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New global energy linkages needed.

The international energy industry has changed dramatically in the 130 years since its inception. It has grown from a business characterised by a handful of petroleum giants into a $ 2 billion a clay web of thousands of enterprises competing in a global marketplace. I will venture to briefly recount some of the contemporary developments taking place in the energy world.

Petroleum industry has always been highly capital intensive. With the growth in scale, the investment and, consequently, the risks have tremendously increased. The growing awareness for the need to protect the environment, the recent upheaval in the Gulf, advances in technology and the search for new oil reserves and non-oil alternative energy sources pose continuing challenges for the industry. North America appears to be struggling with deregulation and the effects of increased competition. The industry is having to adapt to new rules of the game and learn to use them to their best advantage.

The energy sector in Europe is undergoing one of the greatest revolutions ever witnessed triggered by the break-up of the common trading block in Eastern Europe and the accelerated move for the establishment of a single European energy market. The energy sector in the former Soviet Union is perhaps the most complex and challenging of any in the world today. The Soviet oil and gas sector has almost entirely been closed to outsiders until recently. With the lowering of the barrier, tremendous opportunities and vast reservoirs of valuable information may now become accessible to the outside world.

As a representative of a developing country, I wish to inform you that the energy sector in the developing countries is changing too. Although the change is not as spectacular or dramatic as in Europe or in the US, there are many similarities. For instance, barriers to free trade are being lifted, currency restrictions removed and regulatory framework largely being liberalised. It is inevitable that sooner or later we shall also be exposed to the same problems as confront by the petroleum industry in the developed countries and many of the solutions will also be similar. Much of under-developed world is trying to get away from the inefficiencies of rigid state control and to open its doors to foreign investment, participation and competition.

Existing and previously state-owned oil and gas companies (SOCs), especially in developing countries, now control a major share of global reserves and production and this share is set to increase further. Downstream, except for the large-scale producers, the outlook is not so encouraging. Although some of the developing countries have sufficient finances available to upgrade their refining and distribution operations, many others cannot achieve these objectives without outside investment.

Whatever their strengths and weaknesses, many national oil companies face a decade of increasing competition. Long used to relying upon a privileged domestic position they will be compelled to re-orient themselves towards the international markets where they will be competing for finances. The key issue facing the SOCs is, therefore internationalisation. Economies that were isolationist in energy terms will have to reverse that policy. The geographical diversification brings with it new challenges. Finding capital is a real challenge. Companies have to start thinking in these terms. The SOCs have to realise that international linkage is vital for their continued growth - and, in some cases, survival.

One of the major problems facing the energy business in the 90's will be how to maintain the required pace of project developments in the face of increasing worldwide competition for the available finance. By the beginning of the next century, it is estimated that the global annual demand for energy will be at least 10 billion tonnes of oil equivalent. But the majority of the world's proven oil reserves are located in countries which account for less than 10 per cent of worldwide demand. Similarly, nearly 70 per cent of the remaining proven gas reserves are in countries accounting for only 43 per cent of total consumption.

The location of these reserves away from their main markets means that substantial capital investment will be needed before they can be fully accessed. In the oil industry, investment will be required to: find and develop new reserves; increase refining capacity to meet the anticipated demand for oil-based products; facilitate the manufacture of light products from increasingly heavy crude oils; comply with existing and anticipated environmental legislation. The total new capital required in the oil industry in the next decade is estimated to be as much as $ 2000 billion.

The primary source of finance will be oil and gas revenues. Debt finance will continue to be available for attractive projects, but the energy business is competing for increasingly scarce finance. As a result, it is likely that the use of project finance will increase in the energy business. In view of their past experience with developing companies, lending institutions, while insisting on economic viability of the project, place even greater emphasis on favourable political conditions in the country where the project is located. More sophisticated and imaginatively structured finance and risk management tools will, therefore, need to be developed. State owned oil companies need to ensure that they are as efficient as their competitors and better able to compete successfully with private companies.

It is a well known fact that there are very few externally funded oil and gas development projects which have resulted in a loss to the financiers. The international financiers and capital markets, therefore, should regard oil and gas development projects in the developing world as relatively low-risk and be willing to meet their financial requirements without undue apprehension. The energy industry of the developed world is in a perfect position to help the developing countries; it has the technology, the expertise and the money. A balanced portfolio in terms of geographical spread, the oil and gas mix, the breadth and depth of operation (upstream, downstream and chemicals) is in the mutual interest of the developed and the developing countries.

The geographical diversification of the energy available to the world and its effective utilization for the sustained growth of the mankind requires us to look at new global linkages between the developed and the developing world. Democratization of energy affairs at the international level is, therefore, essential in order to obtain greater participation by all. To achieve these objectives of international sharing and participation, I would like to put forward the following concepts:-

Macro Linkages: With the disintegration of the Soviet Union and the emergence of the Commonwealth of Independent States (CIS), a totally new opportunity has become available to the world to more beneficially employ the vast financial resources of Middle East, the inexhaustible energy resources of the Central Asian States and the trained technical and managerial manpower available in South Asia. This triangular linkage in a contiguous land mass having a market of 1.5 billion consumers, will be able to provide a very stabilizing factor in the growth of energy industry worldwide. To implement such a linkage, a forum needs to be conceived and named as CAMESACOM (Central Asian, Middle East/South Asia Commonwealth).

Micro Linkages: Perhaps no industry has weathered more turbulent storms of change in the past 25 years than the world oil and gas industry. While soaring performance trends launched an era of unbridled growth during the 70's, plummeting profit margins created near-crippling over-capacity just one decade later. Such jarring upheavals trigger an industry-wide struggle for survival. Certain measures that could minimize turbulence and encourage equilibrium are identified as follows:-

a) Strengthening internal and external communication channels.

b) Streamlining and Integrating information systems.

c) Simplifying business processes.

I wish to conclude by saying that the developing countries would welcome any help from the developed world to implement the linkages proposed above so that we may start the 21st century with a more economically balanced world than we are today. Let it be our commitment to the future that we dedicate our utmost endeavours to achieving this objective through integrating our operations, optimising our resources and implementing our projects in the most efficient manner.
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Author:Hak, Shahid K.
Publication:Economic Review
Date:Sep 1, 1993
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