Role of Sustainable Mega Projects
on the Future of Iraq Economy & Human Capital
Iraq Energy Forum 2018
Dr Husain Al-Chalabi [ IEI Fellow]
Role of Sustainable Mega Projects on the Future of Iraq Economy & Human Capital
• 1. Introduction
• 2. Energy Balances and the future of renewables
• 3. Projected adaptation in the Supply Chains of Oil and Gas to the changing market conditions
• 4. Deliberation on the role of Iraq’s oil & gas in the future petrochemical Industry and its benefits to Domestic SMEs.
• 5. Concluding remarks
Introduction
Since the 1950s the dream of using the hydrocarbon
resource as a catalyst for development , prosperity of its
citizens and a return to the Golden age of relying on
human capability and productivity to bridge the gap
with the “ Developed Nation” remains a mirage . In fact
many regional oil & gas producers found that even
their food depends on the revenues of selling the
hydrocarbon resource , knowing full well that they have
no control on the price or its volatility.
This presentation looks at the projections of the Energy profile
from respected International sources over the next 20 years .
From such data, it may become clear what the common
overlap areas of concerns to the regional producers of fossil
fuels when considering the scale of investment and the
increasing cost of compensating for the depletion rate of
resource production and / or supporting the marginal increase
in projected demand for the resource.
Further , for Iraq in particular, the growth in population and the
potential reduction in oil net revenues leading to deteriorating
living standards prompt us to focus on new sustainable
revenues from both Capital investment and the skilled Human
capital.
Variable Renewable Energy (VRE)
The Economist – February 25th -March 3rd 2017:-Clean energy’s dirty secret :- “From being peripheral to the energy system just over a decade ago, they are now growing faster than any other energy source and
their falling costs are making them competitive with fossil fuels.” “There is a $20 trn hitch , though. To get from here to there requires huge amount of investment over the next few decades, to replace old smog –belching power plants and to upgrade the pylons and wires that bring electricity to consumers.” Yet green energy has a dirty secret. The more it is deployed, the more it lowers the price of power from any source. That makes it hard to manage the transition to a carbon free future , during which generating technologies, clean and
dirty, need to remain profitable if the lights are to stay on.
Source IEA
Recent discussions in the IP Week 2018 held in London, confirmed the
commitment of the major ME oil and Gas producers to take the risks of retaining
their role as providers of hydrocarbons to the consuming nations over the next 20
years.
Such commitment comes even with the challenges to carbon base fossil fuels and
their uncertain future in the blend of energy as well as initiatives by major banking
institutions to discourage financing projects related to fossil fuels.
Capital cost of projects in the region and more specifically the Mega projects carry
a higher price tag compared to Developed Countries. Future costs of construction
will increase at a higher rate than global
A regional cooperation as Iraq re-aligns its relations with neighbours, with a focus
on efficiency, cost reduction and strategy for diversification, promises to
transform the Middle East to a more attractive region for Foreign Direct
Investment.
Suggested Scope for Regional Co-operation :- Historical Event to be Re-visited :- “Cost Reduction Initiative in the New Era [ CRINE ]” In the early 1990s, the North Sea production was unsustainable due to low oil prices and high projects’ cost. All the stakeholders connected with the initiative knew the following must happen:- 1. Cultural change – new way of doing things. Revised relationship between operators, contractors & suppliers with a change in attitudes and practices and breaking down the mistrust by working closely and transparently as a team with an aligned project objectives & targets. 2. aims and objectives- CRINE Targets:- 30% reduction in Capital costs 50% reduction in Operating costs 3. No compromise in Safety, protection of the environment , continue to maximise the remaining recoverable reserve, improve the construction industry’s competitiveness in the international market. Results:- survival of the North Sea as an Oil & Gas centre & return to profitability. * Repeat of similar initiative to “CRINE” in 2014 by an Asian Company to combat similar business environment to that of the 1990s.
Remarks – Relevant to Iraq
• Iraq is very conscious of 2 things :- – Want to increase oil production to reap higher economic return [ net revenue = volume X
price - costs] to catalyse the socio- economic development plan ; with the consequence of increased gas production.
– Want to minimize the economically wasteful Flaring of gas and comply with the environmental practices.
• The views of increasing oil [and hence the associated gas ] production while combating the gas Flaring , via absorption capabilities & diversification [ that generates the maximum benefit to Iraq] , has been endorsed by energy experts and strategic planners. The associated gas is considered as the backbone for highly competitive petrochemical industries.
• Gas is the Fuel of choice for the “ highly developed” nations, so with a vision to see Iraq in that category, we need to make sure that the priority for gas is for Iraq. For compliance with the “ Climate Change” transition scenario, the decarbonization from current power stations emitting high quantities of CO2 due to firing coal and/or liquid fuel , gas offers an effective intermediate solution.
Cost of Imported Products
• For Iraq , with limited sea access, the importation of deficit products is logistically difficult exercise as well as being expensive. The lack of the productive capacity means the following :-
– Iraq oil is exported to a refinery [ cost of marketing / logistics / inventory ] ;
– the Foreign refinery is an economic centre [ profit making ] store the products [ cost of inventory & marketing] ; This refiner may not be using the Iraqi crude.
– trader buys the product & ship it to Basra port ;
– storage and distribution from Basra .
What is Lost in the cycle ? ….. Big Money
• Oil Refining :- With the changes in products quality, product slate and low demand for fuel oil , the availability of cheap source of hydrogen – namely from natural gas – became very important parameter in optimizing the investment and profitability of modern refineries.
The International Maritime Organization (IMO) - voted to move the implementation of a 0.5% global sulfur cap on marine fuel to 2020 from 2025. This decision will give an opportunity for refiners with access to gas to build Hydro conversion & treating process units and improve their competitiveness, while meeting the lower sulfur levels in fuel oil.
• Petrochemicals:- Associated Gas is a cost effective feed [ price and impact on investment ] for the petrochemical industry. The alternate is using liquids derived from Oil Refining as raw material.
Role of Natural gas in supporting oil refining for clean fuels and petrochemicals
New Refinery project - Characteristics
• Location :-
– Market
– Features and size of the location
– Raw material supply
– Environmental Impact
– Infrastructure
– Support facilities , resources and supplies
• Typical period of time to implement the project [ from concept to commissioning ]:-
– Best recent record is Reliance Industries Ltd 33 months for the first refinery and 36 months for the second refinery
– Recent refineries in China , US , Saudi Arabia , Vietnam have taken 5-10 years [ source:- Reliance ] .
• Basis for project conceptualisation & evaluation :-
– The “Concept phase” of a refinery project is based on the knowledge of today & the events of the past and prediction [ and / or vision ] of the future .
– Prediction accuracy reduces the further the projection.
– The Asset will be designed for the projected availability of the crude oils & their quantities and the quality of the various products. Often the “value” of phasing [ dynamics of organic growth ] the investment is overlooked.
– The accuracy of the project cost is better known [ especially with a lump sum EPC ], than the revenue stream.
– The project revenue is derived from the operation of the refinery and the sales of products , which is about 4-5 years from the conceptualisation of the project, hence carries relatively high uncertainty . Fortunately there is a trend in “refining margins” , which is more important for the cash flow than revenue from sales .
Harmonisation with the Overall
Economic Development Plan [EDP]
• Multi Industrial projects Integration Concept
and its benefits
• Just in time phasing
• Development of Skills and Resources
• Outside the boundary:- Infrastructure and
Support Services
Remember:- [ EDP] is structured to:- Synergise & integrate projects in all sectors
in a multiphase plan; includes ORGANIC growth over time; Guided by long-term
Vision; flexible to re-examine progress and alignment with emerging needs.
4. Mega Projects with a reach to local SMEs
“Distribution of benefits”
• The Socio Economic Benefits are :-
- Economic Improvement
- Participation of the Private Sector
- Employment
- Skill Development
- Security & stability
Selection of Business Structure
Model
• Once you confirm the need for External Sourcing, you evaluate options for the functionality & sustainability of the project [Stress testing]
• If securing investor [with the right qualifications] mitigate the concerns, you translate the partnership into a Business Model
• Relationships & responsibilities are established by negotiated Agreements
Note :- Agreements are negotiated . It is often overlooked that : “ You get what
was negotiated & not what your worth is”
Lessons Learnt:- Enrich your negotiating team with compatible skill to that of
the other party to achieve longer lasting relationship
Typical Subjects in the Business Plan
• There is no standard format but most plans include:
• An executive summary highlighting the main points - Details of key personnel with an organisational chart showing individual responsibilities.
• Market research - details of competitors and how the project fits into the market - eg who are the potential customers are and why you think they will buy your product or service.
• Your marketing plan - how you are going to get your products to the potential customers, together with any assumptions made when setting your targets.
• Financial information – eg. key ratios. These can be used to compare your business' performance against industry benchmarks. How you will manage credit, expenditure, stock planning and control, and debtors and creditors.
• When seeking funding, include:
• A cash flow forecast indicating the amount of funding you need and why. For a start-up, include estimates of how much finance you will need for two to three years or until you start to make a profit. Indicate contingency funds that might be needed for rough patches.
• Financial forecasts for a three- to five-year period.
• How a loan will be repaid, how investors can get their money back, and when.
Private Sector – Decision Tree
• A) Yes / No :- • Security ; safety of employees ;
• B) High Concerns • Security and sustainability ; ability to operate without disruptions
• License & Permits validity [ political stability ] and enforcement [ legal ]
• Expropriation
• Corruption & lack of transparency
• C) Standard Concern • Likely return on investment
• Future opportunities in country
• Company’s comfort with the type of project, operating environment and skill requirement
5. Concluding Remarks
• From the regional cooperation, as Iraq re-aligns its relations with neighbours, Oil & gas projects &
investment co-ordination strategy promises to transform the Middle East.
• For Iraq, with limited changes to the current revenues from the Oil & Gas sector and the growth in
population leading to deteriorating living standards prompt us to focus on new sustainable revenues
from both Capital investment and the skilled Human capital. To create the new sources of revenue
there must be a vision with a road map for the implementation of the development projects led by
Iraqis with Practical experience, competency , integrity, commitment to the vision and ability to
strike compromises that will guarantee successful “value added” results with robust
economic growth and is tailored to enhance the prosperity & the social wellbeing of all the
Iraqis.
• There is a need to develop & organise skilled resources to manage sustainable projects acceptable to the providers of Funds and/or investors.
• “Provider of Funds” or investors will need the comfort that all the risks and uncertainties are quantified and plans for mitigating such events are in place. There are variety of options for the Engagement of external resource; but the final selection is based on the “value addition” and the alignment of the business objectives.
• Make sure you know what you are doing, if you follow Frank Sinatra “ I DO IT MY WAY”.