Norwegian Petroleum Local Content and the Relevance to Iran

Global Local Content Summit for Oil and Gas 2006 Build long-term measurable strategies for sustainable growth
October 26 - 27, 2006 IQPC

Farshad Tehrani Alfa Development and Engineering AS www.alfa-dev.com

Part 1 The Norwegian Experience of Local Content in Petroleum Industry

Part 1

The Norwegian Experience of Economic Diversification in Relation to the Petroleum Industry

Part 1: The Norwegian Local Content in the Petroleum Industry

The background and rationale for Local Content

The different policies of Local Content adopted: Procurement Transfer of Knowledge

Part 1

The Norwegian Experience of Economic Diversification in Relation to the Petroleum Industry

The background for the policy of Local Content (Economic Diversification)

When petroleum activities commenced in the 1960s, Norway already was a developed industrial country A strong tradition in shipping and hydro-electricity A diversified manufacturing base including capital and energy intensive metal / wood processing, shipbuilding and mechanical industry.

Part Part1 1

The Norwegian Experience of Economic Diversification in Relation to the Petroleum Industry

The rationale for Local Content in relation to petroleum

For the oil industry, oil-in-the-ground has an intrinsic value that exceeds the normal return on investment in exploration and production Extracting oil means depleting the resource capital of the host countries, which need to compensate by building up another capital base to reduce petroleum revenue risk exposure

Part Part1 1

The Norwegian Experience of Economic Diversification in Relation to the Petroleum Industry

The rationale for Local Content in relation to petroleum

The division of economic rent is the outcome of bargaining, where the government land owner can demand more than money

Part 1

The Norwegian Experience of Economic Diversification in Relation to the Petroleum Industry

New Government Policies related to Local Content Development

A stronger bargaining position caused policy changes in 1972 Application in 1973 licensing round Initial emphasis on procurement and human capital

Part 1

The Norwegian Experience of Economic Diversification in Relation to the Petroleum Industry

New Government Policies related to Local Content Development

Local Content through bidders lists and procurement reviews Transfer of managerial and operational skills Cooperation in research and development

Part 1

The Norwegian Experience of Economic Diversification in Relation to the Petroleum Industry

The different policies of Local Content chosen

Procurement: preference to domestic goods and services, to build up supply industries, 1972-94 Transfer of knowledge, priority to human capital to enhance research and development, 1972-94 Petroleum Fund, setting revenues aside to spend proceeds only, since 1992

Part 1

The Norwegian Experience of Economic Diversification in Relation to the Petroleum Industry

Procurement Policy

Provision to use Norwegian goods and services introduced in 1972 Preferential policy discontinued in 1994 by EEA agreement with EU Objective to secure part of the value chain for domestic firms, to develop appropriate technology and to gain insight and control Assessment: successful, but costly

Part 1

The Norwegian Experience of Economic Diversification in Relation to the Petroleum Industry

Policy from 1973 to 1994

Field development operators had to present to the Ministry of Petroleum and Energy plans for all tenders above NOK 1 million (USD 200 000) Prior to tender invitations, the operator had to announce the tender schedule and companies to be invited The Ministrys role was to ensure that qualified Norwegian companies were included in the bidders list The Ministry did not specify content or supplier

Part 1

The Norwegian Experience of Economic Diversification in Relation to the Petroleum Industry

The Licensing Incentives

Norwegian Local Content was an essential factor for all oil companies The Ministry used Norwegian content as one of the evaluation criteria when evaluating companies competing for new prospects. The Ministrys policy was transparent and predictable in respect to enforcement of the procurement policy.

Part 1

The Norwegian Experience of Economic Diversification in Relation to the Petroleum Industry

Transfer of Knowledge

Provision to train Norwegian personnel introduced in 1972, discontinued in 1994 Objective: bridging the original skills gap Assessment: successful

Provision of research and technology cooperation introduced in 1979, discontinued in 1994 Assessment: successful

Part 1

The Norwegian Experience of Economic Diversification in Relation to the Petroleum Industry

Technology Cooperation

Agreements between Norwegian research institutions and International Oil Companies, contributing funding, personnel and competence, directly related to petroleum

Three types: 1. 50% Agreements 2. Effort Agreements 3. Good will Agreements

Part 1

The Norwegian Experience of Economic Diversification in Relation to the Petroleum Industry

1. 50% Agreements

Operators to conduct in Norway at least one half of the research effort required to exploit the resources of a license, including feasibility studies, development studies, etc. Efforts supervised by Ministry of Petroleum and Energy. Measurement expenditure By 1985 project value NOK 140 million( USD 24 million)

Part 1

The Norwegian Experience of Economic Diversification in Relation to the Petroleum Industry

2. Effort Agreements

Oil companies to make a certain research effort in Norway ahead of licensing rounds in cooperation with Norwegian research institutions and the Research Council Efforts supervised by Ministry of Petroleum and Energy Measurement expenditure By 1985 volume NOK 370 million (USD 60 million

Part 1

The Norwegian Experience of Economic Diversification in Relation to the Petroleum Industry

3. Good-will Agreements

Oil companies had to conduct as much as possible of petroleum related research and development in Norway, without any specified requirement as to volume or effort Efforts supervised by Ministry of Petroleum and Energy Measurement expenditure and outcome More than one half of funds to engineering firms, rest to Norwegian Oil Companies, maritime services, mechanical industry and some research institutes

Part 1

The Norwegian Experience of Economic Diversification in Relation to the Petroleum Industry

Part 1

The Norwegian Experience of Economic Diversification in Relation to the Petroleum Industry

The significance of the Norwegian Local content experience

The issue of developing away from a rentier economy highly exposed to oil revenue risk is pertinent also in other oil exporting countries The challenge is to establish real economic linkages between the oil - gas and other sectors Norways experience cannot be imitated, but can serve as an example

Part 1

The Norwegian Experience of Economic Diversification in Relation to the Petroleum Industry

Part 2
The Relevance of the Norwegian Local Content to Iran

Part 2

The Relevance of the Norwegian Content to Iran

Part 2: Iranian Local Content

Prior to revolution 1979 Iran had no Local Content policy, agency was flourishing 23rd April 1997: Law on the maximum usage of the countrys production, industrial, executive, technical and engineering potential in performing projects and facilities the exportation services was approved

As per today: Iran supporting creation of competitive and commercialization of Iranian petroleum contractors and supplier companies Government of Iran encouraging and supporting Iranian Content 51% policy International companies are generally willing to make use of compative, local companies and look towards long term benefits', however incentive is essential

Part 2

The Relevance of the Norwegian Content to Iran

Iranian Content Observations:

Iran has limited industrial bases to converter to petroleum industries, however changes are occurring Iran petroleum contractors: Mainly in fabrication Developed rapidly since 1990s with substantial work load Benefited from national demand and Buy Backs Limited financial frame work Challenges in an international compative market Benefited less from international development since 1979 Revolution Award contracts resulting focus on survival rather than strategy and development

Part 2

The Relevance of the Norwegian Content to Iran

Iranian Content Observations:

- Iranin companies have limited competence and capacity to take part in complex petroleum projects, however improving is ongoing - Iranian companies lack: - Mangment skills - Organizational capability - Technical personnel and equipment - Financial basis - International companies do not have long term incentives to assist in building Local Content - Incentives

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The Relevance of the Norwegian Content to Iran

Management and Competence :

Challenges: - Decisions are made at executive level and one needs: Delegation Responsibility Accountability Authority - Middle Management does not exist - Lack of permanent competence work force - Lack of incentives

Part 2

The Relevance of the Norwegian Content to Iran

Conclusions:

Developing Iranian Local Content: - Time required - patience - Needs strategy and planning - Incentivs for international companies - Costs

Part 2

The Relevance of the Norwegian Content to Iran