THE OXFORD INSTITUTE FOR ENERGY STUDIES A RECOGNIZED INDEPENDENT CENTRE OF THE UNIVERSITY OF OXFORD UNIVERSITY OF OXFORD Companies and Governments James Henderson November 2018 Industry Demographics • Company Categorisation: - NOC (National Oil & Gas Companies) - IOC's - International Oil & Gas Companies • The Majors (Shell, ExxonMobil, BP, Total etc). • The Mid Sized Players (ENI, Marathon, Occidental etc) • The Independents (Anadarko, Plains Petroleum etc) • Upstream/downstream - Some companies purely upstream focussed; some integrated through the oil and gas supply chain. • Most companies engaged in both oil and gas^^ Oil and Gas Companies and Host Governments Ownership of oil and gas is vested with the State apart from certain areas of the US and Canada where mineral rights reside with landowners. Governments, on behalf of the nation, delegate the stewardship of resource management to a Ministry. Exploration and Development of hydrocarbon resources is undertaken by International and State Oil & Gas Companies. Ministry of Oil & Gas I International Oil & Gas Companies State Oil & Gas Company mm Participation in the oil and gas sector ■ Market structure and entry regulation / openness NOC ■ Level playing field / privileges POC monopoly ■ Degree of direct state participation ■ Role of state companies (operators/investors) W competition • Governments have important choices to make over governance of their energy sectors - How much state control? - How much foreign help required? - How much competition? - The balance of revenues between state and industry - Who to trust with the country's strategic resources? - How much bargaining power is there and what is the balance? • NOCs can provide a balance to the perceived power of experienced private international oil companies, as well as an initial institutional framework Top 30 Oil and Gas Companies in the World 1 Saudi Aramco Saudi Arabian Oil Co. Saudi Arabia State-ow ned 2 NIOC National Iranian Oil Co. Iran State-ow ned 3 Exxon Mobil Exxon Mobil Corp. US Private 4 PDV Petroleos de Venezuela, SA Venezuela State-ow ned 5 CNPC China National Petroleum Corp. China State-ow ned 6 BP BP pic UK Private 7 Royal Dutch Shell Royal Dutch Shell pic The Netherlands Private 8 Chevron Chevron Corp. US Private 9 ConocoPhillips ConocoPhillips Co. US Private 10 Total Total SA France Private 11 Pemex Petroleos Mexicanos SA Mexico State-ow ned 12 Gazprom OAO Gazprom Russia 50% State 13 KPC Kuw ait Petroleum Corp. Kuw ait State-ow ned 14 Sonatrach Enterprise Nationale Sonatrach Algeria State-ow ned 15 Petrobras Petroleo Brasileiro SA Brazil 32.2% State 16 Rosneft OAO Rosneft Russia 75.16% State 17 Lukoil OAO Lukoil Russia Private 17 Petronas Petroliam Nasional Berhad Malaysia State-ow ned 19 Adnoc Abu Dhabi National Oil Co. UAE State-ow ned 20 Eni Eni S.p.A. Italy 30.30% State 21 NNPC Nigerian National Petroleum Corp. Nigeria State-ow ned 21 QP Qatar Petroleum Corp. Qatar State-ow ned 23 EGPC Egyptian General Petroleum Corp. Egypt State-ow ned 23 INOC Iraq National Oil Co. Iraq State-ow ned 25 Libya NOC National Oil Corp. Libya State-ow ned 26 Sinopec China Petroleum & Chemical Corp. China 75.84% State 27 Statoil Statoil ASA Norway 70.13% State 28 Surgutneftegas OAO Surgutneftegaz Russia Private 29 Repsol YPF Repsol YPF, SA Spain Private 30 Pertamina Perusahaan Pertambangan Minyak Dan Gas Bumi Negra Indonesia State-ow ned 7m NOCs dominate oil and gas production 14000 12000 10000 Q. X2 8000 6000 4000 2000 Top 20 oil producing companies o u u " o o III..... ■ ■■■■■■ Ü u u < CD Q- Q- l/l c Z ^ > o o c < a. CD C Q- = O rY a) u nd 7323/1 SUtnllO) 40*1 500F 20% 1 ?418 PL SSS /12t/*) (i.nilin (O) fiOS Capricorn 40% PI f SS 7»74/\. 6. 737S/4 jntl S v.:.«l;o| IS* OMV li% lullcw 70* 10% PL »2 7123/7 Onlrir J (0| 60« Dotnortkc 40 \ PI «S1 .'7W<* »21/7 and a lundn (0) 40 X WA 30 X ION pi«o*c nwftttut '721/10 lUIKl«l(0| 40* DU JO* Idcmjttu 30 * PL *S» 7)35/1. 2. 3. 73W/1,74J4/7.8, t. /4.IVM. 10. 11. 17 Jml /4 tO/10 Stj:od(0) 30* f hevfon TDK CoaiocuP liilltpN IS* Lundn IS* MX» 70 H 23rd Licencing Round ] Offered acreage Government confidence in companies, and company confidence in future government policy are key elements for long-term relationship ^flU^ WZ Reserves and Resources Q. E m ü 3 a. < i- LU _l S I- LU Q. 5 I- 0. □ LU LU > O o to o a: uj 8 PRODUCTION RESERVES 2P Proved hi o o t a. a LU a LU o « a Probable 1C CONTINGENT RESOURCES ■ ■ ■ 2C 3C UNRECOVERABLE PROSPECTIVE RESOURCES Best Estimate UNRECOVERABLE *- Range of Uncertainty http://qeodc.aapq.org/PRMS Guidelines Nov2011.pdf, Page 7 * — E E o ü 0) u e cd O m c "55 TO CU Not to scale Country and Company Reserves Booking • Country level reserves are collated by organisations such as the IEA, EIA and others. Many countries do not provide supporting technical 'evidence' for their declared reserves. There is significant scepticism regarding those of some OPEC countries in particular. • Companies, certainly those listed on major stock exchanges are required to comply with rules and guidelines: - BP estimates proved reserves in accordance with SEC Rule 4-10 (a) of Regulation S-X and relevant Compliance and Disclosure Interpretations (C&DI) and Staff Accounting Bulletins as issued by the SEC staff Companies are always keen to book reserves, as these then sit as assets on their balance sheet and provide a basis for valuation by shareholders 7m Oil and Gas Upstream Investment Frameworks Concession (Tax & Royalty) Agreement Production Sharing Agreement Ministry of Oil & Gas Royalty Oil & Gas Company (jes) Ministry of Finance Debt repayment, shareholder dividends, retained profits Ministry of Oil & Gas Revenue from Sale of State Profit Oil State Share of Profit O State Oil & Gas Company Oil & Gas Company (ies) T Debt repayment, shareholder dividends, retained profits Assessing the cost of a new development Tanker $8/bbl Main Export Pipeline Capital Costs Appraisal Wells Export Pipeline Production Facilities Development Drilling Abandonment Total Capital Costs Export Pipeline 2010 2011 100 2012 100 $ Millions 2013 2014 2015 2016 2017 2018 500 500 1,000 2,000 2,000 500 500 500 500 100 100 1,000 2,500 3,000 500 500 500 $8.2 bn Capex mm Concessionary tax scheme Company is granted rights to reserve base via a fixed term lease Tax system based on a royalty paid on extraction, plus profit tax Countries occasionally impose additional taxes to supplement the royalty payment Companies can book the reserves in the fields which they are developing they effectively "own" the reserves Russian example of a tax and royalty scheme: - Revenue - (royalty + export tax + social taxes) - operating costs = operating profit - Operating profit - depreciation - profit tax = Net Profit Key issue for oil companies here is cost recovery and exposure to oil price - Royalties often have a sliding scale to reduce impact of lower prices Production Sharing Agreements - a unique legal framework TYPICAL PSA Companies recover costs and share in profit Government share increases once costs have been paid off Individual legal document that provides reduced risk for both parties, as the commitment is typically for the life of an investment Title to the oil and gas reserves remain with the state Service contract Government Oil company pays for development of field Oil company paid a fixed fee for work done on a field May have some upside potential if targets are exceeded Company has no oil price exposure Government retains full ownership of field Much lower incentive for oil company to perform well 7K Upstream Investment Frameworks 250 200 150 100 50 0 -50 -100 -150 -200 -250 Tax & Royalty Regime '4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 I Opex I Royalty I Tax lCapex ■cflow ■ Revenue IRR = 13.5% in both cases Production Sharing Agreement State Profit Oil Company Profit Oil Company Cost Recovery Oil Opex Capex •Company Cashflow mm Governments can generate significant revenues from the downstream business too HOW FIGURES ADD UP TO REACH THE PRICES AT THE PUMPS PETROL Pump price IDDBiDI pence per litre Wholesale price* 24p Delivery and distribution 1.9p Retail margin" 8.1 p Duty 57.95p MT (at 20%) 18.4p Predicted price in 2 weeks (Based on analysis ot historical data) Percentage of the pump price that is dirty & VAI 69.2% "Compriyng oil production & refining. S-day average "forecourt costs & profit DIESEL Pump price IDOQia pence per litre Wholesale price'28p Delivery and o on distribution *"*p Retail margin" 9.8p Duty 57.95p VAT (at 20%) 19.6p Predicted price in 2 weeks (Based on analysis of historical data) Percentage of the pump price that is duty & VAT 66% SOURCE: UK pump prices and RAC Petrol and diesel prices often contain a high level of taxation In addition, governments often retain the right to limit price increases, or to insist on price declines, in times of perceived crisis 7K Governments subsidise domestic consumption with low fuel prices Economic value of fossil-fuel consumption subsidies by fuel (% of GDP) Note: MER = market exchange rate. SO 100 Billion dollars ■ Oil Gas ■ Coal ■ Electricity O Total subsidies as share of GDP (MERf I top axis) Governments of fossil fuel producing countries reserve the right to subsidise prices for domestic consumers - This is a key political tool in many countries This strategy inflates demand and reduces returns for oil companies The oil industry faces geo-political risk as a global strategic resource Geopolitical disrupters Trump's America: unilateralism, protectionism, transactionalism China: escaping Thucydides Trap Russia: revising post-Cold War order EU: towards European disintegration MENA: Thirty Years' War North Korea: always the disruptor Energy companies are often caught up in geo-political conflict They can either be directly involved (their assets are affected) or can be caught up in the economic and political consequences mm Sanctions on Russia have a direct link to energy US Treasury EO US Treasury EO US Commerce EU Finance EU Technology 13662 Directive 2 13662 Directive 4 Dept. Export Restrictions Restrictions (Financing) (Technology) Controls Transneft Yes Yes Yes Gazprom Yes Yes South Kirinskoye field Yes Yes (Sakhalin 3 - Gazprom) GazpromNeft Yes Yes Yes Yes Yes Lukoil Yes Yes Novatek Yes Rosneft Yes Yes Yes Yes Yes Surgutneftegas Yes Yes • Activity in specific regions has been sanctioned - Arctic - Deep water offshore - Shale oil • Finance has also been restricted - US and EU sanctions limit the duration of debt to 30-90 days • Any companies with business in the US and EU must now think twice before doing any oil business in Russia (fS Impact of fossil fuel subsidies on renewable energy Electricity generating costs in the Middle East onshore Notes: MWh - me^watt-houn CGGT = combined-cycle gas turbine; PV = photovoltaic [utility-scaler: CP ■ concentrating solar power. Generating costs -are for new plants comingonline in 2020; assumptions are available at wtm.wortoenErgywtfook.org/weomQdef/inwstmentzosts. • Fossil fuel subsidies undermine renewables by reducing the cost of gas and oil-fired power generation • However, this may no longer be a viable strategy, given other constraints ©[^ 7tt& Subsidising new energy Support method Support mechanism I i ■ i r -L J lMi! ill Price premiums Providing additional revenue Cash grants • • • • Green certificates Net metering • Feed-in tariffs • • • Providing a guaranteed price Power purchase agreements • • • • Auction tenders • • • • Required share or amount* • • • Reducing total costs Tax credits or exemptions • • • • * Preferential financing rates • • m Accelerated de preciation * * • * Policies may specify a required share |e.g. renewable* in total generationjor minimum amount of installed capacity or generation. * * Accelerated depreciation lowers total discounted costs by delaying the tax burden. Note. 4 ■ primary driver of renewable* deployment; ■ secondary d river of renewable* deployment. Sources: lEA/lHENAJoint Policies and Measures database; lEAanalysit. mm Global subsidies for renewables set to continue Renewables-based electricity support — 3O0 o ' 250 Projections 200? 2020 205O 450 Scenario: "otal :jppo~t New Policies Scenario: Other CSP" ■ Solar PV Bioenergy ■ Wind offshore Wind onshore Cumulative generation excluding large hydro 200 150 IOC NFS 450 2016-40 White support for renewob/e electricity will be needed for yeors to come, transitioning to a low-carbon pathway con be achieved for just 15% more support • Geographical spread of subsidies will broaden from 0ECD to non-OECD countries • At the same time fossil-fuel subsidies are likely to fall to encourage increased energy efficiency mm Saudi Arabia is diversifying - a sure sign of dramatic change Increase in non-oil revenues from SR163.5bn in 2015 to SR530bn by 2020 Privatizing many and investing the proceeds of privatization in a diversified manner through the PIF. Improving ranking in the ease of doing business Preparing for 30 million Umrah visitors and promoting Red Sea tourism wilh resorts Entrepreneurial opportunities and training for young Saudis and creating vocational centers After IPO, Saudi Aramco will enjoy better efficiency and higher productivity as foreign investors demand higher profitability AMBITIOUS VISION 2030 GOALS/ Employment and activity expansions in various sectors for the benefit otSMEs ....................... t j Increasing efficiencies i in the industrial cities • as government Is : planning to rationalize : subsidies vision a_igj 2«30 QjjgQuuJI n njoll riSlf\nll KINGDOM OF SAUDI ARABIA Triple non-oil revenues by 2020 Privatise Saudi Aramco, the state oil company Rationalise subsidies across the economy Increase domestic production of renewable energy Improve the business environment for domestic and international ^yy^ companies Conclusions • The role of NOCs is increasing - lOCs are increasingly struggling to find a unique selling point • Governments of hydrocarbon producing countries are finding it more difficult to balance tax with financial incentive - Really need more oil revenues - Still need companies to invest in new production - Can't afford continuing subsidisation of domestic fuel prices - Need to incentivise new investment in renewables Partnership is increasingly taking place between lOCs and NOCs, but this carries greater governance risk for lOCs Geo-political risk to energy economy is increasing Even Middle Eastern countries are having to anticipate an increased role for renewables and a diversification away from oil and gas mm