Conference on the Economy 2008
The Petroleum Industry and the
Economy
Some thoughts on meeting the challenges of the
21st Century
Gregory McGuire
Presentation Outline
 Introducing
the Works of
Trevor Farrell
 Assessing the Current
Context
 Farrell’s Themes and
Industry Evolution.
 Ideas on the Future
Farrell’s Major Concerns




Planning Capability in the Energy
Sector
Engaging MNC and Technology
Acquisition
National Ownership
Technological Capability and Industrial
Policy
Some Early Conclusions of
Farrell



Oil industry has failed to provide
Trinidad with the development one
might have expected.(1974)
Failed to play role of dynamic sector –
weak productive linkages with rest of
the economy
Venturing downstream (Plastics etc)
remains a option to be explored
Some Early Conclusions of
Farrell

Resource based industrialization was
misleading because :
– Supply side approach to the definition of
what is to be produced
– Static comparative advantage is easily
lost.( 1988)

Planning is a poorly developed function
in the Caribbean (1980)
Some Early Conclusions of
Farrell


A technological capability still does not
exist over a whole range of activities
necessary for running the oil industry .(
1979)
The country clearly had the worst of the
deals in the two petroleum
nationalizations of the early seventies
due inpart to psychological weaknesses
of negotiators and poor planning. (
1976)
Some Early Conclusions of
Farrell

In the development of the JV at Point
Lisas the local strategy was too
narrowly focused on getting the plants
built rather than acquiring
technological capability. ( 1986)
Assessing the Context
International and Local
Current Global Trends
and Issues
Developed world not driving demand
growth but could drive demand
destruction
 Reduced Transnational Company role in
favor of National Oil Companies
 Emerging supply sources give no
assurance of supply stability
 Increasing commoditization of gas and
LNG

Demand growth no longer driven by developed economies
The Power of NOCs
Source: Frank Kuijlaars- Oil & Money 2007
Supply Dynamics
Three of five largest decrease came from OPEC .Suggesting initial
attempts to stabilize prices.
LNG Commoditization
Oil Prices Which way ?
Rising Oil Prices
120
100
US$/bbl
80
60
40
20
0
86 87 88 89 90 91 92 93 94 95 96 97 98 99 0
Source: Appendix table 6
1
2
3
4
5
6
7
8
Years
Demand from Non OECD countries and market psychology have been the principal drivers.
Back to the Future
Real Oil Prices 1980-2008 ( 2006 dollars)
90.0
80.0
70.0
50.0
40.0
30.0
20.0
10.0
Source: US EIA. Annual Energy Outlook 08
Ye ars
20
07
20
04
20
01
19
98
19
95
19
92
19
89
19
86
19
83
0.0
19
80
US$/bbl.
60.0
Oil Prices : Which Way ?
•Declining Non -Opec
Supply .
•New supply sources
mainly in non “friendly”
areas.
•NOC vested interest
•Declining Economic Growth
: OECD & Non OECD
•New supply sources: Brazil,
Heavy Oil Tech.
•Convulsions within OPEC
•Bearish market psychology
•Fuel Switching
•Peak oil theory losing steam
Oil Prices : Which Way?

Some Critical EWS
– Real oil prices have climbed back to 1982 levels
– IEA, EIA and OPEC have all lowered demand
forecasts for 2009
– Short term supply disruptions e.g. Ike and
Gustav Nigeria, Georgia have had no
discernible impact on prices.
– China is not imported gasoline for two months;
instead exported surplus stock.
Rising Gas Prices
12
Figure 6
US Natural Gas Prices 1994-08 ( Henry Hub) US$/MMbtu
US$/MMbtu
10
8
6
4
2
0
94 95 96 97 98 99
Source: Table 6
0
1
Years
2
3
4
5
6
7
8
Gas Price Forecast
Henry Hub Spot Prices
14
12
10
8
6
4
2
Source US EIA
This forecast was produced before the current crisis. Henry-Hub prices this
morning quoted at 6.75/mmbtu lowest level in four years.
no
v
se
p
l
ju
m
ay
m
ar
n
ja
no
v
se
p
l
ju
m
ay
m
ar
n
ja
no
v
se
p
l
ju
m
ar
m
ay
ja
n
0
What does this mean ?
Henry Hub
vs NCMA Well Head Prices
10
9
8
US$/MMBTU
7
Avg. Diff. 48%
6
5
4
3
2
1
0
2003
2004
2005
2006
2007
Years
Henry Hub
NCMA Price
Local Industry Context
The Big Picture
Resumption of long term decline in
Crude oil production
 Significant slowing in the rate of
gas utilization and production
 Decline in both exploratory and
development drilling over last two
years.

The Big Picture

Refining at the cross roads.
– Upgrade project
– Costs
– Markets

Long overdue modernization
The Big Picture




World class primary petrochemical
business.
World class LNG business.
Limited national participation in value
chain
Only initial steps at downstream
expansion led by local private sector.
The Big Picture
Industry growth slowed by rising
capital costs, market uncertainly
and tougher local terms.
 Stagnation at the national
enterprises.
 Massive expansion in skill training
to match requirements of the
industry.

Long Term Production
Decline
Figure 13
Crude Oil Production (000bbls/d)
250
"000 bbls/day
200
150
100
50
Source Table A8
Years
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
0
Refinery Output
Figure 14
Refinery Product Slate ( 2006)
Other
4%
Gasoline
17%
Fuel Oil
32%
Reg Gasoline
7%
Unf Gas/Ref
Feed
6%
Kerosene
11%
Source: Petrotrin
Gas Oil /
Diesel
23%
Still a relatively high percentage of low value fuel oil .
Gas Consumption
1995-2006
4000
3500
(MMscfd)
3000
2500
2000
1500
1000
500
0
1995
1996
1997
Ammonia
Heavy Industrial
1998
1999
2000
Methanol
Light Industrial
2001
2002
2003
2004
Power Generation
LNG
2005
Metals
2006
LNG Dominates Gas Utilization
Farrell’s Themes
Planning and the Energy Sector
Successful Planning –
Farrell’s Six Preconditions
6. Quality
Information
5. Willingness
Of Policy
Makers to plan
4. Sophisticated
Understanding
of planning
1. Effective
Organizational
Apparatus
2. Cadre of
Skilled people
3. Effective Control
Over Energy Sector
Approach: AFROSIBER

Nine Point Planning Methodology
–
–
–
–
–
–
–
–
Assess Context
Forecasting
Resource evaluation
Objectives
Strategies and Implications
Balances
Execution
Review
Assessment



Planners were mainly project managers
concerned with getting the physical plant off
the ground.
A handful of people were entrusted with the
responsibility for projects were not enough
to do the kind of planning required.
Planners did not have the level of
information required and relied on the
information provided by technology supplier.
Recent Approaches



Vision 2020 Energy met criteria of
skilled cadre, and information
requirements .
Widening Gap between plan and what
is being implemented.
Organizational Apparatus remains
basically the same as 30 yrs ago, with
the same personalities.
Farrell’s Themes
Engaging MNC’s and Technology
Acquisition
Philosophy


Major concern ; the level of benefits
the country receives from MNC’s in the
form of Technology Acquisition and
Value Added.
TNC’s don’t willingly transfer
technology . Host Governments need
to develop the national capacity to
acquire required technology.
Assessment


It is clear that the areas where the
country has developed a capability
have been only those areas which the
companies needed to develop locally st
to carry out their activities.
Technological capability still does not
exist over the whole range of activities
necessary for running the industry .
Current State

The relationships with ANLG suggest
that technology acquisition is still not a
specific item on the agenda and that
weaknesses in dealings with the
Multinational persist.
– PM’s cry for a better deal from ANLG
Farrell’s Themes
National Ownership
Philosophy




We cannot plan for what you could not
control.
Multinationals run the business in their own
interest
This is so even when they are engaged in a
JV arrangement
The primary aim of Nationalization is to
create a national vehicle to build national
technological capability in the sector.
History and Performance


Nationalization and national ownership in
sector since 1969.
Features:
– Rescue Nationalization
– Cosmetic Nationalization
– Direct Investments

Process reversed during the 1990’s with
privatization of bulk of direct investment
assets
Assessment

An effective and meaningful genuine
nationalization would possess the
following features:
– Effective local control of the nationalized
properties
– The actual exercise of such control for the
furtherance of development goals
– The targeting of areas of real economic
significance
Assessment

Farrell study highlighted breath
weaknesses:
– Major projects and construction
– Research and development
– Economics and Planning Transportation
– International marketing
Assessment





Farrell study highlighted Depth
weaknesses: Exploration and Marine
production
Petrochemicals
Genaeral administration
Purchasing
Information and Data Processing
Assessment

in a 1979 study of industry Farrell
concluded :
– Nationalization is unlikely to work even in
the short run unless ways are found for
tackling the basic skills deficits in the are
of the critical functions
State of the National
Enterprise
Fully Owned,
 Petrotrin
 National Gas Company
 National Energy Corporation
Equity
 Tringen
 PPGPL
 ANLG – Train 1 and 4
State of the National
Enterprise
THE CASE OF PETROTRIN
The Refiner’s Economic
challenge

Refinery location issues
– Raw materials, markets, utilities, labour
supply

Capital investment
– Fixed and working capital



Refining costs
Project and payout time
Economics of impurities
The Developing Country
Problem





Access to low cost secure crude supply
Lack of capital for investment
Diseconomies of scale and small
refineries
Market demand and refinery output
imbalance
Lack of design and construction
capability Lack of managerial,
commercial and technical expertise
Main Products

LPG

Aviation Gasolene

Motor gasolene

Kerosene/Avjet

Gas Oil/ No. 2 Fuel Oil

Fuel Oil

Bitumen

Sulphur
Refinery Throughput
1994-2008 August Ytd
180
161.2 157.8
160
145.5
MBPCD
140
120
100
154.7 151.26
149.7 148.5 136.3
158.8
151.21
123.2
107.1
100.2 103.6 103.5
80
60
40
20
0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Aug
Ytd
180
10
160
9
140
8
7
120
6
100
5
80
4
60
3
40
2
20
1
0
0
1994
1995
1996
1997
1998
1999
2000
Throughput
Refinery Utilization
2001
2002
2003
2004
2005
2006
Sales
Indicative Margin
2007
2008
Aug
Ytd
US$/Bbl
MBPCD or Refinery Utilization
Refining & Marketing Performance
Indicators
INCOME STATEMENT - R&M (TT$MM)
2000
2001
2002
2003
2004
2005
2006
2007
Audited
Audited
Audited
Audited
Audited
Audited
Audited
Audited
10,695
10,968
8,443
11,392
11,749
18,878
24,106
24,872
9,393
1,302
9,672
1,296
7,310
1,133
9,949
1,443
10,200
1,549
15,880
2,998
21,722
2,384
21,669
3,203
811
825
775
756
762
850
967
980
-
-
-
11
25
83
80
77
125
126
126
147
155
141
200
196
Abandonment Depletion
-
-
-
3
15
13
4
34
Abandm't Finance Costs
-
-
2
2
27
12
15
41
100
114
95
157
196
185
269
302
Post Ret.Medical Benefit
-
-
7
16
43
90
37
47
Other Expense/(Income)
Total Expenses
60
1,096
77
1,142
105
1,110
95
1,187
32
1,255
33
1,407
(12)
1,560
(70)
1,607
Income Before Tax
206
154
23
256
294
1,591
824
1,596
Taxation (PPT/UL)
Net Earnings
(5)
201
(6)
148
(1)
22
(15)
241
(12)
282
(280)
1,311
(386)
438
(481)
1,115
TT$MM
Gross Revenue
Less : Cost of Sales
Gross Margin
Less : Expenses
Operating Expenses
Variable Pay
Depreciation & Amortization
Corporate Overheads
Refining at the
crossroads





Refinery Sustainability
Specifications
Petrocaribe & Caricom
Gas & LNG
Oil Prices
Cost Challenges to the
refining Industry
Petronas : A benchmark
National Enterprise:




Founded in 1974
Total Assets ( 2004) US$ 53 billion
compared to NGC/Petrotrin $3 billion.
Business : Fully integrated oil and gas , gas
processing, liquefaction, LNG shipping
regas, shipping property investments.
Petronas Group: 94 wholly owned
subsidiaries, 55 associated companies 14
countries.
Technological Capability
and Industrial Policy
Philosophy


At the heart of our ability to win the
game with the TNC’s is the
technological capability
That is ; the ability to find one’s
problems and needs and find ways to
meet and solve them.
Local Content in Energy




Local content policy formulated
Permanent local content committee
appointed
Need to build on achievements –
Labidco etc
Need to provide resources
Enterprise development



Local enterprise development vital for
the continued meaningful growth o f
the industry.
CL Financial is an outstanding example
of what is possible by a local enterprise
Policy makers should learn lessons of
that experience in order to inform the
way forward.
Thoughts on Moving
Forward



Place technology acquisition and
technological capability back on the
agenda.
Develop that Cadre of skills personnel
involved in the planning and Management
of the Sector.
Make strategic use of state equity
participation to expand downstream and
down the value chain.