The Petroleum Industry and The Petroleum Industry and the Economythe Economy
Some thoughts on meeting the challenges Some thoughts on meeting the challenges of the 21of the 21stst Century Century
Gregory McGuire Gregory McGuire
Conference on the Economy 2008
Presentation OutlinePresentation Outline
Introducing the Works of Introducing the Works of Trevor FarrellTrevor Farrell
Assessing the Current Assessing the Current Context Context
Farrell’s Themes and Farrell’s Themes and Industry Evolution.Industry Evolution.
Ideas on the FutureIdeas on the Future
Farrell’s Major Farrell’s Major Concerns Concerns Planning Capability in the Energy Planning Capability in the Energy
SectorSector Engaging MNC and Technology Engaging MNC and Technology
AcquisitionAcquisition National OwnershipNational Ownership Technological Capability and Technological Capability and
Industrial Policy Industrial Policy
Some Early Conclusions Some Early Conclusions of Farrellof Farrell Oil industry has failed to provide Oil industry has failed to provide
Trinidad with the development Trinidad with the development one might have expected.(1974)one might have expected.(1974)
Failed to play role of dynamic Failed to play role of dynamic sector –weak productive linkages sector –weak productive linkages with rest of the economy with rest of the economy
Venturing downstream (Plastics Venturing downstream (Plastics etc) remains a option to be etc) remains a option to be exploredexplored
Some Early Conclusions Some Early Conclusions of Farrellof Farrell
Resource based industrialization Resource based industrialization was misleading because :was misleading because :– Supply side approach to the Supply side approach to the
definition of what is to be produceddefinition of what is to be produced– Static comparative advantage is Static comparative advantage is
easily lost.( 1988)easily lost.( 1988) Planning is a poorly developed Planning is a poorly developed
function in the Caribbean (1980)function in the Caribbean (1980)
Some Early Conclusions Some Early Conclusions of Farrellof Farrell A technological capability still does A technological capability still does
not exist over a whole range of not exist over a whole range of activities necessary for running the activities necessary for running the oil industry .( 1979)oil industry .( 1979)
The country clearly had the worst of The country clearly had the worst of the deals in the two petroleum the deals in the two petroleum nationalizations of the early nationalizations of the early seventies due inpart to psychological seventies due inpart to psychological weaknesses of negotiators and poor weaknesses of negotiators and poor planning. ( 1976)planning. ( 1976)
Some Early Conclusions Some Early Conclusions of Farrellof Farrell
In the development of the JV at In the development of the JV at Point Lisas the local strategy was Point Lisas the local strategy was too narrowly focused on getting too narrowly focused on getting the plants built rather than the plants built rather than acquiring technological capability. acquiring technological capability. ( 1986)( 1986)
Assessing the Assessing the Context Context
International and Local International and Local
Current Global Trends Current Global Trends and Issuesand Issues
Developed world not driving demand Developed world not driving demand growth but could drive demand growth but could drive demand destruction destruction
Reduced Transnational Company role Reduced Transnational Company role in favor of National Oil Companiesin favor of National Oil Companies
Emerging supply sources give no Emerging supply sources give no assurance of supply stabilityassurance of supply stability
Increasing commoditization of gas Increasing commoditization of gas and LNGand LNG
Demand growth no longer driven by developed economies
The Power of NOCsThe Power of NOCs
Source: Frank Kuijlaars- Oil & Money 2007
Supply DynamicsSupply Dynamics
Three of five largest decrease came from OPEC .Suggesting initial attempts to stabilize prices.
LNG CommoditizationLNG Commoditization
Oil Prices Which Oil Prices Which way ?way ?
Rising Oil Prices Rising Oil Prices
0
20
40
60
80
100
120
86 87 88 89 90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 8
Years
US
$/b
bl
Source: Appendix table 6
Demand from Non OECD countries and market psychology have been the principal drivers.
Back to the Future Back to the Future Real Oil Prices 1980-2008 ( 2006 dollars)
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
Years
US
$/b
bl.
Source: US EIA. Annual Energy Outlook 08
Oil Prices : Which Oil Prices : Which Way ? Way ?
•Declining Economic Growth : OECD & Non OECD
•New supply sources: Brazil, Heavy Oil Tech.
•Convulsions within OPEC
•Bearish market psychology
•Fuel Switching
•Peak oil theory losing steam
•Declining Non -Opec Supply .
•New supply sources mainly in non “friendly” areas.
•NOC vested interest
Oil Prices : Which Oil Prices : Which Way?Way? Some Critical EWSSome Critical EWS
– Real oil prices have climbed back to 1982 Real oil prices have climbed back to 1982 levelslevels
– IEA, EIA and OPEC have all lowered IEA, EIA and OPEC have all lowered demand forecasts for 2009demand forecasts for 2009
– Short term supply disruptions e.g. Ike and Short term supply disruptions e.g. Ike and Gustav Nigeria, Georgia have had no Gustav Nigeria, Georgia have had no discernible impact on prices. discernible impact on prices.
– China is not imported gasoline for two China is not imported gasoline for two months; instead exported surplus stock. months; instead exported surplus stock.
Rising Gas Prices Rising Gas Prices
Figure 6 US Natural Gas Prices 1994-08 ( Henry Hub) US$/MMbtu
0
2
4
6
8
10
12
94 95 96 97 98 99 0 1 2 3 4 5 6 7 8Years
US
$/M
Mb
tu
Source: Table 6
Gas Price Forecast Gas Price Forecast
Henry Hub Spot Prices
0
2
4
6
8
10
12
14
Source US EIA
This forecast was produced before the current crisis. Henry-Hub prices this morning quoted at 6.75/mmbtu lowest level in four years.
What does this What does this mean ? mean ?
Henry Hub vs NCMA Well Head Prices
0
1
2
3
4
5
6
7
8
9
10
2003 2004 2005 2006 2007
Years
US
$/M
MB
TU
Henry Hub NCMA Price
Avg. Diff. 48%
Local Industry Local Industry Context Context
The Big PictureThe Big Picture
Resumption of long term Resumption of long term decline in Crude oil productiondecline in Crude oil production
Significant slowing in the rate Significant slowing in the rate of gas utilization and of gas utilization and production production
Decline in both exploratory Decline in both exploratory and development drilling over and development drilling over last two years.last two years.
The Big PictureThe Big Picture
Refining at the cross roads.Refining at the cross roads.– Upgrade project Upgrade project – CostsCosts– MarketsMarkets
Long overdue modernization Long overdue modernization
The Big PictureThe Big Picture
World class World class primaryprimary petrochemical petrochemical business.business.
World class LNG business.World class LNG business. Limited national participation in Limited national participation in
value chain value chain Only initial steps at downstream Only initial steps at downstream
expansion led by local private expansion led by local private sectorsector. .
The Big PictureThe Big Picture
Industry growth slowed by Industry growth slowed by rising capital costs, market rising capital costs, market uncertainly and tougher local uncertainly and tougher local terms. terms.
Stagnation at the national Stagnation at the national enterprises. enterprises.
Massive expansion in skill Massive expansion in skill training to match requirements training to match requirements of the industry.of the industry.
Long Term Production Long Term Production DeclineDecline
Figure 13Crude Oil Production (000bbls/d)
0
50
100
150
200
250
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Years
"000 b
bls
/day
Source Table A8
Refinery Output Refinery Output
Figure 14Refinery Product Slate ( 2006)
Gasoline 17%
Reg Gasoline7%
Unf Gas/Ref Feed6%
Kerosene11%
Gas Oil / Diesel23%
Fuel Oil 32%
Other 4%
Source: Petrotrin
Still a relatively high percentage of low value fuel oil .
Gas Consumption Gas Consumption 1995-2006 1995-2006
0
5 0 0
1 0 0 0
1 5 0 0
2 0 0 0
2 5 0 0
3 0 0 0
3 5 0 0
4 0 0 0
(MM
scfd
)
1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6
A m m o n ia M e th a n o l P o w e r G e n e r a tio n M e ta ls
H e a v y In d u s tr ia l L ig h t In d u s tr ia l L N G
LNG Dominates Gas LNG Dominates Gas Utilization Utilization
LNG, 54%I ron and
Steel, 3%
Pow er Generation,
7%
Methanol, 16%
Ammonia and Urea, 15%
Gas Processing,
LI C and Others, 5%
Natural Gas Utilization - 2007
Farrell’s ThemesFarrell’s Themes
Planning and the Energy Planning and the Energy Sector Sector
Successful Planning – Successful Planning – Farrell’s Six Farrell’s Six PreconditionsPreconditions
1. Effective Organizational Apparatus
2. Cadre of Skilled people
3. Effective ControlOver Energy Sector
4. SophisticatedUnderstanding of planning
5. Willingness Of Policy Makers to plan
6. Quality Information
Approach: AFROSIBER Approach: AFROSIBER
Nine Point Planning Methodology Nine Point Planning Methodology – Assess ContextAssess Context– Forecasting Forecasting – Resource evaluation Resource evaluation – ObjectivesObjectives– Strategies and ImplicationsStrategies and Implications– BalancesBalances– Execution Execution – Review Review
Assessment Assessment
Planners were mainly project managers Planners were mainly project managers concerned with getting the physical plant off concerned with getting the physical plant off the ground. the ground.
A handful of people were entrusted with the A handful of people were entrusted with the responsibility for projects were not enough responsibility for projects were not enough to do the kind of planning required. to do the kind of planning required.
Planners did not have the level of Planners did not have the level of information required and relied on the information required and relied on the information provided by technology supplier.information provided by technology supplier.
Recent Approaches Recent Approaches
Vision 2020 Energy met criteria of Vision 2020 Energy met criteria of skilled cadre, and information skilled cadre, and information requirements .requirements .
Widening Gap between plan and Widening Gap between plan and what is being implemented.what is being implemented.
Organizational Apparatus remains Organizational Apparatus remains basically the same as 30 yrs ago, basically the same as 30 yrs ago, with the same personalities. with the same personalities.
Farrell’s ThemesFarrell’s Themes
Engaging MNC’s and Engaging MNC’s and Technology Acquisition Technology Acquisition
Philosophy Philosophy
Major concern ; the level of benefits Major concern ; the level of benefits the country receives from MNC’s in the country receives from MNC’s in the form of Technology Acquisition the form of Technology Acquisition and Value Added. and Value Added.
TNC’s don’t willingly transfer TNC’s don’t willingly transfer technology . Host Governments technology . Host Governments need to develop the national need to develop the national capacity to acquire required capacity to acquire required technology. technology.
Assessment Assessment
It is clear that the areas where the It is clear that the areas where the country has developed a capability country has developed a capability have been only those areas which the have been only those areas which the companies needed to develop locally companies needed to develop locally st to carry out their activities. st to carry out their activities.
Technological capability still does not Technological capability still does not exist over the whole range of exist over the whole range of activities necessary for running the activities necessary for running the industry . industry .
Current State Current State
The relationships with ANLG The relationships with ANLG suggest that technology suggest that technology acquisition is still not a specific acquisition is still not a specific item on the agenda and that item on the agenda and that weaknesses in dealings with the weaknesses in dealings with the Multinational persist. Multinational persist. – PM’s cry for a better deal from ANLG PM’s cry for a better deal from ANLG
Farrell’s Themes Farrell’s Themes
National Ownership National Ownership
Philosophy Philosophy
We cannot plan for what you could not We cannot plan for what you could not control. control.
Multinationals run the business in Multinationals run the business in their own interest their own interest
This is so even when they are engaged This is so even when they are engaged in a JV arrangement in a JV arrangement
The primary aim of Nationalization is The primary aim of Nationalization is to create a national vehicle to build to create a national vehicle to build national technological capability in the national technological capability in the sector. sector.
History and History and PerformancePerformance Nationalization and national ownership Nationalization and national ownership
in sector since 1969. in sector since 1969. Features:Features:
– Rescue Nationalization Rescue Nationalization – Cosmetic NationalizationCosmetic Nationalization– Direct Investments Direct Investments
Process reversed during the 1990’s Process reversed during the 1990’s with privatization of bulk of direct with privatization of bulk of direct investment assets investment assets
Assessment Assessment
An effective and meaningful An effective and meaningful genuine nationalization would genuine nationalization would possess the following features: possess the following features: – Effective local control of the Effective local control of the
nationalized propertiesnationalized properties– The actual exercise of such control for The actual exercise of such control for
the furtherance of development goalsthe furtherance of development goals– The targeting of areas of real The targeting of areas of real
economic significance economic significance
AssessmentAssessment
Farrell study highlighted breath Farrell study highlighted breath weaknesses: weaknesses: – Major projects and constructionMajor projects and construction– Research and developmentResearch and development– Economics and Planning Economics and Planning
Transportation Transportation – International marketing International marketing
AssessmentAssessment
Farrell study highlighted Depth Farrell study highlighted Depth weaknesses: Exploration and weaknesses: Exploration and Marine production Marine production
PetrochemicalsPetrochemicals Genaeral administration Genaeral administration Purchasing Purchasing Information and Data Processing Information and Data Processing
Assessment Assessment
in a 1979 study of industry in a 1979 study of industry Farrell concluded :Farrell concluded :– Nationalization is unlikely to work Nationalization is unlikely to work
even in the short run unless ways even in the short run unless ways are found for tackling the basic skills are found for tackling the basic skills deficits in the are of the critical deficits in the are of the critical functions functions
State of the National State of the National EnterpriseEnterprise
Fully Owned,Fully Owned, PetrotrinPetrotrin National Gas CompanyNational Gas Company National Energy CorporationNational Energy Corporation
Equity Equity TringenTringen PPGPLPPGPL ANLG – Train 1 and 4 ANLG – Train 1 and 4
State of the National State of the National EnterpriseEnterprise
THE CASE OF PETROTRIN THE CASE OF PETROTRIN
The Refiner’s Economic The Refiner’s Economic challengechallenge
Refinery location issues Refinery location issues – Raw materials, markets, utilities, Raw materials, markets, utilities,
labour supplylabour supply Capital investment Capital investment
– Fixed and working capitalFixed and working capital Refining costsRefining costs Project and payout timeProject and payout time Economics of impuritiesEconomics of impurities
TheThe Developing Country Developing Country ProblemProblem Access to low cost secure crude supplyAccess to low cost secure crude supply Lack of capital for investment Lack of capital for investment Diseconomies of scale and small Diseconomies of scale and small
refineriesrefineries Market demand and refinery output Market demand and refinery output
imbalanceimbalance Lack of design and construction Lack of design and construction
capability Lack of managerial, capability Lack of managerial, commercial and technical expertise commercial and technical expertise
Main ProductsMain Products LPGLPG
Aviation GasoleneAviation Gasolene
Motor gasoleneMotor gasolene
Kerosene/AvjetKerosene/Avjet
Gas Oil/ No. 2 Fuel OilGas Oil/ No. 2 Fuel Oil
Fuel OilFuel Oil
BitumenBitumen
SulphurSulphur
Refinery ThroughputRefinery Throughput1994-2008 August Ytd1994-2008 August Ytd
107.1100.2 103.6 103.5
123.2
145.5
161.2 157.8149.7 148.5
154.7 151.26158.8
151.21136.3
0
20
40
60
80
100
120
140
160
180
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008AugYtd
MB
PC
D
Refining & Marketing Refining & Marketing Performance IndicatorsPerformance Indicators
0
20
40
60
80
100
120
140
160
180
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008AugYtd
MB
PC
D o
r R
efin
ery
Uti
lizat
ion
0
1
2
3
4
5
6
7
8
9
10
US
$/B
bl
Throughput SalesRefinery Utilization Indicative Margin
INCOME STATEMENT - R&M (TT$MM)INCOME STATEMENT - R&M (TT$MM)
2000 2001 2002 2003 2004 2005 2006 2007
Audited Audited Audited Audited Audited Audited Audited Audited
Gross Revenue 10,695 10,968 8,443 11,392 11,749 18,878 24,106 24,872 Less : Cost of Sales 9,393 9,672 7,310 9,949 10,200 15,880 21,722 21,669 Gross Margin 1,302 1,296 1,133 1,443 1,549 2,998 2,384 3,203
Less : Expenses
Operating Expenses 811 825 775 756 762 850 967 980
Variable Pay - - - 11 25 83 80 77
Depreciation & Amortization 125 126 126 147 155 141 200 196
Abandonment Depletion - - - 3 15 13 4 34
Abandm't Finance Costs - - 2 2 27 12 15 41
Corporate Overheads 100 114 95 157 196 185 269 302
Post Ret.Medical Benefit - - 7 16 43 90 37 47
Other Expense/(Income) 60 77 105 95 32 33 (12) (70) Total Expenses 1,096 1,142 1,110 1,187 1,255 1,407 1,560 1,607
Income Before Tax 206 154 23 256 294 1,591 824 1,596
Taxation (PPT/UL) (5) (6) (1) (15) (12) (280) (386) (481) Net Earnings 201 148 22 241 282 1,311 438 1,115
TT$MM
Refining at the Refining at the crossroadscrossroads Refinery SustainabilityRefinery Sustainability SpecificationsSpecifications Petrocaribe & CaricomPetrocaribe & Caricom Gas & LNGGas & LNG Oil PricesOil Prices
Cost Challenges to the Cost Challenges to the refining Industryrefining Industry
Petronas : A Petronas : A benchmark National benchmark National Enterprise: Enterprise: Founded in 1974Founded in 1974 Total Assets ( 2004) US$ 53 billion Total Assets ( 2004) US$ 53 billion
compared to NGC/Petrotrin $3 billion.compared to NGC/Petrotrin $3 billion. Business : Fully integrated oil and gas , Business : Fully integrated oil and gas ,
gas processing, liquefaction, LNG gas processing, liquefaction, LNG shipping regas, shipping property shipping regas, shipping property investments. investments.
Petronas Group: 94 wholly owned Petronas Group: 94 wholly owned subsidiaries, 55 associated companies subsidiaries, 55 associated companies 14 countries.14 countries.
Technological Technological Capability and Capability and Industrial Policy Industrial Policy
PhilosophyPhilosophy
At the heart of our ability to win At the heart of our ability to win the game with the TNC’s is the the game with the TNC’s is the technological capability technological capability
That is ; the ability to find one’s That is ; the ability to find one’s problems and needs and find ways problems and needs and find ways to meet and solve them. to meet and solve them.
Local Content in Local Content in EnergyEnergy Local content policy formulatedLocal content policy formulated Permanent local content Permanent local content
committee appointedcommittee appointed Need to build on achievements –Need to build on achievements –
Labidco etcLabidco etc Need to provide resources Need to provide resources
Enterprise Enterprise development development Local enterprise development Local enterprise development
vital for the continued meaningful vital for the continued meaningful growth o f the industry.growth o f the industry.
CL Financial is an outstanding CL Financial is an outstanding example of what is possible by a example of what is possible by a local enterpriselocal enterprise
Policy makers should learn lessons Policy makers should learn lessons of that experience in order to of that experience in order to inform the way forward. inform the way forward.
Thoughts on Moving Thoughts on Moving Forward Forward
Place technology acquisition and Place technology acquisition and technological capability back on the technological capability back on the agenda.agenda.
Develop that Cadre of skills personnel Develop that Cadre of skills personnel involved in the planning and involved in the planning and Management of the Sector. Management of the Sector.
Make strategic use of state equity Make strategic use of state equity participation to expand downstream participation to expand downstream and down the value chain. and down the value chain.
