PACIFIC PETROLEUM PROJECT PHASE 1- A BULK PROCUREMENT INITIATIVE

Presentation to STAR 2010

Shakil Kumar16th October 2010

Presentation Outline

• SPC’s role in the Petroleum sector• Overview of Oil & Gas Industry.• Overview of fuel Consumption & Supply Chain in

PIC’s• Pacific Petroleum Project Status.• Recommendation

- Harmonizing fuel quality and its benefits.- Encourage more countries to Sign

SPC’s role in the Petroleum Sector• Provides petroleum data and advisory services to

Pacific Island Countries for efficient use of fuel.• Strengthening the existing petroleum database of

PIC’s (Demand/Supply).• Assist regulators in PIC’s to monitor price control

instruments.• Harmonize Fuel standards• Support the Bulk Procurement Initiative which is

retained by Pacific Islands Forum Secretariat currently.

Oil and Gas industry - Overview

Oil and gas provide the world's 6.4 billion people with 60 percent of their daily energy needs.

The other 40 percent comes from coal, nuclear and hydroelectric power, "renewables" like wind, solar and tidal power, and biomass products such as firewood.

Crude Oil Refining

Downstream Sector

OVERVIEW OF FUEL CONSUMPTION & SUPPLY CHAIN IN PIC’S

Consumption World - 82,000,000 barrels per day

Pacific - 40,000 barrels per day

Fiji - 11,000 barrels per day

PNG - 20,000 barrels per day

Petroleum Market share of Pacific Island Countries

Federated States of Micronesia, 2.5

Vanuatu, 1.5Tuvalu, 0.2Cook Islands, 0.9

Tonga, 2.3

Republic of Marshall Islands, 4.8

Samoa, 4

Solomon Islands, 3

Nauru, 0.4

Palau, 4

Niue, 0.1

Kiribati, 1.1

Fiji, 25.6

Papua New Guinea, 49.6

SINGAPORE

Hub Ports /MR

Secondary Distribution Ports

Fuel Supply Chain – PIC’s

Extraction of Crude Oil - Malaysia

Crude Oil refined in Singapore

SPOL

Shipped in MR

FDI & State Investment 2010

MNOC

SOE

Regional

Loss of Foreign Direct Investment (FDI)

• Exxon Mobil Divestment 2002.

• Shells Divestment 2005

• BP (SWP) Divestment 2010

• Reduction in level of competition.• Additional players in the value chain.• Strengthening of market power.• Transfer of contaminated land liability.• Transfer of operations and

management.• On going operation of grandfathered

facilities.

PACIFIC PETROLEUM PROJECT STATUS

SIGNATORIESCOOK IS, MARSHALL,

NAURU, NIUE & TUVALUPIFS ADVERTISED TENDERPIFS ADVERTISED TENDER

HALE & TWOMEYHALE & TWOMEYIMPLEMENTATION SINCE

JANUARY 2010IMPLEMENTATION SINCE

JANUARY 2010

PROJECT OUTLINE

Pacific Petroleum Project Phase 1 Milestone 1: Assessment of national standards and requirementsMilestone 2: A procurement strategyMilestone 3: A risk assessmentMilestone 4/5: A commercial contractMilestone 6: Associated tendering documentation (Expression of

Interest & Cost benefit Analysis).

First five milestones which have been completed with exception to Republic of Marshall Islands.

SUPPLY ROUTES TO PACIFIC ISLANDSMR tanker supply from Singapore

LCT supply

Possible LCT supply from Fiji

Tanktainer supply from New Zealand

BULK FUEL PROCUREMENTWhat it is• Achieving efficient supply into

each country• Aim to get price competition

between suppliers • Working with current suppliers

and supply infrastructure • Combining countries to leverage

volume• Levering supply with other

countries as appropriate.

What it isn’t•A single cargo purchased in Singapore delivering to all countries•Forcing a certain delivery method•Nationalisation of oil industry•Forcing a single supplier for all participants.•Price cross-subsidisation.•It can’t change location and volume constraints.

PROCUREMENT STRATEGY: PRINCIPLES• Maximise Volume

– Encourage more participation as appropriate

• Mutual dependences recognised– Dependences exist between Signatories, non-Signatories and market

participants

• Market approach will be followed• Innovation from suppliers will be encouraged• Transparency of pricing is essential• Costs will lie where they fall

– No cross-subsidisation between countries

PROCUREMENT STRATEGY: APPROACH• Recognise different situations in different countries

– Government or private sector control of petroleum supply infrastructure

– Will require voluntary participation of marketers; can be encouraged

• Cover full supply chain into country terminal(s)– Covering both primary and secondary distribution

• Supply standards to be harmonised – Tender can cover product quality and marine standards

• Standards within countries handled outside the tender – Recommended managed through regional organisations

ISSUES TO MANAGE IN PROCESS• Voluntary participation of private sector – encouraged

through maintaining competitive supply • Countries dominated by a single supplier – can be efficient

but lacks price competition• Countries with only one supply option/single company• Quality of receiving assets – ports/terminals• Suppliers who have interest in the in country facilities• Availability of funds for term supply• Willingness of donors to participate• Commitments to existing suppliers

RECOMMENDATIONS - PPP

• Encourage more Pacific Islands to sign and participate in the Pacific Petroleum Project.

• Harmonisation of fuel quality, vessel and terminal facility standards are required across the region.

• Regional role recommended for supporting Pacific Island countries

with petroleum standards

Fuel Quality in PICs

Type of Fuel Grades Countries

Unleaded Petrol (Mogas) Gasoline 97 unleadedGasoline 95 unleadedGasoline 92 unleaded

Aust/NZ

Fiji and most PICs

Kerosene/Jet Dual Purpose Kerosene All PICs

Gasoil (Diesel) Gasoil 10 ppmGasoil 50 ppmGasoil 500 ppmGasoil 2500 ppmGasoil 5000 ppm

Aust/ NZFrench TerritoryFijiAmerican SamoaSmall Is States e.g. Tuvalu

Fuel Oil Heavy Sulfur Fuel Oil Fiji Electricity Authority

Waste Oil - Fiji & Nauru

Pacific Island Countries Diesel QualityCountry Land Transport Electricity

American Samoa N/A 2500 ppm

Cook Islands 10 ppm 5000 ppm

Fiji 500 ppm 5000 ppm & Heavy Fuel Oil

New Caledonia 50 ppm N/A

Tonga 5000 ppm 5000 ppm

Tuvalu 5000 ppm 5000 ppm

Harmonising Diesel Standards

• Pacific Island Countries that are currently importing 5000ppm sulphur diesel to adopt 500ppm sulphur diesel as maximum quality.

WHYPrice differential less than 1 cent/litre

Low Sulphur fuel Reduces CO2 and sulphur Emission

Price Differential 5000 500

FOB - Price of Gasoil for month of September (US$/Barrel)

87.042 87.639

US cents per Litre 54.747 55.123

Fiji cents per Litre 105.83 106.55

Difference Fiji cents per litre

0.729

Harmonizing ULP

This area is difficult as it will require :1. Oil Industry Consultation2. Vehicle Suppliers Consultation 3. Huge Capital Investment.Therefore this can be a long term objective for SPC to work

towards with PICs.

THANK YOU