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

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?

Forms of control  Ownership – direct (extreme case USSR)  Regulatory framework – indirect (extreme case USA)  Norway: Flexible combination  Russia: Unclear balance

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...

Composition of ownership in the Russian oil industry

Norway’s 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

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

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 –Reasessment of policy

How to increase exploration? Stimulation of private companies and investors:  Finder’s 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

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.

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

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

Licensing terms - Norway  License period  Work commitments  Plan for development and operation  Cooperation agreement (within license group)  Room for adjustments

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

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

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

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

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

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

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

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

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

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?

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

Thank you for your attention!