Vertical Integration Strategy Implementation Through Hybrid Upstream and Downstream Concession Agreements

Abstract

Upstream developments in prolific oil and gas fields are highly profitable and hence attract various investors/partners, whereas Downstream developments profitability is margin based and challenging under certain situations to receive similar interest for investment in the same location. Vertical Integration Strategy implementation through hybrid upstream and downstream concession agreements can help address this issue. The seventies witnessed major changes in the oil industry's structures and strategies resulting from the nationalization of oil and gas reserves. This ultimately led to a separation between the upstream sector with national oil companies (NOCs) controlling most of the world reserves and crude production, and the downstream sector with the international oil companies (IOCs) controlling the largest share of the refining and marketing aspects in the main consuming countries. In the recent past, NOCs have started forward integration of its upstream sector with downstream sector to take advantage of the synergies and increase profitability. This paper takes the strategy a step more forward by exploring the possibility of developing oil and gas assets through a hybrid upstream/downstream concession agreement that can be awarded by the host government. The model hybrid agreement is built by integrating a typical upstream concession agreement with downstream equity-based joint venture (JV) agreement. It also takes the learnings from Production Development Production Sharing Agreement (DPSA) applied in the development of a Gas-To-Liquids (GTL) asset or Liquefied Natural Gas (LNG) asset which are usually developed as an integrated upstream and downstream business model. It is also feasible to build the hybrid agreement based on upstream Production Sharing Agreement (PSA) instead of a Concession Agreement. The paper will discuss how the hybrid upstream and downstream concession agreement is built and how it will distribute the risk and rewards across the entire value chain for investors, expand the scope of investment and support in the economic development of the host country.