Oil and Gas Where is the Value Added? How Do You Get it? Extracting

Oil and Gas Where is the Value Added? How Do You Get it? Extracting from an Extractive Industry Maximising Local Value in the Trinidad & Tobago Energy Sector Anthony E. Paul Managing Director, Caribbean Energy Specialists [email protected] Dakar, 7th Feb, 2008

Contents CONTEXT – – The Premise Where we started The Vision – Energy Vision 2020 – Energy Sector’s role in national development Policy Development Strategies Current Status Summary & Lessons Learnt Anthony E. Paul February 2008 2

Trinidad & Tobago - Location G RENADA 200 M . USA TO BAG O T&T Venezuela T R IN ID A D VENEZUELA Eastern Venezuela Basin – one of most prolific in the world Ideally situated for accessing major/high value markets R I V E R O R I N O C O G U IA N A S H IE L D E A S T E R N V E N E Z U E L A B A S IN Anthony E. Paul February 2008 3

Oil & Gas Production History & A Conservative Forecast - 2023 ALNG IV Ministry of Energy & Energy Industries Anthony E. Paul February 2008 4

Context The Premise – Past experiences – The “Plantation Economy” “Resource Curse” We have another chance to get it right For ourselves For future generations Anthony E. Paul February 2008 5

Context Where we started – E&P – Big natural gas discoveries (1990s) Major field developments Increasing production and operations Downstream Natural gas industry growth – – – LNG Chemicals Services Growth Anthony E. Paul February 2008 6

Leverage Upstream Opportunity Sustained and Continuous Upstream Growth , underpinned by great exploration success story – Natural Gas is DIFFERENT 4000 3500 Future Field Developments (Conceptual) MDQ 200 MMCFD Cushion Gas 3000 mmcfd 2500 2000 1500 1000 500 0 2002 2004 2006 2008 2010 2012 2014 2016 2018 Anthony E. Paul February 2008 2020 2022 2024 7

Major Upstream Third Party Service sub-sectors & spend - Some Services enable transfer to other sub-sectors and industries UPSTREAM Exploration MIDSTREAM Development Production Power / LNG DOWNSTREAM Chemicals, Metals etc. 1% 5% 2% Subsurface Services ACTIVITY 6% 15% 31% Drilling, Well Services & Rigs 40% Engineering, Fabrication & Construction Operations Support & Production Logistics (marine, water, land, air) Consulting, Professional Services and Business Office Support Anthony E. Paul February 2008 8

Contents CONTEXT – – The Premise Where we started The Vision – Energy Vision 2020 – Energy Sector’s role in national development Policy Development Strategies Current Status Summary & Lessons Learnt Anthony E. Paul February 2008 9

The Energy Sector Plays a Major Role in T&T’s Development The energy industry is the primary driver of economic activity in T&T, accounting for an average of 36.6% of the country’s GDP over 2001 to 2005 (based on constant 2000 prices). For 2006, this has risen to 45.1% Because of its scale and scope, the energy sector will continue to be a major driver for economic development, while providing a platform for significant development of: People, Enterprises The Capital market and Innovation and Technology These are key ingredients in achieving the “Vision 2020” goals. This allows us an opportunity to use the energy sector as an agent for sustainable development and diversification. Trinidad and Tobago has embarked on an ambitious and far-reaching programme to achieve widespread and sustainable development by the year 2020. Anthony E. Paul February 2008 10

Increasing Local Value-Add – The Trinidad & Tobago Framework LOCAL CAPITAL & PUBLIC TRADING AL PIT CA KETS R MA EN DE TERP VE LO RISE PM EN T Local Value-Add building blocks: Enterprise Capability – improving the value-add, know-how and innovation OWNERSHIP & CONTROL H CA UMAN PA BIL ITY Alliances & Collaboration Innovation Technology tfr. STRATEGIC SKILLS Business Dev Commercial Leadership Human Capability – employment, training, development and internationalisation (making globally competitive) of Trinidad and Tobago nationals in: Operations skills - technical, operational and managerial capability. Strategic business skills - commercial, analytical, business development and leadership capability. capability of local businesses and institutions, by developing and enhancing: governance access to and adoption of best-in-class business practices, knowledge, tools, technology, processes and standards market share and reach (locally and internationally)· level of local control and ownership transferability to government, education & other sectors Capital markets – encouraging the growth of the use of the local capital market through its role as: A source of debt and equity financing. A mechanism for: Analytical i. increased levels of in-country profit retention and ii. public trading of Trinidad and Tobago businesses, to: - promote good corporate governance and - wider wealth distribution. “Knowledge” skills OPERATIONS SKILLS Technical Managerial Operational Moving up the pyramid enhances sustainability through the creation of transferable capability Source: A.E. Paul 2003 Anthony E. Paul February 2008 11

Vision To be an integrated and fully developed energy sector that is a key driver of a sustainable and flourishing local and regional economy while attaining global competitiveness in all of its sub-sectors by 2020. sustainable, operating transparently with the full support of the government, through effective governance will include locally owned and managed energy-based companies throughout the complete value chain both local and global Trinidad and Tobago will : – become the regional financial and energy trading centre, supported by a strong and vibrant capital market world-renowned educational institutions a technology hub that stimulates innovation and entrepreneurship a strong public-private sector partnership. Anthony E. Paul February 2008 12

Vision 2020 – Energy Sector Goals 1. 2. 3. 4. 5. 6. 7. 8. 9. Optimise exploration and production (pace & volume) Maximise wealth creation, capture and distribution Development of human capital Robust & respected institutions and regulatory framework Transparent governance Competitive and sustainable local energy companies Industrial development and diversification to high value-add service industries Protection and enhancement of the natural environment Sustainable investment in social capital Anthony E. Paul February 2008 13

LOCAL CONTENT POLICY Value Maximization Government & Country can Maximize Value from Resources through: 1.Fiscal Measures Taxation and Royalty Policies Government Expenditure 2.Non Fiscal Measures Local Participation Local Content 3.Local Capability Development transfer of technology and know-how form international partners capabilities that can be transferred to other sectors cluster developments with other industries that have a natural synergy with the energy sector (e.g. ITC, Education & Maritime) Anthony E. Paul February 2008 14

Local Content and Participation Policy Statement To achieve the goal of maximum local content and participation in the energy sector, all participants will be selected, engaged and managed in a manner that: 1. Identifies WHERE to enable local value added opportunity capture, by selecting specific goods and services for focusing efforts Determines HOW to enable delivery of maximum local value-added by : 2. 3. Managing the pace and scheduling of the programme of sector’s activities Targeting local capability development by increasing in-country activities Giving preference, firstly, to locally owned, controlled and financed enterprises, then to those that demonstrate a clear culture, commitment and capacity for maximizing local value-added, participation and capability development consistent with T&T’s aspirations and vision Focusing on improving local skills, business know-how, technology, financing, capital market development and wealth capture and distribution, Ensures DELIVERY of Maximum Local Value Added by: Setting targets Measuring and reporting Establishing benchmarks, targets and opportunities for improvement and the transfer of best practices . Anthony E. Paul February 2008 15

Contents CONTEXT – – The Premise Where we started The Vision – Energy Vision 2020 – Energy Sector’s role in national development Policy Development Strategies Current Status Summary & Lessons Learnt Anthony E. Paul February 2008 16

Managing The Resource To Maximise value Roles & Responsibilities of Stakeholders (Illustrative) OWNERS LEADERS Country Parliament People Cabinet FIRMS Ministers & Ministries CEOs MANAGERS State Companies Private Companies SUPPORTING AGENCIES Regulators Capacity Development Institutions Service Companies VISION POLICIES Legislation OBJECTIVES STRATEGIES ACTION PLANS Priorities OPERATING Terms of Engagement REPORTING Contracts IMPROVING Regulations Development Poverty Reduction Sustainability Wealth Creation CIVIL SOCIETY Anthony E. Paul February 2008 17

Training and Skills Development Programmes and Institutions - From the bottom up UWI / UTT ENGINEER NESC - TTIT 2-Year Diploma in Technology 4-Year B.Tech Degree Continuous Professional Development Customised Short Courses for Industry TECHNOLOGIST M IC / NSDP Community College SFTI / JDTI MASTER CRAFTSMAN TECHNICIAN MULTIMULTI-SKILLED CRAFTSMAN (JOURNEYMAN) - CERTIFIED M IC/NSDP SKILLED CRAFTSMAN - CERTIFIED NESC CRAFT CENTERS Welders & Pipe Fitters Electricians Instrument Fitters Millwrights, etc. YTEPP Secondary Schools CRAFTSMAN HELPER ENERGY SECTOR / INDUSTRY NEEDS Brechin Castle Point Lisas NATIONAL ENERGY SKILLS CENTER FOCUS POINT LISAS POINT FORTIN MACOYA STE. MADELEINE BARRACKPORE SUPPLIERS INSTITUTIONS Anthony E. Paul February 2008 18

Some upstream activities are better positioned than others in their ability to achieve SD’s multiple strategic aims Deep Analysis of the value chain to identify sources of value CHARACTERISTICS UPSTREAM ACTIVITIES S E AT O E . NC B C S N – S A A N O N LL TI RF CS E I CO TE A U S T W N C S & E / I S AI GI UB VIC G. GS BR M I S O A N R R L F E SE upstream spend Job creation potential Cyclical nature Gas/Oil price sensitivity Value-added skill content potential Innovation Technology potential Knowledge transferability Non-energy JV attractiveness transferability High Moderate Low Anthony E. Paul February 2008 19

Fabrication, engineering and construction and drilling/well services are upstream activities which have high potential for broadly achieving LC&P multiple aims UPSTREAM SUB-SECTORS High Sustainability sectors High impact sectors C RI B FA CHARACTERISTICS N IO T A & G. N E C E AC F S IC U R ES T S S B IC GI SU RV O L SE S. N O S AT O –B RI EL W / GS LS N TE N I MA CE N A upstream spend Job creation potential Cyclical nature Gas/Oil price sensitivity Value-added skill content potential Innovation Technology potential Knowledge transferability Non-energy JV attractiveness transferability High Moderate Low Anthony E. Paul February 2008 20

Contents CONTEXT – – The Premise Where we started The Vision – Energy Vision 2020 – Energy Sector’s role in national development Policy Development Strategies Current Status Summary & Lessons Learnt Anthony E. Paul February 2008 21

Current Status What’s been happening since – Aggressive Exploration – – – – – Nearshore, including Deep drilling, Land (deep & shallow), Deep water Heavy oil & tar sands Major downstream developments Natural Gas – Oil – – – Chemicals, Metals, Power, LNG Refining (upgrade/expansion) Marginal and heavy oil field development New Contracts (Production Sharing Contracts and E&P (Tax & Royalty) Licences) align with value-added policies and include: local content and participation policy Training and development & Research and development requirements Anthony E. Paul February 2008 22

New Production Sharing Contracts (2006) Policy Objectives Encourage greater exploration and development activities Encourage diversification of investors Ensure availability of supplies for domestic and export markets* Ensure new revenue stream for future generations Maximise Value Capture for T&T Maximise Revenue to State Increase Local Value-Add * Government participation in the full value chain Contract Re-opener Clauses Anthony E. Paul February 2008 23

Contract Terms Availability of Supplies for Domestic and Export Markets GOV’T to advise of its preferred marketing arrangements GOV’T to develop separate marketing arrangements for its Share Contractor to include an analysis of marketing options, including supplies to existing or potential projects in the internal market. Source: MEEI, Nov 06 Anthony E. Paul February 2008 24

What Are We Doing? Local Value-Added Building Blocks - Institutions, Policies & Procedures 1. People Development – Capacity building – Universities – UWI/UTT Technical schools High school programmes Primary school curriculum Pre-school Community engagement & enhancement 2. Media training Civil Society Network Enterprise Development – – Local Content & Participation Business Support – Centre for Energy Enterprise Development – (www.ceedtt.com) Diversification Deepening & broadening in energy – – – Downstream vs. LNG Oil vs. Natural Gas Other value chain activities (shipping, trading, distribution, etc.) Building other sectors – – From energy (e.g. services, training) Clusters alongside energy (e.g. ITC, maritime) Innovation & Technology – – – 3. UTT eTecK Downstream Industries w. technology focus Capital Market/ Revenue Stabilisation – Funds – – Private Equity & Mutual Stabilisation & Heritage Trading & Distribution TTLNG Anthony E. Paul February 2008 25

Learnings: Setting up a fair and realistic local content policy, adapted to the existing skills base is a necessary, but not sufficient condition. 1. 2. Have a very high level champion Think Strategically, Act Practically – – – – – – – – 3. Analyse, Analyse, Analyse Focus on services Disaggregate Be Selective, based on strategic value Engage early in the life cycle and contract for it (do not make it optional) See Capability Development as an investment Take a business-like & business-friendly approach It should be desirable,but achievable) “Do it in Country” first. “ Do it with locals”, will come next. The question to be asked: – – 4. is not: “what can we do with existing local capability?” Rather: “what can we build with existing and projected demand, so as to enhance local capability and allow us to capture more value in the future? ID current capability and gaps – – Set Targets Build capability 5. 6. 7. 8. strengthen or build institutions, set and maintain high standards Don’t remain static (monitor, change and improve) Regulate local content and knowledge and technology transfer – it doesn’t work if it’s an option to the IOCs and International service companies. Pick partners who support your strategy and will help deliver it Measure performance, Report it, Learn from it, Build on it. Involve (Engage & Empower) Civil Society from the Outset. Anthony E. Paul February 2008 26

Socio-Economic Scenarios Business As Usual / Status Quo Extraction from Extraction Cohesiveness SOCIAL SOCIAL INTERVENTION INTERVENTION UTOPIA UTOPIA Government re-distribution and intervention Steady growth of basic services only Basic skill sets and low cost Cheap workshop for other countries Social Export orientated of value-add services Low cost labour provider to high productive and value provider Diversified economy Leader in energy skills Re-distribution of wealth Few large players dominate all industries Socio-economic inequality Cheap workshop for other countries productive and value provider Diversified economy Leader in energy skills Wealth not translated through society InputEcono Econo Value-Focused Output mic Focuse Steady growth of basicmic services only Export orientated of value-add services Social d Basic skill sets Low cost labour provider to high PARADISE PARADISE LOST LOST GOLD GOLD RUSH RUSH Fragmentation Anthony E. Paul February 2008