1. Learning with overseas What UK and Norway O&G industrial policy can teach Brazil May 2013

2. Page 2 Current state of NCS and UKCS (2010) Norwegian Continental Shelf (NCS)UK Continental Shelf (UKCS) Production and reserves ► Daily oil production: 2,1 Million b/d ► Daily gas production: 0.3 Billion Sm3/d ► Annual oil production: 654 Million barrels ► Annual gas production: 106 Billion Sm3 ► Remaining oil reserves: 5,2 Billion barrels ► Remaining gas reserves: 2,042 Billion Sm3 ► Global ranking: 7th (oil) and 2nd (gas) ► Daily oil production: 1.3 Million b/d ► Daily gas production: 0.15 Billion Sm3/d ► Annual oil production: 489 Million barrels ► Annual gas production: 57 Billion Sm3 ► Remaining oil reserves: 5.5 Billion barrels ► Remaining gas reserves: 520 Billion Sm3 ► Global ranking: 19 th (oil) and 15 th (gas) Contribution to the economy ► Value creation from the oil and gas in 2010: $87 billion ► Cumulative value creation since 1971: $1,485 billion ► Cumulative investments since 1971: $446 billion ► Industry ranking: Number 1 ► Petroleum sector’s share of: ► GDP: 21% ► State revenues: 26 % ► Total investment: 26 % ► Total exports: 47 % ► Net government cash flow: $45 billion ► Estimated total employment: 200.000 ► Companies with offshore acreage: 90 ► Attracts around $18.5 billion annual expenditure by industry ► Provides around $12.4 billion annually to the Treasury in taxation ► Directly and indirectly supports around 350,000 jobs (1.2% of the working population) ► 133 companies hold offshore acreage in the UK (177 including onshore licences) ► Accounts for less than 3% of national gross added value Figures relate to 2010 Sources: NPD, DECC, Wood Mackenzie, Oil & Gas UK Accelerate Oil & Gas 2013

3. Norway – industrial policy model Page 3Accelerate Oil & Gas 2013

4. Policy framework overview Page 4 Start phaseGrowth phaseMaturity phase ► Concession rounds to control the development (1965) ► The 10 oil commandments were used as a roadmap for the policy (1971) ► The establishment of Statoil and the Norwegian Petroleum Directorate (NPD) to secure the state’s interests (1972) ► The establishment of the Ministry of Energy and Petroleum to represent Norway authorities’ interests (1978) ► The development of Hydro and Saga as operators, creating Norwegian competition (1979→) ► The establishment of the States Direct Financial Interest (SDFI) to secure future revenue (1985) ► Increased focus on safety and the environment ► Policies to increase oil recovery ► An increased focus on gas and gas transportation to Western Europe ► The state loosens its grip, as Statoil became partly privatized (2001) Million barrels o.e. per year PolicyFiscalR&D Accelerate Oil & Gas 2013

5. The Norwegian model – roles and responsibilities Government ► Set strategic direction ► Derive license areas The Norwegian Petroleum Directorate – administrative function ► Creating value for the society ► Driving force for realizing the resource potential ► Advisor to the Ministry ► Policy implementation and monitoring Page 5 Ministry of Petroleum and Energy – central management ► Represents the Norwegian authorities’ interest ► Responsible for the policy making ► Award of licenses ► Funding R&D Statoil – commercial function ► State controlled ► Sliding scale mechanism ► Carried interest requirements ► Driver of innovation ► Presence of competition ► Vehicle for developing local industry capability Source: MPE, NPD & Statoil Norwegian Ministry of Petroleum and Energy Norwegian Petroleum Directorate Statoil Government PolicyFiscalR&D Accelerate Oil & Gas 2013

6. Financial frameworks and incentives Page 6 Start phaseGrowth phaseMaturity phase ► First petroleum act (1965) ► Tax incentives to attract foreign companies and stimulating exploration activity ► Carried interest agreement (1972) ► The sliding scale was introduced (1974) ► Petroleum tax act was created (1975) ► No longer a need for incentives to increase activities, but for the state to secure a higher share of the profit ► SDFI was introduced to secure future revenue for the state (1985) ► Co2 emission tax introduced (1991) ► Revision of the Petroleum Tax act to increase oil recovery (1992) PolicyFiscalR&D Accelerate Oil & Gas 2013

7. The state’s revenues from petroleum activities Page 7 ► The petroleum tax act laid the foundation for high future revenue and has ensured steady and significant growth that will benefit the Norwegian nation in decades to come ► No conflicting interest with regard to the revenue from the petroleum industry Source: NPD PolicyFiscalR&D Accelerate Oil & Gas 2013

8. Technology, innovation & skills framework Page 8 Start phaseGrowth phaseMaturity phase ► World-leading technology was not good enough for the harsh environment and Norwegian shipbuilding and marine expertise were needed; new oilfield- services companies were emerging rapidly ► The government implemented protectionism measures to enable Norwegian companies to compete (1972) ► Good-will agreements initiated by the Norwegian state (1979) ► Norwegian sea seen as a 'test bed' for new technology ► Increased focus on IOR ► INTSOK established (1997) ► Government funded research programs such as RUTH and Demo2000 (1999) PolicyFiscalR&D Million barrels o.e. per year Accelerate Oil & Gas 2013

9. 9 Norwegian industry development across the value chain (example of companies) Reservoir/ seismic Exploration drilling Project development Engineering, fabrication and installation Operations Support DrillingProduction AHTS Tanker Seismic PSVPipe layers Subsea 7 Petroleum Geo- Services Smedvig drilling SeaDrill OdfjellSolstad Offshore Deep Sea SupplyFrontlinePlayers: Rosenberg, Norwegian Contractors & Aker Aker Solutions Players: StatoilNorsk HydroSaga Petroleum Statoil PolicyFiscalR&D Present situation; a significant oilfield-services industry developed over time; 1500 companies, 350 BNOK revenues, 90.000 employees – increasing international activities and revenue Accelerate Oil & Gas 2013

10. Retrospective glance; well planned sustainable development ► Sustainable and phased development of the NCS has been governed by the 10 Guiding Principles ► The tripartite model has provided transparent governance of the sector ► Statoil has been the primary focus and agent for the development of Norwegian industry expertise and capability ► R&D funding a key to developing new technology (license funding and three-party arrangements) and hence also transforming existing companies into today’s international oilfield-services industry ► The phased licensing approach has contributed to the development of local skills and expertise and simultaneously built industry clusters along the Norwegian coast – each with it’s own strength ► A slower approach has enabled local firms to build expertise; providing an opportunity to be part of a new industry with significant breadth and width Page 10 PolicyFiscalR&D Accelerate Oil & Gas 2013

11. UK – industrial policy model Page 11Accelerate Oil & Gas 2013

12. Development of UKCS policy framework Page 12 Start phaseGrowth phaseMaturity phase ► British National Oil Corporation (BNOC) and British Gas Corporation (BGC) formed (1976 and 1972) ► Creation of Offshore Supplies Office to increase local content (1973) ► Government bail-out of Burmah Oil (1974/5) ► 51% of BNOC sold off (Britoil created – 1982) ► BGC privatized (1984) ► Government sells remaining stakes in Britoil and BP (1987) ► BP acquires Britoil (1988) ► Renewed focus on gas to offset predicted domestic supply shortfall ► Encouraging new entrants – Promote Licence introduced (2003) ► Focus on maximising recovery ► 1000th licence awarded (1999) ► PILOT established (2000) Growth phase: maximising production Start phase: encouraging exploration Maturity phase: maximising recovery Decline phase? Transitioning to other sectors Sources: DECC, BP Statistical Review of World Energy PolicyFiscalR&D Accelerate Oil & Gas 2013

13. Key policy framework learnings from the UKCS ► UK policy on the development of the UKCS was dictated by the country’s balance of payment position at the time of the first discovery of North Sea oil and the need for early revenues. ► This resulted in a rapid depletion policy that meant that the UK had to rely on the expertise of foreign companies and this slowed the development of local capability. ► The establishment and the subsequent abolishment of BNOC reflect the rapidly changing (and short- term) policy priorities of UK governments during the development of the industry. ► The main impact of the abolition of BNOC and focus on competition has been an increase in activity by smaller and niche companies in the E&P and oilfield services sectors of the UKCS ► Local companies only entered the industry at the periphery, with the key areas, such as those requiring offshore specific facilities and expertise, remaining firmly in the hands of foreign companies. ► OSO’s local content policies did very little to strengthen British performance in technological capability development, where American companies had established a considerable lead. Page 13 PolicyFiscalR&D Accelerate Oil & Gas 2013

14. UK financial frameworks and incentives Page 14 Start phaseGrowth phaseMaturity phase ► Prior to 1975, there was no specific regime for the taxation of UKCS oil and gas companies ► Petroleum Revenue Tax (PRT) introduced (1975) ► Fundamental changes in the tax regime correlated with movements in oil prices ► Desire for state to secure a higher share of the profit ► Close discussions and formal consultation between government and the UK oil & gas industry on tax changes ► Abolition of PRT for new fields and reduction of PRT rate to encourage exploration in the early 1990s ► Uncertainty surrounding decommissioning Sources: DECC, HMRC Policy Fiscal R&D Accelerate Oil & Gas 2013

15. Page 15 The state’s revenues from petroleum activities Sources: DECC, HMRC PRT removed for new fields SC introduced SC increased to 20% SC increased to 32% PolicyFiscalR&D Accelerate Oil & Gas 2013

16. Key fiscal policy learnings from UKCS ► The fundamental changes in the tax regime reflect movements in oil prices. ► Changes in tax policy have resulted in a fairly complex set of tax rates. ► The fiscal framework has generally been less stable and more complex than in Norway. ► The close discussions and formal consultation between government and the UK oil & gas industry in recent years have been the driving force for recent policy developments. ► This has enabled the tax regime to take into account the maturity of the basin. ► Decommissioning is becoming an increasingly important matter for the UKCS as the basin matures. Page 16 Policy Fiscal R&D Accelerate Oil & Gas 2013

17. UKCS technology, innovation & skills framework Page 17 Start phaseGrowth phaseMaturity phase ► Government view that oil and gas industry should fund its own technology development ► Recommendation that specialist research institution in offshore technology is established in the UK (1973)* ► Government focus on safety aspects of oil and gas R&D ► Government R&D support targeted at nuclear technology ► Government funded oil and gas R&D carried out under oversight of Atomic Energy Agency ► Government R&D support targeted at renewable energy ► Engineering & Physical Sciences Research council formed (1984) ► ITF formed (1999) ► Technology Strategy Board formed (2004) * Recommendation never fulfilled Sources: DECC, UK government archives PolicyFiscalR&D Growth phase: maximising production Start phase: encouraging exploration Maturity phase: maximising recovery Decline phase? Transitioning to other sectors Accelerate Oil & Gas 2013

18. Key technology & skills development learnings from the UKCS ► There was no coordinated UK government R&D strategy, which has resulted in duplication of effort in oil and gas technology development. ► The government’s policy emphasis on innovation was exclusively placed on corporate entities and did not entail significant investment in research or education capabilities. ► There are a number of organizations that help drive oil and gas technology development but their activities are not aligned. ► As there is little opportunity for public sector funding for innovation in oil and gas, the industry itself has had to find new ways of nurturing innovation (e.g., ITF). ► There was no systematic effort within the UK to develop education or research capabilities focused on the oil and gas sector. Links between universities and industry developed as a result of the efforts of individual academics. Page 18 PolicyFiscalR&D Accelerate Oil & Gas 2013

19. CONCLUSIONS Page 19Accelerate Oil & Gas 2013

20. Summary of key learnings Page 20 NorwayUK Policy ► 10 Guiding Principles established early ► State management and direct participation in the development of the NCS clearly established ► The tripartite model provided clear governance of the industry ► A phased approach to commercialisation of resources managed through licensing rounds ► Rapid depletion policy developed ► Laissez faire, market driven approach has predominated ► Consequently, UK has had faster commercialisation and subsequent depletion of resources than Norway Fiscal ► Tax regime has been simple, stable and transparent ► High marginal tax rate, but with very beneficial depreciation regulations to stimulate high R&D levels ► Recent changes aimed at maximizing recovery ► Tax regime has become more progressive over time in response to high oil prices ► There have been 14 major tax changes over the period 1970 to 2011 ► Recent changes aimed at maximizing recovery R&D ► Solid industry base and competence to build on ► Creation of an innovation framework for R&D and training (licenses, three-party agreements) ► Statoil played an integral role in skills transfer and local content management ► Stimulating competition and cooperation ► Oil and gas R&D not a government priority ► Local content target of 70% achieved – all companies with a UK listing counted as ‘local’ (EU regulation and local content laws are incompatible) ► Local 'champions' have emerged but without state assistance PolicyFiscalR&D Accelerate Oil & Gas 2013

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