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Finance & Development, June 1979
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Prospects for oil and gas production in the developing world: An assessment of the financial and technical needs of the developing countries in this field in the face of increasing costs of energy imports

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
June 1979
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Etrain Friedmann and Raymond Goodman

Since the oil price increases of 1973 and 1974, the economics of energy production have changed radically. On the one hand, the price makes the exploitation of previously uneconomic resources commercially viable. On the other, it has raised the cost of importing oil to a point where many developing countries acutely need assistance to organize and finance programs to reduce their dependence. Forty-eight of the 74 larger developing countries that import oil depend on it for at least 90 per cent of their commercial energy requirements; only four (India, Korea, Pakistan, and Zambia) are less than 50 per cent dependent on oil. Oil imports of these 74 countries amounted to $14.4 billion in 1975 and are expected to reach some $38.5 billion in 1985. Although oil production is projected to increase in these countries at a faster rate than consumption (8.9 per cent versus 5.2 per cent), the absolute deficit will continue to grow.

Table 1 shows preliminary World Bank estimates of the energy balance for oil importing countries and non-OPEC oil exporters on present trends. (The “neutral” assumption is made that crude oil prices will remain constant in real terms through 1985. The non-OPEC developing countries are assumed to grow at 5.9 per cent per annum for the decade, as projected in the World Development Report, 1978.) Many developing countries are passing through the energy-intensive phase that the developed countries experienced during their time of rapid industrialization and urban growth. In fact most projections of future energy growth show that developing countries will increase consumption at almost double the rate of the industrialized countries. Therefore, unless their energy deficit can be narrowed by exploiting indigenous sources of energy more fully, scarce foreign exchange will need to be diverted to imports that would otherwise be available for investment goods.

Table 1Preliminary projections of non-OPEC developing countries’ energy balance 1975–851(In millions of barrels a day of oil equivalent)
197519801985Growth rates (In per cent per annum)
1976–801981–851976–85
Oil importing developing countries
Consumption: Oil4.335.357.204.36.25.2
Non-oil23.734.957.305.88.16.9
Total8.0610.3014.505.07.16.0
Production: Oil1.211.662.856.511.48.9
Non-oil3.624.887.356.28.57.3
Total4.836.5410.206.29.37.8
Net energy imports33.233.764.303.32.73.0
Oil imports3.123.694.353.43.43.4
Oil imports as per cent of total imports14.412.512.4
Value of oil imports (current $ billion/year)14.324.438.5
Non-OPEC oil exporting developing countries4
Consumption: Oil1.141.361.883.66.75.2
Non-oil0.490.851.3711.610.010.8
Total1.632.213.256.38.07.1
Production: Oil2.364.095.5511.66.38.9
Non-oil0.611.141.9113.310.912.1
Total2.975.237.4612.07.49.6
Net energy exports1.303.024.2118.46.912.5
Oil exports1.222.733.6717.56.111.6
Oil exports as per cent of total exports22.033.226.6
Value of oil exports (current $ billion/year)4.313.925.0
Source: Bank staff estimates.

Refers to commercial energy sources only and assumes that OPEC crude oil prices remain constant in real terms through 1985 ($11.50 per barrel in 1975). Oil importing developing countries are projected to grow at 5.3 per cent per annum in 1976-80; 6.4 per cent in 1961-85; and 5.8 per cent per annum for the whole of the decade. Corresponding growth rates for non-OPEC oil exporters are 5.5 per cent, 6.6 per cent, and 6.1 per cent; and for all non-oil developing countries the growth rates assumed are 5.4 per cent, 6.4 per cent, and 5.9 per cent. Totals may not add due to rounding.

Non-oil includes coal, gas, hydropower, nuclear power, and geothermal energy.

As indicated, the bulk of energy imports is in the form of oil; coal and gas account for almost all of the remainder.

Non-OPEC oil exporters include: Angola, Bahrain, Bolivia, Congo. Egypt, Malaysia, Mexico, Oman, Syrian Arab Republic, Trinidad and Tobago, Tunisia, and Zaire.

Source: Bank staff estimates.

Refers to commercial energy sources only and assumes that OPEC crude oil prices remain constant in real terms through 1985 ($11.50 per barrel in 1975). Oil importing developing countries are projected to grow at 5.3 per cent per annum in 1976-80; 6.4 per cent in 1961-85; and 5.8 per cent per annum for the whole of the decade. Corresponding growth rates for non-OPEC oil exporters are 5.5 per cent, 6.6 per cent, and 6.1 per cent; and for all non-oil developing countries the growth rates assumed are 5.4 per cent, 6.4 per cent, and 5.9 per cent. Totals may not add due to rounding.

Non-oil includes coal, gas, hydropower, nuclear power, and geothermal energy.

As indicated, the bulk of energy imports is in the form of oil; coal and gas account for almost all of the remainder.

Non-OPEC oil exporters include: Angola, Bahrain, Bolivia, Congo. Egypt, Malaysia, Mexico, Oman, Syrian Arab Republic, Trinidad and Tobago, Tunisia, and Zaire.

The price of oil is now high enough to cover the cost of exploiting known reserves of oil and gas that were previously uneconomical to exploit—either because they were too small, and the cost of recovery too high, or because transport was too expensive. Economic returns on these projects are likely to be very high, on average above 30 per cent. The higher oil price also justifies increased expenditures on petroleum exploration in areas which previously did not promise economic returns. It should be feasible to attract much larger flows of private capital to developing countries and in some selected cases to justify risks taken by the countries themselves.

In response to this situation, in July 1977 the Executive Directors of the World Bank approved a five-year program calling for an expansion of lending by the Bank Group in the development of the fuel and nonfuel mineral resources of member countries. Petroleum production—defined in this article to mean the production of oil and natural gas—is a new area of activity for the Bank. After a year and a half of favorable experience in this field, a further expansion of Bank lending for energy fuels was approved in January 1979. The tentative lending program, which will be reviewed annually, would rise to $1.5 billion a year (in current dollars) five years from now; it would include $1.2 billion a year for oil and gas projects and the rest for coal projects. About 60 per cent of the lending would be for production facilities and would cover on average up to 20 per cent of their total cost. The balance of 40 per cent would be for preproduction activities, contributing a larger share of the costs, perhaps two thirds on average. The total cost of the projects assisted by the Bank in FY 1983 would be in excess of $4 billion, which would represent a substantial share—about one third—of the upstream (exploration and production) investment requirements of the non-OPEC developing countries in the sector.

This article is taken from a longer study, A Program to Accelerate Petroleum Production in the Developing Countries, World Bank, 1979.

Potential petroleum resources

The oil and gas prospects for 70 developing countries are summarized in Table 2. It is based on the best available information on the size of prospective petroleum areas, onshore and offshore, past seismic and exploratory drilling activities, the existing permit and contract situation, and the outlook for exploration in the near term. It should be noted that, measured against the reserves of the Organization of Petroleum Exporting Countries (OPEC), even the “Very high” category is modest. But in terms of domestic consumption, the “Low” category may be very significant Most African countries, for example, consume less than 5 million barrels a year. The ultimately recoverable reserves of the developing countries are not known with any certainty, but a recent estimate suggests that the oil importing developing countries, whose proven reserves are now about 2 per cent of the world total (approximately 10 billion barrels), could account for as much as 15 per cent of the world’s ultimately recoverable resources, or some 200 to 300 billion barrels. (Oil resources are considered “proven” after exploratory drilling confirms the existence of measured quantities of oil that are recoverable from known fields at current prices and costs, assuming presently available technology.)

Table 2Petroleum prospects of 70 developing countries
Size of potential resources
Type of countryNumber of countriesVery high1High2Fair3Low4
Oil producer/net importer126321
Nonproducer/known reserves104231
Nonproducer/no discoveries45141030
Non-OPEC producer/exporter32100
Total7013101532
Source: World Bank data.

Very high: over 1,500 million barrels.

High: between 750 and 1.500 million barrels.

Fair: between 100 and 750 million barrels.

Low: less than 100 million barrels.

Source: World Bank data.

Very high: over 1,500 million barrels.

High: between 750 and 1.500 million barrels.

Fair: between 100 and 750 million barrels.

Low: less than 100 million barrels.

Although exploratory wells have been drilled in some 70 non-OPEC developing countries, the drilling density (the number of wells drilled per square kilometer of petroleum prospective area) is far lower than in the OPEC and the industrialized countries. The adequacy of past and current levels of exploration is a highly debatable subject as a result of differing evaluations made by specialists and potential investors of geological prospects, expected costs, and, tc some extent, of political risk. A study made for the Bank suggests that in most non-OPEC countries recent and near-term exploration levels are likely to be inadequate for their potential requirements, let alone their current needs.

Only 10 out of these 70 countries are found to be adequately explored, and 38 inadequately. Of the 23 countries that are judged to have high or very high prospects of finding viable petroleum resources only 7 have been explored adequately, 6 have been explored moderately, and the rest inadequately. Countries whose prospects warrant an increase in exploration activity include such comparatively large consumers of petroleum as India and Argentina (146 million barrels a year each), Turkey (66 million), the Philippines (66 million), Colombia (44 million), Peru (44 million), Pakistan (26 million), and Viet Nam (22 million).

The cost of exploration may be several times as much in a developing country as in the United States, since the reserves are often in remote or difficult areas and much less is known about them. At current prices the cost (mostly in foreign exchange) of an onshore exploration campaign is in the range of $10-30 million, and an offshore one, $20–50 million. Some 25–40 per cent of the cost is attributable to geological and geophysical surveys and 60–75 per cent to drilling. Estimates made by a United Nations group of experts in 1977 suggest that the additional financing requirements for petroleum exploration in the oil importing developing countries are in the order of $1 billion a year (in 1976 prices) over the period 1978–90, nearly half in countries that are presently nonproducers. This compares with an expected increase of about $7 billion for exploration in the industrial countries. Although the desirable shift of global expenditure on exploration toward the oil importing developing countries is not large—from 12 per cent to 17 per cent—and the magnitudes themselves are hardly very great, the shift seems unlikely to take place soon if left to market forces.

Problems of exploration

What is involved in finding out whether a country has commercially viable sources of petroleum? The exploratory work that has to be done before production facilities can be constructed may conveniently be divided into three stages, although in practice they often overlap: geological and geophysical surveys, exploratory drilling, and appraisal drilling. A vigorous effort to improve the available data on the location, scale, and commercial exploitability of petroleum reserves is a precondition for future increases in production.

Geological surveys are usually the first stage of exploring for petroleum. Techniques include the interpretation of aerial photographs and the sinking of boreholes to a limited depth to test rock characteristics. Geophysical prospecting is typically carried out by specialized contractors and includes reconnaissance, using aeromagnetic and gravimetric techniques and seismic work.

This phase of predevelopment is extremely important in determining the prospects for discovering commercial reserves of oil and gas and in minimizing the amount of drilling that has to be done. A study commissioned by the Bank found that most developing countries were in need of assistance for the re-evaluation of existing data, the implementation of new surveys, and the drilling of stratigraphie test wells. Accurate geological information is particularly valuable in negotiations between governments and private investors who are seeking to acquire exploration rights. A host country that can provide detailed geological information, when it opens an area for bids, increases the competition for exploration rights; the eventual exploration agreement should provide for more rapid assessment of the petroleum potential of the area. The cost of the geological and geophysical work required by the developing countries ranges from about $500,000 to as much as $5 million per project.

Exploratory drilling is a high-risk activity, but it is the only way to prove the existence of oil or gas reserves. The costs of a major drilling program can range from $10 million to $50 million per 10,000 square kilometers, and there is no assurance that a commercial deposit will be found. About 600 sedimentary basins with petroleum potential have been identified throughout the world, and drilling has been done in some 400 of these to date. The 200 basins that have not been explored are located mainly in high-cost areas: deep offshore (more than 200 meters of water), the Arctic areas, and the lightly inhabited interior of continents (for example, the mid-upper Amazon and central Africa). Many of the lightly explored or unexplored basins lie in developing countries.

The vast bulk of known reserves of oil occurs in “supergiant” fields (accumulations of more than five billion barrels). Few of the basins that have been explored in recent years contain geological structures where such large fields might be found, and none of the unexplored basins possesses geological characteristics that suggest the discovery of another “Middle East” where 24 supergiant fields have been found. A Mexican field is the only supergiant field discovered in this decade. The focus of exploration activity has therefore shifted to the smaller fields, and improvements in technology have enhanced the ability of drillers to discover them.

In principle, therefore, the prospects for increased exploration of smaller fields in the developing countries would appear to be good. However, in practice, much of the exploratory effort is confined to currently producing basins in developed countries, in the expectation that smaller, but now profitable, fields will be discovered in these basins. The advantage of working in developed countries is that the essential infrastructure is in place and that any new discoveries would be close to the markets. These circumstances probably explain much of the difference in relative drilling intensity between developed and developing countries.

A serious constraint on exploratory drilling is the shortage of risk capital for investment in developing countries, which some countries have overcome by offering attractive terms to foreign investors. In many developing countries this shortage is aggravated by the absence of a knowledgeable negotiating agency, which may lead the government to ask for terms that do not offer a reasonable incentive to the investor or, on the contrary, to accept terms that are too favorable to the latter. Countries in this position require technical assistance to collect and evaluate basic data, to improve the legislative framework in the energy sector, and to negotiate petroleum agreements, which are typically very complex and call for a high degree of sophistication. Without the technical capacity to assess the adequacy and “fairness” of the potential financial rewards offered to prospective foreign investors, developing countries will be handicapped in drawing up appropriate exploration strategies.

Appraisal drilling, usually backed by detailed geophysical surveys and engineering studies, is undertaken once a find has been made and there is a high probability of a commercial field being developed. This phase of predevelopment activity generally is not very risky. Projects that have reached the stage where appraisal drilling is required are likely to be commercially viable, and the Bank would therefore be justified in making an engineering loan or credit in the expectation that it could later be refinanced from a subsequent loan for production.

Comprehensive assistance

Under the new conditions of the supply and price of energy, developing as well as developed countries need coherent policies to address national energy needs, as well as an appropriate strategy to implement them. The various elements of an energy program have to be pulled together and fitted into the government’s economic and financial plans. Assistance is needed in many cases to create, or reorganize and strengthen, an energy planning authority and to train the necessary administrative and technical staff. Assistance is also required in some countries to revise petroleum and mineral legislation, as well as official regulations and fiscal measures that affect the energy sector.

The elements of an energy policy include a strategy that will make maximum use of the most efficient energy sources, make more effective use of existing resources, promote conservation, increase knowledge of the country’s resource potential and its development, and develop or adapt techniques for using traditional fuels, such as firewood and bagasse, more effectively. The Bank is prepared to expand both technical assistance in energy planning and lending for research and development in the more efficient use of these traditional fuels, which currently provide about half the energy requirements of developing countries and perhaps as much as 80–95 per cent of the needs of the rural population. There is wide scope for disseminating existing or adapted technology more effectively.

The Bank’s sector and subsector work, which will be geared to the expanded program for energy, will cover some 15-20 member countries annually. As a result of this work, technical assistance will be provided to help these countries draw up improved national plans and policies and to establish a capability to continue doing so on their own in a permanent way. Provision for these activities will be made in the technical assistance, engineering, and production loans and credits referred to below.

In the area of predevelopment work, over 50 countries need assistance in evaluating and updating data from earlier surveys or in commissioning new surveys. Where assistance is not available from another source, the Bank would finance such surveys with technical assistance loans or credits. Costs would range between $0.5 million and $5 million in each case. It seems that some ten countries may be receiving this form of Bank assistance annually from FY 1981 onward.

The Bank’s expanded program includes an important component to finance exploratory drilling. The Bank is ready to help and advise member governments and foreign collaborators in concluding agreements for petroleum exploration and production and also to confirm its willingness to finance the eventual production facilities, provided the project meets the Bank’s usual criteria. One such arrangement has already been concluded—the joint venture for crude oil and natural gas development between the Government of Pakistan, the Pakistan Oil and Gas Development Corporation, and Gulf Oil. The Bank has helped the parties reach agreement and has told the Government that it will consider financing the cost of production facilities, if and when a commercial discovery is made, and arranging additional financing from other sources. Other similar arrangements are under consideration.

The Bank is prepared to make loans (or extend IDA credits) to technically qualified national oil companies of developing countries—or, when these do not exist, to the government—to cover the government’s share of the costs of exploration undertaken in association with a foreign private or state-owned company that would provide the technical expertise and share the risk. In countries where such an arrangement is not feasible, the Bank would consider making a loan or extending credit to cover the costs of exploration done by an exploration company under a service contract. Because of the risk to member governments in assuming a loan for exploration, the Bank will take more than its usual care to ensure that the best technical assessment has been made of the prospects of finding an exploitable field, and that the progress of the work is thoroughly monitored.

The program also includes provision for project preparation. Engineering loans and credits would be offered to finance preappraisal drilling for fuel mineral projects; and the Project Preparation Facility would also be available to fund preparatory work within the normal limits.

In terms of finance, the bulk of the expanded program will be for production. A steady increase is proposed, rising to between 12 and 16 loans or credits in FY 1983, of which 10–12 would be for oil and gas (and 2–4 for coal and lignite). Emphasis in this and other phases will be on the needs of the poorer countries. Of the 30 projects now under preparation, 16 are in countries with per capita incomes (1976) below $500.

Since the policy was approved by the Executive Board in mid-1977, loans have been made to India, Pakistan, Thailand, Turkey, and Zaïre. In FY 1980 it is projected that nine loans will be presented to the Board for approval for production facilities—in, for example, Bangladesh, Bolivia, Egypt, and India—and six to eight loans for preproduction work, to countries such as the Congo, Liberia, Madagascar, and Morocco.

Assistance in many of the areas mentioned above is available from a variety of agencies within the United Nations system. Bilateral agencies, including the national oil companies of some industrial countries, are also in a position to help, and several have done so. The Bank will work with these agencies in order to draw on their experience and specialized knowledge and to avoid duplication of effort.

The importance of helping member countries to reduce their dependence on imports of high-cost oil hardly needs stressing. The Bank’s intention is to offer them financial and technical help over the whole range of energy fuel activities, from geological surveys to production. Of course, not all countries need help at every stage. The Bank’s role will be essentially catalytic to attract the maximum flow of private finance and technical know-how into the petroleum sector. If the Bank’s tentative program for the coming five years is fully achieved, activities financed in part by the Bank will represent one third to two fifths of the estimated investment requirements of non-OPEC developing countries in the sector.

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