February 07, 2011
Exporting the Norwegian Model - How oil rich countries are trying to avoid the resource curse
I recently came across two interesting working papers from Stanford University that you may like to read when free.
I am giving short summaries:
1. Exporting Norwegian Model: Limits of Institutional Design
Many countries across the world having rich oil reserves get affected by what is called " Resource curse". Access to easy oil and overdependence on oil revenues reduces the overall competitiveness of the country's economy and increases corruption, internal strife etc., which causes an overall low development of the country. Possible examples are- Nigeria, Sudan, Venezuela etc.
Norway is an exception, which despite depending for over 40% of its exports on Oil and Gas, has avoided this oil curse. The Norwegian model consists of following 2 constructs:
1.Separate the commercial activities of the country's National Oil Company (Statoil in case of Norway) from Oil policy making and Complaince Regulation. In short, have three separate bodies- one that makes policies, one that ensures complaince to policies and one that is run as a commercial entity
2. Divide petroleum revenue into three pools – budget, heritage and stabilization funds. Any excess revenues due to oil price rise go into heritage and stablisation funds.
Many oil rich countries across the globe (e.g. Kuwait) have tried to adopt the Norwegian model, but with varying levels of success.
http://pesd.stanford.edu/publications/the_limits_of_institutional_design_in_oil_sector_governance_exporting_the_norwegian_model/
2. Risk Management and Frontier of Petroleum industry:
The paper discusses how risks change for upstream oil sector as fields become more mature, why IOCs are better equiped to manage risks, when NOCs need to partner with them and when they can avoid them.
1. Exploration and production risks are very high when the field is developed, become low when the production starts and then again become very high when production starts falling and advanced techniques are needed to get more production. (e.g. Kuwait is now slowly moving to third phase)
2. NOCs need to partner with IOCs in first and third phase
3. Oil services companies (e.g. Schlumberger etc) have given NOCs an upper hand when negotiating with IOCs.
http://pesd.stanford.edu/publications/on_the_states_choice_of_oil_company_risk_management_and_the_frontier_of_the_petroleum_industry/
Hope you will enjoy these. Please let me know your views.
Posted by apandey at 06:30 AM
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August 26, 2010
It's getting tougher than ever- Uncertainity and risks for the Oil and Gas industry
In a recently concluded International Seminar in the Middle East Region for Oil & Gas firms, participants expressed concerns about the five issues that the Oil & Gas industry is currently facing. These issues pose both significant risks as well as some opportunities. Senior Executives from Oil and Gas firms have started considering them in planning their short term and long term objectives...
In a recently concluded International Seminar in the Middle East Region for Oil & Gas firms, participants expressed concerns about the five issues that the Oil & Gas industry is currently facing. These issues pose both significant risks as well as some opportunities. Senior Executives from Oil and Gas firms have started considering them in planning their short term and long term objectives.
The five important issues mentioned were as follows:
1. Recovery of the economy and global consumption: This seems to be the most important single risk factor in the immediate term. While the OPEC is happy about the current crude prices (in the range of 70-80 USD per barrel), there are big uncertainties about the future. There are significant downside risks that demand will slow on an uncertain global economic outlook, the International Energy Agency (IEA) said in August 2010.
The IEA is projecting that China and other developing nations will offset shrinking demand for oil next year in richer countries such as the U.S., where the Federal Reserve said yesterday it won’t unwind stimulus measures because the economy is weaker than previously anticipated. Even China is showing signs of slowing growth, with industrial output increasing the least in 11 months, according to a report today.
2. The impact of renewable energies: In 2008, of the total worldwide energy consumption, roughly 80 to 90 % was derived from the combustion of fossil fuels. This percentage is expected to reduce in coming years, with nuclear, wind, solar, and renewable sources contributing to a much higher % in providing energy to the world. For example, Europe could meet at least 80% of its energy needs from renewables by 2050 without paying more for electricity than it would by continuing with current fossil-fuel based infrastructure, according to a new report by the European Climate Foundation (ECF).
3. Legislation on carbon emissions: The global community is now taking carbon emissions seriously. This trend will continue in future, with expected legislations on carbon emissions from major economies of the world. This will have a direct impact on the world demand for oil.
4. Questions of surplus in refining capacity: The world is facing a significant surplus of refining capacity despite a vast number of cancellations and deferrals of new projects, says consultancy Turner, Mason & Company in a new report. The key reason for the refining surplus is that a sharp fall in global demand for oil products has occurred at the same time of a spate of new refinery capacity. And not until 2016 will demand be expected to grow more than refinery additions, says the report Crude and Refined Products Outlook.
5. Marketing of oil and gas in environmentally conscious world: Oil and gas firms are now realizing the need for better marketing of their products in environmentally conscious world. Usually referred to by the term Green Marketing , Oil and Gas firms need to demonstrate their corporate social responsibility and efforts they have made towards environment protection.
Posted by apandey at 07:33 AM
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March 07, 2010
How safe is oil and gas industry in an uncertain environment
The Oil and Gas industry is by its very nature of business, exposed to signifiant business and operational risks,. Talking of some examples, consider the scenarios that are given under:
1. Even with modern oil-exploration methods which are better than previous ones,the success rate for finding new oil fields may still be only a 10-percent.
2. A 7-10% error in reservoir modelling could easily lead to loss of 50 Million Barrels of oil (for medium size reservoirs)
3. International crude oil prices have fluctuated from the peak of nearly 150 US $/Barrel to a low of 30 US $ /Barrel in recent times
4. A wrong production strategy may mean light oil (high quality crude) exhausting sooner than expected
Now if we talk of the recent example, the year 2009 will have a recall value for Executives in Oil industry for more than one reason. The global economic turmoil during this period that shook the foundations of the economic order, created a profound impact on almost all the sectors of industries, large and small. The Oil and Gas industry was no exception to this and during this period we saw perhaps the biggest swings in the prices of crude oil within a short duration. The previously unimaginable high of nearly USD 150 per barrel suddenly became a reality, and thereby brought some of biggest windfall profits for many oil firms. But during the same period, and with an unexpected speed, prices plunged to below USD 30 per barrel and threw all planning and business expansion targets out of gear.
The highly uncertain environment that exists today undoubtedly forces our attention to the high level of risks that this industry is now exposed to. And commodity price fluctuation, of which the above scenario was an extreme example, is just one of the many risks that exist for this industry. Some of the other risks which we will discuss shortly are in fact bigger in terms of their longer term impact and the level of preparation that the industry would need to make to effectively mitigate them, and potentially benefit from some of them.
Given below are "seven key risks" that loom around the Oil and Gas industry at present. These risks differ in their nature,some of these are more strategic and others are more operational, some are more acute in the short term while others will show a larger impact in the coming decades; but all of these are very real and tangible issues. Senior Executives from the industry should started planning around them and perhaps the need of the hour is an enhanced focus on risk management considering all these issues and not a lesser one.
Here is my opinion of the major risks for this industry:
1. Talent pool shortages (short and long term)
2. Ongoing economic turmoil
3. Depleting reserves of light oil (light oil is the high quality, easy to produce, low sulphur content oil)
4. Increase in competition for reserves( this is applicable even for NOCs looking to expand their footprint outside their country)
5. Commodity/ crude price instability (apart from possibility of low returns, it badly affects right planning)
6. Going green voices (i.e. increasing emphasis on environment friendly energy options)
7. Emerging Alternative energy options (thermal, nuclear,wind-power etc. )
At the end, it is worthwhile to remember that Risks are not just threats; they can create many opportunities also.
Please let me know your insightful comments and suggestions...
The End-Note:
According to some estimates, Saudi Arabia has close to 25% of Worlds proven oil reserves. However when Standard Oil (now Chevron) started searching for Oil in Saudi Arabia, it took them four long years before they could make their first discovery at Dammam in 1937.
Some more interesting facts on Oil and Gas industry are available at http://www.gravmag.com/oil.html.
Posted by apandey at 11:10 AM
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