1. PACIFIC PETROLEUM PROJECT PHASE 1 - A BULK PROCUREMENT INITIATIVE Presentation to STAR 2010 Shakil Kumar 16 th October 2010

2. 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

3. 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.

4. 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.

6. Crude Oil Refining

7. Downstream Sector

8. OVERVIEW OF FUEL CONSUMPTION & SUPPLY CHAIN IN PIC’S

9. 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

11. SINGAPORE Hub Ports /MR Secondary Distribution Ports

12. Fuel Supply Chain – PIC’s Extraction of Crude Oil - Malaysia Crude Oil refined in Singapore SPOL Shipped in MR

13. FDI & State Investment 2010 MNOC SOE Regional

14. 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.

18. PACIFIC PETROLEUM PROJECT STATUS SIGNATORIES COOK IS, MARSHALL, NAURU, NIUE & TUVALU SIGNATORIES COOK IS, MARSHALL, NAURU, NIUE & TUVALU PIFS ADVERTISED TENDER HALE & TWOMEY IMPLEMENTATION SINCE JANUARY 2010

19. PROJECT OUTLINE Pacific Petroleum Project Phase 1 Milestone 1: Assessment of national standards and requirements Milestone 2: A procurement strategy Milestone 3: A risk assessment Milestone 4/5: A commercial contract Milestone 6: Associated tendering documentation (Expression of Interest & Cost benefit Analysis). First five milestones which have been completed with exception to Republic of Marshall Islands.

20. SUPPLY ROUTES TO PACIFIC ISLANDS MR tanker supply from Singapore LCT supply Possible LCT supply from Fiji Tanktainer supply from New Zealand

21. BULK FUEL PROCUREMENT What 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.

22. 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

23. 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

24. 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

25. 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

26. Fuel Quality in PICs Type of FuelGradesCountries Unleaded Petrol (Mogas)Gasoline 97 unleaded Gasoline 95 unleaded Gasoline 92 unleaded Aust/NZ Fiji and most PICs Kerosene/JetDual Purpose KeroseneAll PICs Gasoil (Diesel)Gasoil 10 ppm Gasoil 50 ppm Gasoil 500 ppm Gasoil 2500 ppm Gasoil 5000 ppm Aust/ NZ French Territory Fiji American Samoa Small Is States e.g. Tuvalu Fuel OilHeavy Sulfur Fuel OilFiji Electricity Authority Waste Oil-Fiji & Nauru

27. Pacific Island Countries Diesel Quality CountryLand TransportElectricity American SamoaN/A2500 ppm Cook Islands10 ppm5000 ppm Fiji500 ppm5000 ppm & Heavy Fuel Oil New Caledonia50 ppmN/A Tonga5000 ppm Tuvalu5000 ppm

28. Harmonising Diesel Standards Pacific Island Countries that are currently importing 5000ppm sulphur diesel to adopt 500ppm sulphur diesel as maximum quality. WHY Price differential less than 1 cent/litre Low Sulphur fuel Reduces CO2 and sulphur Emission

30. Price Differential 5000500 FOB - Price of Gasoil for month of September (US$/Barrel) 87.04287.639 US cents per Litre54.74755.123 Fiji cents per Litre105.83106.55 Difference Fiji cents per litre 0.729

31. Harmonizing ULP This area is difficult as it will require : 1.Oil Industry Consultation 2.Vehicle Suppliers Consultation 3.Huge Capital Investment. Therefore this can be a long term objective for SPC to work towards with PICs.

32. THANK YOU