Direct and indirect management of petroleum resources

1
Direct and indirect management of petroleum
resources
Valery Kryukov and Arild Moe Strategic
Forum Moscow, 23 september 2008
2
Main issues

• What have been the main elements in state
  policies in the petroleum sector in Russia and
  Norway?
• How has direct and indirect state management been
  balanced?

3
Forms of control

• Ownership direct (extreme case USSR)
• Regulatory framework indirect (extreme case
  USA)
• Norway Flexible combination
• Russia Unclear balance

4
Privatisation and de-privatization of the Russian
oil industry

• Principal decision political
• But speed and the way privatization was carried
  out determined by narrower goals
• Initial goal restructurization and creation of
  more efficient industry
• Later dominant goal revenues to the state budget
• Deprivatization from 2003 onwards
• Alternative to a resources management system?
• But also other reasons...

5
Composition of ownership in the Russian oil
industry 2004 - 2007
6
Norways experience

• Starting point Foreign companies
• Establishement of a Norwegian oil industry
• Statoil - 100 state owned
• Hydro - 50 state owned
• Saga Petroleum - private
• Saga sold to Hydro Initial consolidation of
  sector
• Part privatization of Statoil Increased
  efficiency, sharing of risk
• Fusion of Statoil and Hydro Consolidation of
  sector in light of mature continental shelf
  international challenges
• StatoilHydro 62.5 state owned
• Creation of Petoro (100) State direct
  financial interest in petroleum licenses
• Separate from state oil company

7
State representation on the boards of directors

• Russia
• From professionals to high level officials
• 2008 A return to professionals?
• Weak stimulus to increased efficiency
• Norway
• State represented by independent people on board
  of StatoilHydro
• State may be represented in license committes
• Capacity issue

8
Development of Russian reserves

• Post-USSR Huge reserve base
• Developed reserves transferred to users
  (companies)
• No incentive for companies to explore for new
  discoveries
• Only additional exploration in fields in
  production and in their vicinity
• Crisis in prepared reserves building up visible
  2004-05
• Reasessment of policy

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How to increase exploration?

• Stimulation of private companies and investors
• Finders rights
• More flexible system for transfer of licenses
• Access to information
• Increased state activity
• Increased budgets
• New state exploration organization
• From tenders to auctions
• From annual plans to long-term program

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The Russian licensing system - changing

• From flexible annual plans to inflexible program
  approach
• Results unsatisfactory return to application
• From license (investment) competitions to
  auctions
• Results unsatisfactory - return to competitions
• From public process on regional and federal level
  to closed administrative process on federal level
• Offshore resources removed from competition
  altogether
• Licensing not used strategically, but as a way to
  allocate assets.

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Norwegian licensing strategy a flexible
programme approach

• Stated goal
• increase the attractiveness of the Norwegian
  continental shelf for established and new players
  that can contribute to efficient exploration
• Ministry proposes opening of areas for licensing
• Overall consideration of resource potential and
  impact on society
• Consultation between companies and authorities
• Nomination
• Oil companies suggest blocks for licensing
• Ministry announces blocks available for
  application
• Companies apply
• Balanced state/company interaction

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License conditions - Russia

• A certain production level within a certain time
  after start-up
• No room for adjustments according to changing
  geological or technical conditions
• No clear criteria for revoking of license
• License violation widespread
• Results Uncertainty, unpredictability

13
Licensing terms - Norway

• License period
• Work commitments
• Plan for development and operation
• Cooperation agreement (within license group)
• Room for adjustments

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State control of trunk pipelines Stimulus or
hindrance for resource users?

• Main issues for determining profitability for new
  entrants to oil production
• Access to trunk pipelines in the production
  areas, or
• The possibility for a company to build and use
  its own pipelines
• Access to selected markets, especially exports,
  but also to lucrative domestic markets in terms
  of volumes and price
• Outlets for associated gas

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Russian pipelines

• Trunk pipeline transportation monopolized
• Trunk gas pipelines Gazprom 100
• Trunk oil pipelines Transneft 90
• Oil product pipelines Transnefteprodukt 30
• State ownership of trunk pipelines presented as
  important for the functioning of the economy
• Pipeline companies have their own interests and
  priorities
• Separate government commission granting access to
  oil pipelines abolished 2002
• General impression Regulatory powers transfered
  to the operators
• But new regulation of independents access to
  Gazprom pipelines under consideration

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Norwegian pipelines

• Initially gas pipelines controlled by state oil
  company (Statoil). Combined with de-facto gas
  exports monopoly (GFU)
• Smaller (foreign) companies complained about
  access
• Gas transportation transferred to new independent
  operator Gassco - providing equal access.
  Combined with dissolution of export monopoly.
• Pipelines owned by partnership of oil companies
• Combination of indirect and direct measures

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Resource data - in whose interest?

• Access to information reduces the investment risk
  and facilitates rational development of
  resources.
• Norwegian system Collection and sharing of data
  to give resource users equal opportunities
• Russian data management has a different main
  purpose control over the fullfillment of license
  conditions

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Taxation

• Very powerful instrument in resources management.
  
• Differentiated taxation can encourage resource
  users to enter new areas
• Various schemes can be used to reduce the
  investment risk

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Taxation systems main characteristics

• Russia Fiscal orientation maximization of
  state revenues
• Simplicity easy to apply and administer
• Absence of considerations for the specifics of
  hydrocarbon exploitation deteriorating
  production conditions in existing fields
• Adjustments based on selected criteria
• Norway Fiscal objectives, but also encourage
  investment
• Taxation depending on market developments oil
  market, equipment market, service market
• But also negotiations about marginal areas
• Negotiation power changes over time

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Preconditions for a more flexible taxation system

• An objective picture of costs
• Consideration of the special characteristics of
  each field is impossible without a market
  determining costs
• a market for equipment, technology and services
• But development of this market is hurt by the
  monopolization in the petroleum industry

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The basis technical regulations

• Russia had a detailed standard system (GOST)
• Development plans presupposes use of existing,
  sometimes outdated technologies
• Complicated to introduce new technology
• Supposedly possible to calculate costs
• 2002 Law introducing a system of technical
  regulations covering only safety aspects
• Leaving the rest to the market
• 2008 Proposed new Law on standardization
• A return to the Soviet GOST model?
• Norway Safety standards Elsewhere technologies
  determined by resource user to achieve stated
  goals

22
Russia Extended state participation

• The state is governing through regulatory
  agencies on one hand and
• participating in commercial enterprises on the
  other
• But also quasi governance through state
  controlled companies, by letting them take on
  regulatory functions
• Neglect of impact on other economic sectors
• Increasing monopolization
• No cost concern alliances with friendly
  companies
• Non-public character of decisions

23
Norway Increased flexibility

• Access to resources
• Access to infrastructure
• Taxation
• Public character of development decisions
• Will increased dominance of one company
  (StatoilHydro) on Norwegian shelf be
  counterbalanced?

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Direct and indirect management

• Clear delineation of methods depends on clear
  determination of goals
• Russian policies pursuing several competing
  goals, Norwegian goal hierachy simpler
• No objective balance direct/indirect
• Depends on circumstances over time
• Different countries different models but
  similar challenges similar solutions

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Thank you for your attention!