean business Pertamina’s new world

39. Policy • Examples • Kuwait • Pemex ? • Venezuela Ministry Nationaloil company Regulations Business Some prefer a strong Ministry

40. Policy Govt’ Nationaloil company IOC IOC IOC IOC IOC Regulator Business Some let the NOC handle it all? • Examples • Malaysia • Angola • Libya • Iran? • Mauritania? IOC

41. Policy Policy • Examples • US • Canada • Australia • UK Ministry IOC Strong Regulatory institutions IOC IOC IOC IOC IOC IOC IOC IOC IOC IOC IOC IOC Regulator Regulator Business Business Some see no need for a NOC

42. Civil society is making an impact • Civil society has during the last decade increasingly influence the agenda and the oil companies’ strategy and the financial institutions policy • Environment • Human rights • Corruption • Requiring more oil revenue transparency • Caspian, Nigeria, Angola, Sao Tome, Timor Leste, Chad, Iraq

43. Independents Indigenous • Nigeria awards blocks to local firms • Often controlled by the elite • Many small independents are going abroad Focus cannot be only on Big Oil • Newcomers are moving in to mature oil areas • They are often ahead of big oil companies in untested provinces • They are less scrutinized and less transparent

44. The oil curse will not go away • The problem of the oil curse is likely to become even more entrenched - and prominent due to rising oil prices and fierce global competition for the resources • The objective must therefore be to • Help natural resource-rich countries on a democratic path • Consolidate accountable institutions, • Strengthening the capacity of citizens in natural resource-rich societies to monitor and act, • Establishing norms of natural resource revenue transparency globally

45. The right to know • The public have a right to know how much revenue is being generated, ensuring that its distribution is fair and correct. • Transparency not only removes the cover for corruption, it also allows rapid intervention and builds trust. • Accountability of decision-making provides assurance to society

46. Back up

47. Institutional sources used: • EIA: • The US Energy Information Administration • IEA • The International Energy Agency (IEA) acts as energy policy advisor to 26 Member countries. Founded during the oil crisis of 1973-74, IEA’s initial role was to co-ordinate measures in times of oil supply emergencies • OPEC • The Organization of the Petroleum Exporting Countries (OPEC) is a permanent, intergovernmental Organization, created at the Baghdad Conference on September 10–14, 1960.

48. World Energy demand billion tonnes oil equivalent Hydro 16 Nuclear Coal 12 8 Gas 4 Oil 0 1971 2002 2010 2020 2030

49. CGEC – 55 dollar/barrel OPEC We need more oil…. Mill barrels per day But OECD demand declined 400 000 b/d in 2006

50. And even more natural gas Source: EIA