The Global Oil and Gas Industry: Stories from the Field

The Global Oil and Gas Industry: Stories from the Field

_BOOK_Inkpen-Moffett-Ramaswamy.indb 1 5/10/17 12:24 PM

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Contents

Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix

Part 1 Energy and Government

1 Enron and the Dabhol Power Company . . . . . . . . . . . . . . . . . . . . . . . 3Enron Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Market Reform in India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5The Dabhol Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Structure of the Dabhol Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Indian Politics at the Central Level . . . . . . . . . . . . . . . . . . . . . . . . . 14Cancellation of the Dabhol Project . . . . . . . . . . . . . . . . . . . . . . . . . 18Completion of Phase I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

2 Bolivia and the Pacific LNG Project . . . . . . . . . . . . . . . . . . . . . . . . . 27The LNG Value Chain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28The Bolivian People and Privatization . . . . . . . . . . . . . . . . . . . . . . . 33Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

3 Kazakhstan’s Tengiz and Kashagan: A Tale of Two Projects . . . . . . 47Tengiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48Kashagan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

4 Dutch Natural Gas and the Groningen Field: The Creation of a New Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

Nederlandse Aardolie Maatschappij (NAM) . . . . . . . . . . . . . . . . . . 71The Natural Gas Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73Dutch Gas Policy and Fiscal Regime. . . . . . . . . . . . . . . . . . . . . . . . 75Marketing and Distribution of Groningen Gas . . . . . . . . . . . . . . . . 78Revision of Dutch Gas Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80Dismantling of Gasunie . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81Earthquakes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83GasTerra and Gasunie in 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87


The Global Oil and Gas Industry: Stories from the Fieldvi

Part 2 The Changing World of NOCs

5 Statoil’s Evolving Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91National Oil Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92Norway’s Oil and Gas Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94Statoil’s Evolution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95Statoil’s Performance: Past, Present, and Future . . . . . . . . . . . . . . 106Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113

6 Mexico and Pemex. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115Mexico and Oil. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116Pemex. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120Reforma Energética . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126The Rest of the Story . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131

7 A Russian Rhapsody: The Rise and Fall of Gazprom. . . . . . . . . . . 133The Genesis of Gazprom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134Russia: The Home Market and Consequences of State Control. . . 137Global Ambitions: “Near Abroad” and “Far Abroad” . . . . . . . . . . . 144Looking at the Future: An Ambitious Project Portfolio . . . . . . . . . 146Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149

8 China’s National Oil Companies: Restructuring the Three Dragons. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

The Origins and Evolution of China’s National Oil Companies. . . 154Going Out: The Globalization of the NOCs . . . . . . . . . . . . . . . . . 156China’s Domestic Environment: The Structure and Control of

NOCs at Home . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172

9 Nigeria and Reforming Nigerian National Petroleum Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175

Nigeria’s Gifts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175Nigerian National Petroleum Company. . . . . . . . . . . . . . . . . . . . . 178The Curse of Oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187Reform Prospects and Possibilities . . . . . . . . . . . . . . . . . . . . . . . . 195Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200


Contents vii

10 The Rise and Fall of Petrobras. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205Petrobras History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205Presalt Discoveries and a New Regulatory Regime . . . . . . . . . . . . 212New Refi neries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216Corruption and Operation Car Wash. . . . . . . . . . . . . . . . . . . . . . . 218What’s Next for Petrobras?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222

Part 3 Contemporary Challenges in Global Oil and Gas

11 Shell and the Arctic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227Oil and Gas in the Arctic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227Shell Returns to Alaska . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228The Years 2009–2011. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231Shell Finally Starts Drilling—2012 . . . . . . . . . . . . . . . . . . . . . . . . 233The Kulluk Goes Aground . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235Shell’s Arctic Exploration—2013–2015 . . . . . . . . . . . . . . . . . . . . . 238Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240

12 Australian LNG Megaprojects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243The Project Labor Challenge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244Gorgon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247Employment Structures and Strategies . . . . . . . . . . . . . . . . . . . . . 251Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255

13 ExxonMobil and Royal Dutch Shell: The Tale of Two Projects in Sakhalin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257

A Promising Phoenix Rises from the Ashes of the USSR . . . . . . . 258The Challenge of Execution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261Same Place, Same Conditions, but Different Results:

ExxonMobil and Sakhalin-I . . . . . . . . . . . . . . . . . . . . . . . . . . . 267Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271

14 TNK-BP (Russia) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273BP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274The Oil and Gas Industry in Russia. . . . . . . . . . . . . . . . . . . . . . . . 274BP’s First Foray in Russia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276BP and TNK. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277


The Global Oil and Gas Industry: Stories from the Fieldviii

Key Joint Venture Events, 2003–2007. . . . . . . . . . . . . . . . . . . . . . 286Events of 2008: Can the JV Survive? . . . . . . . . . . . . . . . . . . . . . . 289BP’s Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 292Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 294

Part 4 The Disrupters

15 Ghana and Kosmos Energy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297Kosmos Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 298Ghana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300The Jubilee Field . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301Oil and the Ghana National Petroleum Corporation . . . . . . . . . . 306Jubilee’s Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 313Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 314

16 Mitchell Energy and the Shale Revolution. . . . . . . . . . . . . . . . . . . 315Shale Exploration: The Early Years. . . . . . . . . . . . . . . . . . . . . . . . . 316George Mitchell and the Birth of Mitchell Energy . . . . . . . . . . . . 317Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329

17 Reliance Industries (India): Rewriting Strategy in the Downstream Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331

Reliance Industries: The Genesis . . . . . . . . . . . . . . . . . . . . . . . . . 333The Decade of the 1990s: From Chemicals to Oil Refi ning and

Beyond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 338Mukesh Ambani and the Growth of the Reliance Empire. . . . . . . 343Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 352

18 Delta Airlines and the Trainer Refi nery . . . . . . . . . . . . . . . . . . . . . 355Delta’s Dilemma. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 356The Structure and Profi tability of US Refi ning . . . . . . . . . . . . . . . 356East Coast Refi neries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 361Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 368Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 369

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .371

About the Authors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .389


ix

Preface

Much has been written about the oil and gas industry over the years, so it is a legitimate question to ask, “Why another book on the oil and gas industry?” The thinking behind this book grew from our vantage point as educators and researchers with a deep interest in the global dimensions of the industry. Our perspective has been honed through decades of experience and discussion, on the ground and in the classroom, with industry professionals in executive programs for oil and gas executives, field studies from Kazakhstan to Norway to Chad; speaking engagements at industry forums; and rich interactions with industry experts as part of our own research programs. From these cumulative experi-ences and exposure to the industry, it became apparent that there are distinct and important pockets of knowledge about the role of oil and gas companies, the contexts they populate, and the technological innovations they have pioneered. It also seemed to us that a comprehensive discussion of the complex interac-tions between the discrete knowledge domains, such as external relations and governmental affairs, societal impact and community development, sustain-ability and environmental citizenship, economic viability and shareholder value, were quite rare or missing altogether. While much has been written about how the firms in the industry ought to operate, there is little on how they actually do operate. How do they set strategies, manage multiple stakeholders, and develop complex projects in places that seem to be inaccessible, within an industry that constantly challenges received wisdom? This book seeks to address this gap.

The book is a compendium of “stories” that illustrate, define, and analyze the key challenges facing the industry. It is organized around four key themes, with each theme related to the structure and operation of the global oil and gas industry. It opens with a series of stories that illustrate the macroeconomic forces that impact the industry, encompassing issues including governmental priorities, economic growth and poverty reduction, and creating new market structures. It then successively narrows the focus to individual firms in specific contexts dealing with critical decisions. For example, in exploring the theme of the national oil companies and the changing world in which they compete, we illustrate the competing pressures using studies covering companies with very different strategies, structures, and performance, such as Gazprom in Russia, Statoil in Norway, and Petrobras in Brazil. We explore contemporary challenges facing the industry, such as the incidence of megaprojects and their unique demands, the technical challenges of exploring in the Arctic, and the political challenges of doing business in frontier regions. The book closes with a series of studies that showcase “disrupters,” or oil and gas companies that have gone against conventional wisdom to establish competitive positions in the industry.


The Global Oil and Gas Industry: Stories from the Fieldx

Using stories drawn from Reliance in India, Kosmos in Ghana, and Mitchell Energy in the United States, the book provides a nuanced picture of the ways in which disrupters have challenged orthodoxy in what is widely seen as an estab-lished and mature industry.

Because of the complexity of the industry, we have chosen to stay away from generic frameworks or simplifying mechanisms. Such approaches can diminish the complexity associated with the industry and force readers to subscribe to a generalized view of best practice. Instead, we let the subtleties and complexities play out in the stories presented. Having worked with companies from across the globe, we have seen that some of the sources of complexity present in this industry defy easy solutions. Our goal is to present the stories objectively and allow readers to learn from the experiences of the various companies involved. Accompanying each story, we provide a postscript discussing the events that followed after the end of the case time frame. The postscript notes include some general observations and lessons from the case studies. We have tried to tread a middle path between guiding the reader toward a set of conclusions derived from the stories and the presenting the stories as a series of events without thoughtful analysis or discourse. We believe this fosters self-discovery and a healthy intellectual debate that must precede any distillation of meaningful lessons learned.

The stories presented cover a wide swath of the globe where oil and gas companies operate. We provide a wide range of events, experiences, and managerial challenges independent of geography. The stories encompass organi-zations large and small, novel and traditional, and state- and privately owned. They cut across the distinct components of the industry value chain from upstream to downstream. Our intellectual journey has generated insights into an industry of tremendous importance to the contemporary world. It is our hope that readers will also walk away with equally enriching insights about the oil and gas companies and the complex world that they populate. The readers who should fi nd this book useful include the following:

• Oil and gas industry professionals, including general staff, management, and professional and technical personnel interested in learning more about their current industry

• Public and private sector individuals engaged or associated with the global oil and gas industry, including regulators, policy makers, consul-tants, journalists, and government employees

• Business students in energy programs and oil and gas industry courses • The general public interested in learning more about one of the world’s highest profi le and most global industries in greater depth from a business perspective, not a technical one


3

1

In September 2001 Enron Corporation (Enron) was embroiled in a long-running dispute with various levels of government in India. The dispute involved the

Dabhol Power Company (DPC), the manager/operator of a 2,184-megawatt (MW) power project in the Indian state of Maharashtra. With Phase II of the multibillion dollar project 95% complete, Enron announced that it would sell its DPC stake due to payment disputes with its sole buyer, the Maharashtra State Electricity Board (MSEB), and the failure of the Indian central government to honor its counter-guarantee.1

In response to the ongoing dispute, Enron CEO Kenneth Lay sent a strongly worded letter to India’s Prime Minister Atal Bihari Vajpayee, questioning the government’s willingness to honor its contracts and its future ability to attract foreign investment. Lay wrote:

Our experience would indicate that contracts with governmental authorities in India really do not seem to represent anything more than a starting point for a later renegotiation and are broken by Indian govern-mental authorities whenever and as often as they prove inconvenient or burdensome.

Enron Corporation

Houston-based Enron, formed in 1985 in a merger between InterNorth, Inc. and Houston Natural Gas Corp., was involved in various worldwide energy industries. In the 1990s Enron coined the slogan “Creating Energy Solutions Worldwide,” and its stated vision was to become “the world’s leading energy company—creating innovative and effi cient energy solutions for growing

Enron and the Dabhol Power Company


The Global Oil and Gas Industry: Stories from the Field16

had always been opposed to the project for various reasons, including the social and environmental aspects, alleged bribes, the project’s cost, and the lack of competitive bidding. The BJP/Shiv Sena campaign strategy painted the Congress (I) Party as antipoor, corrupt, and partial to foreign fi rms. This platform evidently appealed to Maharashtrians. On March 13 the election results were announced. The BJP/Shiv Sena coalition won 138 of 288 seats in the election and, with the help of several independent members, formed the new government. The Shiv Sena’s Manohar Joshi became the new chief minister.

Not long after the election, Enron CEO Kenneth Lay noted, “If something happens now to slow down or damage our power project, it would send extremely negative signals to other foreign investors.”14

Construction beginsOn March 2, 1995, Enron completed the fi nancing for Phase I of the Dabhol project.

Phase I fi nancing would come from the following sources:

• A 12-bank syndication led by the Bank of America and ABN-AMRO (loans of $150 million)

• US Export-Import Bank ($300 million; arranged by GE and Bechtel) • The United States–based Overseas Private Investment Corp. ($298 million) • Industrial Development Bank of India ($98 million)

Construction was soon underway. But, almost simultaneously, the new state government in Maharashtra, in keeping with its campaign promises, decided to put the project under review.

The Munde CommitteeOne week after coming to power, Deputy Chief Minister Gopinath Munde,

who was also the state BJP president, ordered a review of the Dabhol project. The committee formed to carry out the review had two members from the BJP and two from the Shiv Sena. Munde, a known critic of Dabhol, was the committee chair. An open invitation to individuals to appear before the committee was followed up by letters to the MSEB and Dabhol Power Company. The committee was scheduled to submit its report by July 1.

Over the next few months, the committee held more than a dozen meetings and visited the site of the power plant. The committee was assisted by fi ve state government departments: energy, fi nance, industries, planning, and law. All requests for appearances before the committee were granted. Among those making depositions were environmental groups, energy economists, a former managing director of the Mumbai Suburban Electric Supply Company,


2 | Bolivia and the Pacifi c LNG Project 37

As a result of the congressional selection of Sánchez de Lozada over Evo Morales in August 2002, the newly formed government was a coalition. The coalition had three widely publicized objectives: (1) economic reactivation (fi scal stimulus); (2) elimination of governmental corruption; and (3) social inclusion, specifi cally the voice of the indigenous peoples. By February 2003 the situation had worsened. Bolivian President Sánchez de Lozada had proposed an income tax of 12.5% on the Bolivian middle class to fi ll the growing government defi cit. Evo Morales and his followers objected. Riots ensued in La Paz, resulting in a number of deaths. Sánchez de Lozada’s government, which had acknowledged publicly that it supported the Chilean pipeline route, held on to its power by the smallest of margins.

The Camisea threatThe lack of decision of the port by which the Bolivian gas should be exported is causing a strain in the agreement between the Consortium and Sempra Energy, the main issues being the price at the delivery point that would vary depending on which port is chosen. The exclusivity agreement is also in play, if Bolivia misses this window of opportunity it would have to wait � fteen years before it would be able to attempt to enter the California market again, making Bolivia dependent on Brazil as its main purchaser of natural gas. The most pressing matter is that there are four other countries competing for the California market, such is the case of Peru (Camisea), Russia (the Sakhalin Islands), Australia (Western Shelf), and � nally Indonesia (Botang). Camisea of Peru is the more developed in regards to the project than Bolivia, and the Sakhalin Islands is the one that has the most advantages, as it is closer to the California coast, and it already counts with a liquefaction plant.

—“Pacifi c LNG Project,” Indacochea & Asociados, Abogados, October 2002

In March 2003, in an attempt to provide a third-party opinion, the Bolivian government published the results of an independent consulting company’s assessment of the pipeline path alternatives. The report, produced by US consultants Global Energy Development, supported the Chilean path. Without committing, the Bolivian authorities publicly acknowledged that the Chilean pipeline route made more economic sense. The report also noted the compet-itive threat posed by Peru’s Camisea fi eld.

Camisea was a large gas deposit in the Ucayali Basin, on “the wrong side of the Andes” as it was often described. Located deep in the cloud forest in eastern Peru, natural gas had been discovered by Shell in 1981 in two fi elds, San Martin and Cashiriari, situated on opposite banks of the Camisea River. The devel-opment rights were originally held by a JV between Shell (UK/Netherlands)


The Global Oil and Gas Industry: Stories from the Field58

By 2010 Tengiz was exporting 400,000 bopd via the CPC Pipeline (at capacity) and another 300,000 bopd (plus sulfur and liquefi ed petroleum gas, LPG) by rail.9 The rail routes were complex: 200,000 bopd went north around the Caspian and across Russia to the Black Sea, while the other 100,000 bopd traveled south to a Kazakh port on the Caspian and then across the Caspian Sea by barge to Baku. From there it was loaded once again on railcars for passage to the Black Sea port city of Batumi in Georgia. Rail transportation continued to be costly, roughly $6/bbl, and capacity limits were in sight.

The Russian government announced it would soon begin the expansion of the CPC. TCO responded soon after that it would begin a major expansion of Tengiz, estimated at $16 billion, but only if a number of other new issues were settled with a variety of government ministries. Issues to be settled included the following:

• Export tax. The Kazakh Oil and Gas Ministry announced in July that it was re-imposing an export tax on all hydrocarbons, and Tengiz would have to pay. Previously the JV had not been subject to the tax. TCO argued that it had a permanent exemption under its operating agreement.

• Illegal production. The Oil and Gas Ministry launched a criminal investigation against TCO in July for what it termed “illegal production,” for producing oil and gas from depths at Tengiz not allowed under its production agreement. TCO argued that the production agreement had no such restrictions.

• Illegal fl aring. The Kazakh Environmental Ministry imposed a $1.4 million fi ne on TCO for gas fl aring. TCO, which had recently fi nished a $258 million investment in gas capture and recycling facilities, explained that the fl aring was the result of an emergency situation.

• International employee work permits. The Kazakh Labor Ministry announced in August that all international employees of TCO would be required to have both work visas and work permits. The work permits, never required before, were customarily much more diffi cult to obtain.

Despite Chevron’s continuing problems with the Kazakh government and the diffi culty in producing and moving ever-greater volumes of crude from Tengiz, the development was an economic windfall to Kazakhstan. As illustrated in Figure 3–4, cumulative payments to Kazakhstan totaled $15 billion in 2013, roughly 10% of the country’s GDP. Since start-up, TCO had contributed $90 billion to Kazakhstan.


4 | Dutch Natural Gas and the Groningen Field: The Creation of a New Industry 79

by local governments, later to be transformed into local, government-owned private companies.

Consumers had to be convinced to use natural gas, and their cooking, hot water, and heating appliances would have to be converted. By 1969 about 80% of Dutch houses were connected to the grid and 60% were heated with gas. Gas was also accepted very quickly by industrial users and by the agricultural sector, especially greenhouses. This was followed by the rapid development of a large export-oriented greenhouse agricultural industry. The power sector converted to natural gas much faster than originally expected.11

A challenge in building a gas market is to balance supply and demand in such a way that there is optimal capacity utilization to cover high fi xed costs while maintaining a suffi cient profi t margin. Since the Groningen gas would be used for domestic heating, there would be large seasonal variation in demand. A seasonal pattern creates challenges for the coordination of marketing and investment planning for production and transport capacity.12 Fortunately, the geology of the Groningen fi eld and the investment in production capacity allowed for a balance in supply and demand. Rather than building expensive storage capacity, the Groningen fi eld itself was used for storage.

Export marketsTo create exports markets, Shell and Exxon concluded that pipelines should

be built from the Dutch border into Belgium, France, Germany, and other European countries. If successful, this would be the beginning of an integrated European gas network.

When Shell and Exxon began their European marketing efforts, NAM had not yet received a production concession, and it was by no means assured that the parent organizations were prepared to commit to the large investment necessary for pipeline construction. Not surprisingly, the initial response from Belgian, French, and German gas companies was, “Shell and Exxon will never market gas in our territory.”

Getting past the initial negative response required long and complex negoti-ations. Ultimately, Shell and Exxon prevailed by convincing the governments and gas companies that an integrated approach, with large companies playing a key role in creating the market, could be very profi table. Shell and Exxon ended up with major stakes in Distrigas in Belgium and Ruhrgas and Thyssengas in Germany, and gas was being sold to Gaz de France. Dutch gas exports to Germany started in 1964. Exports to Belgium commenced in 1966, and exports to France followed in 1967. In the 1970s, export contracts were signed in Italy and Switzerland. Since the late 1960s, between 30% and 40% of Dutch gas has


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