Increasing local content by optimising operator - service company relationship

1. Increasing local contentby optimising operator - service company relationship Øystein Noreng, BI NORWEGIAN SCHOOL OF MANAGEMENT Saudi Energy Forum Dammam 18-20 November 2006

2. The Issues • Petroleum industry capital intensity and job creation • The extended value chain: procurement • The state versus the market • Infant industry protection • Operator – supplier relations • Control, accountability and transparency • The Norwegian experience: procurement and knowledge policies

3. Maximising the social benefit from petroleum • Offset the depletion of a finite asset with the creation of durable assets • Collect economic rent from oil to establish comparative advantages • Build infrastructure • Establish competitive firms • Develop human capital

4. Petroleum industry capital intensity and job creation • The petroleum industry engenders money, not employment • Many oil exporters experience financial wealth and social misery, much money and few jobs • Waste of resources to use the petroleum industry to create employment; high capital cost per job • Procurement policy a more appropriate tool, secure local content in goods and services

5. The extended value chain: procurement and petrochemicals • Supplying goods and services • Exploration • Development • Extraction • Transportation • Refining • Distribution • Petrochemicals Activities in italics are labour intensive

6. The state versus the market • In most oil exporting countries market forces are undeveloped and weak • Risk that the market forces alone do not secure the rise of competitive firms and jobs • Risk that the state alone does not secure efficient firms and viable jobs • Case for joint action by the state and private interests

7. Infant industry protection • The value of infant industry protection long-standing issue of dispute • Argument in favour is that the social benefit of protecting new industries exceeds the cost, but that protection should be transient • Argument against is that the social cost tends to exceed the benefit due to the perpetuation of protection than engenders inefficiency

8. Operator – supplier relations • For the operators: balance requirement to use local suppliers with a choice • For the suppliers: balance protection with competition • For both: balance flexibility with long-term research and development cooperation • For the state: use incentives and measures that are limited in time

9. Control, accountability and transparency • Risk in long-term operator – supplier relations: sharing the benefit of protection, fending off competition, transfer of costs • Need for independent control and auditing • Accountability to independent bodies • Transparency prerequisite for success • Benchmarks to evaluate performance

10. The Norwegian experience: procurement and knowledge policies • Procurement policy to use Norwegian goods and services from 1972 to 1994 • Successful and costly • Lasted too long time • Knowledge policy from 1972 to 1994 • Successful and less costly • Continues in different forms

11. Situation in Norway in the 1960's • Industrialised economy: • Heavy industry based on hydro-electricity • Shipping • Shipbuilding • Mechanical industry • High level of education • Skilled workforce • Entrepreneurial culture • Scientific competence

12. Key Drivers for Change • Norway embarked on policy to maintain a diversified economy • Policy objective: realise the value added in input factors (goods and services) to the oil industry • Economic agents, entrepreneurs, present and keen to take part • Government under pressure to assist and prepare conditions

13. The Policy Objectives • Control of the activities • A strong bargaining position with the international oil industry • Insight into the details of the industry • Establish national suppliers • Leading positions in research and development

14. The Methods • Procurement policy • Norwegian share • Use of Norwegian goods and services whenever competitive • Targets, not directives • Competition among suppliers • Policy for transfer of knowledge • Research joint ventures • Practical training

15. Ministry Supervision • Ensure that a Norwegian bidder was awarded the contract, when competitive in terms of price, quality, delivery time and service. • Otherwise, consent could be withheld. • Information on coming tender invitations was to be submitted to the Ministry of petroleum and Energy twice a year by the operators. • The Ministry collected the information and released it to all Norwegian suppliers as a special service.

16. The Technology and Industry Cooperation • A comprehensive programme of technology and industry cooperation was introduced in 1979: • Projects between Norwegian industry and foreign oil companies ”Industry cooperation” • Projects between Norwegian research institutions and foreign oil companies “Technology cooperation” • Bilateral cooperation with foreign governments

17. Role of IOC’s in Local Content Development • IOC’s critical in early phase 1972-1986 • R & D to cut costs in a hostile environment • Procurement and the local supply industry • Transfer of knowledge and personnel training • Partnerships with Norwegian oil industry • Currently, IOC’s take Norwegian suppliers overseas

18. Statoil’s Role • Since the early1980s, Statoil has been the driving force in developing the oil supply industry • Since the 1990s, Statoil has been predominant after the Ministry’s role was discontinued • Preferential treatment of local manufacturers to keep and develop a domestic supply base and technology, avoid foreign dominance

19. Statoil Industry Development • Invests in external companies • Ownership positions in 30+ companies • Total market value about USD 160 million • Companies partly conversions from SDP projects

20. The Results • A large Norwegian petroleum service industry • The Norwegian share at first rose to 90 per cent, then declined to about 50 per cent • Large exports • Leading technology • Cost reduction

22. Ekofisk Volume Story

23. Improve knowledge • Encourage research and development through technology deals between foreign and Norwegian companies • Encourage joint ventures between oil companies and the supply industry • Policy of local contents • R & D priorities decided by industry, supply industry and research institutions • Cooperation with international leaders

24. Active participation • Strategic use of licensing policy to promote national industrial interests • Honouring oil companies that cooperate • Use of Statoil as prime policy tool to coordinate development of a new petroleum province • Procurement policy to build up a base of suppliers of goods and services

25. E&P Cost Distribution