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Transcript of Local Content_Farshad Tehrani FINAL
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Farshad TehraniAlfa Development and Engineering AS
www.alfa-dev.com
Norwegian Petroleum Local Contentandthe Relevance to Iran
Global Local Content Summit for Oil and Gas 2006Build long-term measurable strategies for sustainable growthOctober 26 - 27, 2006 IQPC
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Part 1
The Norwegian Experience ofLocal Content in Petroleum
Industry
Part 1 The Norwegian Experience of Economic Diversification in Relation to the Petroleum Industry
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The background and rationale for Local Content
The different policies of Local Content adopted:
Procurement
Transfer of Knowledge
Part 1: The Norwegian Local
Content in the Petroleum Industry
Part 1
Part 1 The Norwegian Experience of Economic Diversification in Relation to the Petroleum Industry
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When petroleum activities commenced in the 1960s, Norwayalready was a developed industrial country
A strong tradition in shipping and hydro-electricity
A diversified manufacturing base including capital and energy
intensive metal / wood processing, shipbuilding and mechanical
industry.
The background for the policy of
Local Content (EconomicDiversification)
Part1Part 1 The Norwegian Experience of Economic Diversification in Relation to the Petroleum Industry
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For the oil industry, oil-in-the-ground has an intrinsic value that
exceeds the normal return on investment in exploration andproduction
Extracting oi l means depleting the resource capital of the host
countries, which need to compensate by building up anothercapital base to reduce petroleum revenue risk exposure
The rationale for Local Content in
relation to petroleum
Part1Part 1 The Norwegian Experience of Economic Diversification in Relation to the Petroleum Industry
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The division of economic rent is the outcome of bargaining, where
the government land owner can demand more than money
The rationale for Local Content in
relation to petroleum
Part 1Part 1 The Norwegian Experience of Economic Diversification in Relation to the Petroleum Industry
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A stronger bargaining position caused policy changes in 1972
Application in 1973 licensing round
Initial emphasis on procurement and human capital
New Government Policies related
to Local Content Development
Part 1Part 1 The Norwegian Experience of Economic Diversification in Relation to the Petroleum Industry
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Local Content through bidders lists and procurement reviews
Transfer of managerial and operational skills
Cooperation in research and development
New Government Policies related
to Local Content Development
Part 1 The Norwegian Experience of Economic Diversification in Relation to the Petroleum Industry
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Procurement: preference to domestic goods and services, to buildup supply industries, 1972-94
Transfer of knowledge, priority to human capital to enhance
research and development, 1972-94
Petroleum Fund, setting revenues aside to spend proceeds only,
since 1992
The different policies of Local
Content chosen
Part 1 The Norwegian Experience of Economic Diversification in Relation to the Petroleum Industry
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Provision to use Norwegian goods and services introduced in 1972
Preferential policy discontinued in 1994 by EEA agreement with EU
Objective to secure part of the value chain for domestic firms, to
develop appropriate technology and to gain insight and control
Assessment: successful, but costly
Procurement Policy
Part 1 The Norwegian Experience of Economic Diversification in Relation to the Petroleum Industry
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Field development operators had to present to the Ministry of
Petroleum and Energy plans for all tenders above NOK 1 million(USD 200 000)
Prior to tender invitations, the operator had to announce the tender
schedule and companies to be invited
The Ministrys role was to ensure that qualified Norwegian
companies were included in the bidders list
The Ministry did not specify content or supplier
Policy from 1973 to 1994
Part 1 The Norwegian Experience of Economic Diversification in Relation to the Petroleum Industry
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Norwegian Local Content was an essential factor for all oil
companies
The Ministry used Norwegian content as one of the evaluation
criteria when evaluating companies competing for new prospects.
The Ministrys policy was transparent and predictable in respect to
enforcement of the procurement policy.
The Licensing Incentives
Part 1 The Norwegian Experience of Economic Diversification in Relation to the Petroleum Industry
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Provision to train Norwegian personnel introduced in 1972,
discontinued in 1994
Objective: bridging the original skills gap
Assessment: successful
Provision of research and technology cooperation introduced in
1979, discontinued in 1994
Assessment: successful
Transfer of Knowledge
Part 1 The Norwegian Experience of Economic Diversification in Relation to the Petroleum Industry
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Agreements between Norwegian research institutions andInternational Oil Companies, contributing funding, personnel and
competence, directly related to petroleum
Three types:
1. 50% Agreements
2. Effort Agreements3. Good wil l Agreements
Technology Cooperation
Part 1 The Norwegian Experience of Economic Diversification in Relation to the Petroleum Industry
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Operators to conduct in Norway at least one half of the research
effort required to exploit the resources of a license, includingfeasibili ty studies, development studies, etc.
Efforts supervised by Ministry of Petroleum and Energy.
Measurement expenditure
By 1985 project value NOK 140 mill ion( USD 24 mill ion)
1. 50% Agreements
Part 1 The Norwegian Experience of Economic Diversification in Relation to the Petroleum Industry
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Oil companies to make a certain research effort in Norway ahead oflicensing rounds in cooperation with Norwegian researchinstitutions and the Research Council
Efforts supervised by Ministry of Petroleum and Energy
Measurement expenditure
By 1985 volume NOK 370 million (USD 60 mill ion
2. Effort Agreements
Part 1 The Norwegian Experience of Economic Diversification in Relation to the Petroleum Industry
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Oil companies had to conduct as much as possible of petroleumrelated research and development in Norway, without any specifiedrequirement as to volume or effort
Efforts supervised by Ministry of Petroleum and Energy
Measurement expenditure and outcome
More than one half of funds to engineering firms, rest to Norwegian
Oil Companies, maritime services, mechanical industry and someresearch institutes
3. Good-will Agreements
Part 1 The Norwegian Experience of Economic Diversification in Relation to the Petroleum Industry
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Part 1 The Norwegian Experience of Economic Diversification in Relation to the Petroleum Industry
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The issue of developing away from a rentier economy highly
exposed to oi l revenue risk is pertinent also in other oil export ing
countries
The challenge is to establish real economic l inkages between the
oil - gas and other sectors
Norways experience cannot be imitated, but can serve as an
example
The significance of the Norwegian
Local content experience
Part 1 The Norwegian Experience of Economic Diversification in Relation to the Petroleum Industry
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Part 2
The Relevance of the NorwegianLocal Content to Iran
Part 2 The Relevance of the Norwegian Content to Iran
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Prior to revolution 1979 Iran had no Local Content policy, agency was flourishing
23rd Apri l 1997: Law on the maximum usage of the countrys production,industrial, executive, technical and engineering potential in performing projects andfacilities the exportation services was approved
As per today:
Iran supporting creation of competitive and commercialization of Iranian petroleumcontractors and supplier companies
Government of Iran encouraging and supporting Iranian Content 51% policy
International companies are generally willing to make use of compative, localcompanies and look towards long term benefits', however incentive is essential
Part 2: Iranian Local Content
Part 2 The Relevance of the Norwegian Content to Iran
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Iran has limited industrial bases to converter to petroleum industries,
however changes are occurring Iran petroleum contractors:
Mainly in fabrication
Developed rapidly since 1990s with substantial work load
Benefited from national demand and Buy Backs Limited financial frame work
Challenges in an international compative market
Benefited less from international development since 1979 Revolution
Award contracts resulting focus on survival rather than strategy anddevelopment
Iranian ContentObservations
Part 2 The Relevance of the Norwegian Content to Iran
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- Iranin companies have limited competence and capacity to take part
in complex petroleum projects, however improving is ongoing- Iranian companies lack:
- Mangment skills
- Organizational capability
- Technical personnel and equipment
- Financial basis
- International companies do not have long term incentives to assist in
building Local Content
- Incentives
Iranian ContentObservations:
Part 2 The Relevance of the Norwegian Content to Iran
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Challenges:
- Decisions are made at executive level and one needs:
Delegation
Responsibility
Accountability
Authority
- Middle Management does not exist- Lack of permanent competence work force
- Lack of incentives
Management and
Competence :
Part 2 The Relevance of the Norwegian Content to Iran
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Developing Iranian Local Content:
- Time required - patience
- Needs strategy and planning
- Incentivs for international companies
- Costs
Conclusions:
Part 2 The Relevance of the Norwegian Content to Iran