Oil and gas & development

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					Oil and gas & development

     VI study tour by students from Russia

        Claudine Sigam & Rachid Amui
     UNCTAD, Special Unit on Commodities
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

            Part 1
  Introduction to Oil and Gas –
formation, reserves distribution,
      production, trade flows
   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
• Over time formed petroleum matures, and as the breakdown of large
  molecules continues, successively “lighter” hydrocarbons are
• 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                         4
  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

Oil reserves from 1980 to 2009

  Crude oil reserves - end of 2009
 Region              At end of 1999   At end of 2009   % of World Total
                     (bn barrels)     (bn barrels)
 North America       69.5             73.3             5.5
 South & Cent.       97.8             198.9            14.9
 Europe          &   107.8            136.9            10.3
 Middle East         685.8            754.2            56.6
 Africa              84.7             127.7            9.6
 Asia Pacific        39.9             42.2             3.2

                                                             Asia Pacific   North America
                                                                 3%              5% South & Cent.
                                                                   Africa                 15%

                                                                                        Europe &
                                                              Middle East

Data Source: BP Statistics                                                                          7
 Regional oil production ‘000 bbls

Data Source: BP Statistics
Oil Production – Europe and Eurasia


                           8000                                                        Kazakhstan
               '000 bbls

                           6000                                                        Romania
                                                                                       Russian Federation
                           4000                                                        Turkmenistan
                                                                                       United Kingdom
                                                                                       Other Europe & Eurasia

                                   2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Data Source: BP Statistics
   Natural gas reserves from 1980 to

Data Source: BP Statistics         10
World gas reserves – end of 2009 (tn m3)
  Region             At end of 1999 (tn   At end of 2009 (tn   % of World Total
                     cubic metres)        cubic metres)
  North America      7.32                 9.16                 4.9
  South & Cent.      6.81                 8.06                 4.3
  Europe & Eurasia   56.17                63.09                33.7
  Middle East        54.74                76.18                40.6
  Africa             11.44                14.76                7.9
  Asia Pacific       12.07                16.24                8.7

                                                                                  North America
                                                                                       5%         South & Cent.
                                                                        Asia                           4%
                                                                 Africa 9%

                                                                                       Europe &
                                                               Middle East               34%

Data Source: BP Statistics
  Regional gas production bn m3


               billion cubic metres

                                       800.0                                                       Total North America
                                                                                                   Total S. & Cent. America
                                                                                                   Total Europe & Eurasia
                                                                                                   Total Middle East
                                                                                                   Total Africa
                                       400.0                                                       Total Asia Pacific


                                               2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Data Source: BP Statistics
   Gas production – Europe & Eurasia

                                      600.0                                                       Denmark
                                      500.0                                                       Italy
               billion cubic metres

                                      400.0                                                       Netherlands
                                      300.0                                                       Poland
                                      200.0                                                       Russian Federation
                                      100.0                                                       Ukraine
                                                                                                  United Kingdom
                                        0.0                                                       Uzbekistan
                                              2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
                                                                                                  Other Europe & Eurasia

Data Source: BP Statistics
         Oil trade movements in 2009 (mt)

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

Source: BP Statistical Review 2010
       Part 2
The future of oil and gas
         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”
        Primary energy supply* in 2008

World primary energy consumption

Source: Statistical review of world energy 2010
                           Global oil demand growth
                                     2009/2010/2011; ‘000 bbls/day

Source: IEA Oil Market Report 2011
                            Oil Supply

Source: IEA Oil Market Report 2011
Reserves/production ratio: crude oil, natural
              gas and coal

                          Oil production profile

Source: www.peakoil.com
        Part 3
Oil and Gas and Development
   The importance of oil and gas to
• 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: The use of natural gas as energy source
  can help reduce greenhouse gas emissions and combat global
• Natural gas can be used to replace inefficient fuels
• Consumption linkages: Can influence savings levels and therefore
  investment – eg. Infrastructure development, education, health etc.

      Challenges facing developing
• 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

      Addressing the challenges (I)
• 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

    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

            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
          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

    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
• Local entrepreneurs have little access to longer-term finance and
  often have to use short-term facilities to invest.

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

          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

        Addressing the challenges (V)
Boosting local participation
• Encourage business to communicate opportunities & requirements
• 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.

       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
• 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.

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.

  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
• 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,

       Part 4
UNCTAD and Oil and Gas
 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

Oil and gas conferences

                   Learning resources

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

Thank You

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