Non renewable natural resources: Oil and gas

VI study tour by students from Tanzania

Rachid AmuiUNCTAD, Special Unit on Commodities

Rachid.amui@unctad.org

Outline

Part 1• Introduction to non renewable energy resources – formation,

reserves distribution, production, trade flows

Part 2• The importance of oil and gas in development; revenue generation,

environmental issues, job creation, etc.• The challenges facing Africa in the oil and gas industry• Addressing the challenges

Part 3• UNCTAD and oil and gas development in Africa

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Non renewable resources – what are they?

Energy resources that cannot be replaced over a short period of time eg. crude oil, natural gas, coal, and

uranium

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Crude oil, natural gas, coal: 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 asphalt.

• As the petroleum matures, and as the breakdown of large molecules continues, successively “lighter” hydrocarbons are produced.

• 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

• The inputs to coal formation are similar to oil and gas. Layers of dead plants in swamps are overladen by sediments and over time the heat and pressure helps turn the organic matter into coal

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World oil reserves - end of 2008

Region Billion barrels % of World Total

North America 70.9 5.6%

South & Cent. America 123.2 9.8%

Europe & Eurasia 142 11.3%

Middle East 1258 59.9%

Africa 125.6 10%

Asia Pacific 42 3.3

Data Source: BP Statistical Review 20095

Historical oil reserves from 1980 to 2008

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Oil reserves without Middle East

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World crude oil production

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Gas reserves from 1988 to 2008

9Data source: BP

World gas production

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Africa oil/gas production (1997 – 2008)

0

2000

4000

6000

8000

10000

12000

Th

ou

san

d b

arre

ls

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Year

Total Africa

0.0

50.0

100.0

150.0

200.0

250.0

billion cubic metres

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Year

Africa

Africa

Algeria41%

Egypt27%

Libya7%

Nigeria16%

Other Africa9%

Algeria19%

Angola18%

Chad1%

Egypt7%

Equatorial Guinea4%

Gabon2%

Libya18%

Nigeria21%

Sudan5%

Tunisia1%

Cameroon1%

Rep. of Congo (Brazzaville)

2%

Other Africa1%

Source: USGS

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Reserves/production ratio: crude oil, natural gas and coal

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Peak oil

Source: peak oil website

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Oil trade movements

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Source: BP

Natural gas trade movements

16Source: BP

Outlook for oil demand

17Source: IEA Oil Market Report 2010

OPEC Crude oil supply

18Source: IEA Oil Market Report 2010

Oil supply growth non-OPEC

19Source: IEA Oil Market Report 2010

Price volatility in oil markets

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The importance of oil and gas to development

• Provides an important share of the export earnings of developing countries, up to 90% in Africa

• Generates financial revenues through royalties taxes etc.• Gas can be used to replace inefficient fuels• Can create jobs & Can create linkages with other sectors of the

economy• Infrastructure development

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Challenges facing developing countries

• Environmental issues surrounding the exploitation of oil and gas; destruction of biodiversity

• Greenhouse gases arising from Gas flaring and use of fossil fuels • Dutch disease : i.e. the negative impact on the economy resulting

from a sharp rise to inflow of foreign currency; • High price volatility• Increasing local participation in the sector & creating linkages with

other sectors • Resource curse – conflict, governance, low human development

etc.

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Addressing the challenges (I) Environment

• 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

• Sterilize revenue inflows that can not be absorbed – eg. foreign investments, stabilisation funds, funds for future generations

• Revenues that can be absorbed should be channelled into physical and human capital

Governance

• Strong civil society

• Transparency – EITI, PWYP

• Strict lending guidelines eg. IFC rules, Equator principles

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Addressing the challenges (II)

Volatility• Market based instruments – futures, options, swaps,• Stabilisation funds• Long term fixed-price contracts• Buffer stock schemes

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Addressing the challenges - Constraints facing existing and new local players (I)

• 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

projects • Local entrepreneurs have little access to longer-term finance and

often have to use short-term facilities to invest.

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Addressing the challenges - Constraints facing existing and new local players (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 sector)

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Addressing the challenges (III)– 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 changes

• Advertise opportunities & 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.

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Addressing the challenges (IV)– 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 entrepreneurs

• Strengthen the capacity of financial institutions to evaluate local entrepreneurs creditworthiness in a cost-effective manner, for example through the use of credit scoring techniques

• 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.

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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.

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Potential benefits to resource owners• Substantial job creation• Positive impact on GDP and economic growth • Creation/stimulation of other industries on the supply chain of the Oil

and Gas industry e.g Insurance, Transportation, Catering, Medical, Telecoms etc

• 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,

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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

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Oil and gas conferences

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Learning resources

• Transparency: www.eitransparency.org• Prce risk mamangement: UNCTAD training materials• Local content: Extracts from presentations at oil and gas

conferences (CD ROMs)

Statistics: • British Petroleum Statistical Review of World Energy 2009

http://www.bp.com/• Energy Information Administration: http://www.eia.doe.gov/• International Energy Association: http://www.iea.org/

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