Nationalization vs Privatization in the Upstream Oil sector · Based on the Reserves (Billions of Barrels of Oil Equivalent) as at April 2007 include • Saudi Arabian Oil Company

Nationalization vs Privatization in the Upstream Oil sector

Presented By:Moye Ajao

Matric No: 312867Process Energy and Environmental Systems Engineering

Technical University of Berlin

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Is this true?

“Privatization means selling off assets paid for with the money of ordinary people through taxes so that rich people and expatriates

can make huge profits and sack all the workers.”

…......Unknown

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Contents

• Overview of the Upstream Oil and gas sector

• What’s Privatization really?

• Why is the Ownership structure of oil companies important?

• Upstream Oil and Gas companies, NOCs & IOCs

• Today’s Energy Dynamics

• Fact and Figures from the Oil and Gas sector

• Recommendations

• Conclusions

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Upstream , Midstream and Downstream Oil and gas sector

The entire process starting from the Exploration and Production of oil up to the delivery to the end user (Lifecycle) can be generally classified into 3 broad sectors Upstream, Midstream and Downstream oil sector.

Upstream Oil sector (exploration and production sector) encompasses all activities, starting from searching (exploration), recovery and the production of crude oil and / or Natural gas.

The Midstream Oil sector is responsible for the processing, storage marketing and Transport of semi processed products.

Downstream Oil sector is the last stage of the oil processing cycle. The networks and companies responsible retailing and distribution of the products.

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Production Geology/ Seismology

Production Economics

Production Operations

Production Technology

Process Engineering

Well Engineering

Reservoir Engineering

Petrophysics

Environmental Technology

Upstream Oil processes

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• Recommendations

• Conclusions

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Alternative definitions of Privatization

I. “privatization is the sale of state owned assets”.

II. “The transfer of a majority ownership of state-owned enterprises to the private sector by the sale of ongoing concerns or assets following liquidation.” (Kikeri, Nellis and Shirley [1994]).

III.Privatization , “refers to the sale of all or parts of a government’s equity in state-owned enterprises to the private sector.”(Ramamurti [1992, p. 225] )

IV.Privatization is defined as “the divestiture by the state of enterprises, land or other assets.” (According to World Bank [1996, p. viii],)

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Activities in the definition of Privatization

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Has Privatization always been successful?

The Quantity and Quality of privatization is dependent on

Political environments,

Economic conditions of the country,

Government policies,

Legal framework and

Financial Environment (Banks).

Typical obstacles to privatization include

Salient problems (speed, priorities, Restructuring, New owners)

Technical problems ( Market Structure, Absence of capital structure, Valuation, Initial condition of privatization),

Economic Problems (Absence of capitalist class, Distribution aspects of divestments, Organization of Auctions, Macroeconomic environments),

Managerial Problems (Principal agent problem, Information, Managerial capabilities, corporate governance) and

Attitudinal Problems ( Consumer preference, Sell off to foreigners, Entrepreneurship and Market entry and Exit )

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• Recommendations

• Conclusions

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Why is the Ownership structure of oil companies important?

The ownership of Oil and Gas companies is an issue of paramount importance for various reasons, amongst which are.

• The security of oil and gas supply depends, not only on demand and supply but also on political, religious and the climatic factors

• Speculative purchase

• Pressure from investors on the companies

• Rising world Oil demand

• Switching to non fossil fuels will not take place until technological / cost breakthroughs are achieved.

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• Recommendations

• Conclusions

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Top oil and Gas companies in the world

Based on the Reserves (Billions of Barrels of Oil Equivalent) as at April 2007 include

• Saudi Arabian Oil Company 295

• National Iranian Oil Company 287

• Qatar Petroleum 165

• Abu Dhabi National Oil Company 137

• Iraq National Oil Company 137

• Gazprom 115

• Kuwait Petroleum Corporation 107

• Petróleos de Venezuela S.A. 102

• Nigerian National Petroleum Corporation 62

• National Oil Corporation (Libya) 45

• Sonatrach 40

• Rosneft 35

Source:Credit Suisse First Boston;Forbes (2007 )

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Control of world Oil Reserves

Source: James A. Baker III Institute for Public Policy (2007)

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NOCs’ classification

• Pre-1960: Established in the 1950s under centralized command and controlled economies as countries grappled with a growing desire for self-sufficiency in oil resources.

• 1960s–early 1970s: The end to European colonial rule and the rise of nationalist movements gave impetus to several major oil producing nations to nationalize their oil reserves .

• 1980s: The commoditization of oil, price volatility and falling oil prices decreased the profitability of NOCs.

• 1990s–present: With the breakup of the Soviet Union, another group of NOCs was formed to handle the transition from central oil ministry structures and producing.

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How are NOC’s different from IOCs

• Oil wealth redistribution to society at large,

• Wealth creation for the nation,

• Industrialization and economic development,

• Energy security, including assurance of domestic fuel supply and security of demand for producing nations,

• Foreign and strategic policy and alliance building, and

• Participation in national level politics.

The above mentioned goals limits the NOCs in their attempts to

• Maximize the value of oil resources,

• Replace reserves

• Expand production, and

• Perform in a technically efficient manner.

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NOCs and Socioeconomic Policy Objectives

Source: James A. Baker III Institute for Public Policy

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IOCs

An oil company that is majorly private owned. Some of them originated from the developed economies. some started out as National Oil companies and with divestment and Privatization being fully privately held companies now. They are renown for excellent delivery and they are the preferred partners for collaborative projects in the oil and Gas sector.

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IOCs ‘ Business Strategies

Alliances :e.g. Totalfina-E lf, Chevron-Texaco, and Conoco-Philips .But despite these alliances the IOCs still have to do more to expand their access to reserves.

Joint Operating Agreements (JOA): The Joint Operating Agreements (JOA) is the basic, standard agreement between the NOC and the IOCs (operators). Types include

Joint Venture Contract (JVC) : This agreement determines the interests and obligations of the contracting parties.

Product Sharing Contracts (PSC) :. Cost is recoverable with crude oil in the event of commercial find, with provisions made for: Tax Oil, Cost Oil and Profit Oil

Despite these Strategies , The IOCs can still not offer Oil for Infrastructure/ Development contracts.

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• Recommendations

• Conclusions

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The Oil industry Today

Over 120 projects in development or planning stage.

Cumulative investments in new capacity of more than $120 billion.

OPEC crude capacity is expected to increase by more than 5 mb/d by the end of 2012

The IOCs have gradually over the past decade outsourced most of their operations

Innovation and Ownership of technology has shifted to the Oil servicing companies

Source: OPEC facts and Figures

OPEC upstream Investment Plans

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Why are the IOCs still relevant

Industry specialization and Leadership positions in areas such as. Liquefied natural Gas, Gas to Liquid, Ultra deep water Unconventional Oil and alternative fuels.

The markets and delivery infrastructure of the IOC’s remains a valuable asset.

The need for Foreign Investment by some of the countries to give a Political image which reflects stability

Possible strategies that IOCs can adopt for retaining their relevance and being the preferred partners for NOCs include

Getting to know the host countries better

Develop their individual strategies, which set them apart from their competitors.

Risk taking and asset Swaps

Local content development

Setting the pace with innovation and capital project management

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NOCs Today

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Employees per Million BOE produced, 2004

Source: oil and Gas journal

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NOCs and Price Subsidy

Subsidized domestic fuel price in $/Litre, 2004 Source: James A. Baker III Institute for Public Policy

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Revenue per Barrel of Oil produced

Revenue per Barrel of Oil produced , 2004 Source: James A. Baker III Institute for Public Policy

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How can NOCs improve their performance

Possibilities include

Listing of Public shares, IPOs or Debts

Having an autonomous board of directors that are free from government influence

Filling leadership positions with professionals and not Politicians

Transparency of earnings and eradication of corruption

Vertical integration, i.e. expansion into the downstream sector

Exposure to both domestic and foreign competition

Production and Reserve expansion

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Interesting Facts

PETROLEUM PRODUCT COST DISTRIBUTION

Source: Energy Information Administration, 2004

Source: Energy Information Administration, 2004

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RECOMMENDATIONS

Discussing about “Nationalization vs Privatization” in General, gives only a broad overview. With the changing trend and development in the Upstream Oil and Gas sector further work should be done, but with specific countries as case study.

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CONCLUSION

• NOCs perform differently from IOCs in many respects

• Comparisons not always favorable

• Many aspects of NOC ownership and operation of energy related businesses may be inefficient or suboptimal when compared with IOCs

• IOCs have to improve on their appeal

• NOCs have to reform in order to be competitive on the global scene

• Presently, both have challenges and opportunities to NOC/IOC cooperation

• They have to work together so the world’s Energy demands can be met

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Reference

1. Harvard Business Review , http://harvardbusinessonline.hbsp.harvard.edu

2. The Mckinsey Quarterly, www.mckinseyquarterly.com

3. Oil and Gas Insight, www.oilandgasinsight.com

4. OPEC, World Oil Outlook 2007

5. www.opec.org

6. BP Statistical Review of World Energy June 2007

7. Sunita Kikeri and Aishetu Fatima Kolo (World Bank), Privatization: trends and recent developments, 2005

8. Redda and Bereket Mehari, Post-privatisation changes in management control, firm activities and performance , 2007

9. Hailemariam, Stifanos, Corporate value creation, governance and privatisation, 2001

10. Amy Myers Jaffe, The Changing Role of National Oil Companies in nternational Energy Markets,2007

11. Stacy Eller, Peter Hartley and Kenneth B Medlock III, National Oil Company Efficiency: Theory and Evidence, 2007

12. AEGIS ENERGY ADVISORS CORP, NOC Perspectives: Comparative Performance Metrics, 2007

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13. Nina Poussenkova (Carnegie Moscow Center) , Lord of the Rigs, Rosneft as a Mirror of Russia’s Evolution , 2007

14. Dan Brumberg & Ariel I. Ahram, The Internal Politics of Iranian Oil , 2007

15. Koichiro Tanaka , Upstream Development Strategy of the National Iranian Oil Company

16. Steven W. Lewis, Energy Security and the Consuming Country : China’s NOCs, 2006

17. David R. Mares & Nelson Altamirano, Venezuela’s PDVSA, Lessons Learned : Social Welfare Priorities and the NOC, 2007

18. Martha Brill Olcott, Kazakhstan’s NOC, 2007

19. Bernardo Bortolotti, Domenico Siniscalco and Marcella Fantini, Privatisation and Institutions: A cross country Analysis, 2000

20. Bernardo Bortolotti, Domenico Siniscalco and Marcella Fantini, Privatisation around the world: New evidence from panel Data, 2001

21. R. Quentin Grafton, Dale Squires and Kevin j. Fox, Private Property and Economic efficiency: A study of common- pool resource, 1999

22. Maxim Boycko, Andrei Shleifer and Robert Vishny, Privatizing Russia , 1995

23. Thomas Clarke, International Privatisation: strategies and Practices, 1994

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Thanks for your Attention!

Documents

Nationalization vs Privatization in the Upstream Oil sector · Based on the Reserves (Billions of Barrels of Oil Equivalent) as at April 2007 include • Saudi Arabian Oil Company