Maximizing Benefits from the Oil and Gas Production in Developing Countries - Case Study Example

Maximizing benefits from the oil and gas production in developing countries through local content participation and value addition” Introduction: Oilor black diamond is one of the most valuable assets which for the country. Presence of oil in the country gives the assurance of economic growth. However discovery of oil and gas in the country brings not only revenues but also huge amount of expectations with it. The most common assumption related with the discovery of these energy types is that it helps in easing financial stress of the economy or government with reference to budget for public or masses of the country. With the discovery of oil and gas, country will surely develop in terms of building infrastructure and basic needs will be approachable for all as the country will have more resources. However things are not as simple as they might look. According to various examples and researches it is believed that countries that enjoy abundance in resources are on average less likely to attain economic development in comparison with countries that do not (Heum, Kasande, Ekern, and Nyombi, 2011). Value Chain Of The Oil And Gas Industry Overview: Porter (1985) has explored the progressions of various combinations of actions or activities that are performed in order to come up with the final product for the customers. The process involved different actions and services carried out on the specific product from beginning till the end i.e. from extracting the product till the product is manufactured and later distributed to the final customers. However the analysis of Porter can be significantly applied to separate entity or firm (single firm) and can also be applied on number of firms or organizations keeping one thing under consideration i.e. their interconnections amongst each other in the supply chain context or in simple words the link among manufacturers, distributors, suppliers and customers in a specific area or globally (Tordo, Tracy, and Arfaa, 2011). Meanwhile the value chain supply system of the oil and gas industry with reference to social value creation has been highlighted below (Tordo, Tracy, and Arfaa, 2011) Oil and gas sector value chain comprises of various procedures initiating from development, processing, transporting and marketing of the product (oil) to the end user or consumers. The process of value chain in the oil and gas sector begins from allocating areas in order to later search or explore those areas for oil and gas. However soon after the basic search for oil or gas, evaluations are carried out on the grounds or fields; development and production are the other two things that are carried out later. The overall procedure is also known as Exploration and Production (E&P) or in other words it is also known as up streaming of the oil and gas (field) (Tordo, Tracy, and Arfaa, 2011). Keeping in view that the above mentioned value chain system is very much confined to conventional oil fields, relatively different oil exploration from oil sands or shale oil generally undergoes a (significant) different line of actions in terms of processes related to oil extraction. Likewise separate or additional help is required in terms of exploration and production processes. As mainly this helps in geographical and geological evaluations of the oilfields through different techniques mainly surveys. Similarly various mechanical work conducted on the field also requires high tech equipments and machineries; these machineries are brought through variety of different channels. Therefore they also play an integral part in the E&P process (Tordo, Tracy, and Arfaa, 2011). Another vital part of the value chain of oil and gas industry is infrastructure, usually transporting of oil through variety of different channels like roads, railways, sea ways, airways and through pipelines etc. With it storage of oil is another important factor that falls under the same category of infrastructure (Chatham House, 2008). Furthermore the process of value chain from exploration, production and processing of the fossil fuel to the end consumer is also referred by many as “midstream”. Nevertheless the final stage of the value chain which is Refining and Marketing (R&M) is also known as “downstream”. As the crude oil is refined through application of proper procedures and later made this crude oil a usable product. This then further carried out in the market for end consumers as a ready to consume product by following marketing procedures (Tordo, Tracy, and Arfaa, 2011). Usually oil and gas companies perform variety of tasks along with the application of the value chain system. They can adopt and work on horizontal and vertical integrations methods and procedures. Mostly vertical integration involves exploration and production (E&P) and refining and marketing (R&M) activities. Furthermore the oil and gas companies at times even extend their workings for a specific activity which take towards horizontal business (scale) consolidations (horizontal integration). Different companies adopt different line of action regarding the application of vertical or horizontal integration. These integrations are muzzled by countries policies and regulatory, legal working patterns. Local Content And Value Creation (Policies): Private oil companies (POCs) and National oil companies (NOCs) are very much affected by the policies of local content but the magnitude of affect may vary depending upon the circumstances. However the transformation of local content policies from conventional patents (which were initially confined with providing transfer of technology options to the locals, creating jobs for locals and enhancements over control and power through local ownerships) from new futuristic approach (that involves planting of refineries, petrochemical industries and fertilizers productions prior to export of oil and gas) by creating or accommodating a linkages amongst the two. However at present local content has gone through a transformation and has undergone broader economic diversification, as a result moving way ahead from the span of value chain of oil and gas industry (Gylfason, 2001). Meanwhile in regards with implementing local content and value creation policies government practices different apparatuses, some important ones are highlighted below: Contracts requirements: Basics implications on the usage of local resources (goods and services) or in other words enforcing local trainings. Taxes: Application of formal taxes and regulations which supports local business sectors or industries. Technology transfer: Policies are made accordingly in order to ensure transfer of technology from foreign companies to locals. Various incentives for foreign companies: Coming up with the policy in terms of providing reinvestment opportunities to foreign investors or companies in the local infrastructure by offering number of different incentives. Development of local infrastructure: Coming up with investment opportunities and ensuring investments for the development of local infrastructure and education. Compulsion for foreign companies: Various compulsions are enforced on foreign companies in order to help develop the host country by investing. Ownership of locals: Policies are designed in order to accommodate, facilitate and promote local ownerships. Government interventions: Government may intervene directly through SOEs (State Owned Enterprises). Many believe that local content policies are responsible for creating disruptions, distortions, inefficiencies and also can result in amalgamation of corruption factors with the above mentioned ones. Meanwhile technological strangeness is amongst the prime and core reason that is responsible for inefficiencies which are mainly created by local content policies (Boyefio, 2012). Similarly another important fact is that countries or economies that have confined or limited primary sources are likely to falter or cope up in terms of providing quick oil or gas supply. Likewise the infrastructure development of the oil and gas sector is also in many ways dependent upon the amount of time (speed) to which gas and oil resources are being developed (Thurber, Hults, and Heller, 2010). However this is often related with the role of the government or in other words government’s policy of depletion. One fine example in this regard is of Norway and UK oil and gas industry. As Norway deliberately opt to develop the oil sector slowly in comparison with UK. The main reason behind this policy of slow development was to allow necessary amount of time for the Norwegian oil and gas sector to garner more development. On the other hand UK’s fast and rapid development in the North Sea was to attract US for the oil sector related expertise (Hallwood 1990). The outcome of local content policies: There is no assurance that through ameliorating value for local content will garner benefits for the home country. According to the case studies of six different countries regarding the local content development policies, results were not always fruitful all the times (Nordås, Kyvik, Vatne and Heum, 2003). However given below are some examples of the mixed results: Norway is considered as the most successful country that is able to gain benefits from the local content policies. Norwegian firms managed to reap industrial development through the system and are now currently providing services in the oil and gas industry around the globe. Heum, Kasande, Ekern, and Nyombi, (2011) believe that this ideal experience of the country in terms of success is very hard to copy for other countries. However the main reason for this success lies in the fact that before the exploration of oil Norway had already developed tendency of industrial capacity. Moreover the country had proper democratic system in full practice. Therefore these reasons further garner ways for providing more opportunities in terms of development in the oil and gas industry. Nigeria’s experience is totally opposite in this regard though exploration of oil and gas in Nigeria and their presence in the soil was confirmed ten years before Norway. But still Nigeria has failed to gain the advantage and reap the fruits from the oil and gas industry. There are several important reason behind this fallback, out of them corruption, limited or confined participation of the Nigerian firms in the industry, lack of importance shown by the government in local content developments and manipulation of the oil field by many are amongst the prime most factors. Moreover another important factor is that mainly other sectors save their money on the foreign soils (Nordås et al., 2003 and Heum et al., 2003) Indonesia like Nigeria has to cope with corruption in the oil and gas industry. Unlike Nigeria the money gained from the oil and gas sector is reinvested in different businesses or sectors within Indonesia. Moreover more openness approach is put forward by Indonesian government in terms of foreign investments (Marcel, 2006). Malaysia is another country that is reaping fruits from the local content policies. The country has successfully expanded its local manufacturing of products while oil and gas exploration was going on within the country (Abidin, 2001). The key role played by national oil company Petronas is of great importance in this context. Moreover Malaysia’s stance towards foreign investments is quite flexible. Meanwhile the oil companies of Mexico and Brazil have strong national presence. As these countries are reluctant towards foreign investments, as a matter of fact in order to enhance local content foreign investments are totally shut off. High magnitude of local content developments has been carried out in both the countries. However both countries were unable to mark their significance in terms of building industrial capacity that could compete with the international standards. Meanwhile Brazil since 2000 has adopted a systematic approach in terms of coping with the serious issue and dealing with local content policies in terms of providing benefits to its masses. On the other hand Mexico is struggling to match the pace of Brazil. Therefore from the above mentioned six countries example one can clearly state that if local content value policies are applied systematically and succinctly these policies are likely to give benefits to the country and help ameliorating the economy. If country fails to apply systematic approach then destruction is fate of the country in perpetuity. Challenges to local content value: Oil industry is amongst one of the powerful industries responsible for giving trillions of dollars revenues to various countries of the world. The industry in the past and at present is further garnering evidence in order to carry current trend of expansion in the future as well. However the industry is mainly dominated by some oil companies. Various national and international oil and gas based companies are present around the world. These companies have different suppliers that are providing or catering the industry by offering services and equipments. However the span of control in terms of providing services and equipments by these suppliers are of different volume. Some cater local markets while others are global service providers. The working of oil companies and suppliers are interlinked in many ways. This link is usually formed by signing a contract which often at times follows hierarchy. However, on occasion various sub contractors are also the part of the supply chain system. In order to gain entry in the supply chain system of the petroleum and gas industry, new contractors have to come up with breaking this system. Moreover their success is merely dependent upon the assurance of maintaining and providing international standards. This is the reason why that new entrants in the oil and gas industry are more likely to garner success outside the span of principle or core of the oil sector. Similarly another important challenge related with the industry building capacity of the nation in the context of various operations carried out in the oil and gas industry is the possibility of its impact on host economy in different sectors. Moreover countries ambitions for local building capacity are only going to fulfill provided other industry sectors are also developed. Because the concept of gaining economic development is not achieved only by making developments in the single sector or industry (Petrad, 2009). Furthermore discovery of the fossil fuels in the country might lead towards creating an ambiance of serious expectations. Since the industry involves enormous amount of revenue generation tendencies, but these revenue generations do not directly create impact on the masses all of a sudden. It takes certain amount of time in order to give fruits or returns (because of reinvestment of revenue by the government in different sectors). However if the challenges to local content value are summarized or concluded then following are the main challenges faced: Barriers in the local content development: This includes lack of opportunities or resources for the local company in terms of entering in the oil industry such as Poor infrastructure, strict rules and regulations, less effective licensing policies etc. Lack of Education and skills: No industry can achieve growth without proper education and knowledge about the working of the specific sector or industry, or in simple words lack of skilled labor creates hurdle in the local content development. Lack of industrialization: Local content development through oil and gas industry can only be achieved provided other sectors are also aligned and well developed. Otherwise serious chances of collapsing the system are eminent. Poor infrastructure: Another factor that muzzles growth of local content value is poor infrastructure. Roads, railways, airways and sea ways are basic needs of growth of the economy. With these basic infrastructure needs, an industry is able to use its resources in the most efficient manner. Moreover, proper and effective communication system has also become an important infrastructure need. Countries that lack these resources most of the times fail to reach towards economic development. Investment ambiance: Countries that promote friendly and safe investment environments are likely going to gain benefits from the system. On the other hand countries that have conflicts and wars going on are likely to create catastrophic situations for themselves. Besides the above mentioned challenges good governance, financing and high expectations are other important challenges that local content development has to oversee while in practice. List Of References ABIDIN, M. Z. (2001) Competitive Industrialization with Natural Resource Abundance: Malaysia. In Resource Abundance and Economic Development, pp. 147-164 BOYEFIO, G. (2012) Absence of local content law threatens Ghana’s 90% indigenization target in oil sector’. Ghana Business News. [Online] 10th September, 2012. Available from http://www.ghanabusinessnews.com/2012/09/10/absence-of-local-content-law-threatens-ghanas-90-indigenization-target-in-oil-sector/ [Accessed 11 December 2012] CHATHAM HOUSE. (2008) Asian National Oil Companies’ Investments Abroad: Industry Trends and Impacts on Development. Chatham House, Royal Institute of International Affairs, London. GYLFASON, T. (2001) Natural resources, education and economic growth. European Economic Review, 45, p. 847-859. HALLWOOD, C. (1990) Transactions Costs and Trade Between Multinational Corporations: A Study of Offshore Oil Production. Boston: Unwin Hyman. Heum, P., Kasande, R., Ekern, O. and Nyombi, A. (2011) Policy and regulatory framework to enhance local content. Institute For Research In Economics And Business Administration. [Online] Available from http://brage.bibsys.no/nhh/bitstream/URN:NBN:no-bibsys_brage_24139/1/A02_11_(1).pdf [Accessed 11 December 2012] HEUM, P., QUALE, C., KARLSEN, J., KRAGHA, M. AND OSAHON, G. (2003) Enhancement of local content in the upstream oil and gas industry in Nigeria – a comprehensive and viable policy approach, Bergen. The Institute for Research in Economics and Business Administration, SNF-Report 25/03. MARCEL, V. (2006) Oil Titans: National Oil Companies in the Middle East. Chatham House, Royal Institute of International Affairs: London. NORDÅS, H., KYVIK, E., VATNE AND HEUM, P. (2003) The upstream petroleum industry and local industrial development: A comparative study, Bergen. The Institute for Research in Economics and Business Administration, SNF-Report 08/03. PETRAD. (2009) Oil for Development Local Content Training Module. [Online] Available from http://www.norad.no/en/thematic-areas/energy/oil-for-development/how-we-work/_attachment/159112?_download=true&_ts=126c1760a3b [Accessed 10 December 2012] THURBER, M., HULTS, D., AND HELLER, P. (2010) The Limits of Institutional Design in Oil Sector Governance: Exporting the Norwegian Model.‛ Program on Energy and Sustainable Development. Stanford University, Stanford, CA TORDO, S., TRACY, B., AND ARFAA, N. (2011) National Oil Companies and Value Creation. The World Bank. [Online] Available from http://www.mdbc.org.my/noc_volume_I.pdf [Accessed 11 December 2012] Read More