Oil and Gas Conference
London 30 October 2007

IOC’S-NOC’S COLLABORATION AND PARTNERSHIP
A Win-Win Situation for All
Dr. Shokri M. Ghanem

Chairman
National Oil Corporation, Libya

Mr. Chairman
Ladies and Gentlemen
It gives me great pleasure to participate once again in this prestigious event and to address such a distinguished and expert audience on the topic of IOC-NOC relationship. It was certainly an honor and a thrill for me to receive last year’s Petroleum Executive of the Year Award and I would like to take this opportunity to extend my sincere and warm congratulations to this year’s recipient of this award; my dear friend HE Abdulla Bin Hamad Al-Attiyah, Deputy Prime Minister and Minister of Energy and Industry of the state of Qatar. I would also like to take this opportunity to express my thanks to the organizers of this event for inviting me to share with you some of my thoughts on what I believe will be shaping the future relationship between the IOC’s and NOC’s.

Mr. Chairman,
When I addressed this conference last year, my speech dealt with the controversial issue of the end of the era of cheap oil. In that speech, I discussed some of the most important factors that were causing the rise in the price of oil, in nominal terms that is, to levels not seen before. I have argued, then, that the high oil prices which have prevailed in 2006 will most likely persist in the future if the demand for oil worldwide continues to grow as it did then, particularly in the developing countries, and if investment to expand production capacity in the producing countries lags behind. I have stressed the fact that the situation will get even worse if the world refining capacity is not expanded in time to match the rising demand for petroleum products that must meet stricter environmental standards. Of course, I cited other important factors which were contributing in one way or another to the volatility of the oil market such as geopolitics, traders’ speculation, natural disasters and civil unrest.

Looking back now at how the world oil market has behaved since then, it is quite obvious that the same factors are still largely at play. They are the main driving forces behind the fluctuations and spikes in the oil price and the volatility of the oil market. How else can we explain the reaction by the oil market when the WTI price surpassed the $80 per barrel mark to reach an all time high of $90 per barrel this month despite the subprime mortgage financial crisis in the US and the fear of its depressing spillover effects on the US economy and the economies of the rest of the world and also despite the recent decision by OPEC to increase production by 500 000 b/d? How else can we explain the views held by many analysts of the oil price reaching $100 per barrel by the end of this year?

Mr. Chairman,
Before I take on the main topic of my talk about the relationship between IOC’s and NOC’s, I would like to elaborate a little bit on what I have just said regarding the world oil market. The fact of the matter is that during the past 12 months world demand for oil has continued to grow particularly in such emerging economies as China, India and Brazil. Focusing on the growth of oil demand by the developing countries in the Middle East, Africa, Latin America and Asia, and historically speaking, it can be readily seen that it has grown substantially from slightly under 5 million b/d in 1965 to more than 30 million b/d by the end of 2006 with the growth rate really picking up significantly since 1995. Of particular interest are the growth rates of both China and India which have been phenomenal.

Looking ahead, and according to OPEC’s recently published 2007 World Oil Outlook, in the reference or BAU case, world oil demand would be nearly 90 million b/d by 2010, 104 million b/d by 2020 and 118 million b/d by 2030. Compared with the oil demand in 2005, an additional demand of 34 million b/d of must be reckoned with, mainly by the developing countries (mostly by China, South Asia, and South East Asia) which account for nearly 85% of this additional demand. In fact, the additional oil demand by the OECD countries is only 4 million b/d while that by the economies in transition (FSU) is a mere 1 million b/d.

Comparing notes with other published outlooks, such as the IEA Outlook, it can be seen that by 2015, the EIA Oil Demand Outlook coincides with that of OPEC’s, but is slightly lower up to 2030 when it predicts a demand of only about 115 million b/d.
With these outlooks in mind, and regardless of which Outlook is used for the reference or BAU case, at least 30 million b/d of new upstream capacity must be added worldwide. Huge investments are required to secure such a sizable increase in capacity particularly as the costs of developing known oil reserves and exploring for additional ones become more and more expensive.

According to OPEC’s World Oil Outlook, upstream investment requirements necessary to secure this additional oil capacity up to 2030 are a staggering $2.4 trillion (in 2006 $US). Focusing on the share of OPEC, the cumulative upstream investment requirements up to 2030 are estimated at $680 billion (in 2006 $US) or around $27 billion/year. This will boast OPEC’s capacity, which is currently around 30 million b/d, to nearly 49 million b/d by 2030. The rest of the new upstream capacity, or around 11 million b/d, will come from OECD and Non-OPEC, and which will mostly be non-conventional oil supply (tar sands, biofuels, etc). The estimated bill for this additional capacity is a mere $1700 billion.

Furthermore, the expected increase in oil demand and supply would have to be matched by a similar increase in refining capacity as well as meeting tighter environmental regulations.

Failure to expand the refining capacity to match the demand for environmentally friendly oil products in due time would be quite detrimental to the stability of the oil market. To insure meeting additional refining capacity requirements, significant investments are required to insure that enough refining capacity is there when it is needed. According to OPEC’s World Oil Outlook, by 2020 in the reference case, the total required investment worldwide is projected at $455 billion, with almost 75% of the new refining capacity to be built in the Middle East and Asia-Pacific.

Mr. Chairman,
Needless to say that these projections carry within them several elements of uncertainty and thus pose considerable risk for the oil producing countries. To start with, there is a great deal of uncertainty over the future demand for oil worldwide, particularly demand by the developing countries in view of their large share of the projected global demand. Downside risks to oil demand in these countries will not only have a devastating effect on the economies of these countries themselves but will badly affect the economics of future oil supply expansion projects. Secondly, there is great deal of uncertainty over the future non-OPEC oil supply which will mostly come from the high expectations attached to such non-conventional sources as tar sands and biofuels. This in turn can introduce large uncertainties over the quantities of oil that OPEC Member Countries will be called upon to supply which could put their capacity expansion projects at considerable risks and consequently lead to a greater shortage of oil supply.

To minimize these uncertainties and risks, it essential for the world oil market to tie the issue of security of oil supply for the consuming countries closely to the issue of security of oil demand for the producing countries. This of course can be achieved only through continued dialogue between producers and consumers, a dialogue that should have as its main objective ensuring increased energy security for all by making the global oil market more efficient and transparent. Co-operation between producers and consumers, not confrontation, should be the motto of all concerned parties. The relationship between the IOC’s and NOC’s should be based on more balanced agreements that will promote investment, ensure adequate supply response at reasonable and fair prices, minimize uncertainty and share risks; which brings me now to the main topic of my speech.

Mr. Chairman,
Let me start by saying that the days when confrontation was the order of the day in the relationship between the IOC’s and the producing countries are now long gone. It is Equally true that the days when the so-called “Seven Sisters”, “Majors” or “Cartel” ruled the world oil market unchallenged are also long gone. The “Seven Sisters” were basically seven super giant international oil companies; five American, one British and one British-Dutch. For those of us here who do not know or perhaps might have forgotten the history of those “Seven Sisters”, their near 100% operating monopoly of the oil market was acknowledged even in the US itself when the Federal Trade Commission regarded their behavior as that of a cartel.

And for a bit of history, in the sixties, these “Majors” or “Seven Sisters” had more than 80% share of world oil production, owned more than 65% of world refineries, and controlled more than 60% of petroleum products market. In the Middle East alone, they almost had total control as they produced more than 92% of the total oil production of the area. As a result, they were able to set whatever oil production levels and prices they liked. They treated their host countries as mere custodians of the oil, perused a policy of dictating whatever prices and production levels that best suited their interests without regard to the interest of the host countries refusing constantly even to sit down with them and discuss such matters. The only thing that the producing countries kept on doing, but without much success, was to protest and reserve for themselves the right for fair compensation in the future as well as to try to unite against the injustice of the “Majors”.

However, with the formation of OPEC as an instrument in the hands of the producing countries to defend their interests against the tyranny of the oil companies led by the “Seven Sisters”, the rules of the game began to change. And despite the ineffectiveness of OPEC during the sixties, its role during the seventies was much more pronounced thanks to the leading role of some of its Member Countries, notably Libya’s role, which has led to correcting the posted price of its oil by forcing the oil companies to sit and negotiate. Other OPEC Member Countries quickly followed suite and were able to negotiate better deals with the “Majors” which slowly began to lose grip of the oil market in favor of the emerging NOC’s of the producing countries and a new era was dawning.

Today, the picture is completely different. The “Seven Sisters” became five super international oil companies, commonly known now as (“Big Five” or “Super Majors”), with mostly un-sisterly behavior. Their share of world oil reserves is only about 3% and produce only about 10 per cent of the world’s oil and gas. On the other hand, the NOC’s of OPEC Member Countries hold about two thirds of world oil reserves and produce nearly 40% of the world’s oil and gas. Not only that, but new elements are entering into the picture with the emergence of the NOC’s of the consuming countries such as China, India, Brazil, and Japan, just to name a few. These NOC’s are aggressively competing with the IOC’s as well as with the NOC’s of the producing countries who are looking outside their backyard. The competition for new oil and gas reserves now encompasses the traditional IOC’s; super majors and independents, the NOC’s of the major consuming developing countries eager to secure part of the supply to meet their growing demand, and the NOC’s of the producing countries themselves driven by their new financial and technological status.

Mr. Chairman,
With such a complex picture of the new oil market and the diversity of interests of the various players, it is quite obvious that only through dialogue, collaboration, and partnership between the IOC’s and NOC’s can market stability be achieved and the interests of all involved are met. The issues of security of supply and security of demand must be transparently debated. The debate should not be confined to oil and gas but should involve all energy sources such as coal, tar sands, oil shale, and new and renewable energies such as hydro, solar, wind and nuclear energy. The growing world energy demand should be met with all available energy sources and technology should be used to solve the problems, environmental and otherwise, that are standing in the way of greater use of other resources such as coal, non-conventional oil resources such as tar sands and oil shale, renewable energy as well as nuclear power. The world economy should not run on oil and gas alone. The developed countries should work hard at developing the energy resources available to them within their own territories such as coal, oil shale, tar sands, and renewables by developing new technology that will enable them achieve the security of supply they seek. They should not wait until the oil wells of the Middle East run dry.

In the context of oil and gas, the debate should address such issues as the right capacity level that is sustainable for the long-term, coping with ageing developed fields so as to maximize recovery, developing new ones as well as exploring for new reserves. The IOC’s with their advanced technology and vast experience can play an important role as partners to the producing countries’ NOC’s, provided of course, they accept the sovereignty of these countries over their resources. They can provide the necessary investment and technical help to support production growth and reserves replacement by sustaining existing reservoirs to ever higher levels of recovery whilst maintaining a sensible and controlled cost base, developing difficult, marginal and unconventional reservoirs, and exploring the higher risk and higher cost plays. They can also help the producing countries diversify their economies by increasing the local content of their oil industry activities which can provide the maximum benefit possible in terms of employment opportunities and workforce development. Moreover, they must accept the fact that other competitors are there and that the oil market is now much more open and much more diversified.

Mr. Chairman,
With these thoughts in mind, I would like to highlight now some of our recent Libyan experiences with the IOC’s as well as NOC’s. Since the lifting of the embargo in the late nineties, we at NOC have been working hard to establish collaboration and partnership with the IOC’s, independents, the new emerging NOC’s of the consuming as well as those of the producing countries. Since 2004, three Open Bid Rounds under EPSA4 type agreements were successfully conducted involving areas both onshore and offshore. In Round 1, 57 Blocks areas were offered in 15 areas both onshore and offshore with a total area of about 127000 square kilometers. More than 50 companies participated and the blocks were awarded to 12 of them. In Round 2, 44 Blocks were offered in 23 areas both onshore and offshore with a total area of around 94000 square kilometers. Also, More than 50 companies participated and the blocks were awarded to 15 of them. In Round 3, 41 Blocks in 10 areas both onshore and offshore were offered with a total area of around 69000 square kilometers. More than 40 companies participated and the blocks were awarded to 10 companies. In all, 48 contracts were signed as a result of the three bid rounds with a total investment commitment of more that $1.7 billion. The exploration programs of several companies are already underway this year and the rest will start during next year. Already, some companies have been quite successful in finding oil and gas.

Moreover, a closer look at the results of the first three bid rounds would reveal the strong presence of the NOC’s of the consuming as well as the producing countries in all phases of the bidding process. Of the total number of companies that won, almost 50% were also NOC’s. Not only that, but the results reveal quite the astonishing fact of NOC’s and IOC’s joining ranks and bidding together for certain blocks. And in July of this year, a fourth Open Bid Round was launched involving areas that are mostly gas prone. It is comprised of 41 blocks with a total area of around 77000 square kilometers. Thirty companies have already qualified and the bidding results will be announced in December.

Mr. Chairman,
We are aware of the fact that the oil industry is going through important, if not unprecedented changes. As I mentioned earlier, oil prices are reaching new heights and the appetite for oil and gas to satisfy the increasing needs of the developing countries is setting new records. This situation prompted some producing countries to take a number of measures, some of which are very drastic, to redress the balance of the contractual relationship that emerged as a result of these changes. Some countries increased their tax rates, others imposed price caps and some went as far as nationalization, an action which is not welcomed anymore in today’s world. We in Libya, cognizant of the new market realities which necessitate a fresh look at the old types of contractual relationship, opted for negotiated solutions to reach amicable settlements that will lead to win-win situations. We believe that producing countries should not try to kill the goose that lays golden eggs; on the contrary, they should see to it that the goose is very well looked after to lay even bigger eggs.

With this spirit, we started negotiations with the companies working in Libya on the old contractual basis, be it old concession agreement, joint ventures or old types of EPSA. The response of these companies, I must say, was very positive. With some of them like ENI we were able to conclude what we may call historical agreements and the negotiations are still going with the others. We hope that soon we will reach agreements that will pave the way for the country to achieve its goals in increasing its production to help in meeting the increasing world oil demand and at the same time enable the companies to invest more, produce more, profit more, and continue the long good working relations in a very friendly environment.

On the basis of what I have just said, we at the Libyan NOC believe that the way forward is only through collaboration and partnership between IOC’s and NOC’s. Only through collaboration and partnership between various IOC’s and NOC’s of different nationalities willing to share as well as take the risk can a win-win situation for all those involved exist. In Libya, we strongly believe that a win-win situation exists for us all and we shall endeavor to do all we can to achieve it.

Thank you for your attention.

Source: NOC web site.