Table of Contents

  • Three basic objectives or drivers lie at the core of the energy policies of countries belonging to the United Nations Economic Commission for Europe (UNECE). These are enhancement of energy security, the promotion of economic efficiency, and the protection of human health and the environment. Energy security has grabbed most of the headlines recently because of the significant rise in oil prices from $20 in 2003 to about $135 per barrel as of June 2008, and concerns regarding the overall tightening of world energy markets and increasing geopolitical and energy security risks. Once again, stark warnings can be heard about the sharp draw down and availability of conventional hydrocarbon resources.

  • This publication has been prepared at the request of the Committee on Sustainable Energy, United Nations Economic Commission for Europe. It is largely based on a study commissioned by the secretariat to examine the investment prospects and financing of the hydrocarbon sector in the light of the need to enhance global energy security. The secretariat is indebted to the author of the study, Terry Newendorp, Chief Executive Officer, Taylor-DeJongh, Washington, D.C., and to his colleagues. This publication would not have been possible without the knowhow and substantive input of Taylor-DeJongh. The secretariat is very grateful for the contribution George Kowalski has made to the research, writing and editing of this publication both as Director of the Sustainable Energy Division and subsequently as a consultant to the secretariat.

  • Developments in the energy market, particularly for hydrocarbons, over the last decade have contributed to an increased sense of vulnerability among countries about the future availability of reasonably priced energy. As a result, energy security is once again uppermost in the minds of the general public and policymakers, not unlike the concerns in the 1970s. These concerns have also spilled over into the strategic security and foreign policy agenda of countries.

  • The energy industry faces increasing capital requirements over the next 10 to 30 years to maintain existing capacity and develop new capacity to meet growing demand. Particularly in electric power, many emerging countries will require significant investment in generation and distribution infrastructure as demand grows in response to economic development. Similarly, developed countries must upgrade old facilities that are nearing the end of their usable lives, and will have to make significant investments in response to domestic demand for cleaner fuels and environmentally friendly technologies. Expenditures in energy infrastructure investment of nearly US$ 22 trillion through 2030 will be required, over half of which will be in the power sector

  • The host government typically plays a large role in energy investments across the value chain. At a minimum, the host government is responsible for instituting a legal and regulatory framework necessary to create a suitable environment for investment. Due to differing investment characteristics between upstream and midstream investments, this framework is often not uniform throughout the value chain. At the upstream level, host governments must enact a policy that promotes efficient and timely development of natural resources, while at the same time preserving the state’s rights to the economic value of its natural resources. At the midstream level, encouraging investment through an appropriate regulatory framework is even more important, as midstream projects often entail more complex commercial structures and derive value not only from commodity sales but also from service fees and tariffs.

  • Total capital costs throughout the energy value chain are substantial. Oil and gas investments alone will require nearly US$ 9.6 trillion through 2030, with exploration and production activities taking up over half of this amount. The total assets held by the world’s five largest IOCs (ExxonMobil, Shell, BP, ConocoPhillips, and Chevron) in 2006 were just over US$ 734 billion. This is equivalent to about eight per cent of total oil and gas capital requirements through 2030, demonstrating the magnitude of the investment needs. The specific breakdown of investment by stage of the value chain is shown in figure 7.

  • Although generalizations about NOCs are difficult to make due to the tremendous differences that exist between companies, examining case studies of those NOCs viewed as the best performers and those which face the greatest challenges can offer some lessons for determining the best course of action to be taken for ensuring energy security.

  • The following country case studies of Nigeria, Algeria, and Kazakhstan are designed to highlight the important role that governments can play in creating investment climates amenable to investment by NOCs and IOCs. As well, these country case studies outline some of the policies that have been applied to maximize the national benefit of petroleum revenues to host countries.

  • Both developed and emerging energy markets will require large capital investments of about US$ 22 trillion over the next three decades to meet the forecasted growth in energy demand. Capital, on a global basis, will be available for allocation to investment in the energy sector. The constraint is not likely to be capital (i.e. sources of financing) but the conditions under which investment can take place (i.e. the investment climate) in both developed and emerging countries.