Middle East Economic Survey
VOL. XLVII
No 26
The Oil Investment Climate
By Vahan Zanoyan
The following is an excerpt of a longer paper “Institutional Cooperation in Oil and Gas: Governments, Companies and the Investment Climate,” presented by Vahan Zanoyan, President and CEO of the Washington-based Petroleum Finance Company (PFC) at the 9th International Energy Forum 2004, held on 22-24 May, Amsterdam, the Netherlands.
1. The Investment Imperative
In a depletion business, not investing is not an option. Governments, national oil companies (NOCs) as well as international oil and gas companies (IOGCs) all face the challenge of formulating and implementing viable investment programs to replace, or more than replace, produced reserves. As their traditional open areas – such as the US and NW Europe – become more mature, IOGCs are increasingly forced to look into, and compete in, areas traditionally controlled by governments and NOCs. At the same time, many producing governments face mature and declining fields and competing fiscal pressures.
Many of the profitable producing areas are increasingly mature for both IOGCs and NOCs, creating a host of investment challenges. Mature areas present larger technical challenges for projects, which increase the capital cost of the necessary investments while reducing the rewards of such investment. The probability of making new very large discoveries decreases as a producing area matures, and the field sizes of new discoveries decline over time. At the same time, the costs and technical complications of maintaining production levels from existing fields begin to rise. In many producing areas, it takes larger amounts of capital outlays every year to just keep production constant.
For IOGCs, who have to face very competitive demands from their investors, this is a critical challenge. They face the formidable responsibility of profitable growth in a depletion business, where often growth alone can be a major challenge. But even for state-owned NOCs, where capital market pressures are not paramount, there are some serious challenges to overcome when it comes to responding to the call of the investment imperative. The lower returns and higher capital costs required by mature areas and by higher risk high-technology plays haunt NOCs as much as IOGCs.
However, generally, governments do not like or understand exploration risk (or any technical risk). For a politician, several hundred million dollars spent on a dry hole is often a “waste,” whereas for an oil executive, it is a normal cost of doing business. Furthermore, governments have many competing demands for cash and the investment in the hydrocarbon sector is just one item in the budget.
Finally, the fact that some traditionally “oily” areas are transiting into gas creates new investment challenges for governments, NOCs and private companies. The investment decisions in the gas sector are more complicated by not only very large capital costs for export oriented projects, but also by uncertainties over demand growth, pricing, and ‘ability to pay’ for projects that target emerging markets in the producing countries themselves.
Producing governments can meet the investment challenge in a number of ways:
a. They can formulate and finance an adequate investment program themselves and execute it through their NOCs; Saudi Arabia is a good example of a country that has adopted this approach. This approach requires an NOC that is fully capable of taking the operations role in upstream asset development. In reality, this practice varies widely. In some countries, governments have not mandated their NOC with this objective; rather, NOC’s have played the role of non-operating (although often majority) working interest partner, sometimes ensuring due diligence on technical and commercial aspects of projects, but often being a “façade” organization, providing employment for locals and collecting rents for the government. In other countries, however, NOCs have been mandated with an operational role. These NOCs are now facing cost and technology challenges as they face increasingly mature oil sectors and the transition to gas.
b. They can create the right environment and conditions for IOGCs to make the necessary investments in their upstream sectors, minimizing capital outlays themselves and without developing substantial internal technical and operating capabilities; Qatar is a good example of a country that has adopted this approach.
c. And of course, there can be a combination of the two approaches, where an active NOC combines forces with material and significant foreign capital and technical expertise to meet the investment needs of the country; there are many examples here, including Norway, Egypt, Indonesia, etc.
There is no universally winning approach among these three. Each producing country faces ever-changing hydrocarbon sector needs and potential, as well as evolving national needs and priorities. But in countries where none of these approaches are implemented efficiently, there is usually an investment problem.
Before looking at the competitive environment facing IOGCs when it comes to their upstream investment and reserve replacement challenges, it is worth taking a brief look at the global reserve base that is in fact open for IOGCs to compete over.
While geographic preferences based on corporate presence or long-standing relationships are often factors, it is quality reserves with quality fiscal terms that the companies are after; it is that objective that ultimately guides them in targeting assets and allocating investment dollars. Of total global oil and gas reserves, only about 14% are fully open for IOGC competition, where governments regulate the activities of oil and gas companies, but do not themselves participate in the exploitation of reserves (largely in the US and the UK). A further 17% of global oil and gas reserves are held by Russian companies, both privatized and public, where the degree of openness, the nature of IOGC access and the competitive environments and terms are still evolving and basically still unclear.
Figure 1
World Proven BOE Reserves
(Bn boe)
Only 11% of global reserves where NOCs are present and governments own the resources are open for IOGC to have equity access to reserves. By far the largest portion of global reserves, 58%, are held by governments and NOCs where IOGCs do not yet have equity access; in part of this portion, IOGCs can have some limited involvement through service contracts or technical service agreements, but they cannot have equity access to reserves. In spite of this, out of some $180bn in capex spent in the global E&P sector in 2002, $140bn was spent by publicly traded companies. The situation is only slightly different if one considers only natural gas, where Russia becomes more dominant, holding about 31% of the global reserve base. Reserves with full IOC equity access amount to some 10% of world reserves, and only 8% of world natural gas reserves where NOC are present are open to IOGCs. When it comes to the remaining 51% of global gas reserves, IOGCs have only limited access, through service contracts, but no equity access.
2. IOGCs: Investment Decisions and Competition
The investment climate for upstream projects is basically driven by three types of forces: First, Commercial Considerations, which are paramount for IOGCs but also affect NOCs and governments; Second, Strategic Considerations, which primarily affect governments and their NOCs, but are important to the sustained success of the IOGCs’ business plan; and Third, Access and Inertia – a host of bureaucratic, historical, traditional, and perception/knowledge-gap related factors that often act as hurdles even when the commercial and strategic aspects are conducive to investment. There are a few basic prerequisites that act as the necessary (although by no means sufficient) conditions to making any upstream investment happen. The resource base, both quantitatively and qualitatively, has to be attractive and accessible, at least in principle. This means that the country has to have a policy of allowing foreign investment in its hydrocarbon sector, with a generally acceptable legal framework that IOGCs can understand and that offers sufficient protection to their shareholders. It also means that governance of the hydrocarbon sector is provided with a minimum level of cohesiveness among the various players, including the oil ministry, the NOC, the state, in some cases the finance ministry, and the regulatory agency where one exists. When these different government branches are at odds on a policy affecting foreign investment, the IOGC cannot even begin to take concrete steps toward building a case to invest in that country. Thus, in addition to the physical resource base, a minimum level of comfort with the host country’s institutions, the degree of transparency and real or perceived commercial and political risks are part of the necessary conditions for making a positive investment decision.
The necessary conditions listed above are enough to bring an opportunity under consideration, but by no means enough to lead to a positive investment decision. The sufficient conditions for making an investment happen are more complex. At the very basic level, there are the conditions of profitability and materiality. Profitability is important both in absolute and in relative terms – absolute, meaning a minimum preset rate of return; relative, meaning providing a high enough return to get beyond the hurdle rate in a larger portfolio of projects that a company has to choose from subject to its own capex ceiling. Materiality is a matter of size and scale. Even profitable projects can be turned down if they do not pass the materiality threshold of a company. Materiality and profitability thus serve as important initial screening guides. But in many cases, they alone will not to lead to an investment. Companies scrutinize projects in broader and often more sophisticated ways as well. In recent years, “portfolio fit” has become an important consideration: how well does a project fit with the current and planned portfolio of projects of a company? Aside from its own financial metrics, what does it add to strengthen the overall position of the company? Related but somewhat different is the consideration of “strategic fit” – the project’s fit with the company’s overall corporate strategy, in terms of type of activity, regional growth and positioning, diversification or focus, etc.
Finally, companies increasingly look at a project from the perspective of providing opportunities for repeatable, profitable investments. A single project, with little or no potential for repeat investment opportunities surrounding it, is not as attractive as one that can help a company over time build a position of critical mass in a given play area, and thus help it establish a new platform or core area of operations.
The competitive landscape and pressures facing various IOGCs also affect their investment strategies in a profound way. These pressures vary considerably, depending on the size of the IOGC, its global diversification and specific niche strengths. PFC Energy classifies the IOGCs into three broad categories of competitors:
The Global Competitors: ExxonMobil, Shell, BP, ChevronTexaco and Total. For these companies, scale and materiality are the key challenges. They have global portfolios capable of generating substantial efficiencies from high quality assets. Their reinvestment challenge is to replace depleting high return assets with lower return assets outside of North America and Europe, without undermining the profitability of their portfolio. For some of these companies, reserve replacement requirements exceed 1.5bn barrels per year. What makes the challenge of the global competitors even more difficult is the fact that they must replace maturing legacy assets that contribute a substantial portion of their upstream net income, from new areas where they do not have particular preferential access to assets and where governments have considerably more control and direct involvement.
The Regional Majors: These are companies with a dominant presence on one or two regions and generally are either commercializing NOCs or privatized NOCs. Examples include ENI (dominant in Italy and North Africa), RepsolYPF (Spain, Latin America); Statoil (Norway); Petrobras (Latin America); Petronas (SE Asia); Lukoil, TNK, (Russia) and others. The challenge for the regional majors is to use their regional dominance as a base and create growth opportunities both in their own regions and outside.
The Focus Players: These are companies that have a specific competitive niche defined by a signature competence, a differentiated business model, or a narrow but highly disciplined geographic focus. Examples include BG, Anadarko, Unocal, Woodside, Marathon, Nexen, Apache, Oxy, Devon, and others. For this group, it is advantaged access to new quality assets that secures their profitable volumetric growth.
Clearly, these different sets of companies pursue different competitive strategies, with consequent differences in their investment strategies. The Global Competitors are focused on securing large assets with the intention of maximizing financial returns through efficiencies. Their focus is primarily financial (Return on Capital Employed) rather than volumetric (net asset growth), and thus they face the challenge of replacing the quality of their maturing assets, not just their size. By contrast, The Regional Majors are focused on maintaining monopolies in domestic markets and diversification of their asset base. An important part of their strategy has been to use control over resources and/or access to markets in their dominant regions to back into upstream resources or markets outside. The Focus Players pursue various differentiating strategies in order to compete and survive: A specific focus on an E&P play type (eg, deepwater or global LNG), a distinct geographic focus, or a differentiating performance measure (eg, reserve additions, net asset growth, etc). The key for them is to excel in a niche competency or unique business model.
Thus, in addition to seeking the necessary and sufficient conditions outlined earlier, companies are driven by competitive pressures to differentiate themselves and excel in the eyes of the market, which, in turn, has an impact on the types of assets that they pursue.
If an investment opportunity meets the conditions set out above, more often than not it gets approved and implemented. But there are a number of important factors that can either delay or sometimes prevent investments form happening, even if they meet all of the conditions outlined above. These are the “Access and Inertia” factors. Ease of entry and ease of operations in a host country can make a huge difference. Misalignment of priorities between an IOGC and the host government is also an important factor, and can work in a number of ways to delay projects. Delays can cause considerable erosion in financial returns, something about which IOGCs are very sensitive, but about which governments may not share the same sense of urgency. Conversely, certain projects may be much more important to governments than to the IOGCs involved in them for a number of reasons, not the least of which could be competing projects in the IOGC’s portfolio. Minimum compatibility of professional skills between an IOGC and the host country can be critical to push a project forward. IOGCs need to have adequate counterparts in the host governments to negotiate and close deals.
Finally, an IOGC needs to know that it has the ability to create a clear, sustainable competitive advantage in pursuing and capturing an investment opportunity before committing resources to it. Simply being “high bidder” is not always enough to ensure success. Other things being equal, being the high bidder can mean that the winning company is prepared to accept the lowest rate of return for the project. But, contrary to conventional wisdom, that may not be the best outcome for a host government, because a very low return project will not have the same priority and urgency for the IOGC as more profitable projects, and thus will not necessarily lead to the type of commitment that a host government should be seeking from IOGCs.
3. The Role of Governments
The drivers for IOGC investment decisions are dictated by market forces and by the fiduciary responsibility of the companies’ executives toward their shareholders. There is little that can be changed or modified in that area, short of changing the entire market structure. This, combined with the fact that the lion’s share of the exploitable reserves of hydrocarbons in the world remain under government control, puts the major burden of instituting changes in the investment environment on governments, not companies. Put another way, the IOGC is very much the “contractor”, providing services to the government and NOC “client.” A very important part of the business development efforts of the IOGCs is spent in trying to secure access to known opportunities. More often than not, however, this means trying to navigate through a complex and nontransparent maze of different actors within a country’s hydrocarbon sector bureaucracy.
Clarity and transparency in the roles of various governmental agencies is one of the most important non-commercial facilitators of IOGC investment in host countries. The main actors usually include the following:
1. The State itself, as the owner of the resources of the country, the shareholder of the NOC and the main authority issuing the laws that govern the hydrocarbon sector.
2. The Oil Ministry, as the body entrusted with formulating hydrocarbon sector policy and articulating the national priorities in developing the national resources.
3. The NOC, as the “commercial” entity that turns the country’s hydrocarbon reserves into commercial assets, adds value and generates growth, operates and manages the hydrocarbon assets of the state, and serves as the main operating link with IOGC and all that they have to offer.
4. The Finance Ministry, as the body entrusted with managing the revenues generated from the sector.
5. In some countries, the independent regulatory agency that regulates all energy sector commercial activity.
Where does an IOGC start? Who does it talk to? Is the NOC the main starting point or is it the ministry? How much influence do the governments of the countries where the IOGCs are based have on the process of access? How much influence should they try to exert and through what channels? Obviously, the answer to these questions varies considerably from country to country and from company to company. But the uncertainties surrounding these questions often delay investments by several years and, as often, prevent them from happening altogether.
The basic drivers of investment decisions for IOGCs are relatively clear and, as importantly, relatively uniform across companies. These are: Access, scale, profitability, strategic and portfolio fit, minimum level of comfort with host country, and competitive advantage. Although these drivers represent different measures and triggers to different companies, they nonetheless are the issues that matter in making a final decision about an upstream investment. But the basic policy drivers toward foreign investment for governments are less clear and far less uniform across countries. Sometimes, the most basic questions do not have one clear answer: Is “Country A” really open? If so, what does that mean? Do all the relevant decision-makers in the country agree on the policy and on the definition of openness? Do they agree on the procedures that need to be followed and on the rules that should govern foreign companies’ investment in their upstream sector?
A second set of uncertainties are related to the expectations of the host country from the IOGC. What does the host country hope to gain by allowing an IOGC access to its reserves? Capital, technology, access to markets and global marketing reach, managerial skills, faster monetization of resources, introduction of best practices in the operations of its own NOC, long-term sustained commitment to the country rather than the pursuit of a single project, a measure of political influence in the IOGC’s home country, employment, training, infrastructure, social investments, investment opportunities elsewhere. This is a long and diverse list, and the chances that the state, the oil ministry, the NOC, the finance ministry and the regulatory agency in a host country will agree on the exact nature of their expectations from an IOGC are virtually nil. So how should an IOGC optimize its position in the host country? The main message here is that clarity and transparency of various roles and cohesion in the host government’s hydrocarbon sector hierarchy can be absolutely critical in either progressing or hindering an investment.
The creation of core areas is critical for both IOGCs and host governments. Core areas are developed around long-lived assets that allow for repeatable profitable investment opportunities. For IOGCs, the benefits from core areas are obvious: critical mass, profitability through economies of scale and synergies, building on existing relationships and familiarity with a particular area, relatively predictable growth, etc. But providing the right conditions for IOGCs to create core areas is also beneficial to host governments. They make sustainable development of natural resources easier and more secure and they generate growth in government revenues over time. It is in the interest of a host country to set up the conditions that allow their NOCs to build core areas with chosen foreign partners for repeatable, profitable investment over time. Such programs – whether arrived at by aggregating smaller assets or through application to a single large asset base – bring a measure of stability, predictability and sustainability to investment flows that would be difficult to arrive at in any other way.
4. A Ten-Point Recommendation List to Governments
Governments can do a lot to encourage investment in the upstream sector. Some measures require fundamental rethinking vis-à-vis the sector’s geological potential and the competitiveness of existing fiscal terms in relation to that potential and in relation to other investment opportunities that IOGC have. Other measures are procedural and bureaucratic, and make a major difference to IOGCs. While these come at no monetary cost to governments, they can be very difficult to implement nonetheless. This is because most energy sectors in producing countries are not necessarily organized to optimize efficiency, productivity and transparency; rather, they are organized with the optimization of domestic political objectives in mind. In most cases, that is the root cause of the bureaucracy in the first place. Thus, in order to institute some of these seemingly “cost free” measures, governments first to make the leap to accept an organization designed to achieve efficiencies from the more typical organization designed to achieve various political purposes.
With the caveats discussed above, here is a 10-point list of recommendations for host governments:
1. First, achieve consensus on the hydrocarbon-sector needs in the country. Create a common strategy shared by all key actors in the hydrocarbon sector.
2. Formulate a coherent investment strategy and program, based on the consensus achieved regarding the hydrocarbon sector needs. A critical prerequisite for this step is a thorough understanding of the government’s appetite for risk. Is the government willing and able to take major exploration risks? Is it willing and able to take the risk of moving into relatively uncharted waters of gas sector development? Only by defining the acceptable level of risk can a viable strategy and investment program be formulated.
3. Agree on the role that the NOC will play in that strategy. Misalignment of goals and objectives between the NOC and the government is a common source of project drag and frustration for the IOGC. A prerequisite for this is an objective understanding of the NOC’s capabilities and skills. Is your NOC set up to manage assets or to develop new business opportunities? How much of the exploration risk required by the development of your hydrocarbon sector can be assumed by your NOC?
4. Agree on the role that IOGCs should play in that strategy. Explain that role to all agencies involved in dealing with IOGCs. Ensure adequate institutional and professional capabilities to support that role.
5. Clarify the operating link between the NOC and the IOGCs.
6. Identify the type of IOGC that would best fulfill your sector needs and design your upstream offerings to appeal to that type. This requires understanding the strategies, objectives, targets, capabilities and drivers of the main IOGCs, as well as a thorough analysis and often a reevaluation of your upstream sector.
7. Establish as much clarity and transparency of roles within the government as possible. Often, clarity and transparency are achieved through separation of the roles, particularly separation of the policy formulation, operations and promotion/regulatory functions.
8. Eliminate the bureaucratic and logistical hurdles to easy entry and easy operations for IOGCs. Make it easier for an IOGC to do business in your country; it costs little and it makes a huge difference for the IOGC (see caveat above).
9. Appreciate the fact that even as a government you are in a competitive market and act accordingly. Countries compete for quality investment dollars and technically superior investors, just like IOGCs compete for quality assets and superior commercial terms. This means that the fiscal terms that you offer to IOGC need to be competitive if you want competitive results.
10. Finally, be realistic and objective in assessing your country’s geological and commercial potential. This is not only generally difficult for governments to do, but also increasingly more critical, especially in countries with maturing sectors. An objective assessment of geological potential is not only critical in its own right, but also it is a prerequisite to formulating reasonable and competitive fiscal terms, because the two need to be closely synchronized and correlated. Be prepared to reassess everything – in mature areas, it will take more than cosmetic improvements in fiscal terms to revive material interest in the sector.
5. The Role of IOGCs
As stressed above, IOGCs respond to the demands of the market. Investment decisions are made in large part on the basis of a number of financial metrics and competitive considerations, and on the basis of how those implications may be received in capital markets. Considering these market constraints and the fact that it is governments that own and control the below ground resources, there is relatively little that IOGCs can do to encourage upstream investment.
However, there are certain measures that IOGCs can take to improve the investment and operating climate, subject to these limitations. With greater exposure to and involvement in international projects, it is increasingly important that IOGCs develop a more sophisticated approach to recognizing and mitigating above ground risks. In part, this is necessary in order to properly align the risk tolerance and operating capability of the IOGC with the set of candidate investment opportunities. Pursuing an exploration play in a socio-political environment within which the IOGC will not be comfortable operating can result in significant value destruction. While this may seem self-evident, there are few IOGCs that are skilled at new entry analysis, and fewer still that effectively and accurately analyze each opportunity.
In general, those IOGCs that go the extra mile to differentiate themselves by offering capabilities or services over and above what is called for to implement a project, and those that apply “best practices” in engaging with host countries at the federal, state, and municipal/community level, can find their competitive position strengthened. IOGCs often can offer to help host governments solve problems. And while these offers come with certain monetary costs, they can also advance the commercial interests of the IOGCs and improve their competitive position.
Instead of the single-minded commercial pursuit of specific commercial targets, IOGCs would do better with a broader approach where they consider the needs of the hydrocarbon sector of the host country, and, through the execution of specific projects that they are pursuing, offer solutions to those problems and needs. This could come in the form of assistance with the design and management of large and complex set of projects, of which the IOGC’s target is part. It could also involve regional development concepts, technical support directly related the specific target project of the IOGC, specific training programs also directly associated with the project targeted by the IOGC.
By tying “peripheral” offerings directly to the targeted project, the IOGC gets the necessary assurance that its commercial targets will not be overwhelmed by noncommercial activities, without reducing the benefits to the host government. The same broader approach can be extended to a more thorough analysis and understanding of the needs of the NOC in the host country, and often even some of the specific needs in the oil ministry itself.
6. Concluding Thoughts: Cooperative Measures
The IOGC-Host Government/NOC interaction does not have to be reduced to a zerosum game, where what one side wins the other loses. Yet, this is often a large stumbling block to successful longer term ventures. These two entities have different objective functions, different capabilities different assets and different appetites and tolerance for risk. They are generally complementary, not competitive. In principle, each side possesses what the other side seeks: Governments hold the below ground resources sought by IOGCs, and IOGCs control most of the above ground drivers of the global energy business that governments need.
Figure 2
A “Typical” Production Profile And The Key Skills Required At Different Phases
Figure 2 depicts a typical production profile of most countries (it happens to specifically depict the actual and projected production in Colombia, with the white bars representing production from higher-risk EOR investments). In the early phases of the development of a hydrocarbon sector, strong business development and risk taking skills are critical. However, NOCs generally (although there are exceptions) are set up as Asset Management companies, not as business developers. They are entrusted with the vast resources of a nation’s hydrocarbon sector, and as expected to manage these resources and pass on the rents to the government.
This asset management function is usually ideally suited for the plateau segment of the production profile. While strong business development skills are usually required to build and develop the sector, once the sector is established, countries can rely on an asset management company focused on that sector for long periods of time – in some countries much longer than others. However, for many oil sectors, mature oil reserves and the transition to gas render business development skills (risk taking) necessary once again. But, business development requires taking risks, and governments generally do not like to take risk. Not surprisingly, NOCs are usually not organized to take the risks inherent in higher risk technical plays and or longer term investments in natural gas.
Generally, countries that are in the plateau phase of their production life-cycle resist the entry of IOGCs into their sector. In the plateau phase, the NOC is generally well placed to perform the necessary asset management tasks, at least to the satisfaction of the government. Also, this phase generally is the least risky phase, both technically and in terms of requirements of risk-capital. So the need for IOGCs is not felt strongly. For some countries, this phase can last only a decade or two, while for others it can last for fifty or sixty years.
By the same token, and also generally speaking, countries that are either in the early stages of development or that are struggling with reviving mature sectors, see more reason to involve IOGCs. However, the institutional and bureaucratic structures built up over the previous decades do not encourage this. In their asset management role, NOCs tend to be inward looking and focused more on their domestic political and asset management roles. Business development, on the other hand, requires an outward looking and far less risk-averse posture.
Once the critical hurdle of agreeing on the need for investment in a country’s upstream sector is crossed, governments and IOGC can cooperate to make the process easier, faster and more beneficial to both sides. By far the most critical prerequisite for such cooperation is knowledge. Knowledge of the host country’s needs, policy drivers and objectives on the part of the IOGC, and knowledge of the IOGC’s constraints and incentives on the part of the host government. It is in fact quite surprising how little of substance companies and governments learn about each other, even after years of interaction.
How would such knowledge, once acquired, be used? One area where direct cooperation between IOGCs and governments can pay out for both is consultations regarding a country’s hydrocarbon laws. A country’s hydrocarbon laws should serve the country not only through providing the legal framework for organizing and regulating the sector, but also through managing and directing the behavior of NOCs or IOGCs in the best interests of the country. Without a solid and objective understanding of what drives IOGC behavior, the legislative process will miss out on the second part of this function. In some countries, the hydrocarbon laws are antiquated and need to be subjected to major reassessments and revisions. In other countries, such revisions are already taking place, but with little or no dialogue with the IOGCs who will be most impacted by them. Dialogue and consultations with IOGC does not mean abdicating the legislative responsibilities of the state, or giving up any measure of sovereignty. It just means testing certain ideas and concepts, and, more importantly, trying to find out what types of provisions would maximize an IOGC’s commitment to the country. Often, by some variation in their legal framework, countries can secure substantially stronger and longer term commitments from IOGCs, with substantially larger amounts of capital flows.
Many countries in Latin America have either recently announced revisions to their hydrocarbon laws or are currently in the process of conducting such evaluations and revisions – including Colombia, Venezuela, Mexico. Colombia recently announced new hydrocarbon terms that were the result of interactions between IOGCs and the Ministry. Through several rounds with the IOGCs the country has come up with a system which it hopes will attract new investment, not only from the current players but new ones as well. An important feature of the new terms is a sliding scale royalty (versus the previous flat 20%) and no stringent provision for local content, although the Ministry would like to see some Columbians gainfully employed.
Another area of cooperation between IOGCs and governments would target directly the challenges of high cost technology needs, especially in the increasingly more demanding EOR investments in mature areas. NOCs and IOGCs could create joint 22-24 May, Amsterdam, the Netherlands venture companies specifically dedicated to EOR investments in mature oil sectors. These “separate” companies, jointly owned by NOCs and IOGCs, would merge technical capability and experienced staff with younger personnel in need of training, capital and assets. The purpose for creating a separate JV company would be to allow different behavior with respect to risk taking and application of higher technology, which may be harder to achieve within the NOC itself. The joint venture company could also be used by the NOC to upgrade its own skills and technical capabilities.
A third potential area for mutually beneficial cooperation between IOGCs and governments is the area of organizing the upstream sector in such a way that is more conducive to generating repeatable investment opportunities both for the IOGC and for the country’s NOC. This can be done through rebundling of smaller areas into larger areas for exploration plays, with mobile commitments, or by providing creative ringfencing provisions for multiple investment opportunities in a given region.
The ultimate objective of the government in such consultations would be to understand more clearly and precisely what needs to be done to extract the most benefit from the IOGC’s presence in its upstream sector. A dialogue between IOGCs and governments can help this process by avoiding schemes that do not necessarily provide an incentive to IOGCs and thus saving considerable time and frustration. It is therefore cooperation in order to fine-tune a policy tool that will ultimately serve the needs of the state, while providing the IOGC the necessary incentives for cooperation.
