the oil council's drillers and dealers february 2011 edition

The Official Publication of The Oil Council ::: ::: February 2011 Issue

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Welcome to Drillers and Dealers

Drillers and Dealers ::: ::: February 2011 Edition

Contents 2011 Oil & Gas Survey Results 5 EMERGING MARKETS SPECIAL FEATURE Q&A: Risk / Reward Matrix of Caspian Exploration & Production: An M&A Energy Advisor’s Perspective

9

Dana Novakovic, LB Capital Iraq – A Diamond in the Ash 12 Greg Hammond, Akin Gump Strauss Hauer & Feld Do NOC Leaders have the skills to deliver their National Mission?

14

Johan Nell and Colin Sloman, Accenture The New Emerging Energy Future 17 Mehmet Ogutcu, BG Group

MENA Region’s Oilfield Services 20 Nawaf Marafi, Ali Rampurwala and Rajiv Bishnoi, Kuwait Financial Centre “Markaz”

Monetizing East African Gas 25 Wylie Clark, Taylor-DeJongh Latin America’s Emergence as an Oil & Gas Stronghold

26

Evelyse Carvalho Ribas, CARVALHO RIBAS - Advocacia e Consultoria

Best Practices in Engaging Stakeholders in Oil and Gas Projects – The African Experience

31

Ziwase Ndhlovu, Mukazi Consulting OC Columnists – What’s New Online?

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Copyright, Commentary and IP Disclaimer ***Any content within this publication cannot be reproduced without the express permission of The Oil Council and the respective contributing authors. Permission can be sought by contacting the authors directly or by contacting Iain Pitt at the above contact details. All comments within this magazine are the views of the authors themselves unless otherwise attributed to their company / organisation. They are not associated with, or reflective of, any official capacity, or any other person in their company / organisation unless so attributed ***

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Emerging Markets Focus


Risk / Reward Matrix of Caspian Exploration & Production:

An M&A Energy Advisor’s Perspective

Drake Lawhead interviews Dana Novakovic, Managing Director of LB Capital

DL: What does 2011 hold for Oil & Gas emerging markets M&A? DN: Whilst most of our mandated work since 2009, through 2010, has been in Canada and North and West Africa, at the start of 2011 we see renewed interest, and opportunity to grow shareholder value, in the Caspian – places such as Kazakhstan, where the deal count has been limited and where most deals have

been of a local or a private nature over the past 3 years. Only in January we accepted two mandates in the Caspian, a cross-border buy-side, and a sell-side in Kazakhstan. From a Macroeconomic perspective, according to projections put together by the IEA, Caspian oil and gas output will approximately double by 2030. Whilst the quickest output growth will come from Turkmenistan, the quickest growth in export quantities will still come from Kazakhstan, requiring that the country expands its oil export capacity from 1.5m bbl/d to as much as 3.5 m bbl/d. On the microeconomic level companies are carefully scrutinising technical, “soft” and financial consideration, and the risk envelope of the Caspian is recovering relative to the alternatives, as well. DL: How is this affecting acquisition multiples and expected level of deal flow? DN: Kazakhstan acquisition multiples have fallen significantly between 2007 and 2009, from its highest level of over ca. $5 per boe of 2P reserves between 2005 and 2007. This reflected not only the lack of acquisition finance since 2007, but also the changes in the risk envelope of the country. Whilst the bulk of renegotiations of the largest contracts such as the case with Karachaganak, may well be isolated and not spread to other large projects, a level of uncertainty remains, in particular, with respect to the export-tax regime and the local factors’ ambitions to increase its levels of ownership in the largest of the projects. However, the risks associated with renegotiations of contracts have affected primarily the Majors involved in the largest projects, and small and medium size producers remain largely unaffected. DL: So, are we to expect more activity in 2011? DN: Following the decline in acquisition multiples, a number of sizable assets bearing low technical risk remain available at reasonable multiples. Some of these assets have effectively been on the market since 2009, and Kazakhstan is emerging from the credit crunch as an attractive place for small and medium size E&P acquirers seeking both value and growth.



In fact, in the 1Q 2011, the total value of mainly producing assets on the market in Kazakhstan, formally mandated by sell-side advisors for, on average, over a year now, amount to in access of $1 billion. Now, the supply / demand curve is reaching that point where we see renewed interest by investors to result in a couple of reasonably sized transaction expected to close in February / March, as the “air pocket” between the seller’s expectations (pre credit crunch) and the acquirers’ ability to spend (post credit crunch) has diminished. A couple of these larger deals have been drawn out and reflect the sellers’ dissatisfaction in case of

protracted processes involving Chinese potential acquirers. On a separate note, we also see a number of small cap explorers obtaining funding for higher-risk pure exploration drilling strategies. DL: What seem to be the most opportunistic acquisition targets? DN: It is indeed a bold proposition, but Cogito Ergo Sum: there is a case for a “roll-up” of a number of, especially, undervalued onshore properties in Western Kazakhstan, a proven hydrocarbon basin with existing infrastructure. This is a particularly fitting proposition for smaller and medium size acquirers because of the under-developed nature of the country’s smaller onshore resources of well known geologies, relative to the big bets (the likes of Kashagan) that Majors have focused on. Western Kazakhstan was well explored

during the Soviet era, the data has been stored and has been successfully used by foreign companies operating there to focus and reduce costs of their 3D campaigns. DL: Which on-shore prospects offer the highest upside?

DN: A number of onshore assets with substantial resources offer significant financial upside that will come from the conversion of resources into reserves in the next couple of years. These are assets at a stage where a small investment in development and external valuations of discoveries to confirm reserves is required in order to satisfy creditors and raise future development capital. Whilst, such situations would usually be positioned in the upper right hand corner of the risk / reward matrix, the known character of the local geology and low technical risks, have already allowed for such strategies to obtain financing over the past two years.

We are looking at a number of portfolios where 3D seismic has been applied to the proven hydrocarbon basin, actively de-risking portfolios of low-risk, low-upfront-expenditure prospects with substantial production upside. Rolling up a number of smaller assets of this description would allow a larger acquirer to participate in several licences and diversify exploration risks for investors, in order to obtain a premium over the typical one-asset risk situations of smaller exploration plays, which is the case with most Caspian plays that are publicly traded. DL: What about producing assets?

DN: The universe of acquisition targets for larger acquirers is case-book, as well. All Kazakhstan-based E&P players fall, quite neatly, into 3 categories: exploration plays, growing early producers and mature producers. When it comes to production, companies operating in Kazakhstan sell approximately 20% of oil in the local market at ca.50% of Brent, and export about 80% of produced oil. Barrel sold in Kazakhstan is less profitable than exported barrel but still much more profitable than, for example, Russian barrel. This is also why oil prospects in Kazakhstan are safer bets relative to gas prospects; whilst gas producers face uncertainty related gas pricing, as well as gas transportation and processing, oil producers, on the other hand, enjoy clear and stable export price that equals Brent minus a predictable discount that depends on transportation cost from the point of sale to Europe and quality of crude. Also, most producing assets and

companies in Kazakhstan have substantial resources that have not migrated to reserves yet offer substantial exploration and development upside. In conclusion, we do see value for investors in a few carefully selected oil assets higher up the development curve here, as well.

LB Capital companies provide cutting edge strategic advisory service on merger and acquisition (“M&A”) and A&D transactions. We serve corporate clients and governments, as well as a range of institutional and private investors, including sovereign wealth funds in Energy and Natural Resources Sectors. Dana is Managing Director at LB Capital. Prior to LBC, she was Corporate Director M&A Energy at ABN Amro and Associate Director M&A Energy at UBS Investment Bank in London. She joined UBS Investment Bank in 2004 after working at Lehman Brothers M&A Energy and McKinsey & Company’s Petroleum Practice in London and New York. Dana holds an MBA with concentrations in Finance and Accounting from the William E. Simon Business School, University of Rochester, New York: http://lb-capital.com/

http://lb-capital.com/

Privately held E&PAdvisor to a privately held company in connection with a proposed sale of oil & gas exploration and production propertiesin Kazakhstan.

UK IndependentAdvisor to a UK Independent on potential acquisitions of oil & gas producing properties in the Caspian.

Canadian corporationAdvisor to Canadian corporation supported by Carmignac Gestion on the next stage of its corporate development includingacquisition of oil & gas producing properties in West Africa.

NOC clientAdvisor to an NOC on potential acquisitions of a privately held company producing oil in the CIS.

PetronorseAdvisor to Petronorse in connection with its decision to explore strategic opportunities in pursuing next stage of development.

CEACAdvisor to Central European Aluminium Company on potential acquisition(s) of power producing assets.

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SELECTED RECENT MANDATES

We were founded on the belief that a private and independent advisory firm that offers pureadvice, untainted by the conflicts inherent in multi-product investment banks offers superiorvalue to our sophisticated and results-oriented Sector clients. With no lending or tradingconflicts, LB Capital's fundamental focus, and our cutting edge, is in valuing our long-termclient relationships by delivering high-impact advisory services based on specialist experience,uncompromising integrity and continuity of personnel.

WHAT MAKES US DIFFERENT

Cutting edge specialist Oil & Gas M&A boutique repeatedly engagedby sophisticated Sector clients seeking to attain specific results and grow value

Mandated Diversified International ConglomerateAdvisor to a privately held diversified corporation in connection with reviewing strategic alternatives regarding itsoil & gas portfolio.

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LB Capital LimitedBerkley Square HouseBerkley SquareLondon WIJ 6BDUnited Kingdomhttp://www.lb-capital.com

Our model has evolved in response to the industry's increasing demand for a more thoughtfuland sophisticated approach to portfolio optimization, capital re-deployment, and carefulinvesting. As a result, our track record of delivering value for clients, and our uniquecombination of skills, has quickly made us the firm of choice for sophisticated clients looking toachieve superior results under challenging market conditions, including in the emerging andfrontier markets.

In addition to independence, our distinct advantage is our singular Sector specialisation; weare primarily an Oil & Gas boutique that is better positioned to include and leverage the hands-on expertise of our technical consultants, primarily petroleum engineers, combined with thesophisticated corporate finance prowess of a leading investment bank.



Iraq – A Diamond in the Ash

Written by Greg Hammond, Partner, Akin Gump Strauss Hauer & Feld

Iraq is possibly unique among the major oil producing nations insofar as its oil production profile over the last 30 years shows a succession of truly spectacular collapses in production. Depicted on a graph, it resembles the jagged blade of a giant wood-saw. Since its all-time production peak in 1979, Iraq has of course been subjected to three devastating wars which brought the country to its knees and destroyed key elements of its hydrocarbons infrastructure. As if this wasn’t enough, the source of the world’s fourth largest oil reserves has experienced a number of other setbacks. Religious and cultural divisions (for example amongst the Shia and Sunni muslims, as well as the Kurds in the north and the Marsh Arabs in the south) continue to create barriers. These divisions are also sometimes reflected in the political landscape. Following the elections in 2010 (when no clear majority emerged), it took over nine months for a coalition government to be formed which delayed and further hindered Iraq’s rebuilding effort. In addition, Kurdistan continues to govern itself semi-autonomously through the Kurdistan Regional Government (“KRG”), with the result that there are differing oil and gas licensing regimes in Kurdistan and the rest of Iraq. These differences (which have arisen partly from a disagreement over the interpretation of the Iraqi Constitution adopted in 2005), resulted in the oil embargo imposed by Baghdad which has recently frozen exports out of Kurdistan. Another source of friction between Baghdad and Erbil has arisen from the KRG’s preference for a traditional PSC-style licensing arrangement in contrast to the south where a form of technical services contract (the “DPSC”) is more typically used (which rewards participants with a cash fee per barrel of oil recovered rather than with a pre-agreed percentage share of physical oil). One of the starkest logistical problems facing Iraq relates to the lack of transportation facilities and storage capacity for hydrocarbons – particularly in landlocked (and mountainous) Kurdistan. While a network of ageing pipelines does exist up and down the country, Iraq is still a long way short of the infrastructure which will be required if its current production targets are to be achieved. Of course security also remains an issue of concern – both as regards safety of employees, as well as security of assets and infrastructure. Hijackings and bombings continue – and there is concern in some quarters over the ability of the Iraqis to maintain reasonable standards of law and order in the future once foreign forces have left. On a more practical level, unexploded munitions and mines from the Iran-Iraq war and two Gulf wars often need to be removed before fields can be accessed and developed. Indeed the form of Iraqi DPSC makes specific reference (where appropriate) to the preparation of a “de-mining work program” which must then be performed as a recoverable cost of the contractor parties. Wars (and even previous production methods) have on occasions damaged the oil deposits themselves, leading to by-passed reservoirs and unpredictable operational difficulties. For example, a UN Report in 2000 highlighted such problems in the massive Kirkuk field. As one might expect, three wars in quick succession have also resulted in the loss or destruction of years of accumulated appraisal data. Oil reserves information is therefore often based on limited data, giving scope for interpretation or error. In addition, the once plentiful pool of world-class technical experts emanating from Iraq (including geologists and geophysicists) has been severely reduced by war and emigration. There are even claims from some circles that certain fields in the south of Iraq may be subject to the stringent environmental laws which govern the area of the Marsh Lands around Basrah – protecting its water supplies, flora and sensitive fishing stocks. Add to that the global financial crisis, the resulting fall in the oil price and the collapse of Dubai as the hub for Middle Eastern finance and (as one might expect) the list of problems, handicaps and restricting factors goes on and on. So why then in 2009 did BP and CNPC buck the general trend and alone enter into a DPSC under the First Licensing Round in Southern Iraq when all other bidders had declined? More intriguingly, why in 2010 did the market capitalization of one AIM-listed oil producer soar to £1.5bn when its oil production in Kurdistan is both limited and currently transported solely by road? In short, why (in spite of the catalogue of risk factors listed above) does the tide now appear to be turning in favour of investment in Iraqi oil and what are the prospects in the medium-to-long term for investors there? As we know, the oil industry is essentially an exercise in understanding and assessing risk – which can take many forms and is often present across the full length of the oil exploration, production and off-take chain. The big difference in Iraq is that one of the key customary risks – exploration risk – can often be almost eliminated due to the unusual degree of confidence that hydrocarbons are in place. In the south of Iraq, this is frequently because most of the oil fields which have been the subject of the latest three licensing rounds are known to have existed (and indeed have often been in full-scale production) at some point over the last thirty years. The existence of these huge fields has of course been the justification for the technical services arrangement embodied in the Iraqi DPSC – on the basis that there was never any exploration risk for a bidder. All that was required was a large balance sheet and the technical expertise and resources which a super-major IOC could provide to bring a particular field back on stream. In contrast to southern Iraq, the virtual elimination of exploration risk in Kurdistan arises in other ways. It was best illustrated to me many years ago by the look on the face of one of the industry’s leading geologists who, during the early scramble for



Kurdish exploration acreage, memorably emerged open-mouthed from a London data room whispering that he had seen “mountains full of oil”. This prediction turned out to be pretty accurate, given that the success rate for exploration wells in Kurdistan currently stands at around 80% - an astonishing statistic. So, if one can be fairly confident in Iraq about exploration risk, how will one ever be able to get comfortable with the various political, security, transportation, educational, environmental and other risks catalogued above? In other words, what could be the justification for BP’s extraordinary move in 2009 against a clear tide of contrary opinion and responsible eighteen months later for the rocketing upwards of an AIM-listed company’s market capitalization to £1.5bn from almost nowhere ? The answer may recently have arrived in the form of Abdul Karim Al-Luaibi – the newly appointed Iraqi Oil Minister. Aged 51 and standing over six feet tall, he is a petroleum engineer who has spent his whole career with the Iraqi Oil Ministry – where he started out as an engineer’s assistant. A shrewd and capable politician, he is reported to be close to Hussain Al-Shahristani (the former Oil Minister and now Deputy Prime Minister) and Nouri al-Maliki (the recently appointed Prime Minister – who also happens to be from the same tribe). The closeness of these relationships underscores the critical importance of Iraqi’s oil industry to its leaders and also explains the unified position which now appears to be emerging in energy-related matters, notwithstanding the unstable and unpredictable political scene elsewhere in Iraq. Within two weeks of his appointment, Mr. Al-Luaibi (who, as deputy minister of oil for upstream, managed the process for all three previous licensing rounds in southern Iraq) announced a fourth round of licensing – although importantly this will now be for exploration blocks rather than the development of existing fields. As a result, it is possible that southern Iraq will now move away from the current form of technical services agreement and more towards a traditional form of contract. Within that same two weeks, he announced a record increase in output from Iraqi oil fields (which included a ten per cent. increase in BP’s production over its budgeted targets at its Rumaila field). More recently, it has been announced that Iraq has agreed to build an oil pipeline to neighbouring Jordan and is now considering plans for a similar project into Syria. However, if one reads between the lines, the good news doesn’t seem to stop there. Recognising the critical importance of upgrading Iraq’s oil infrastructure, Mr. Al-Luaibi has confirmed that another immediate focus will be on export routes to the south. There are therefore plans for new pipelines (in conjunction with storage expansion at Faw, Nasiriyah and Zubair in the south) in a clear move to increase the flow of oil to the wider global market. As regards the thorny issue of relations with the KRG, there is now evidence that North Oil Company (the vehicle used by the KRG for oil investments in Kurdistan) is being offered participations in some key oil projects in southern Iraq – thereby further breaking down the barriers between Kurdistan and the south, and almost introducing an element of “cross-shareholding”. Furthermore, Mr. Al-Luaibi (who has led negotiations for southern Iraq for the last year and therefore knows the KRG oil officials extremely well) recently announced that “Talks with the brothers in the KRG will continue in order to reach solutions which meet the public interests”. This was the best indication yet that a thawing was occurring in relations between Erbil and Baghdad. Finally, at the end of January, officials from both sides confirmed that pipeline exports would recommence from two Kurdish fields with effect from 1 February – although other details about such a possible relaxation of the oil embargo were hazy at that stage. Then, on 2 February, news began to break that exports had recommenced from two fields in Kurdistan (including DNO’s Tawke oil field where offtake into the Turkish export pipeline is expected to increase to 50,000 bpd in the next few days). At that point, it became clear that the Iraqi Oil Ministry (under Mr. Al-Luaibi) not only has ambitious plans, but also appears to be able to deliver on them. Inevitably, there will also be a number of external factors which will incentivize the Iraqis and the broader oil industry to tackle and overcome the obstacles to Iraqi investment listed above. In the same way that a steadily increasing oil price, rising global demand, desire for security of supply and the recognition of the risks inherent in other areas of the industry have driven the development of new products such as shale gas, the same market forces can be expected to encourage IOCs, NOCs and other oil industry participants to now come to the table in Iraq. Combined with these external factors, it could be that the Iraqis have now found a magical mix of political will, industry expertise, personalities and global circumstances which can help to reduce or overcome some of the risk factors which have affected them in the past and herald a new “golden age” of investment in Iraq. If that proves to be true, one can expect the original wave of first movers into Iraq to now sit back and enjoy the parallel benefits of a rising oil price and reducing Iraqi risk. Likewise, those original prime-movers wishing to make further investments into Iraq (who by now will have experienced its oil industry at first hand over an adequate period of time) will be best placed to assess the new reduced risk levels and price them into their future investments. Greg Hammond is a Partner in the London office of Akin Gump Strauss Hauer & Feld, the leading international energy law firm and a Member of The Oil Council Committee.

Note: The original version of this article appeared in the 31 January 2011 edition of The Lawyer, which The Lawyer entitled "Get Well Soon”

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Drillers and Dealers February 2011 Edition

Drillers and Dealers February 2011 Edition

Do NOC Leaders have the skills to deliver their National Mission?

Written by Johan Nell and Colin Sloman, Accenture

The growing ambition of National Oil Companies (NOCs) has transformed the energy landscape in recent years. But as NOCs increasingly expand beyond their domestic markets, it is now time to ask whether they themselves are ready for further transformation of their business. NOCs are expected to continue delivering on their „national mission‟, and as they expand abroad, and must compete with International Oil Companies (IOCs) where the battle for reserves, equipment and talent is intense. But another challenge is emerging. NOCs are now being asked to operate their business on a different scale which involves delivering large and complex projects (both at home and abroad) operating in new markets, working with multiple partners and ensuring operational excellence. This new way of operating means the spotlight is now being turned on the leadership qualities of NOCs as they face these new challenges. Over the next decade, OPEC will have an opportunity to reassert its dominance as its members‟ share of global production rises from 40% to as much as 46% by 2030

i. International expansion is already a feature for many NOCs. Asian players in

particular are very active in acquiring assets abroad. For example, the Chinese National Petroleum Company (CNPC) now operates 81 oil and gas projects in 29 countries, up from 58 projects in 22 countries at the end of 2005

ii. It recently stated that its average annual growth rate of overseas crude oil

production reached 15.6% during the past five yearsiii.

NOCs are also working together, forming consortia to bid on new projects together as they move into new markets. Saudi Aramco, for example, has become a major supplier to Asia and an important contributor to Asian economies through investment in refining and petrochemical sector activities. In China alone, it currently employs around 8,000 people

iv.

The Importance of Leadership These trends will require very different skills and experience to those required of NOCs before. In a recent survey of NOC executives conducted by Accenture,* most respondents cited leadership skills and quality talent as essential to deliver their strategies, but acknowledged that these were also often the attributes they particularly lack. NOCs recognise the need to introduce leadership development programmes but these programmes often do not go far enough to drive wholesale business transformation. As they expand their horizons, a greater focus on leadership skills is needed. (*in 2010 Accenture undertook a study of NOC executive to understand what leadership capabilities would be required for NOC success in the energy industry. The study composed of surveys, workshops and interviews with NOC senior level executives, and a workshop with over 40 students (the majority are current employees of NOCs) completing Oil and Gas MBAs in Aberdeen, UK) There are many different types of NOCs, all with different strategies and ambitions; as a result they will all need a slightly different focus to delivery their particular leadership development agenda. In addition, NOC leadership skills face unique challenges with which IOCs do not have to contend. In place of the Western ideology of “maximising shareholder returns”, NOCs work to a more holistic concept of “value creation” along both commercial and social lines, which also requires an ability to manage their key stakeholder, the government. Expectations of “value creation” for many NOCs are codified in their „national mission‟ that means that NOC leaders are continuously balancing the priorities of the commercial business with that of the wider economy, against a backdrop of a constantly changing political situation.

What Leadership Capabilities do NOCs need? As NOCs embark on changing their business models (which often involves internationalization) they need to achieve a cultural fit with their new businesses and communicate well with governments in the host nation. Overlooked skills such as languages are fundamental, as are abilities to execute increasingly risky and complex projects on time and to budget. Over the past two decades, the gap in commercial and technical excellence has narrowed considerably between NOCs and international oil companies (IOCs) However over the past few years, IOCs have been forced to raise their levels of efficiency as

they work on projects which have increased in size, complexity, and risk. Many NOCs are now seeing a similar challenge and

need to also build on their business execution skills to be able to deliver projects, on time and on budget. Complex project management skills will be critical to long term success for NOCs. Underpinning the leadership attributes of vision, relationship and execution is a requirement of all leaders to have strong “soft” skills. Such skills include commercial acumen, communication skills and international experience which are all needed to scale companies at a global level. Such skills often come with experience rather than training and are thus, harder to develop. Visioning skills will also be important for NOC who will are required to maintain a focus on the „national mission‟ as well as inspire and engage staff throughout the significant transformation ahead. In the Accenture survey, NOCs identified that the ability of their executives to set a vision, see opportunities and inspire their workforce as fundamental to achieving their future objectives, but is often lacking as a core leadership attribute.



Successful transformations require strong leadership capabilities but are complicated by the fact that the skills and experiences demanded of the NOC leaders for more a more complex project environment at home and international growth is very different. As they transform their companies, NOCs need to address all three levels of leadership at the individual, team and process level. Based on Accenture‟s extensive experience working with leading NOCs across the world, as well as the results of our recent NOC Leadership Survey, we propose five key ways that NOC leaders can build the skills to achieve high performance abroad and successfully deliver their „national mission‟.

1. Understand individual leadership style

In addition to generic leadership training, it is critical to provide individuals leaders with an understanding of their personality and how it impacts their leadership and management style. This is key to the individual leader‟s success and that of the leadership team and wider organisation. Focusing on developing individual leadership styles is important as is the ability of their management to learn through experience

2. Learn through experience

Leaders learn from planned and unplanned experiences varying from major events, such as leading a Joint Venture or recovering from a financial disaster, to the more conventional (e.g. job rotations, working abroad, etc.). NOCs need to develop a comprehensive leadership development program that uses “experience” and equips candidates to learn from both planned and unplanned experiences.

3. Build foundational soft skills

NOC leaders will need to be highly effective communicators, know how to lead change, and have a keen understanding of the commercial and social policy of the company. NOC managers already have considerable relationship building and networking skills, but in order to improve success in international markets, they will need to balance technical skills training with „soft‟ skills development.

4. Develop team leadership capabilities

The strength of leadership teams, as opposed to individual leaders, will dramatically increase in importance as NOCs optimise their businesses and extend their scale in multiple markets. NOC executive teams often operate as homogeneous groups. But according to our survey, 100% believe that a team discipline will be paramount for future success, and 50% believe that diversity in management will act as a strategic asset. Developing good teams of leaders helps leverage the different capabilities, knowledge, experience and styles of individual leaders and obtain the right balance to execute their specific strategy. Attention should be paid to key areas such as diversity and using social networking tools to encourage teaming. Peer reviews and peer coaching can also help by challenging the traditional hierarchical model of most NOCs.

5. Establish strong leadership processes / systems

Cultivating the next generation of leaders will not happen without intervention. NOC leaders not only need to identify their immediate successors but those two generations beyond. This will only occur with a robust performance management system, as well as a comprehensive succession planning and strategy-aligned programmes for high potentials, which develop and rewards high achievers.

Steps Description

1.

Understand individual leadership style

Apply tried and tested tools to give NOC leaders an understanding of their individual leadership styles and how they work with others – enabling them to reflect and set out practical improvement actions

2.

Learn through experience

Embed experiential based learning at the heart of a comprehensive leadership development program – plan experiences and equip candidates to reflect and learn from both planned and unplanned experiences

3.

Build foundational soft skills

Take immediate steps to put in place targeted soft skills training that incorporates experiences and role play, while at the same time embed soft skill development in career paths, expected competencies and training curriculum for the long term

4.

Develop collective / team leadership capabilities

Develop a global mindset through focussing on increased diversity of the executive leadership team, and using peer group coaching and the latest technologies to build stronger teaming, knowledge sharing and collaboration skills

5.

Set the tone and establish strong leadership processes / systems

Establish a performance based culture and actively cultivate the next generation leaders through the rigorous application of performance management and succession planning, as well as putting in place a comprehensive, strategy aligned, High Potentials program



As NOCs transform their business models and extend their international footprint, they will not only need to address leadership skills at all levels of the organisation but make sure they have the processes in place to embed the leadership capability in their company. The Accenture survey showed however that while most NOCs recognise the need for improved leadership skills, they have yet to develop programs to nurture them. For example, the importance of leadership teams, as opposed to individual leaders, will dramatically increase in importance as NOCs optimise their businesses, and have to “get things done on a global scale”. “Today, NOC executive teams operate as homogeneous groups. In the future, 100% believe that a team discipline will be paramount for success, and 50% believe that diversity in management will act as a strategic asset” (Accenture NOC Leadership Survey). Some of the changes will be difficult to adopt, as they may go against both the existing practices and culture of the company. As NOCs change, they will need to offer a more structured career path and create a more dynamic working environment as a value proposition to future leaders. NOC executives will also need not only the skill but the “will” to be able to steer the company and the next generation of its leaders into the next phase of its development. To fulfil their ambitions at home and abroad, many NOCs are already making incredible business transformations. Our survey found that generally, NOCs felt they were better prepared to handle today‟s challenges than those of tomorrow. If successful change is dependent on talent, then the journey starts here.

About the Authors

Johan Nell leads Accentures’s Upstream Oil and Gas Segment. He has worked in the resources environment for the past 20 years in operational and consulting roles and has delivered business improvement initiatives in the chemicals and petroleum, utilities, mining and heavy engineering industries. In his current role Johan is challenged with the task of directing Accenture’s global industry expertise to the challenges of upstream energy companies, creating and delivering capability in the strategy, operations and operational support domains.

[email protected] Colin Sloman is a Senior Executive in Accenture’s London Office and part of Accenture’s Global Talent & Organisational Performance (T&OP) Leadership Team. Colin is responsible for leading the Energy Industry T&OP Service Line and the Global Culture practice. His industry experience spans Oil & Gas, Chemicals and Mining Industries. Colin is primarily focused on large-scale business change projects spanning Europe, Russia, Middle East, Africa, North America and Asia Pacific.

[email protected]

This article was produced with the assistance of Julie Adams (Accenture Research, and Matthew McGuiness, Accenture Media).

i “Demand for oil will keep rising, warns BP”, 20th January 2011, The Daily Telegraph, © 2011 Telegraph Group Limited, via Factiva ii “China's CNPC cuts 2011-2015 overseas investment plan”, 23 November 2010, Reuters News, (c) 2010 Reuters Limited, via Factiva iii “CNPC ups overseas oil production”, 24th December 2010, China Daily Information Company, copyright 2010 China Daily Information Company via Factiva iv “Oil giant invests in social responsibility” 28 September 200, South China Morning Post, (c) 2009 South China Morning Post Publishers Limited, Hong Kong. All rights reserved, via Factiva



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The New Emerging Energy Future: Towards Cleaner, Safer and Smarter Energy

Written by Mehmet Öğütçü, Chairman, The Bosphorus Summit

“When a Brazilian brews her morning coffee today, she is likely to use electricity from a power plant in Uruguay that runs on natural gas from Argentina provided by a Chilean company. She drives to work in a Ford fuelled with Venezuelan gasoline, and her Canadian-owned factory may soon be

powered by a 3,000 km natural gas pipeline from Bolivia.” Tectonic changes are occurring not only in the world financial system, trading and investment, geopolitics, and technology. A fundamental transformation is also underway in the global energy system. Myriad trends indicate that the current system is far from being sustainable. It wil l be shaped by rising demand over the long term, dominance of fossi l fuels, inaccessible supplies, price volati lity, inadequate investment, geopolitical tensions, resource nationalism, and climate change. The most pressing decision facing the next generation may be how best to accelerate the transition from a fossi l -fuel-based energy system to a system based on climate -friendly energy alternatives. No one country can alone address this mammoth challenge. T he US, the EU and BRICs must all embrace this transition—or we all suffer the consequences. As globalization lifts millions out of poverty, the demand for energy worldwide will continue to grow, and we risk ending up with a volatile, “beggar thy neighbor” style of competition between countries to control sources of supply, especially in the developing world. Mankind has had access to electricity for only 130 years. In just over a century, we have extended transmission lines, providing refrigeration and lighting to 5 billion people around the world. NASA's "Earth at Night" map highlights this world of prosperity, yet 24 percent of humanity still lives in the dark. We are forced to embark on a journey to create a new energy system. However, describing this cleaner energy system is a lot easier than creating it. The transition will take time. History shows that once a new energy technology is proven, it takes about 30 years for it to achieve 1 per cent of the overall market. There is no easy solution, no technological fix and no single answer. Weaning ourselves off fossil fuels will require a combination of greater efficiency, changes in habits and lifestyle, and deploying major renewable energy projects that some people will not like.

Changing Dynamics In World Energy By dint of their sheer size and population -- and their collective decision to embrace their own particular brand of capitalism -- BRICs are the economic future of the world. They today already account for a combined GDP of $15.435 trillion on a purchasing power basis. These rising economic dynamos will have to compete with the mature economic powers for access to remaining untapped reserves of exportable energy - in many cases, bought up long ago by the private energy firms of the mature powers like Exxon Mobil, Chevron, BP, Total of France and Royal Dutch Shell. Of necessity, the new contenders have developed a potent strategy for competing with the Western "majors": they have created state-owned companies of their own and fashioned strategic alliances with the national oil companies that now control oil and gas reserves in many of the major energy-producing nations. The changing nature of the international petroleum market thus requires new rebalanced mechanisms, and new forms of partnerships among players. The profound changes in world energy, still underway, could be summed up as follows: First, the increased international petroleum prices have, together with many other factors, shifted power significantly to oil producing countries, especially a few large ones, where the majority of remaining reserves are located, such as the Gulf, Russia, and Central Asia. This power, coupled with the huge financial assets accumulated by those producers in a high price environment, has fuelled the international ambitions of these countries to seek changing or reshaping the traditional rules of the game for the benefit of their national interests. Aware of their increasing power, many of the resource-rich countries have either re-nationalised their oil industries or established strategic control through further transfer of power into the hands of governments. Second, there is an increasing concern of security of energy supply at the consumer’s side. Due to increased demand and depletion of domestic reserves, major oil consumers will have to rely more on imported oil and gas, from a few politically-instable regions such as the Middle East, Africa, Russia and Central Asia, through long-distance pipelines and vulnerable sea routes. This, combined with the fact that international oil market, is less stable and more prone to the disruption of natural disaster, terrorist attack and isolated geopolitical acts increased the vulnerability of these consumer countries.

Third, the capacity of the global energy industry to satisfy demand is shrinking. By all accounts, the global supply of oil will expand for perhaps another half decade before reaching a peak and beginning to decline, while supplies of natural gas, coal and uranium will probably grow for another decade or two before peaking. Yet, there are still huge unexpored areas in the world. For example, the Arctic is estimated to hold reserves of 51bn tons of oil and 87 trillion cu m of gas, of which 9 bn tons of oil and 10 trillion cu m of gas fall in Russia's territory. Energy investment worldwide has plunged over the past few years in the face of a tougher financing environment, weakening final demand for



energy and lowering cash flow. It is estimated by IEA that global upstream oil and gas investment budgets for 2009 were cut by around 19 percent compared with 2008 — a reduction of over $90 bn. The 2010 figures were not encouraging, either. Fourth, Although the OECD countries are still the largest oil consumers, the current increase in demand for oil and gas is mainly driven by fast economic development in developing countries such as India and China, which account for one-third of the world population but only consume 17 percent of world energy. Each Chinese, however, consumes only two barrels a year, so even a small increase in Chinese consumption could have a massive impact on the market. Global energy demand is expected to nearly double in the first half of this century. That is partly due to population growth, going to about nine billion people in 2050 from 6.8 billion today. Different from OECD countries, these newly emerging major oil consumers are less supportive of free market principles and are guarded by national oil companies that are controlled and supported by their governments. Fifth, a rising security of demand concern of major oil producer countries may prevent large scale of investment from happening. To meet the rising energy demand, huge amount of investment is needed. Due to environmental pressure, consumer governments around the world are seeking to reduce consumption and reliance on traditional fossil fuels given that the energy sector is the main contributor of emissions of greenhouse gases. This rising uncertainty of future consumption level for conventional energy, increases the security-of-demand concern of major export countries, and impedes much needed investment. As a result of these developments, the global energy scene is going through a fundamental transformation that will not only change the rules of the game; it will also change the game itself and its players.

The “Green Economy” and Energy Alternatives New sources of energy are desperately needed to compensate for the eventual disappearance of existing fuels as well as to slow the buildup of climate-changing "greenhouse gases" in the atmosphere. In 2030, fossil fuels will still account for exactly the same share of world energy as in 2004 while the expected increase in renewables and biofuels is so slight - a mere 8.1 percent - as to be virtually meaningless. In global warming terms, the implications are nothing short of catastrophic: Rising reliance on coal (especially in China, India and the Us) means that global emissions of carbon dioxide are projected to rise by 59 percent over the next quarter-century, from 26.9 billion metric tons to 42.9 billion tons. The meaning of this is simple. If these figures hold, there is no hope of averting the worst effects of climate change. The winds of economic destruction are flattening not just retirement accounts but also naive visions for a green economy. Public support for costly new green mandates is weakening, and government budgets to fund them are bleeding red ink. The market, it is now clear, is not a reliable force for driving the adoption of green technologies. Just as the role of government is rising across banking and other sectors of the economy, new green will be much more wary of market forces as the route to profit. Supporters of renewable energy have been much more effective in affecting regulation: in most of the US it is now nearly impossible to get approval to build new coal plants (even when they replace older, less efficient units) and half the states force power companies to buy rising amounts of renewable electricity almost regardless of cost.

Final Word What makes the world energy somehow unstable are "above-ground factors." Ironically, the choices we made to achieve our unprecedented prosperity may bring about our downfall. In 1950, there were 2.5 billion people and a global economy of $7 trillion. Today, the consequences of energy use are felt in every wallet, on each continent, coastline and in our shared atmosphere. The new energy future will likely be a world powered by cleaner fossil fuels, more renewable energy and nuclear. It will be a world where cars, appliances and buildings are much more energy-efficient. Biofuels, wind and solar will grow rapidly from their small base. Renewables could make up 30 per cent of the world’s energy by 2050, if we include hydroelectricity. Fossil fuels and nuclear will make up the rest. In the transport sector, consumers will enjoy a wider array of fuel choices. Vehicles will be powered by everything from advanced petrol and diesel to biofuels, electricity and, eventually, hydrogen. The global business community is the crucial link that will enable the world to get to grips with the energy challenge of the coming decades. Governments will set the framework, scientists will invent the technologies and consumers will adapt to a less energy-intensive world, but it is business that will develop, deliver and apply the technologies at every level. How successful it is will determine how successfully the world copes.

About the Author: A former Turkish diplomat, IEA Principal Administrator, Head of OECD Global Forum, Mehmet Öğütçü is Director of a major multinational energy corporation (UK); Chairman, The Bosphorus Summit; a teaching fellow with London School of Economics, Reading University; and a regular columnist in international and Turkish publications. The views expressed in this paper are the author’s and do not necessarily reflect those of any organisation he is associated with. He can be contacted at [email protected]

http://www.cnbc.com/id/22710404




MENA Region’s Oilfield Services

Written by Nawaf Marafi, Ali Rampurwala and Rajiv Bishnoi from Kuwait Financial Centre “Markaz”

In our view, 2011 and the near-future, represent exciting times for the oilfield services (OFS) segment, both globally as well as in the Middle East & North Africa (MENA) region. As a result of the changing stance of National Oil Companies (NOCs), increasingly favorable policies of local governments, reopening of the financial markets, and growth in regional entrepreneurial talent, opportunistic regional OFS companies stand to benefit significantly in the near-future. We also believe that the opportunity to build indigenous regional OFS companies is fundamentally underexploited.

The Global Quotient According to GBI Research, the global OFS market is expected grow at a compound annual growth rate (CAGR) of 7.3% from $131 billion in 2009 to $200bn by 2015. Similarly, Barclay’s estimates that the global E&P capital expenditure will reach $490bn in 2011 highlighting the strong business potential for OFS companies. This is further underscored by the estimates of the International Energy Agency (IEA) that more than 80% of producing assets globally, are in rapid decline and the resulting need for supporting OFS companies to provide the necessary technology and know-how to maximize recovery and improve efficiency.

The Regional Quotient The MENA region’s OFS expenditure is expected to grow from approximately $11 billion in 2010 to approximately $13 billion by 2012, as per Douglas-Westwood. Whereas, the region’s onshore and offshore drilling and work over expenditure on OFS was approximately $7.7bn in 2007, and is expected to increase by 61% to reach $12.4 billion by 2012, and $27.9bn by 2014.

The number of rigs working the market is normally a good leading indicator for assessing the OFS segments growth or shrinkage trends. Growth in rig count is usually associated with higher demand, both due to an increasing scale as well as enhanced service intensity. The rig count across the MENA region has been in an upward trend over last few years, despite a minor dip in 2008-09 due to the global financial crisis, and is expected to continue upwards in the near-term indicating that the OFS sector in the region can witness sustainable steady growth.

The Landscape From a demand perspective, OFS in the MENA present a clear and obvious opportunity. Notwithstanding, the supply side of the equations paints an erratic picture, whereby many of the regional firms are poorly positioned to exploit the same. In particular, the MENA region OFS industry structure is highly fragments, with approximately 19,478 companies operating in the Oil & Gas sector in the MENA region, as per recent estimates. Most of these are concentrated in the UAE and are largely operating under agency type agreements with foreign entities.



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A select few of these regional/local OFS companies are in a position to compete effectively in niche areas with the international OFS companies. Such companies have been able to capitalize on the opportunities presented in the OFS segment as a result of being converted from family-owned to corporate structures, growing inorganically through well-timed acquisitions, and/or establishment of joint ventures (JV) with reputed international companies.

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MENA: Number of Oil & Gas CompaniesSource: Markaz Analysis

The Opportunity We believe there continues to be an opportunity for regional OFS companies to jump on the bandwagon. World oil demand is expected to continue to grow unabated, leading to a call on the region to further increase production. It is widely accepted that in the long-term, most increases in the production and reserves in the MENA countries, are not expected to result from existing giant fields or from any major new discoveries, but from marginal fields and as a result of applying enhanced production and recovery techniques in existing fields. This is where the OFS companies come into the picture. Both, development of smaller fields and production enhancement, are highly service intensive. To sweeten the deal, NOCs are promoting regional companies through favorable policies and initiatives. We believe that in the near-future, as a result of the increasing emphasis on local content, regional OFS companies will potentially have access to a larger portion of the total OFS spend.



This is being complemented by the favorable policies and initiatives of the MENA governments to source increasingly larger volumes of services locally, in order to promote local employment, prevent wealth outflow, develop local talent, and help diversify the economy. Additionally, the region does not lack talented entrepreneurs. Many of them emanate from well-established family businesses that have decades of experience in the oil and gas industry, and are now expanding to provide higher end OFS. Some of the eminent regional names worthy of mention are the UAE based Al-Mansoori Group and the NPS Group which was the result of a merger between the National Oil Well Maintenance Company (NOWMCO) of Qatar, National Petroleum Technology Company (NPT) of Saudi and National Drilling Company (NDC) of Saudi. Another variety of entrepreneurs are those that are leaving large NOCs, IOCs, and global OFS companies alike, to establish start-up businesses to provide niche energy services. For example, companies like Target and Falcon oil field services (both from Oman) and the Kuwait based Gas & Oilfield Services Company (GOFSCO) were started and/or strengthened by such entrepreneurs. There are also a small but growing number of regional OFS companies that are moving from being agents of global OFS majors to establishing their own services, and forming a niche in their own countries as well as throughout the region. Any discussion on opportunities in the MENA regions OFS segment cannot exclude the potential presented by Iraq. Various estimates suggest that the Iraqi OFS market is expected to rise from $1.3bn in 2010 to $8bn by 2014. It is further estimated that over 2010-2016, with a base case target production of 5 million barrels per day, there is a need to drill approximately 5,000 wells; making the Iraqi OFS market-size around $20bn, with local companies accounting for 35% market share. On the bullish side, with a target production of 11 million barrels per day, the market size is estimated to be around $60bn with local companies accounting for a $20bn market share. These statistics alone might be enough reason for the regional OFS companies to capitalize on the aforementioned opportunity.

Exploiting the Opportunity In our view, the approach to exploit the regional OFS opportunity is multipronged. The low hanging fruit is for regional OFS companies to form JVs with international companies. There are numerous examples of such engagements being successful in the past, and there is potential for more. Another approach is for regional OFS companies to acquire companies that provide a specific service or possess a specific technology. Lately, this approach has been the path of choice for regional companies, providing an avenue to rapidly grow their portfolio and allowing them to effectively compete with international OFS companies. Last, and possibly the least explored approach, is to build indigenous OFS companies, ground-up. In summary, the MENA OFS sector represents a large opportunity for regional companies. It is likely that the MENA’s OFS sector is at an inflection point; there is potentially space for several regional OFS players to capture a reasonable portion of the MENA OFS market.

About Kuwait Financial Centre “Markaz”: Kuwait Financial Centre S.A.K. 'Markaz', with total assets under management of over KD1,03 billion (USD 3,64 billion) as of September 30, 2010, was established in 1974 has become one of the leading asset management and investment banking institutions in the Arabian Gulf Region. Markaz was listed on the Kuwait Stock Exchange (KSE) in 1997. Authors:

Nawaf Marafi, Vice President – Oil and Gas, Markaz

Ali Rampurwala, Senior Analyst – Oil and Gas, Markaz

Rajiv Bishnoi, Assistant Vice President – Oil and Gas, Markaz For more information please contact: Mariam A. Al Suwailem Assistant Manager, Media & Communications Kuwait Financial Centre S.A.K. "Markaz" Tel: +965 2224 8000 ext 1817 Direct: +965 2224 8078 Fax: +965 2249 8740 [email protected]


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midstream

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Monetizing East African Gas

By Wylie Clark, Vice President, Taylor-DeJongh

Once virtually ignored by the global oil & gas industry, East Africa now faces the prospect of becoming a global natural gas hub following a string of recent natural gas discoveries. The star of this past year’s exploration campaign was doubtless Anadarko Petroleum Corporation, which made four discoveries off the coast of Mozambique, together estimated by some analysts to hold 6+ trillion cubic feet (tcf) of gas. Farther north, in Tanzania, oil & gas companies continue to add to the country’s natural gas resource base, which presently stands at 7.5 tcf. With additional reservoirs being discovered throughout the region, the big question is how this resource will be monetized.

Limited Local Markets The size of local markets for natural gas varies significantly across East Africa. In Tanzania, natural gas was introduced into the economy in 2004 and since then demand from industrial and power customers has grown. According to the Tanzanian government, demand for natural gas outstrips current supply by12 mmcf/d. Demand for power is expected to grow by 10% to 15% per annum, which will further contribute to gas demand growth. These figures have inspired a rash of projects, including 340 MW of gas-fired generation expected to come online by 2013 and a USD460 million electricity distribution expansion scheduled for completion in 2015. Orca Exploration and Production, which through its subsidiary PanAfrican Energy operates Songo Songo, Tanzania’s only significantly producing gas field, has announced plans to raise production by 60% to 144 mmcf/d, requiring expansion of existing pipeline infrastructure and processing capacity. But domestic demand for gas, despite projected growth, will only ever absorb a fraction of Tanzania’s 7.5 tcf of proven reserves. Producers must surely look further afield in order to monetize existing and new finds. The domestic market in Mozambique offers even fewer options for gas producers. In the power market, Mozal, the BHP Billiton-operated aluminium smelter, is by far the largest single consumer with a peak-demand of over 900 MW. This is met largely through a long-term supply agreement with South Africa’s ESKOM. Outside Mozal, power demand is limited, as only ~13% of the population has access to electricity. Though the government plans to increase this access in the future, the focus appears to be on hydroelectric generation. Energy hungry South Africa offers an opportunity for Mozambique gas stakeholders. At close to 230 bcf/year, South African gas consumption is nearly twice domestic production, with imports from Mozambique already filling much of the gap through a 534 mmcf/d pipeline in operation since 2004, feeding a Sasol run petrochemical plant in Secunda. To put this in context, exports through this pipeline represent 96% of Mozambique’s natural gas production. Additional exports to South Africa would require an expansion of the existing pipeline or construction of a new pipeline, together with a likely extension beyond Secunda to access other gas buyers. Once reserves reach “critical mass”, many resource holders in East Africa will look to monetization options that capture higher margins in the global market. For

resources holders with reserves over 3 tcf, LNG is likely to be the monetization option of choice, given higher potential margins per molecule. Despite weak demand in the Atlantic Basin LNG market, strong demand (and high prices for LNG), together with still prevalent long-term firm offtake contracts in the Asian markets will support LNG monetization for larger scale reserves. At the country level, both Tanzania and Mozambique possess sufficient reserves for LNG. However, governments must ensure that they do not overcommit gas resources to export projects well into the future lest they find themselves short of domestic supply, as Egypt has found to its cost. When assessed at the resource holder level, for now only Anadarko’s Mozambique assets appear to pass the LNG reserve threshold. Given the relative proximity of gas resources in Tanzania and Mozambique, one could argue that resource holders in both countries could pool resources in developing a single larger scale LNG project. History has shown, however, that cross-border gas monetization has proven to be a difficult commercial model to develop and finance (see the West African Gas Pipeline for an object lesson). East African gas could be used to feed ammonia/urea and/or methanol production in order to tap the global fertilizer and petrochemical industries. Although not usually as profitable as pipeline or LNG exports, urea/ammonia and methanol projects can be usefully employed where gas resources are too small to justify an LNG project (or when sponsor capital is constrained). The major global fertilizer-consuming regions include South Asia, North Africa and East Asia. Reports vary on supply and demand forecasts for urea, with some analysts viewing the market as over-supplied in the medium term. Methanol, which serves as a feedstock in the production of petrochemicals, could be pursued in tandem with urea/ammonia or separately. While traditional petrochemical markets in North America and Western Europe are presently stagnant, robust demand in China and other Asian markets offers opportunities for methanol exporters.

What To Expect Going Forward With a growing portfolio of commercial discoveries, oil & gas companies will look to export markets for higher returns. This will require significant investment as well as technical and project expertise, which likely means that many of the junior oil & gas companies active in the region will make way for larger independents and IOCs with the balance sheets and experience to undertake these projects. Assets, and potentially companies, will no doubt swap hands as the resource holders in the region look to consolidate portfolios in an effort to build a sizable resource base. Though full-scale natural gas production is still some years away, it is clear that East Africa’s position in the global natural gas market is moving quickly from a sleepy backwater towards a new gas hub. Special thanks to TDJ analysts Alexander Maass and John Probyn for contributing to this article



Latin America’s Emergence as an Oil & Gas Stronghold

Written by Evelyse Carvalho Ribas, Managing Partner, CARVALHO RIBAS - Advocacia e Consultoria

Latin America has enjoyed robust economic growth in recent years, in part driven by rising global prices for commodities such as oil & gas. The discovery of new gas & oil reserves in Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Peru and Venezuela is causing changes in the relative importance of countries and in the relationships among them. Given the active role played by Brazil on relations among Latin American countries, we will deal with it from the perspective of Brazilian policy. Most of the studies on prospective energy markets, including the World Energy Outlook (WEO), tell us that oil & gas will remain dominant in world energy supply well throughout the first half of this century. Their predictions assume that, without new energy and environmental policies, demand for oil will continue to grow at 1.6% per year. Natural gas demand will grow even faster, at 2.3% per year. Other experts say that new frontiers in oil & gas will spark innovations in E&P technology: Latin American countries are seeking to diversify energy matrices with a majority having biofuel policies. But, some reports appoint market restraints as the decline in oil reserves, the decrease in growth of industry sector and the new regulations against carbon emissions. The oil & gas industry is being transformed by the technological developments needed to explore and develop reserve sites and refine liquid fuel. However, Latin America is a rich under-explored hydrocarbon region whose economic future is dependent on the development of secure energy supplies. But the intensifying need to obtain supplies from more challenging conventional and non-conventional resources will impose very considerable demands on the sector's human, financial and intellectual capabilities. Foreign investors are faced with E&P opportunities in some Latin America countries, enhanced oil recovery field rehabilitation projects, pipeline distribution and transmission projects, the construction of refineries and transport infrastructure for oil, gas, and derivatives, vessels, liquefaction and regasification terminals, as well as widespread local, regional and international electrification projects. The current energy landscape and consequences of current policies The energy situation is very different in the various regions of Latin America. In Central America and the Caribbean, there are greater opportunities for ‘oil diplomacy’. The reason for this is that in those regions several big energy producers cohabit with more than 20 countries that are net importers of crude oil and gas, also, there are its population, its market, its voting power in the Inter-American System, and its geopolitically significant proximity to the United States. Only Guatemala and Cuba produce small amounts of oil, but not enough to satisfy domestic demand. In the Andean region, Venezuela and Ecuador export significant amounts of oil and gas.

Venezuela ranks among the top ten oil producers in the world and boasts a robust 80 billion barrels in proven reserves. Exploiting this abundance should be the main focus of the country’s energy policy. This means improving both the quantity and quality of its refineries and, at the same time, establishing joint ventures to extract, refine and market these crudes through agreements with companies or countries that own or that can build or finance plants with technology capable of processing low-API crudes.

Ecuador has 0.4% of the world’s crude reserves. Oil has an enormous significance in its economy. Peru has major natural gas fields in its southeastern Amazon basin.

Colombia, has huge reserves of high quality coal and abundant hydro resources which, together with gas, will enable it to be an important player in energy integration programmes, especially in Central America and Mexico. However, the Colombian oil industry is showing worrying signs of decline in oil production in recent years. Some analysts believe that the country will no longer be a net oil exporter by around 2011.

In South America...

Bolivia holds the second-largest accumulation of natural gas reserves in South America, behind Venezuela. Due to the composition of its reserve base, Bolivia is primarily a natural gas-producing nation. Argentina has 0.3% of the world’s crude oil reserves.

Argentina is still a net gas exporter, but the rapid growth of its internal demand, the failure to discover significant new reserves and the lack of investment in exploration and production, will sooner or later make it an importer of natural gas.

Paraguay does not produce oil. However, if we consider hydroelectric production, Paraguay is energy independent, since it consumes much less energy than the available hydroelectric capacity of Itaipú (Brazil-Paraguay agreement) and Yacyretá (Argentina-Paraguay agreement).

Uruguay does not produce oil. In terms of energy, Uruguay is the most vulnerable country in South America.

Chile suffers from an energy deficit, as it produces no more than 5% of the oil it consumes and covers no more than 20% of its natural gas needs. Reacting to its oil & gas deficit, Chile is developing an interesting energy diversification



policy. This translates into new funds for hydroelectric plants in the south, boosting coal-powered thermoelectric plants, especially in the north, and combined-cycle plants.

Brazil has been self-sufficient since 2006 and became a net oil exporter in 2009. In the January 2011 Short-Term Energy Outlook, EIA projects that Brazil will continue to be a net exporter through the end of 2012. According to the Oil and Gas Journal (OGJ), Brazil has 12.9 billion barrels of proven oil reserves and it has South America’s largest proved reserves of coal. It is also the world leader in production and a pioneer in the use biofuels such as biodiesel, which is an oil derived from plants such as sunflower, macaúba, soy beans, colza, and as alcohol extracted from sugar cane. Together with the United States, the two countries produce 70% of the world supply of ethanol. However, the main factors for the development of this fuel are the diversification of the energy matrix and the reduction of the country’s dependence on oil by-products. Brazil has the ideal conditions for the development of biofuels projects such as available manpower, abundant land to cultivate and favorable climate conditions. Experts present different scenarios for the future energy landscape in Latin America. Many suggest that the notion of regional integration will be superseded by global integration. The countries that have adopted the most prudent policies are those that have liberalized their oil and gas industries, those that have started to look outside the region to secure additional supplies or both. Brazil, Colombia, Peru, and Chile are all included in this group. Other experts believe aspirations toward regional energy integration have to some degree fallen by the wayside due the current wave of nationalizations and populist energy policies. Some countries are striking bilateral agreements but working toward self-sufficiency - motivated by a mixture of politics and economics - as Ecuador, Bolivia, Argentina and Venezuela that have adopted policies that are impractical and unsustainable. Venezuela and Bolivia ‘oil diplomacy’, for example, decided to nationalize some portion of its hydrocarbon industry that entailed heavy-handed expropriation of assets from private companies. While Argentina heavily subsidized domestic energy prices and Ecuador’s that has been following an aggressive policy against foreign investment. These divergent paths have produced incompatibility in the domestic political economies of the major exporters and the major importers as consequence it have limited the potential for developing regional infrastructure. The needs of the populace will drive governments to moderate or find middle ground. Latin America still has launched regional entities with the objective of improving energy integration and collaboration, as the Initiative for Regional Infrastructure South American Integration (2000) and South American Energy Council (2007). However, the overwhelming consensus is that energy coordination among Latin American nations remains limited and that these institutions have been ineffective, largely because they could not overcome the challenges associated with asymmetrical regulatory frameworks, policy coordination and implementation of rules and procedures. Some experts say that public policy can play a key role in numerous ways, notably by focusing on the following: providing a framework favourable to investment in new resources; providing a policy climate that ensures continued active co-operation between technology developers and hydrocarbon resources holders; actively participating in developing and facilitating the implementation of technologies that improve the safety of installations; vigilantly supporting industry's efforts to reduce its environmental footprint and thus to access resources in new areas.

Brazil’s Energy Overview

According to EIA, International Energy Statistics, the largest share of Brazil’s total energy consumption comes from oil (50 percent, including ethanol), followed by hydroelectricity (34 percent), natural gas (8 percent), coal (5 percent), other renewable (2 percent) and nuclear (1 percent). Natural gas is currently a small share of total energy consumption, but attempts to diversify electricity generation from hydropower to gas-fired power plants could cause natural gas consumption to grow in the coming years. The aggressive policy it has followed to develop Petrobras is changing energy geopolitics in the region. Brazil is the ninth largest energy consumer in the world and recent discoveries of large offshore, pre-salt oil deposits could transform Brazil into one of the largest oil producers in the world.



A consortium of Petrobras, BG Group, and Petrogal discovered the Tupi field in 2007, which contains substantial reserves that occur in a pre-salt zone 18,000 feet below the ocean surface under a thick layer of salt. Following Tupi, numerous additional pre-salt finds were announced in the Santos Basin, such as Iracema, Carioca, Iara, Libra, Franco and Guara. Estimates for the total pre-salt resources vary. Some analysts place total extent of pre-salt recoverable oil and natural gas reserves at more than 50 billion barrels of oil equivalent. Petrobras plans to invest $33 billion in pre-salt exploration and production activities to achieve an oil production target of close to 4 million bbl/d by 2020.More than a quarter of this target is to come from pre-salt oil. Brazil’s pre-salt announcements immediately transformed the nature and focus of Brazil’s oil sector, and the potential impact of the discoveries upon world oil markets is vast. Shortly, the Brazilian government released the proposed regulatory framework for the pre-salt reserves in August 2009. Brazil’s new regulatory meets a need in the gas industry by providing legal stability in the sector. Also, the law is to encourage more investment as well as competition in the natural gas sector, especially in the midstream.

External Alliances Russia, China, India and Iran recognize the strategic importance of Latin America and are building broad relationships in very systematic, aggressive ways.

Russia is widely recognized as using its vast natural resources as a political weapon and holding countries hostage by manipulating access, control and distribution of the energy resources. Russia has also been quite active in building strategic relationships with several resource-wealthy countries to enhance its own long term energy security. In September 2009, Russia and Venezuela announced several cooperative agreements on energy, defense and trade, including a commitment to supply Venezuela with almost $4 billion in weapons. PDVSA, Venezuela’s oil company, signed two agreements with a consortium of energy giants in Russia.

China’s grand strategy has been shaped by its desire to secure surety of energy supplies to fuel its continued industrialization. In April 2010, China announced a $900 million heavy crude production project with Venezuela. Just prior to that, in Brazil, China’s Sinopec and the China Development Bank signed a strategic development pact with Petrobras, Brazil’s state-owned oil company, whereby China agreed to provide financing to the tune of $10 billion in Petrobras over the next five years. China also has operations in Ecuador. In 2006, Andres Petroleum, a consortium of Chinese oil companies, purchased the Ecuadorian assets of the Canadian firm, EnCana for $1.42 billion.

India also recognizes the strategic importance of Latin America. India’s state-owned Oil and Natural Gas Corporation (ONGC) has exploration and production stakes in projects in Brazil and Colombia and is exploring opportunities in Venezuela. In 2006, ONGC Videsh Ltd. (the overseas investment arm of ONGC) joined with the Chinese firm Sinopec to acquire a 50 percent stake (for a combined $850 million) in the Colombian oil firm Omimex de Colombia.

Iran has also been cozying up to Venezuela and Brazil, as well as a number of Andean countries. In 2007, Venezuela and Iran signed three petroleum cooperation agreements which involved bilateral investment in Iranian gas and Venezuelan oil fields and Venezuelan gasoline exports to Iran. Brazilian energy firms - including Petrobras - are exploring possible deals to provide training and technology to modernize the Iranian energy sector. To support its strategic positioning in the region, Tehran has set up branches of its Export Development Bank in Brasilia as well as Caracas. Bolivia and Ecuador also enjoy cozy relations with Iran.

Findings This short article is just a part of a much more complete report on Latin America’s energy. Anyway, it can be said that global demand for energy is expected to increase. Most of this demand will come from developing economies in the long term and will be fulfilled by the oil & gas industry. New analysis estimates that the Latin America region will produce around 11.17 million barrels daily in 2014. Due to energy-efficiency trends, environmental regulation, and energy matrices reconfiguration, new technologies such as gasification (application IGCC), gas to liquid (GTL) or lignocellulosic ethanol will experience a high demand in Latin America in the years to come. However, low internal savings’ rates have limited local capital markets. Because of this, most of that funding must come from direct foreign investment such as emerging strategic partnerships and joint ventures in innovative technologies which are expected on demanding areas that include upstream and downstream segments such as: pre-salt discoveries in Brazil; heavy oil upgrading; and the construction of refineries and transport infrastructure for oil, gas, and derivatives, vessels, liquefaction and regasification terminals. Policy approaches drawing on these observations can help build the partnerships between industry and government that are needed to protect the interests of all stakeholders. Along with continued international collaboration on advancing technological development in the upstream oil & gas industry, such approaches will be needed if the hydrocarbon markets of tomorrow are to deliver on their promises.

CARVALHO RIBAS ADVOCACIA E CONSULTORIA is an independent law firm situated in Mafra city that is actively involved in international matters and transactions working in close collaboration with correspondents and law firms located in key cities in Brazil, USA, Canada, Europe and Asia, which ensures competent assistance in the handling of local matters. Our work focuses on legal advice on all areas of business law, and stands out for its commitment to helping companies develop their activities, defending their rights and negotiating their interests. To obtain more detailed information with respect to the assistance that our professionals are able to provide, our overseas Clients should contact CARVALHO RIBAS ADVOCACIA E CONSULTORIA at [email protected] or online at www.carvalhoribas.com.br


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Best Practices in Engaging Stakeholders in Oil and Gas Projects – The African Experience

Written by Ziwase Ndhlovu, Principal, Mukazi Consulting

African oil projects have sometimes been considered a risky proposition from an investment point of view, given a track record of unrest in the Niger Delta and political and social unrest elsewhere. On the other hand, the local communities are unhappy with the oil companies for destroying their farmland and fishing trails, and making their neighbourhoods dumping grounds for waste resulting from their operations. Moving away from the prolific and well explored basins of West Africa, 2011 expects to see a continuation of heavy upstream investment into the more exotic basins of East Africa, with several key exploration wells planned in Kenya, Uganda, Tanzania and Ethiopia. With the prospects of opening up new hydrocarbons producing areas, there exists the opportunity to develop and operate Oil and Gas projects in a way that reduces conflict with local government and communities, NGOs and other influential stakeholders. An engagement strategy that encompasses all influential stakeholders is necessary – this includes federal and state governments, NGOs and most importantly the local communities. According to research by PWC, when committing millions of dollars in natural resource investments in non-OECD countries, setting up a thorough and substantial engagement strategy increases chances of success by over 50%. This allows the project owner to be better planned, by already considering potential issues that could have an impact on Project timelines, schedules and ultimately the costs associated with developing it. This article will discuss various ways of handling the key stakeholders that will have an influence on the success of your project.

Government- Federal and Local Government After securing a license with government, engagement continues throughout your company’s presence in that country. A list of best practices is below:

Identify the prominent political and cultural structures present at the country level and determine the relationships with the local government. In some countries, the local governments are mandated to regulate Oil operations in their state, reporting to the federal government. As an investor one must make sure they correctly identify which government entities look after certain activities, e.g. identify the department collecting payments for different sections in order to avoid paying certain fees more than once

Identify the key approval bodies and individuals authorised to make decisions. An investor must understand how these bodies make decisions on various issues, from extending the duration on a current exploration permit, or upgrading an exploration license to a production and development license.

Identify early on which departments handle granting and renewal of licenses and the timelines experienced in granting these documents. Will it be Ministry of Energy, Natural Resources or Ministry of Lands as the case may be?

If a signature bonus is to be paid, clearly know to whom the payment is made, and make sure a recordable account of it is made to ensure transparency to regulatory bodies and in some cases NGOs like “ONE”- that try to make sure that natural resource payments are transparent and understood by concerned parties

Identify the department that handles transfer of interest to other parties- either via farm-out transactions and corporate transactions. In most cases governments seek some form of payment before a transfer of legal title can be approved.

Local Communities In most areas where Oil and Gas projects are undertaken in Sub-Saharan Africa, unemployment tends to be extremely high with almost 60% of the population having no jobs. This provides opportunities for oil operations to generate economic uplift for the locals. The people in the direct vicinity of where your project is could be your best assets or worst liability depending on the way you choose to interact with them.

A significant number of tasks in Oil operations can be completed by “unskilled labour”. This pool of the workforce can come from the local community. In some instances, several technicians, mechanics and operators may be present with little or no formal education, but run successful small enterprises in the community with knowledge of handling equipment like valves and pumps, these individuals are likely to have transferable skills that can be applied to Oil operations.

As a foreign investor- make all efforts to not come across as favouring one specific clan/ tribe- showing favouritism and segregating other clans in the region may result in discontentment and possible unrest.

Make every effort to encourage the creation of secondary industries from your presence there. For example, women selling food items to the workers on your site. Alternatively In some malaria-prone zones like East Africa- many women create mosquito nets, your presence there could be de facto market for their goods.

Another added value that a foreign investor can bring to the local community is formal training programmes, not only in Oil and Gas related courses, but opportunities arise in teaching English and general life skills. In Angola, BP has successful created university courses in Portuguese training Oil and Gas lawyers, Engineers and other professionals. This model not only educates a selection of the most promising individuals from the local community- but also makes them take more ownership of the projects taking place in their neighbourhood.



In most of these villages, a formal waste collection system is absent. Alongside your company’s commitment to ensuring minimal damage to the environment- you could advocate programmes promoting locals to collect waste, recycle and even create valuable products from waste items.

When a foreign investor demonstrates that it is not there to merely strip them of their natural wealth, but has a general interest in their economic well-being, then the project becomes a symbol of growth and progress. In certain cases when an investor is able to introduce services that the local government has not so been successful in implementing themselves, then the locals align their personal success in life together with the presence of the oil project.

Engaging with NGOs The influence of NGOs in Sub-Saharan Africa is very strong. NGOs tend to employ large amounts of university educated individuals in these countries, and are therefore rightly or wrongly well-regarded in the communities they operate, meaning the interactions between the Oil and Gas community and the local NGOs must be handled adequately. Developmental institutions are divided into different focus areas; some firms pay particular interest to human rights abuses, some are geared on the environment and water management issues and other are focused on the social and developmental issues of women in the community. There are several good practises that a foreign investor can adopt in working alongside NGOs.

When entering a new area, it would be useful to identify the NGOs operating in your area and gauge their influence both locally and internationally.

In light of identifying the various organisations, sessions can be arranged to strategize and plan on how they would impact the success of your project, whether it be by public relations or competition for local labour skills into your respective projects. In most cases these NGOs have been operating in the area for a number of years, and can provide a wealth of intelligence on the area you are operating in.

As a foreign investor, you must also aim to understand the projects that the NGO is likely to be conducting, you may find that you can work with them on various projects, perhaps it could be building a new school or even an advanced health facility.

An investor must aim to keep the channels of communication open with the NGOs, especially as they possess a wealth of information about the dynamics of the community and region you are operating in as well as being a mouth piece to other international organisations that could scrutinize your company’s reputation in terms of social and environmental issues, such issues may impact the share price of your company.

Benefits of Engagement with Different Stakeholders – Summary

Your company creates a good brand for itself amongst the local community, regulatory bodies and local NGOs

The project can achieve long term potential savings in operating costs- by educating local communities to run Oil and Gas projects. The need to bring in expatriate labour and expensive consultants would decrease over the time of your project.

As project owners you could have more direct control on meeting local content criteria without it being viewed as a burden

The presence of your project in the area can help stimulate new industries and create new markets for goods and services coming out of that community

Certain projects like building hospitals and schools alongside NGOs allows exchange in skills and expertise between entities operating in that area

In most cases, Oil projects have a lifetime of 25 years plus and traditionally the oil and gas business in Africa has specific and often challenging characteristics. But an extremely attractive deposit along with a precisely managed and well planned execution strategy can help grow a company into a long term sustainable business. Effective engagement at the government levels can result in your project achieving approvals at a faster pace, thereby sticking to project schedules and staying within budget constraints. From a local community perspective, when the local population directly feels the benefits of having an Oil project in their neighbourhood, the chances of social unrest are diminished as individuals realise the value of having investments into their area. Active communication with NGOs allows a project owner to stay in tune with other developments in the area and understand how the presence of an oil project can be leveraged to contribute to other projects. Knowing which bodies are responsible for which activities also helps to ensure that you minimize unnecessary fines and penalties. Ziwase Ndhlovu – Principal – [email protected]

Mukazi Consulting is a speciality firm focusing on these sectors with operations on the African continent:

Oil & Gas, Energy Markets- Conventional and Renewable Energy, Metals and Minerals and Infrastructural Development Projects

Our expertise lies in the areas of:

Facilitation of investment into Africa

Techno-commercial Services

Market Analysis and Competitor Intelligence

Business Development Services

Commercial & Technical Due Diligence

http://www.mukazi.com


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Online Columnists This Month Include...


“First and foremost, the longer-term demand for renewable energy assets may in

fact be understated. Political leaders, utility officials, power generation

equipment manufacturers and construction contractors, and project developers

and financiers may need to further shift their thinking”

Read the rest of Kevin’s column here...

“My biggest concerns are Algeria, Yemen, and Jordan where protests have now

continued to varying degrees for the past week. Protests against political

corruption and for democratic reforms also raise risks of regional instability and

disruptions in the free flow of oil. “

Read the rest of Gianna’s column here...

“Clearly, bribery is reprehensible and in certain countries is so endemic that the

culture of corruption is widespread. This is not acceptable and should not be

condoned; however business needs to be able to proceed effectively.”

Read the rest of Elaine’s column here...

http://www.oilcouncil.com/index.php?page=kevinkerr

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