NATIONAL OIL COMPANIES Current Roles and Future Prospects

NOC REFORM: Restructuring, Commercialization and Privatization

Tom Collins
May 27, 2003

AGENDA
2

Challenges to NOC Reform Implementation:

Who Are We and What Do We Do

Where We Have Worked

Overall Trends Identified

Specific Country Experiences

Some Conclusions

SAME ROLE, DIFFERENT NAMES

3

In 1990 we formed a unit in Calgary, Canada, dedicated to assisting National Oil Companies or Ministries of Energy in resource developing nations:
Coopers & Lybrand PricewaterhouseCoopers PricewaterhouseCoopers Consulting IBM Business Consulting Services

Industry Restructuring enhancing the countrys economic engine of growth

Policy Fiscal,

Development Advice Economic, Legal and Regulatory Assistance Building Implementation Assistance and Efficiency Reviews Initiatives

Capacity

Corporate Restructuring improvement of the NOC

Strategic Operational

Privatization

OVER THE LAST THIRTEEN YEARS 4

Funding split almost equally between IFIs and the host country
Cameroon, Congo, Equatorial Guinea, Gabon, Mozambique, Senegal, South Africa

Abu Dhabi, Algeria, Kuwait, Qatar, Saudi Arabia, Yemen

Bangladesh, China, Indonesia, Kazakstan, Pakistan, Papua New Guinea, Thailand, Vietnam

Bolivia, Colombia, Costa Rica, Mexico, Trinidad, Peru

THE IMPORTANCE OF NOCs

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In 2001, the worlds oil reserves were still under the control of governments:

IOCs 10%
1 2 3 4 5 6 7 8 9 10 National Iranian Oil ExxonMobil Royal Dutch/Shell BP Pertamina Sonatrach Saudi Aramco Pemex ChevronTexaco Petronas Iran USA Netherlands UK Indonesia Algeria Saudi Arabia Mexico USA Malaysia

NOCs 90%

Ranked by 2001 Gas Production

THE OIL AND GAS VALUE CHAIN

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Previously the sole responsibility of the NOC, this is changing now:

Optimum efficiency requires collaboration along the chain Removal of cross-subsidy distortions

Award and/or Negotiate Mineral Rights & JVs

Explore and Develop Reserves

Produce Crude, Gas and NGLs

Supply, Market and Transport

Refine and Process Feedstock

Market and Distribute Wholesale Products

Sell Retail Products

Upstream

Midstream

Downstream

WORLD-WIDE TRENDS AND APPROACHES

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Around the world, certain trends and approaches are apparent, as resource nations with energy monopolies transition to private sector partnerships:
Transformation of National Oil Companies

Instigation of Regulatory Roles and Responsibilities

Emergence of the Natural Gas Sector

Changing Contractual Options for Foreign Investment

SPECIFIC COUNTRY EXPERIENCES

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Eight examples: Indonesia, Cameroon, Gabon, Kuwait, Qatar, Saudi Arabia, Pakistan and Mexico

Issues

and challenges faced by the NOC/sector and strength of the petroleum sector players

Structure Brief

description of our role and reform strategies suggested/implemented

Remedies

Comments mainly limited to the upstream and midstream

INDONESIA
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Issues and Challenges

Commercial efficiency, non-commercial objectives, governance, conflict of interest

Structure and Strength

Powerful NOC, weak Ministry, no Regulator, many IOCs working under PSCs

Project
Comprehensive operational and commercial audit of Pertamina for Ministry of Finance,

followed by implementation planning for the restructuring of the company Remedies and Reform Strategies
Take Regulation away from Pertamina, restructure and make it compete commercially with

IOCs, update contractual arrangements with IOCs, strengthen the Ministry

CAMEROON
10

Issues and Challenges

Commercial efficiency, 20 year history of declining production, conflict of interest

Structure and Strength

Weak NOC non-operator, weak Ministry, few IOCs working in country

Project
Two diagnostics of the petroleum sector and two operational and financial performance

assessments of SNH, in preparation for restructuring Remedies and Reform Strategies

Nothing changed in 10 years, not so attractive as other areas, overhaul fiscal system to attract

private sector participation, strengthen SNH, but do not let it operate. Separate ownership and from regulation

GABON
11

Issues and Challenges

Lack of exploration success, recent declining production, governance of sector

Structure and Strength

No NOC, no Regulator, weak Petroleum Ministry, Treasury runs State interests with few IOCs

Project
Comprehensive diagnostic of the petroleum sector, implementation of new petroleum

legislation, followed by many years conducting audits as stand in for the Regulator Remedies and Reform Strategies
Overhaul program of bidding rounds, strengthen the petroleum Department of the Ministry

KUWAIT
12

Issues and Challenges

The Constitution, cash requirements, technology shortfall, non-commercial objectives

Structure and Strength

Strong NOC, strong Minister/weak Ministry, no Regulator, no IOCs, new National Assembly

Project
Introduction of foreign investment, design and development of new style of contractual

arrangements for private sector participation. Models of how to turn KOC into a profit center Remedies and Reform Strategies
Introduction of Service Contracts, update Petroleum Laws and Regulations

QATAR
13

Issues and Challenges

Change from oil to gas-based revenues, commercial efficiency, governance, conflict of interest

Structure and Strength

Competent NOC, strong Minister/weak Ministry, no Regulator, several IOCs participate

Project
Restructuring of NOC and re-introduction of private sector participation, particularly in LNG

Remedies and Reform Strategies

Commercialization of NOC, JVs in LNG, TSCs in NOC, PSCs for offshore oil

SAUDI ARABIA
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Issues and Challenges

Rapid expansion of gas sector, cash requirements, differences between two Ministries

Structure and Strength

Strong SPC, strong Foreign Affairs Minister, strong NOC, strong Petroleum Minister/weak

Ministry, no Regulator, no IOCs Project

Project and process management of the Saudi Natural Gas Initiative. Provision of advice to the

electricity and desalination sectors Remedies and Reform Strategies

Private sector participation in very large, integrated upstream, midstream and downstream

projects

PAKISTAN
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Issues and Challenges

Commercial efficiency, non-commercial objectives, governance, five different governments

Structure and Strength

Strong Ministry, weak NOC, new Regulator, several IOCs participating in PSCs

Project
Eight year program to strengthen the sector to produce self sufficiency

Remedies and Reform Strategies

Sale of NOC assets, privatization of gas utility sector, introduction of Regulator, improvement

of PSC terms, strengthening of the Ministry

MEXICO
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Issues and Challenges

The Constitution, cash requirements, commercial efficiency, non-commercial objectives

Structure and Strength

Powerful NOC, weak Ministry, average regulator, no IOCs

Project
Opening of natural gas sector to foreign investment

Remedies and Reform Strategies

Introduction of Multiple Service Contracts, commercialization of Pemex, update of Petroleum

Regulations

AN IDEAL FRAMEWORK
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As transitions occur in any given country, including the introduction of foreign investment, the ideal roles of the various players should be:
The Ministry of Petroleum/Energy

Overall Hydrocarbon Policy Development Setting Legal/Policy Framework for Foreign Investment High Level Definition of Investment Projects International Promotion
The Ministry of Finance

Collection of Royalties, Payments and Taxes

The National Oil Company

Disconnection from Government budget Forced into Efficiencies by Competition from Foreign Operators
The Regulator

Independent Role in Economic/Infrastructure Regulation

CONCLUSIONS FROM THE TRENCHES

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Depending on the country context:

Isolate the National Oil Company, keep it in state hands, but improve it by

some divestiture or asset sale

Instigate better governance and internal management controls Make it compete for acreage Separate ownership, operation and regulation

Strengthen the Ministries of Energy/Petroleum Improve independent regulation Update the contractual systems to attract more foreign investments

THANK YOU
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Tom Collins Independent Consultant Calgary, Canada

tomc@ca.ibm.com

403 509 7359