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    What Next for theOil and Gas Industry?John Mitchell

    with Valrie Marcel and Beth Mitchell

    October 2012

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    What Next for the

    Oil and Gas Industry?John Mitchellwith Valrie Marcel and Beth Mitchell

    October 2012

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    The Royal Institute of International Affairs, 2012

    Chatham House (The Royal Institute of International Affairs) is an independent body which promotes the rigorous study of international

    questions and does not express opinions of its own. The opinions expressed in this publication are the responsibility of the authors.

    All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical

    including photocopying, recording or any information storage or retrieval system, without the prior written permission of the copyright

    holder. Please direct all enquiries to the publishers.

    Chatham House

    10 St Jamess Square

    London SW1Y 4LE

    T: +44 (0) 20 7957 5700

    F: + 44 (0) 20 7957 5710

    www.chathamhouse.org

    Charity Registration No. 208223

    ISBN 978 1 86203 271 2

    A catalogue record for this title is available from the British Library.

    Cover image: flickr.com

    Designed and typeset by Soapbox Communications Limited

    www.soapbox.co.uk

    Printed and bound in Great Britain by Latimer Trend and Co Ltd

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    Contents

    List of Tables, Figures and Boxes v

    About the Authors vii

    Acknowledgments viii

    List of Acronyms and Abbreviations ix

    Executive Summary xii

    1 Introduction: e Future Has Changed for the Industry 1

    2 Downstream Challenges for Oil Business Investments and Initiative 5

    e transport market 5

    e policy push 6

    Reducing the use of oil in transport 6

    Changes in policies and preferences for transport 7

    Competition 8

    Implications for the oil industry downstream 12

    3 International Oil Markets 18

    State and private sector 18

    Competition and OPEC 19

    New era 22

    4 Gas for Power 24

    e problematic outloook 24

    Uncertainty of future policies to reduce carbon emissions 25

    Shale gas 26

    Uncertain role of imports 26

    Expanding the demand for gas 26

    Implications for the industry 27

    5 Upstream Resources and Reserves 29

    e resource base 29

    What are reserves? 30

    Trends in oil reserves 30

    Trends in gas reserves 32

    New exploration or reserve growth 33 Technology 33

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    Oil-dependent economies 35

    Principles of ownership of reserves 35

    Who owns the reserves? 36

    Strategy and technology 40

    6 Finding the Right Partners for National Oil Companies 42

    Valrie Marcel

    Meeting national development needs 43

    Meeting geological challenges 46

    A greater variety of investors at the ready 49

    Matching competencies and needs 50

    Implications for both sides 53

    7 Financing the Future 55

    Beth Mitchell

    Old questions, new answers 55

    e investment proposition: better or worse? 56

    An unsupportive overall economic environment 56

    Climate change measures: a huge, unpredictable threat 57

    An increasing focus on energy security can cause distortions 57

    e ascendancy of the national oil companies 57

    e scale of investment for the energy industry in 201135 is not unmanageable 59

    e scope for finding reserves changes the regional balance but increases 61

    the technological prizeGas 66

    Who has the money? e changing investment constituency 66

    How can the IOCs adapt and attract investment? 67

    Conclusions 69

    8 Geopolitics and Geo-economics 71

    Competition for resources (investment opportunities) 72

    Competition for supply 72

    Energy security 74

    9 Conclusion 79

    Appendix 1: Climate Change Policies: Restricting Emissions of Greenhouse Gases 83

    Appendix 2: Markets for Oil in Transport 88

    Appendix 3: Gas in Key Power Markets 95

    Appendix 4: Who Are the Investors? 108

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    List of Tables, Figures and Boxes

    Tables

    1 Potential GHG emission reductions due to new aircratechnologies 11

    2 Change in oil use for transport, 200930 14

    3 Upstream to downstream, top 100 companies share of world liquid output, 19

    refining capacity and product sales

    4 Share of primary fuels in the world power sector 25

    5 Power-sector markets for gas 27

    6 Different oil equivalences 40

    7 e choice of investor depends on the level of national capacity and the 50

    geological context

    8 Cumulative investment in energy supply infrastructure by fuel in the New Policies 59 Scenario, 20112035

    9 Oil trade, 2010 74

    10 How much do gas imports matter? 76

    11 Changes in fuels for US transport, 200935 90

    12 Share of primary fuels in energy demand for power generation in US under 95

    current policies, 200930

    13 Share of primary fuel demand by the power sector, 200930 98

    14 2009 gas imports as proportion of consumption 101

    15 Gas in China compared with other major economies 104

    16 Share of primary fuels in power generation in China, 200930 104

    17 Supply of primary fuel to the power sector, 200930 106

    Figures

    1 Change in oil use, 200930 14

    2 Oil for transport 15

    3 Oil prices and share of global energy market 20

    4 Movement in oil and NGL reserves, 19802011 305 Movement in gas reserves, 19802011 31

    6 Schematic for gas resources 32

    7 Ownership of world oil reserves, 2010: top 50 companies, percentage shares 37

    8 Access to oil reserves, 2010: top 50 companies, cumulative ownership 39

    9 Ownership of world gas reserves, 2010: top 50 companies, cumulative ownership 39

    10 R&D expenditure for various types of companies as a ratio of net sales, 2010 47

    11 Access to oil reserves, 2010: top 50 companies 58

    12 Oil capex, 201135 60

    13 Gas capex, 201135 60

    14 Global yet-to-find reserves 61

    15 Upstream capex by type 62

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    16 Project size 62

    17 Technology development 63

    18 Capex and cashflow: state sector 64

    19 Capex and cashflow: private sector 64

    20 Estimate of breakeven price for incremental oil production projects 6521 Regional surpluses and Asian deficit 72

    22 e new balance of the international oil trade 73

    23 Regional deficits requiring supply from global oil markets 74

    Boxes

    1 Models of cooperation 38

    2 Adding oil and gas: oil equivalent 40

    3 International climate change milestones 85

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    About the Authors

    John Mitchell is an Associate Fellow at Chatham House, and Research Adviser at the Oxford Instituteof Energy Studies. In November 2007 he received a lifetime achievement award for research from KingAbdullah at the opening of the 3rd OPEC Summit in Riyadh. He retired in 1993 from British Petroleumwhere his posts included Special Adviser to the Managing Directors, Regional Co-ordinator for BPssubsidiaries in the Western Hemisphere, and head of BPs Policy Review Unit. Before joining BP in1966 he spent ten years in the Governments of the Federation of Rhodesia and Nyasaland and SouthernRhodesia, working mainly on GATT and commodity agreements. At Chatham House he has writtenthree books: e New Economy of Oil (2001), Companies in a World of Conflict (editor, 1998); and e

    New Geopolitics of Energy (1996). He was a contributor to Oil Titansby Valrie Marcel (2006). He haswritten numerous reports and briefing papers and articles for journals. He has a Masters degree from theUniversity of Natal and was born in South Africa.

    Dr Valrie Marcelis an Associate Fellow at Chatham House and a consultant for KPMGs Global NOCteam. From 2002 to 2007 she led energy research at Chatham House. She continues to lead ChathamHouses major initiative on Good Governance of the National Petroleum Sector.She is a leading expertin national oil companies (NOCs), petroleum-sector governance and strategic issues affecting the energyindustry and has contributed to various publications on these topics. She is currently investigatinggovernance issues in new oil hot-spots in sub-Saharan Africa and advises governments on energy-sectorgovernance. She interviewed over 120 executives from the largest state-owned oil companies of the worldand published a seminal book on NOCs, Oil Titans: National Oil Companies in the Middle East (BrookingsInstitution and Chatham House, 2006, with John V. Mitchell). She previously taught international relationsat Sciences Po Paris (Institut dtudes politiques de Paris) and the University of Cairo, and is a graduate ofSciences Po and McGill University She was based in Dubai from 2007 to 2011 and now lives in Toronto.

    Elizabeth Mitchell graduated from Magdalen College, Oxford in PPE and started work in the City inSeptember 1987; an early introduction to market volatility. She has worked in asset management since1989 as both specialist analyst for a wide variety of sector

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