Economics of Oil & Gas

8/13/2019 Economics of Oil & Gas

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Economics of Oil & Gas

University of Petroleum

&

Energy Studies

10thMarch 2013
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Curtain Raiser

Structure of Oil & Gas Industry and Value Chain

Price behavior of Crude Oil & Natural Gas

Demand & Supply of Oil & Gas

Refinery Margin & Capacity

Key Players in the Industry

Energy Outlook


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Role of Oil & Gas

Fossil fuels still dominate energy consumption, with amarket share of 87%.

Renewable energy continues to gain but today accountsfor only 2% of energy consumption globally.

Meanwhile, the fossil fuel mix is changing as well. Oil, stillthe leading fuel, has lost market share for 12 consecutiveyears.

Coal was once again the fastest growing fossil fuel, withpredictable consequences for carbon emissions.


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Oil & Gas Value Chain


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Economic Composition ofOil and Natural Gas Industry

Oil and gas extraction (including NGL extraction) Drilling oil and gas wells Support activities for oil and gas operations

Natural gas distribution Oil and gas pipeline and related structures construction Petroleum refineries Petroleum lubricating oil and grease manufacturing Asphalt paving, roofing, and saturated materials manufacturing Petroleum and petroleum products merchant wholesalers Pipeline transportation Gasoline stations Fuel dealers


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Crude Oil Value Chain

from Wellhead to Gasoline Pump

Exploration Production Transportation Refining Marketing

Using

technologyto find new

oil resources

Bringing oil

tothe surface

usingnatural

andartificialmethods

Moving oil to

refineries andconsumers

withtankers, trucksand pipelines

Converting

crude oilinto

finishedproducts

Distributing

and sellingrefined

products

ComplexitiesGlobal Industry, few dominant producer, high technology and high capitalLinked to national developmental initiative, global environmental impactLimited natural resource, linked to shipping and pipeline industry, capitalmarket interface, future market
http://www.petrostrategies.org/Learning_Center/exploration.htmhttp://www.petrostrategies.org/Learning_Center/production.htmhttp://www.petrostrategies.org/Learning_Center/oil_transportation.htmhttp://www.petrostrategies.org/Learning_Center/refining.htmhttp://www.petrostrategies.org/Learning_Center/refined_product_marketing.htmhttp://www.petrostrategies.org/Learning_Center/refined_product_marketing.htmhttp://www.petrostrategies.org/Learning_Center/refining.htmhttp://www.petrostrategies.org/Learning_Center/oil_transportation.htmhttp://www.petrostrategies.org/Learning_Center/production.htmhttp://www.petrostrategies.org/Learning_Center/exploration.htm


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Natural Gas Value Chain

Specialized Supply Chain

Exploration Production Processing Transportation Marketing

Usingtechnologyto find new

oil resources

Bringing gasto

the surface

Treating gasto be sentto markets

Moving gaswith pipelinesand tankers

Distributingand sellingnatural gas

ComplexitiesEvolving Industry, local trading practices, few dominant producer, hightechnology and high capital, transnational pipeline transportation, Gas toLiquid and Liquid to Gas conversion
http://www.petrostrategies.org/Learning_Center/exploration.htmhttp://www.petrostrategies.org/Learning_Center/production.htmhttp://www.petrostrategies.org/Learning_Center/gas_processing.htmhttp://www.petrostrategies.org/Learning_Center/gas_transportation.htmhttp://www.petrostrategies.org/Learning_Center/gas_marketing.htmhttp://www.petrostrategies.org/Learning_Center/gas_marketing.htmhttp://www.petrostrategies.org/Learning_Center/gas_transportation.htmhttp://www.petrostrategies.org/Learning_Center/gas_processing.htmhttp://www.petrostrategies.org/Learning_Center/production.htmhttp://www.petrostrategies.org/Learning_Center/exploration.htm


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Cost build up of pump price of Petrol

The following tables are estimates of the various cost components thatmake up the pump price of gasoline. The tables are based on a variety ofsources and assume a crude oil price of $49/B and an average pump price

of $2.00/gallon.

OperationCosts Value Gross Margin Net Margin Percent

Exploration 2.97 16.33 16.33 13.36 36%

Production 17.78 49.00 32.67 14.89 41%

Transportation 1.00 51.96 2.96 1.96 5%

Refining 3.70 60.46 8.50 4.80 13%

Distribution 1.90 63.69 3.23 1.33 4%

Marketing 0.80 64.85 1.16 0.36 1%

Pump Taxes 19.15 84.00 0.00 0.00 0%

36.70 100%


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Investment in Oil Industry assetsOil Prices


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Cost of a well


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Where is value in the value chain?

Component $/B Cents/Gallon Percent of Pump Price

Crude Oil 49.00 116.67 58%

Operating Costs 4.90 11.67 6%

Taxes 21.65 51.55 26%

Company NetMargins

8.45 20.11 10%

Total 84.00 200.00 100%

The significant findings are that:

Over 75% of an integrated oil company's net margins are in the upstream.

Crude oil costs contribute nearly sixty percent to pump prices. Severance and gasoline taxes cost consumers nearly 52 cents/gallon or 26% of

pump prices.

Company net margins for refining and marketing are about 20 cents/gallon or10% of pump price.


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2011 a year of disruption & continuity

2011 was an unusually eventful year in global energy. The tumultuousevents of the Arab Spring shook energy markets and underscored the

importance of maintaining spare capacity and strategic stockpiles fordealing with supply disruptions.

The earthquake and tsunami in Japan was a humanitarian disaster; andone with immediate implicationsin Japan and around the worldfornuclear power and other fuels.

Oil prices hit an all-time record high. Yet the revolution in shale gasproduction drove US natural gas prices lower, reaching recorddiscounts to oil.


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Energy Consumption from non OECD

With all of these issues in play, global energyconsumption grew by 2.5% in 2011, broadly in linewith the historical average but well below the 5.1%

seen in 2010.

Once again emerging economies accounted for all ofthe net growth in energy consumption, with demand

in the OECD falling for a third time in the last fouryears.


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Dated Brent averaged $111.26 per barrel in 2011, an increase of 40%from the 2010 level.

The loss of Libyan supplies early in the year, combined with smallerdisruptions in a number of other countries.


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Production of Oil

On the production side, the loss of oil supplies in Libya and elsewhere waseventually more than offset by large increases among Middle Eastern OPECmembers, leading to record oil production in Saudi Arabia, the UAE, and Qatar.

Meanwhile, the US recorded the largest non-OPEC production increase for athird consecutive year. In my mind, it is no coincidence that the innovationsdriving the renaissance in US oil and gas production are taking place in one ofthe most open and competitive upstream segments in the world.

The example of North America highlights how competition and a level playingfield foster innovation, ultimately leading to the production of previouslyinaccessible, new, unconventional resources.


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Production of Oil

Annual global oil production increased by 1.1 million b/d, or 1.3%. Virtuallyall of the net growth was in OPEC, with large increases in Saudi Arabia(+1.2 million b/d), the UAE, Kuwait and Iraq more than offsetting a loss ofLibyan supply (-1.2 million b/d).

Output reached record levels in Saudi Arabia, the UAE and Qatar.

Non-OPEC output was broadly fl at, with increases in the US, Canada,Russia and Colombia offsetting continued declines in mature provinces suchas the UK and Norway, as well as unexpected outages in a number of other

countries.

The US (+285 tb/d) had the largest increase among non-OPEC producersfor the third consecutive year. Driven by continued strong growth in onshoreproduction of shale liquids, US output reached the highest level since 1998.


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Production of Oil in 2011


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Oil Consumption

Global oil consumption grew by a below-average 0.6 million barrelsper day (b/d), or 0.7%, to reach 88 million b/d. This was once againthe weakest global growth rate among fossil fuels. OECD consumptiondeclined by 1.2% (600 tb/d), the fifth decrease in the past six years,

reaching the lowest level since 1995.

Outside the OECD, consumption grew by 1.2 million b/d, or 2.8%.Despite strong oil prices, oil consumption growth was below averagein producing regions of the Middle East and Africa due to regionalunrest.

China again recorded the largest increment to global consumptiongrowth (+505 tb/d, +5.5%) although the growth rate was below the 10-year average. Middle distillates were again the fastest-growing refinedproduct category by volume, for the seventh time in the past 10 years.


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Refining

Global refinery crude runs increased by a below-average 375 tb/d, or0.5%.

Non-OECD countries accounted for all the net increase, rising by 685

tb/d.

While OECD throughput declined by 310 tb/d, US throughput increased(+110 tb/d) and the US became a net exporter of refined products forthe first time on record.

Global refinery capacity utilization fell to 81.2% as global refiningcapacity increased by 1.4 million b/d (+1.5%), outpacing growth inthroughputs for the fifth time in six years.


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Natural Gas Consumption

World natural gas consumption grew by 2.2%.

Consumption growth was below average in all regions exceptNorth America, where low prices drove robust growth.

Outside North America, the largest volumetric gains inconsumption were in China (+21.5%), Saudi Arabia (+13.2%) andJapan (+11.6%).

These increases were partly offset by the largest decline on recordin EU gas consumption (-9.9%), driven by a weak economy, highgas prices, warm weather and continued growth in renewablepower generation.


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Natural Gas Production

Global natural gas production grew by 3.1%. The US (+7.7%)recorded the largest volumetric increase despite lower gasprices, and remained the worlds largest producer.

Output also grew rapidly in Qatar (+25.8%), Russia (+3.1%)and Turkmenistan (+40.6%), more than offsetting declines inLibya (-75.6%) and the UK (-20.8%).

As was the case for consumption, the EU recorded the largestdecline in gas production on record (-11.4%), due to acombination of mature fields, maintenance, and weak regionalconsumption.


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Natural Gas Trade

Following the general weakness of gas consumption growth,global natural gas trade increased by a relatively modest 4%in 2011.

LNG shipments grew by 10.1%, with Qatar (+34.8%)accounting for virtually all (87.7%) of the increase.

Among LNG importers, the largest volumetric growth was inJapan and the UK.

LNG now accounts for 32.3% of global gas trade. Pipelineshipments grew by just 1.3%, with declines in imports byGermany, the UK, the US and Italy offsetting increases inChina (from Turkmenistan), Ukraine (from Russia), andTurkey (from Russia and Iran).


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Energy Outlook

Policy makers face critical choices in reconciling energy, environmental &

economic objectives

Changing outlook for energy production & use may redefine global

economic & geopolitical balances

Iraq set to play a pivotal role in global oil markets

As climate change slips off policy radar, the lock-in point moves closer &the costs of inaction rise

The gains promised by energy efficiency are within reach & are essential tounderpin a more secure & sustainable energy system


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Review of Salient points

Economics of Oil & Gas

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