Winning Strategies in Iraq_MPGC Dubai_April 2014

Winning strategies in Iraq’s petroleum sector
Prepared by Manaar Energy Consulting
Content Page
Introduction
Iraq Energy Overview
Industry strategy analysis (Government strategies in Iraq and the region)
Key constraints and challenges (Controllable and inherent risks)
Impact on global business strategies (Winning strategies)
Conclusion
Introduction
•
Iraq’s hydrocarbon potential is of increasing global strategic interest
•
Still, Iraq’s circumstances challenge the strategies of its government, investors and
global stakeholders
•
The business models of the various IOCs and NOCs in Iraq give valuable lessons
•
What winning strategies can improve the ‘marriage of inconvenience’ between
Iraq and its global stakeholders?
Iraq is the pivot around which the next decade in Middle East Oil will revolve
Content Page
Introduction
Iraq Energy Overview
Industry strategy analysis (Government strategies in Iraq and the region)
Key constraints and challenges (Controllable and inherent risks)
Impact on global business strategies (Winning strategies)
Conclusion
Key global issues in Iraq
Government Strategy
•
Pending oil law reforms
•
Absence of unified position
between KRG & Central
Government leads to erratic
oil policies
•
Inefficient & bloated
bureaucracy
Partnership policies:
Alliance between IOCs,
(I)NOCs and NOC
Private Sector Concerns
• Hesitancy in oil reforms
contributes to increased
corruption and insecurity
• High government take – low
attractiveness & mismatched
incentives
•
Cash Cow Phenomena:
Contract structure allows
(I)NOCs to bid low even when
IOCs may add more value
•
Not all (I)NOCs are the same
•
Some IOC/(I)NOC partnerships
give win-wins
• Risk of involvement in political
turmoil and violence
•
Government unable to attract,
retain or make optimal use of
the best IOCs
•
IOCs seek to add value from
follow-up investments (gas,
mature fields)
•
Revenue-sharing issues
(federal-Kurdistan-provinces)
•
•
Insecurity and sectarianism
Poor regulatory networks
ensure hegemony of NOC
over IOC, through higher
profit margins and lower risk
and costs for the NOC
•
Influence of trade unions and
labour parties
Iraq energy issues
Power shortages
Power investment
programme
New field startups
Worsening
insecurity
Gas flaring
Negotiation of new
OPEC quota
Absence of key
infrastructure
Delays and
downward revision
to plateau targets
Delivery of major
infrastructure
projects
Unattractive
contract terms
‘Blacklisting’
companies in KRG
KRG dispute
Refinery investment
program
Growing
dependency on few
companies/
countries
Challenges
Responses
Iraq liquids production history and forecast
7
6000
6
5000
5
4000
4
3000
3
2000
2
1000
1
0
0
kb/d
7000
2008
2009
2010
Ajil
Gharraf
Luhais and Subba
West Qurna Two
Export Capacity
Source: Wood Mackenzie; Manaar research
2011
2012
Badra
Halfaya
Majnoon
Zubair
2013
2014
2015
Bai Hassan
Jambur
Misan Group
Kurdistan
2016
2017
2018
Basra Gas Project
Khabbaz
Rumaila
Other fields
2019
2020
East Baghdad
Kirkuk
West Qurna One
Oil consumption
mb/d
Liquid production
Iraq has the largest rig activity in MENA
Oil Rigs
100
90
UAE
Number of rigs
80
KSA
70
Iraq
60
Kuwait
50
Oman
40
Qatar
30
Yemen
20
Egypt
10
Libya
Jan '12
Feb '12
Mar '12
Apr '12
May '12
Jun '12
Jul '12
Aug '12
Sep '12
Oct '12
Nov '12
Dec '12
Jan '13
Feb '13
Mar '13
Apr '13
May '13
Jun '13
Jul '13
Aug '13
Sep ' 13
Oct '13
Nov '13
Dec '13
Jan '14
Feb '14
0
Algeria
• However, major decisions in Iraq are largely at a standstill until parliamentary
elections in April
Content Page
Introduction
Iraq Energy Overview
Industry strategy analysis (Government strategies in Iraq and the region)
Key constraints and challenges (Controllable and inherent risks)
Impact on global business strategies (Winning strategies)
Conclusion
Global oil and gas integration models
•
Most IOCs have integrated upstream-downstream because of historical reasons
•
Since the 1980s, state-run players have steadily expanded their role. Around 85% of all oil
and gas reserves are controlled by NOCs. In the 1970s, this was just 15%.
•
Will the shale oil boom slow or reverse this trend?
•
Reasons for IOC integration:
– Optimize the value chain
– Natural hedge
– Balanced funding
– Market access
•
However, some IOCs are now de-integrating (Marathon, ConocoPhillips, Murphy)
•
Now NOCs are increasingly looking for vertical integration themselves
– Both domestically (e.g. Iraq, Saudi & other refineries)
– And internationally – Saudi, Kuwaiti, UAE refineries in Asia, and Iraqi negotiations in
Sudan and Indonesia
Global oil and gas integration models
•
This integrated business model has been successful, but with recent industry developments and
innovation, new models are emerging:
– M&A in the midstream energy sector: more common as the need for infrastructure to transport
crude oil and gas rises
• E.g. Shell’s $6.7 billion purchase of LNG assets in Latin America from Repsol
– Acquisition of niche companies: companies that do not have a strong foothold; small companies
with minimal capital to expand; innovative companies
• E.g. Chevron acquired Atlas Energy
– Acquisition of technology companies: Tapping into downstream and upstream technology
especially in the form of new catalysts and new processes
• ExxonMobil acquired XTO to get an edge on shale oil technology
• GE and Chevron JV to develop technologies for solving critical issues in the O&G industry
– Partnerships: to share resources, knowledge and risk
• Total planning to team up with Lukoil on its shale oil projects in Russia; consortia (even with
NOCs such as ADMA and ADCO)
– (I)NOC-IOC partnerships:
• CNPC/BP Rumaila
• CNPC EPSO Pipeline
Pure players have recently earned greater value
than integrated players
EV/EBITDA (2009-2013)
10
8.78
9
8
EV/EBITDA
7
6
5.28
5
4
3
2
1
0
Integrated
Source: Manaar research and analysis
Non-integrated
Iraq lags behind Saudi Arabia and UAE in downstream
execution
Total Budget Vs. Contracts Awarded
45
40
35
$ billion
30
25
20
15
10
5
0
Iraq
Saudi
UAE
Total Budget
Kuwait
Qatar
Bahrain
Oman
Contracts Awarded
In Iraq, decisions on further development are to be made in April post-election, which
includes several billion in tenders expected to be officially awarded in 3Q 2014
Trends
•
•
•
•
•
•
•
•
In 2013, global M&A transactions of upstream oil and gas assets were the lowest since 2008
– Value of transactions fell from $250 billion in 2012 to $136 billion in 2013 and number of
transactions fell from 263 to 162
Increased role of specialization and organic growth in the value chain for large European and
American multinationals
– Disintegration of downstream assets and organic growth in upstream assets (exploration
and development projects)
NOCs in emerging countries increasing reserves through overseas expansion
Chinese NOCs most active buyers over the past years
– CNPC, Sinopec, CNOOC
– In 2013, China has remained the largest buyer in the global oil and gas market in 2013,
spending US$ 22.2 billion.
Downstream players are shifting focus on regions rather than countries
Utilities are backward-integrating
– Centrica's purchase of Venture in the North Sea
Target companies by technology, specialization, management and resources (financial,
technical and talent)
Increasing role of financial players
Middle East Oil and Gas integration models
•
In the Middle East, NOCs have increasingly moved to integrate the upstream-downstream business
model
•
In the Middle East, focus was on upstream by IOC and NOCs because petroleum product prices to
consumers are controlled and/or subsidized making refiners significantly challenged.
•
Shift by Middle East NOCs towards an integrated business model:
– Domestic Market
• Job creation (though limited)
• Diversify economies away from crude oil exports
• Petrochemical integration - fill the shortage of available gas feedstock (especially ethane)
with naphtha
• Produce refined products domestically rather than import (economic and security of
supply considerations)
– Overseas market
• ‘Secure’ downstream markets, especially in Asia
• Meet increasing global demand for synthetic rubber and associated chemical products
•
However, US shale oil can upset these considerations
NOCs also internationalizing refining interests…
•
Saudi Aramco: existing in the US, Japan, China, Indonesia and South Korea
•
Kuwait Petroleum: existing interests in Italy, Netherlands and India; planned interest in China and
Vietnam
•
MoO Iraq: planned interest in Sudan, Indonesia and possibly India
Motiva refinery in Port Arthur, Texas. Owned by Saudi
Aramco and Shell, it is the largest in the United States.
Hussein al-Shahristani hosted a Sudanese delegation in
March 2014 to discuss supplying Sudan with crude oil
and establishing an oil refinery
Content Page
Introduction
Iraq Energy Overview
Industry strategy analysis (Government strategies in Iraq and the region)
Key constraints and challenges (Controllable and inherent risks)
Impact on global business strategies (Winning strategies)
Conclusion
Iraq government pushes for new refineries
Iraq - $41bn worth of refinery projects
New Projects/developments
Capacity
Target close date
Basra Gas Company (Shell/Mitsubishi)
– end gas flaring; separate NGLs;
possibly LNG export
2 billion cf/d of gas
-
Upgrading Basra, Karbala, Kirkuk &
Missan refineries
-
-
New Qaiyarah refinery
100 000 bpd of crude
2014
New Karbala Refinery - awarded to
Hyundai
140 000 bpd of crude
2016
New Kirkuk refinery
150 000 bpd of crude
2016
New Missan Refinery - awarded to
Satarem
150 000 bpd of crude
2017
New Nassiriyah refinery – most
advanced (combined with field
development)
2018
300 000 bpd of crude
GCC countries are also investing in major expansion projects
Challenges for integration in Iraq
•
Lack of downstream strategy
– New refineries lack economies of scale & competitiveness - four of the five proposed plants
will process less than 150 000 bpd
– Fuel oil still in surplus and gasoline persistently short, though new refineries may correct this
– Lack of export competitiveness due to geography
•
Struggle attracting foreign investment for refinery projects
– Contract terms, bureaucracy, insecurity…
– To attract foreign investment the MoO will pay a fixed fee for each barrel of oil processed,
calculated on the basis of international prices
– Karbala project funded by government – tried to attract foreign investment, but unsuccessful
•
Long negotiation phase and project delays
– Qaiyarah refinery’s first 20 000 b/d train due to be completed in 2014. However, the project is
still nowhere near an agreement
– Bidders waiting for the Basrah third refining unit tender since 2012 (once FEED was
completed); if announced in 2014, project would be completed in 2019
Iraq’s current refinery plans go against its advised
strategy
•
Controversial schemes
– Booz & Co. prepared a downstream plan for MoO which includes:
 210 000 bpd refinery at Qaiyarah
3 new refineries rather than 5
 450 000 bpd refinery at Missan
 300 000 bpd refinery in Basra
 Upgrades to the current facilities
– The plan did not include Nasiriyah development and the refineries at Karbala or Kirkuk
– MoO awarded Karbala refinery to Hyundai, the Missan refinery to Satarem and most
advanced progress made by MoO is for the Nassiriyah development
– Satarem’s lack of refinery experience raised controversy; therefore, MoO might need to start
bidding process again
– In 2011, a previous deal was signed for the Karbala refinery with Eni; Deal collapsed in early
2012 which led to the MoO’s funding the project itself
Due to MoO delays, provincial governments started to announce bids and lead projects
Iraq is pushing for action
•
Export infrastructure capacity is finally ahead of production capacity, but will have to keep
expanding
•
To compete with other OPEC players (notably Saudi and Iran)
•
To attract FDI in the energy sector
•
Secure Asian market share
– Awarding TSC for major oil fields in Iraq to Asian players – 30% of Iraq production comes from
fields operated by Asian companies
•
Needs to diversify export routes given over-dependence on the Gulf;
– Jordan route faces security challenges and is not logistically ideal,
– Syria and Turkey face security and political problems
– European markets not preferable
•
To fuel power stations and reduce power shortages
•
Take advantage of increasing oil prices through exports and use the oil revenue to diversify its
economy
Content Page
Introduction
Iraq Energy Overview
Industry strategy analysis (Government strategies in Iraq and the region)
Key constraints and challenges (Controllable and inherent risks)
Impact on global business strategies (Winning strategies)
Conclusion
Winning strategies in Iraq - Chinese
• Fast progress - MoO’s main
concern
• Cheaper – fewer subcontractors
• Lower costs - can work around
the Iraqi service contracts at a
profit
• Variable quality
• Flexibility
Ancillary
services
Seismic
Operator
Drilling
Facilities
Pipeline
Reservoirs
Operations
Economics
&
planning
E.g. CNPC in Iraq offers seismic data acquisition, well drilling, well logging and testing, surface engineering,
operations, operation management & development
Winning strategies in Iraq - Western IOCs
•
•
Integrated asset teams, but
still outsource
Internal asset teams supervise
the contractors
Contracted
Seismic
Operator
Contracted
Contracted
Drilling
Facilities
Pipeline
Reservoirs
Contracted
Contracted
Contracted
Ancillary
services
•
•
•
•
Note: EIA is usually outsourced
Economics
HSE
Specialized services- opportunity cost of production is lower
Greater efficiency - higher chance of reaching plateau targets
More subcontractors; higher costs and difficult to estimate in tendering process
Conduct some project for goodwill – increasing their chances of future project awards
Content Page
Introduction
Iraq Energy Overview
Industry strategy analysis (Government strategies in Iraq and the region)
Key constraints and challenges (Controllable and inherent risks)
Impact on global business strategies (Winning strategies)
Conclusion
Conclusion
Iraq
Achievements
Challenges
Forecast
•
• Unsustainable challenges in
terms of government red tape
and inadequate infrastructure
• Major but sub-optimal
production growth, continuing
around 60% success rate
• Prone to significant political
uncertainties, incoherent and
unpredictable policy directions
• Increasing dependence on
shrinking list of incumbent
companies
• Unsustainably low/misaligned
contractor incentives given
scope of development
challenges
• Major changes in current
policy post-2014 elections:
review of fiscal system, with
possible entry of independent
and specialized IOCs
• Higher investments in
downstream, storage
capacity and power
• Regional geopolitics and
internal political disputes with
Baghdad
• 60% success in achieving
production targets, assuming
continuing dialogue with
Baghdad
• Created region’s most
exciting exploration projects
• Pressure to translate
exploration prospects into
intangible assets and real
production
•
Largely successful
achievements of around
60% of production targets
since 2010
Attracted major IOCs
under unprecedented
levels of government take
Kurdistan
• Liquid market for E&P asset
trading and swaps, attracting
local and international
companies
Appendix
Increasing role of financial players
Financing
Financial
Institutions
Joint Operating Company
Investor
Asset Holder &
Operator (National
Oil Company)
Technical Partner
(e.g.
Schlumberger)
•
Financial players’ presence rising
•
Private equity interest in:
• Upstream, e.g. Blackstone-backed shale oil companies
• Downstream, e.g. Klesche & Co.’s purchase of Shell’s Heide (Germany) refinery
• Technology, e.g. CF Partners acquisition of Nautronix
Examples of energy industry integration
Company
Type of Integration
Examples
E&P companies
Chevron
De-integration &
acquisition of niche
companies
•
•
•
Split its upstream and downstream operations
Acquired Atlas Energy for edge on oil shale tech to focus on
upstream
Geographically refocusing (de-emphasizing Europe)
Marathon Oil,
ConocoPhillips, Murphy Oil
De-integration
•
•
Split upstream and downstream companies
Murphy Oil sold its 2 US refineries and selling UK refinery
Shell
Vertical integration &
partnerships
•
Increasing its mid-stream gas assets and reducing refining
capacity
Partners with IOCs and NOCs
Cutting high-cost projects
•
•
ExxonMobil
Vertical integration &
partnerships
•
•
•
BP
Vertical de-integration;
E&P investment;
geographic refocussing &
‘shrink to grow’
•
•
•
Repsol
Acquisition
•
Partners with other IOCs
Divesting non-core refining but committed to large scale
refinery & petrochem
Sold its Latin American lubricant business to Cosan
Sale of 2 large refineries in the US (2012) and shifting
downstream focus to Eastern Hemisphere
BP to sell aviation fuels business to Eastman Chemicals in
2014
BP sold its 50% share in TNK-BP, acquired 19.75% share in
Rosneft
Looking for acquisitions in OECD countries to boost E&P in
less politically-risky areas (after Argentina expropriation)
Examples of energy industry integration
Company
Type of Integration
Examples
Service Companies
Schlumberger
Acquisition of Niche
company
•
Acquired Rock Deformation Research & many others
Halliburton
Research institution
partnerships
•
Partnered with Gubkin Russian State University of Oil and
Gas to study Russia’s unconventional resources
Opened the Unconventional and Reservoir Productivity
Technology Center at King Fahd University, Saudi Arabia
•
Chemical Companies
Dow Chemicals
Vertical integration
•
•
To invest upstream in Argentina to secure gas supply
More investments in US to take advantage of low-cost gas
SABIC
Geographic and product
expansion
•
Downstream & speciality chemicals to reduce reliance on
bulk petrochemicals
Partnerships in Asian markets
Investments in US to take advantage of low-cost gas
•
•
Downstream companies
Valero
Vertical integration
•
Entered into branded marketing to gain access to a less
cyclical and non-correlated source of profit margins
Gulf governments push for integration
Saudi Arabia
• $38 billion worth of refinery projects
• Sadara (JV between Aramco and Dow Chemical) to build a petrochemical complex in Al Jubail
Industrial City – 3 million tonnes of chemicals for domestic use
• Yanbu Export Refinery (JV between Sinopec and Aramco) to build a 400 kbpd refinery
Kuwait
• $30 billion worth of refinery projects
• Clean Fuels Project for reconfigure the Mina Abdullah and Ahmadi existing refineries, close
the Shuaiba refinery and create a new refinery doubling total refining capacity to 1.4 Mbpd
• New Al Zour refinery by KNPC with capacity of 615 kbpd
Gulf governments push for integration
UAE
• $26 billion worth of refinery projects
• Ruwais Refinery Expansion Project by Abu Dhabi Oil Refining Company (Takreer)
• Al Gharbia Chemicals Industrial City - JV of Abu Dhabi National Chemicals Company and
International Petroleum Investment Company; an industrial city with 12 power plants to
increase production of olefins, aromatics and fertilizers
Oman
• $10 billion worth of refinery projects
• Upgrading the Sohar refinery in Oman to 187 kbpd by Oman Oil Refineries and Petroleum
Industries Company
Qatar
• $10 billion worth of refinery projects
• Ras Laffan petrochemicals complex - QP's joint venture with Qatar Petrochemical Company
for the production of petrochemicals to market to Asia, Africa and Latin America
• Ras Laffan Olefins Complex – QP’s JV with Shell for ethylene glycol production to source to
Asia and Europe

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