learning with overseas what uk and norway o&g industrial policy can teach brazil may 2013

Learning with overseasWhat UK and Norway O&G industrial policy can teach BrazilMay 2013

Accelerate Oil & Gas 2013

Current state of NCS and UKCS (2010)

Norwegian Continental Shelf (NCS) UK Continental Shelf (UKCS)

Production and reserves

► Daily oil production: 2,1 Million b/d► Daily gas production: 0.3 Billion Sm3/d► Annual oil production: 654 Million barrels► Annual gas production: 106 Billion Sm3► Remaining oil reserves: 5,2 Billion barrels► Remaining gas reserves: 2,042 Billion Sm3► Global ranking: 7th (oil) and 2nd (gas)

► Daily oil production: 1.3 Million b/d► Daily gas production: 0.15 Billion Sm3/d► Annual oil production: 489 Million barrels► Annual gas production: 57 Billion Sm3► Remaining oil reserves: 5.5 Billion barrels► Remaining gas reserves: 520 Billion Sm3► Global ranking: 19th (oil) and 15th (gas)

Contribution to the economy

► Value creation from the oil and gas in 2010: $87 billion ► Cumulative value creation since 1971: $1,485 billion► Cumulative investments since 1971: $446 billion► Industry ranking: Number 1► Petroleum sector’s share of:► GDP: 21%► State revenues: 26 %► Total investment: 26 %► Total exports: 47 %► Net government cash flow: $45 billion► Estimated total employment: 200.000► Companies with offshore acreage: 90

► Attracts around $18.5 billion annual expenditure by industry

► Provides around $12.4 billion annually to the Treasury in taxation

► Directly and indirectly supports around 350,000 jobs (1.2% of the working population)

► 133 companies hold offshore acreage in the UK (177 including onshore licences)

► Accounts for less than 3% of national gross added value

Figures relate to 2010Sources: NPD, DECC, Wood Mackenzie, Oil & Gas UK

Norway – industrial policy model


Policy framework overview

Start phase Growth phase Maturity phase

► Concession rounds to control the development (1965)

► The 10 oil commandments were used as a roadmap for the policy (1971)

► The establishment of Statoil and the Norwegian Petroleum Directorate (NPD) to secure the state’s interests (1972)

► The establishment of the Ministry of Energy and Petroleum to represent Norway authorities’ interests (1978)

► The development of Hydro and Saga as operators, creating Norwegian competition (1979→)

► The establishment of the States Direct Financial Interest (SDFI) to secure future revenue (1985)

► Increased focus on safety and the environment

► Policies to increase oil recovery► An increased focus on gas and gas

transportation to Western Europe► The state loosens its grip, as Statoil

became partly privatized (2001)

Mill

ion

ba

rre

ls o

.e.

pe

r ye

ar

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

0.0

500.0

1000.0

1500.0

2000.0

Sum of oil Sum of gas Sum of NGL Sum of condensate

Policy Fiscal R&D


The Norwegian model – rolesand responsibilities

Government

► Set strategic direction

► Derive license areas

The Norwegian Petroleum Directorate – administrative function

► Creating value for the society

► Driving force for realizing the resource potential

► Advisor to the Ministry

► Policy implementationand monitoring

Ministry of Petroleum and Energy – central management

► Represents the Norwegian authorities’ interest

► Responsible for the policy making

► Award of licenses

► Funding R&D

Statoil – commercial function

► State controlled

► Sliding scale mechanism

► Carried interest requirements

► Driver of innovation

► Presence of competition

► Vehicle for developing local industry capability

Source: MPE, NPD & Statoil

Norwegian Ministry of Petroleum

and Energy

Norwegian Petroleum Directorate

Statoil

Government

Policy Fiscal R&D


Financial frameworks and incentives


► First petroleum act (1965)► Tax incentives to attract foreign

companies and stimulating exploration activity

► Carried interest agreement (1972)

► The sliding scale was introduced (1974)

► Petroleum tax act was created (1975)► No longer a need for incentives to

increase activities, but for the state to secure a higher share of the profit

► SDFI was introduced to secure future revenue for the state (1985)

► Co2 emission tax introduced (1991)► Revision of the Petroleum Tax act to

increase oil recovery (1992)

19

70

19

71

19

72

19

73

19

74

19

75

19

76

19

77

19

78

19

79

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

100 %

10 %

20 %

30 %

40 %

50 %

60 %

0

20

40

60

80

100

General tax rate Special petroleum tax Crude oil $/bbl nominal

Ta

xes

Oil

pri

ce –

$/b

bl

Policy Fiscal R&D


The state’s revenues from petroleum activities

19

71

19

72

19

73

19

74

19

75

19

76

19

77

19

78

19

79

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

-2,000

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

-300.0

200.0

700.0

1200.0

1700.0

General tax rate Production, area and environmental fees

Special petroleum tax Netto cash flow SDØE

Statoil dividend Total petroleum production

Mill

ion

$ (

infla

tion

adj

ust

ed

) Millio

n b

arre

ls o.e

. Pe

r yea

r

► The petroleum tax act laid the foundation for high future revenue and has ensured steady and significant growth that will benefit the Norwegian nation in decades to come

► No conflicting interest with regard to the revenue from the petroleum industry

Source: NPD

Policy Fiscal R&D


Technology, innovation & skills framework


► World-leading technology was not good enough for the harsh environment and Norwegian shipbuilding and marine expertise were needed; new oilfield-services companies were emerging rapidly

► The government implemented protectionism measures to enable Norwegian companies to compete (1972)

► Good-will agreements initiated by the Norwegian state (1979)

► Norwegian sea seen as a 'test bed' for new technology

► Increased focus on IOR► INTSOK established (1997)► Government funded research

programs such as RUTH and Demo2000 (1999)

Policy Fiscal R&D

Mill

ion

ba

rre

ls o

.e.

pe

r ye

ar

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

0.0200.0400.0600.0800.0

1000.01200.01400.01600.01800.02000.0

Sum of oil Sum of gas Sum of NGL Sum of condensate


9

Norwegian industry development across the value chain (example of companies)

Reservoir/seismic

Explorationdrilling

Project developmentEngineering,

fabrication and installation

Operations

Support

Drilling Production

AHTS Tanker

Seismic

PSV Pipe layers

Subsea 7

Petroleum Geo-

Services

Smedvig drilling SeaDrill

Odfjell Solstad Offshore

Deep Sea Supply FrontlinePlayers:

Rosenberg, Norwegian Contractors & Aker Aker Solutions

Players: Players:

Players:

StatoilNorsk Hydro Saga PetroleumStatoil

Policy Fiscal R&D

Present situation; a significant oilfield-services industry developed over time; 1500 companies, 350 BNOK revenues, 90.000 employees – increasing international activities and revenue


http://www.btinternet.com/~derek.mackay/offshore/images/vessels/WestNavion.jpg

http://www.cgg.com/proserv/marine/vessels/symphony.html

http://en.wikipedia.org/wiki/Image:Supertanker_AbQaiq.jpg

Retrospective glance; well planned sustainable development

► Sustainable and phased development of the NCS has been governed by the 10 Guiding Principles

► The tripartite model has provided transparent governance of the sector

► Statoil has been the primary focus and agent for the development of Norwegian industry expertise and capability

► R&D funding a key to developing new technology (license funding and three-party arrangements) and hence also transforming existing companies into today’s international oilfield-services industry

► The phased licensing approach has contributed to the development of local skills and expertise and simultaneously built industry clusters along the Norwegian coast – each with it’s own strength

► A slower approach has enabled local firms to build expertise; providing an opportunity to be part of a new industry with significant breadth and width

Policy Fiscal R&D


UK – industrial policy model


1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Oil Production Gas Production

Mil

lio

n b

arre

ls o

.e.

per

yea

rDevelopment of UKCS policy framework

Start phase Growth phase Maturity phase► British National Oil Corporation

(BNOC) and British Gas Corporation (BGC) formed (1976 and 1972)

► Creation of Offshore Supplies Office to increase local content (1973)

► Government bail-out of Burmah Oil (1974/5)

► 51% of BNOC sold off (Britoil created – 1982)

► BGC privatized (1984)► Government sells remaining stakes in

Britoil and BP (1987)► BP acquires Britoil (1988)► Renewed focus on gas to offset

predicted domestic supply shortfall

► Encouraging new entrants – Promote Licence introduced (2003)

► Focus on maximising recovery► 1000th licence awarded (1999)► PILOT established (2000)

Growth phase: maximising production

Start phase: encouraging exploration

Maturity phase: maximising recovery

Decline phase? Transitioning to other sectors

Sources: DECC, BP Statistical Review of World Energy

Policy Fiscal R&D


Key policy framework learningsfrom the UKCS

► UK policy on the development of the UKCS was dictated by the country’s balance of payment position at the time of the first discovery of North Sea oil and the need for early revenues.

► This resulted in a rapid depletion policy that meant that the UK had to rely on the expertise of foreign companies and this slowed the development of local capability.

► The establishment and the subsequent abolishment of BNOC reflect the rapidly changing (and short-term) policy priorities of UK governments during the development of the industry.

► The main impact of the abolition of BNOC and focus on competition has been an increase in activity by smaller and niche companies in the E&P and oilfield services sectors of the UKCS

► Local companies only entered the industry at the periphery, with the key areas, such as those requiring offshore specific facilities and expertise, remaining firmly in the hands of foreign companies.

► OSO’s local content policies did very little to strengthen British performance in technological capability development, where American companies had established a considerable lead.

Policy Fiscal R&D


UK financial frameworks and incentives


► Prior to 1975, there was no specific regime for the taxation of UKCS oil and gas companies

► Petroleum Revenue Tax (PRT) introduced (1975)

► Fundamental changes in the tax regime correlated with movements in oil prices

► Desire for state to secure a higher share of the profit

► Close discussions and formal consultation between government and the UK oil & gas industry on tax changes

► Abolition of PRT for new fields and reduction of PRT rate to encourage exploration in the early 1990s

► Uncertainty surrounding decommissioning

Sources: DECC, HMRC

Policy Fiscal R&D

1 2 3 4 5 6 7 8 91

01

11

21

31

41

51

61

71

81

92

02

12

22

32

42

52

62

72

82

93

03

13

23

33

43

53

63

73

83

94

04

14

24

34

44

54

64

74

8

0

20

40

60

80

100

0%

20%

40%

60%

80%

100%

Major ChangeReal oil price - $/bbl Fields approved before 1 April 1982 not paying PRT (Royalty; RFCT; SC; no SPD) Fields approved before 1 April 1982 not paying PRT (Royalty, SPD, RFCT, SC) Fields approved between 1 April 1982 and 16 March 1993 (SPD, PRT, RFCT, SC, no Royalty) Fields approved between 1 April 1982 and 16 March 1993 not paying PRT (SPD, RFCT, SC) Fields approved after 16 March 1993 (RFCT, SC, no PRT)

Re

al O

il Pric

e ($

/ba

rrel, 2

01

0 p

rice

s)

Ta

x r

ate


1964

/65

1966

/67

1968

/69

1970

/71

1972

/73

1974

/75

1976

/77

1978

/79

1980

/81

1982

/83

1984

/85

1986

/87

1988

/89

1990

/91

1992

/93

1994

/95

1996

/97

1998

/99

2000

/01

2002

/03

2004

/05

2006

/07

2008

/09

2010

/11-2,000

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

22,000

24,000

26,000

-200

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Licence Fees Royalty Petroleum Revenue Tax

Corporation Tax Supplementary Petroleum Duty Supplementary Charge

Total Oil & Gas Production

Go

vern

men

t re

ven

ues

fro

m o

il &

gas

p

rod

uct

ion

($b

illio

n, 2

009/

10 p

rice

s) To

tal oil &

gas p

rod

uctio

n -

Millio

n b

arrels o.e. p

er year

The state’s revenues from petroleum activities

Sources: DECC, HMRC

PRT removed for new fields

SC introduced

SC increased to 20%

SC increased to 32%

Policy Fiscal R&D


Key fiscal policy learnings from UKCS

► The fundamental changes in the tax regime reflect movements in oil prices.

► Changes in tax policy have resulted in a fairly complex set of tax rates.

► The fiscal framework has generally been less stable and more complex than in Norway.

► The close discussions and formal consultation between government and the UK oil & gas industry in recent years have been the driving force for recent policy developments.

► This has enabled the tax regime to take into account the maturity of the basin.

► Decommissioning is becoming an increasingly important matter for the UKCS as the basin matures.

Policy Fiscal R&D


UKCS technology, innovation & skills framework


► Government view that oil and gas industry should fund its own technology development

► Recommendation that specialist research institution in offshore technology is established in the UK (1973)*

► Government focus on safety aspects of oil and gas R&D

► Government R&D support targeted at nuclear technology

► Government funded oil and gas R&D carried out under oversight of Atomic Energy Agency

► Government R&D support targeted at renewable energy

► Engineering & Physical Sciences Research council formed (1984)

► ITF formed (1999)► Technology Strategy Board formed

(2004)

* Recommendation never fulfilledSources: DECC, UK government archives

Policy Fiscal R&D

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

0200400600800

1,0001,2001,4001,6001,8002,000

Oil Production Gas Production

Mil

lio

n b

arre

ls o

.e.

per

yea

r

Growth phase: maximising production

Start phase: encouraging exploration

Maturity phase: maximising recovery

Decline phase? Transitioning to other sectors


Key technology & skills development learnings from the UKCS

► There was no coordinated UK government R&D strategy, which has resulted in duplication of effort in oil and gas technology development.

► The government’s policy emphasis on innovation was exclusively placed on corporate entities and did not entail significant investment in research or education capabilities.

► There are a number of organizations that help drive oil and gas technology development but their activities are not aligned.

► As there is little opportunity for public sector funding for innovation in oil and gas, the industry itself has had to find new ways of nurturing innovation (e.g., ITF).

► There was no systematic effort within the UK to develop education or research capabilities focused on the oil and gas sector. Links between universities and industry developed as a result of the efforts of individual academics.

Policy Fiscal R&D


CONCLUSIONS


Summary of key learnings

Norway UK

Policy ► 10 Guiding Principles established early

► State management and direct participation in the development of the NCS clearly established

► The tripartite model provided clear governance of the industry

► A phased approach to commercialisation of resources managed through licensing rounds

► Rapid depletion policy developed

► Laissez faire, market driven approach has predominated

► Consequently, UK has had faster commercialisation and subsequent depletion of resources than Norway

Fiscal ► Tax regime has been simple, stable and transparent

► High marginal tax rate, but with very beneficial depreciation regulations to stimulate high R&D levels

► Recent changes aimed at maximizing recovery

► Tax regime has become more progressive over time in response to high oil prices

► There have been 14 major tax changes over the period 1970 to 2011

► Recent changes aimed at maximizing recovery

R&D ► Solid industry base and competence to build on

► Creation of an innovation framework for R&D and training (licenses, three-party agreements)

► Statoil played an integral role in skills transfer and local content management

► Stimulating competition and cooperation

► Oil and gas R&D not a government priority

► Local content target of 70% achieved – all companies with a UK listing counted as ‘local’ (EU regulation and local content laws are incompatible)

► Local 'champions' have emerged but without state assistance

Policy Fiscal R&D


This document has been prepared by Ernst & Young. The information and opinions contained in this document are derived from public sources which we believe to be reliable and accurate but which, without further investigation, cannot be warranted as to their accuracy, completeness or correctness. This information is supplied on the condition that Ernst & Young, and any partner or employee of Ernst & Young, are not liable for any error or inaccuracy contained herein, whether negligently caused or otherwise, or for loss or damage suffered by any person due to such error, omission or inaccuracy as a result of such supply.

Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. Ernst & Young LLP accepts no responsibility for any loss arising from any action taken or not taken by anyone using this material.

© 2011 EYGM Limited.All Rights Reserved.

learning with overseas what uk and norway o&g industrial policy can teach brazil may 2013

Documents

oil gas uk

gas daily oil production

oil reserves

gas reserves

th oil

oil recovery

norwegian state

oil commandments