Willy H Olsen Kenya – new opportunities - new challenges Willy H Olsen Advisor for INTSOK, a Norwegian government/industry partnership Statoil 1980-2003 EITI Board member in Norway Revenue Watch Institute Board in New York
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Willy H Olsen
Kenya – new opportunities - new challenges
Willy H OlsenAdvisor for INTSOK, a Norwegian government/industry partnershipStatoil 1980-2003EITI Board member in NorwayRevenue Watch Institute Board in New York
The long wait for success
Can finally look towards production
First well drilled in the 1960s
Drilled less than 40 wells to date:Many indications of oil and gas
Many will be watching you closely
Oil and gas can transform your country
• Hydrocarbons are a strategic commodity that influences the economy of every nation
• You know how important it is to properly managed the resources and the revenues
• Good governance has to be a critical feature of your future policy
• Your strategy must supports the ambition of improving the quality of life of present and future generations
• Your approach must enable you to avoid the Dutch Disease and the oil curse
• You will have to manage expectations
Uhuru Kenyatta - the new president – will haveto make wise decisionson how to secure that Kenya benefits from itsnew resources
East Africa has become attractive
A global energy hot-spot
• East Africa has become an energy hot spot
• Huge gas finds in Mozambique and Tanzania
• First LNG exports within the next 6-8 years
• Oil finds in Uganda and Kenya
• First oil production within the next 5-8 years
• Many alternative energy projects
• Coal resources are substantial in Mozambique
• Wind in Kenya
• Huge hydro power projects in Ethiopia
• Major part of the energy resources will be exported to global markets
Some of the lessons learned
What will Kenya have to do right?
• For Kenyans to benefit, a few things must be right
– Get the legislation and institutional structure right
– Maximise economic returns to the state
– Increase public trust and manage public expectations
– Build capacity and enable actors to perform their role
– Ensure national oil company participation in the development of the resources
– Increase accountability
You have showed theworld you can deliverand meetexpectations
Sustainable development at the heart of policymaking
Petroleum resources are finite
• Petroleum resources may last for generations
• But they will never last for ever
• Key issues
• Sustainable resource management
• Revenue management
• Commitment to education within and outside the sector
• Support for the non-oil economy
• Corporate social responsibility
• Careful management of the resources and impact on environment should be a core part of the petroleum policies
Good governance is critical
Creating an economic development engine
• Good governance, transparency and participation are prerequisites
• Extractive industries can be an engine of development
• West Africa has produced 35 billion barrels of oil worth more than $1 trillion over last 40 years
• The sector has not provided jobs, skills and technology centres
• Revenues from oil and gas are important, but not enough
• Greater emphasis on industrialization, economic development and diversification, job creation, and prosperity for their citizens
Profits are made upstream
Kenya will be in the whole chain
Upstream: Rent to governments – high return to oil companies
Midstream: Tariffs
Downstream: Margins
Can you learn from Norway?
Legislation approved before oil was found
The Petroleum Law is the foundation
1. The petroleum resources shall be managed with a long term perspective
2. The whole society shall benefit from the resources
3. Resources shall be managed to secure revenues to the country
4. Oil and gas shall contribute to welfare, employment, improved environment and industrial development
5. Take care of regional interests
Source: The Petroleum Law of 1965 – paragraph 1A
An advanced technological industry
Invested in human capacity building
Nationall planning
Laws and regulations
License awards
Approving new field plans
Advisor to Ministry
Monitoring
Database
Information
Exploration and
production
Technology
Refing
Ministry ofPetroleum andEnergy
NOC: Statoil Petroleum Directorate
Willy H Olsen
Clear role and responsibilities
The Ministry in the drivers seat
The petroleum fund has become a pension fund
Our grandchildren’s children will benefit
0
1000
2000
3000
4000
5000
6000
1998 2002 2004 2006 2008 2010 2012 2020
Billio
n N
OK
• Norway used all its oil revenues for 20 years
• Oil fund established in in 1996
• Became the ”State’s pensionfund - global”
• Norway can use the annual return from the Fund
• Estimated to 4% annually
The price has also been high
Norway has not escaped tragedies
Alexander Kielland disaster in 1980 – 123 died
Contracts in the oil and gas industry
Components of a petroleum regime
State normally “owns” the resources
Constitution
Petroleum Law
Petroleum Regulations
Host Government Contracts
Legislature
Ministry
Ministry/ Regulator/NOC
The interests are not the same
What will the country need?
Right to Monetize
Stability
Environment
Training, local employment
Fair Revenue Share
Prompt Exploration
Activity Controls
Local Goods & Services
State Concerns Investor Concerns
The absence of any one of these three aspects puts the investment favourability at risk, and may justify a decision not to invest
Enforceability
Clarity of roles is critical
Not one ideal model of responsibility
• No single ideal organizational model for governing the petroleum sector
• Clarity of roles between agencies and their responsibilities is crucial
• Lack of clarity can lead to conflicting agendas, duplication of effort and policy paralysis.
• There has to be clarity on who provides input
– Who is responsible for recommending actions?
– Who approves the decision?
– Who implements the decision?
– Who monitors implementation of the decision?
Parliament
Government
Ministry
The NOC
President
The main contractual models
Risk contracts are a new feature
Upstream
60 countries
40+ countries
Only in a fewcountries, Mexico, Bolivia, Iraq and Iran
Concession- license
Riskservice
Productionsharing
How can an oil company secure access
Negotiations, bidding, political deals
Direct negotiations
Bidding rounds
Political deals
Acquisitions
Some countries still have an open door and welcome any approach
Most countries will invite companies to deliver bids for acreage on offer
Oil companies may benefit from countries political strategies
Oil companies can buy companies or assets in one or several countries, but may be up
against pre-emption rights
Profitability of government take
Timing on government take
Sharing of risks
Encouraged to invest and
reinvest
Depends on the fiscal features; regressive, neutral or progressive
Are the revenues front end loaded, neutral or back end loaded
Exploration risks, revenue risks, operation cost risks
Carried interests, ring fenced
Fiscal regimes produce different results
NOCs strengths and weaknesses
• More than 100 NOCs around the world
• New NOCs emerged in Uganda, Gabon, Timor Leste – others are reformed
• Most NOCs were created with a mandate to implement government energy policies
• Increase state revenues - be an economic engine
• Secure supply of oil to the country
• NOCs are very different
– Many have been commercialized and have private shareholders
– Many are in dire need of reforms
• A few will move towards becoming new IOCs
NOCs formed as the nations custodians
A mandate that goes beyond making profits
Should NOCs have private shareholders?
Realize value and increasing governance
• Close to 50 national oil companies have private shareholders
• Petrobras, Statoil, Petronas, PTT,
• Chinese, Russian, Indian NOCs
• African NOCs are lagging behind
• Realising value for the State
• Raising capital for investment by NOC
• Help establish domestic Stock Market
• Increase operational efficiency
• Improved governance
• More information becomes available
• Minority Shareholders Rights
Willy H Olsen
Should KNOCK beon the NairobiStock exchange ina few years?
Attributes of a successful NOC
Clear objective and performance focus
Self funding
Self funding
Financial autonomy
Clear objectives
Independent Board
Performance focus
People
High performing
NOC
What are the main NOC challenges?
Finding the right balance
0 10 20 30 40 50 60
Security of demand
Access to capital
Recruiting and retaining skilled staff
Access to technology
Balance national and commercial interests
%
• Many NOCs still lag behind the NOC frontrunners and international oil companies
– Low transparency
– Lack of accountability
– Inadequate budget procedures
– Fund confiscating
– Unclear roles
• Implications
– Low performance
– Financial problems
– Problems to participate in Joint Ventures
Principles of Good Governance
• A clear mission
• Professional Board
• Transparency
• Accountability
• Published accounts
• Audited accounts
• Commercial oversight
• Good management structure
Lack of clarity of roles and responsibilities
Many NOCs are struggling to deliver
Willy H Olsen
Local content
Economic impact of oil and gas activities
The direct and indirect value creation
Direct effect
• Value of oil and gas production
Indirect effect
• Purchase of materials, services and supplies locally
Induced effect
• Spending by employees of both oil companies and suppliers
Oil and gassector
Governmentget taxesfrom oil companies,suppliersand employees
Willy H Olsen
• The local content project was launched in 2003
• Steering committee members– Minister of Energy– Minister of Industry– Petrobras’ CEO and Services
Director– The oil and gas organization
ONIP– The president of Brazil’s
Development bank, BNDES
SteeringCommittee
Oil, Natural Gas and Renewable Fuels Secretariat
Executive Committee
Executive Coordinator
Sectorial Committee
E&P G&P and
PipelinesDownstream
Maritime
Transportation
Environment Thematic CommitteeTechnology Thematic Committee
SteeringCommittee
Prominp – the local content vehicle
Former president Lula’s initiative
Willy H Olsen
The direct and indirect services
Where are the business opportunities?
Fuel
Emergency Services
Waste Management
Security
Medical
Crane
Hire
Personnel
Transport
Freight Forwarding
Custom
Clearance
Facilities
Management
IT
Services
Telecoms
Hotel/Accom.
Off ice
Supplies
HR
Unskilled
Labour
Training
General
Trades
Catering
Communications
Camps/Accom.
FPSO/Wellhead
Tangibles
Rig
Hire
Feed
Seismic
Services
Well
Services
Environmental Services
Int. Freight Services
Site Prep.
Field Construction
Specialist
Trades
InspectionsInf ield
Transport
Spare
Parts
Inf ield
Services
Civil
Mechanical
Electricals
Mud/
Cuttings
Construction
Materials
SPECIALISTS
SERVICES
DIRECTSERVICES
INDIRECTSERVICES
SME’s critical for Kenya’s success
You may need an enterprise center
• SMEs create jobs and generate income
• 80% of employment and 20% of GDP in Kenya
• Small businesses are those with an annual turnover between KES 500,000 and 5 million and employing between 10 and 15 employees
• SMEs provide opportunities to build stability by connecting different ethnic, social and religious groups
• Providing subsistence and a specialized understanding of local context
• They have to meet stringent quality requirements
• They need to have access to finance
• They will need training!!!!
Opportunity appraisal / Feasibility
Concept Selection System DefinitionConcept Definition Project Execution
Ability to Influence Cost
Project Expenditures
ProjectSanction
You will have to act early!
Willy H OlsenWilly H Olsen
“Maximizing the benefits of local content
is not the same as to maximize local content”
Willy H Olsen
Final words
Ten policy recommendations
1. Agree national priorities and protect them
2. Find the balance between the Ministry, regulator and the NOC
3. Manage the revenues wisely
4. Demonstrate social responsibility, host communities should benefit
5. The environment must be protected
6. Maintain and grow the non-oil sectors
7. Create domestic capacity and enhance human resources
8. Encourage private sector participation through the growth of local firms.
9. Give good governance and transparency high priority
10. Macroeconomic stability is important for sustaining prosperity.
You will all have to work together
Oil and gaspolicies
Government
Civil society
Educationsector
Local privatesector
Localcommunities
Oil companies
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