ey’s petroleum society maturity index

EY’s Petroleum Society Maturity Index


Source: OPEC Revenues Fact Sheet, EIA

Oil exporting countries are transforming their economies

1 Governments have been forced to make steep cuts to investment and, critically, to subsidies and social welfare programs following the drop in oil price.

2 Several countries are exploring the sale of stakes in National Oil Companies (NOCs) to raise revenues.

3 NOCs are developing plans to expand along the oil and gas value chain and into other sectors to reduce dependence on revenues from oil and gas.

decline in OPEC’s oil export revenue between 2014 -16

55%


NOCs’ traditional four phase approach is less than optimal

► The NOC is established through mandate from the government.

► Joint ventures are normally formed to leverage external expertise and technology.

► The focus is on exploitation of the domestic resources.

► NOC/State focus is on building local capability to take greater control of domestic production and a greater share of revenues.

► Processes are formalized and leading practice asset management methodologies are applied.

► Vertical integration is applied to refining/LNG/petrochemicals.

► NOCs start to participate internationally through joint ventures, acquisitions or market entry.

► In order to operate in foreign markets, contracts and agreements are formed with international companies.

► NOCs internally develop and foster new talent.

► R&D facilities are established to increase technological innovation.

► Synergies are created with companies that are technology and innovation leaders, allowing the NOC to emerge as an International Oil Company.

Phase 1Establish foundations

Phase 2Gain greater control over production and build local capability

Phase 3 Internationalize to diversify portfolio and strengthen relationship with end-consumer

Phase 4Expand and diversify capabilities

► The traditional approach needs to be adapted to achieve reduced resource dependence and increased sustainability► A cohesive overview of the domestic economy is required for NOCs to balance national and commercial objectives, achieving

economic transformation


NOCs play a pivotal role in the transformation of national economies

Petroleum society maturity and overall economic benefit

Sell-off Production Refining/LNG Petrochemicals OFS ecosystem Intellectualcapital

Petroleum society maturity

Short-term only

Dependent onresources

Sustainability

Econ

omic

impa

ctsu

stai

nabi

lity

Low

High

Resourcedevelopment

Valueaddition

Economic transformation


Economic transformation through EY’s Petroleum Society Maturity Index (PSMI)

► EY’s PSMI helps the NOC and the State to move toward economic transformation by improving the role of NOCs

► PSMI is composed of five indicators that track development of economies as they move along the value chain

Petroleum society maturity development indicators

Resource development

Value addition

Economic transformation

Declining reserves, no energy stability

High reliance and consumption

Alternatives to oil, gas, efficient consumption

Energy

NOC or government subsidized posts

Develop and employ more nationals

World-class national workforce

Society

Importing international suppliers

Increasing capability of domestic suppliers

Diversified competitive exporting industries

Enterprise

Importing international expertise

Oil and gas domestic technology

Knowledge economy exporting IP

Intellectual capital

Sell-off resources to bring in cash

Additional cash from domestic value chain

Growing GDP from a diverse economy

Economy


The example below illustrates EY’s PSMI to understand the current state of a country’s economy

► All three countries (A,B,C) have substantial oil and gas reserves and derive significant revenue from exports of oil and gas.

► Country A is clearly the most developed along the transformation.

► Country B is progressing well through the journey but needs to continue to develop across 4 of the 5 indicators to deliver the most value to the national economy .

► Compared to country A and B, country C needs to develop a plan to lower dependence on revenues from oil and gas, improve quality of its exports, train labor force, and optimize the energy mix.

Enterprise(export quality)

Economy(economic

independence from oiland gas)

Intellectual capitalEnergy(energy

independence)

Society(youth employment

rate)

Country A Country B Country C



EY’s PSMI can assist NOCs set the path for transformation

Today’s NOC model is no longer fit for the future; generating value must

take priority over generating volume

NOCs must change how they define their role and

contribution to the national economy in order to maintain their critical

position within the industry and their countries

NOCs need to commercially allocate capital, measure it and

obtain reasonable returns

NOCs that embark on the journey of transformation to become “commercial NOCs” will maximize their potential enterprise value and contribution to their country

To aid this transformation, EY has identified eight critical aspects NOCs need to address to maximize their earnings and contribution to the State. Read more at ey.com/oilandgas/nocs


► Building and recommending a robust plan for evolution of NOC that will serve as key contributor to thecountry’s GDP

► New “commercial NOC” will fulfill both national objectives and the profitability expectations of key stakeholders of the entity

Balancing nationalvs. commercial objectives1


► Partial privatization of NOCs will raise their potential enterprise value and overall contribution to their country► Improving capital structure through a mix of external commercial finance, equity investors and free cash flow from

operations

Meeting funding needs through a mix of external finance and internal cash flow2


► Utilizing technology and digital approaches throughout the value chain► Harness the power of data to improve efficiency and productivity

► This will help the NOC to retain its status as one of the low-cost producers► Effective monetization of options developed through R & D

Implementing enabling technology to drive better commercial decisions3


► NOC is fully integrated to capture and maximize income in the entire oil and gas value chain► Improving mix of both backward and forward integration based on comparative advantage of the domestic

economy

Exploiting the value chain opportunities through better coordinated vertical integration4


► Renegotiating certain elements of the contract with the state and the oil and gas regulator to assist the NOC to act as “commercial NOC”

► Will facilitate optimal allocation of capital that will enhance its long-term value► Improvement of the current tax regime

Clearly understanding the autonomy required by the NOC to operate at its fullest commercial extent5


► Will increase productivity and efficiency and lower costs ► The transformed NOC will have well-developed centers of excellence in key locations, and its staff will be able to

participate in market-leading training programs

Improving people capabilities and skills development to operate in a commercial mind-set6


► To secure demand/supply and access to technology► Aligning internationalization strategy with broader corporate strategy will improve portfolio risk management and

diversification

Internationalization through investments in major high-growth potential markets7


► Developing core portfolio of investments in other sectors to diversify revenue streams

Maximizing revenue potential through targeted investments and the diversification of revenue streams8

Ioana-Andreea Ene+47 51 70 66 [email protected]

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