Petroleum Crude oil Natural gas LNG Fractionation Oil fields Dissolved gas drive Gas-cap drive Water...
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Transcript of Petroleum Crude oil Natural gas LNG Fractionation Oil fields Dissolved gas drive Gas-cap drive Water...
• Petroleum
• Crude oil
• Natural gas
• LNG
• Fractionation
• Oil fields
• Dissolved gas drive
• Gas-cap drive
• Water drive
OIL EXTRACTION
& PRODUCTION
• How was oil used after its discovery in western PA? What products did it replace?
• How geologists find oil now?
OIL EXTRACTION & PRODUCTION
•Regulation of drilling (“drilling mud” and other wastes) and refining (air pollution and other wastes)
OIL EXTRACTION
Common law
Rule of capture
Monogahela case (PA, 1907): “every landowner or his lessee may locate his wells wherever he pleases … He may crowd the adjoining [landowner] …”
OIL EXTRACTIONDoes the common law tend to ensure production at the maximum efficient rate of recovery? If not, how might we achieve this goal?
•“unitization” and “pooling” by regulation in U.S., solving the collective action problem. By single (government) owner most everywhere else.
•“secondary recovery”
How did the world oil business change in the 1970s?
Lower 48 Crude Oil Reserves & Production, 1945-2000
0
5
10
15
20
25
30
35
40
1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
Cru
de
Oil
Res
erve
s, B
illio
n B
arre
ls
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Cru
de
Oil
An
nu
al P
rod
uct
ion
, Bill
ion
Bar
rels
Lower 48Reserves
Lower 48Production
PeakProduction1970
PeakReserves1959
Economics of Oil Industry
• Shift from control by private oil companies toward state-owned companies
• Declining profitability
View of western oil companies in developing world
Nationalization
1917: Russia
1931: Mexico PEMEX
1970s: Libya, Iran
Do nations have a legal right to nationalize private assets?
“act of state” doctrine in international law
OPEC and Oil Prices:
• 10/73-3/74: OPEC embargo more than doubles world prices
• Israeli-Egypt war
• 1979-83: price more than doubles again
• Iranian revolution
• OPEC price controls
• Post 1983: declining OPEC power
What is OPEC’s goal in supply/price-setting?
What is impeding OPEC’s ability to control prices now?
Production by National Oil Companies
Source: US EIA “Hubbert’s peak”
Source:
BP
Oil Resources in Developing Countries: Political Risk
What is “political risk”?
What sort of political risks can undermine the value of a firm’s investment?
Nationalization/expropriation Policy change (regulatory; monetary) Terrorism/war/civil strife
“concessions” Lease term & lessee duty
to produceAbsolute ownership of
subsurface
How can firms contemplating investment in developing countries predict political risk?
Timeline
Early 20th c: rapid growth of international oil industry
1930s-70s: Latin American nationalizations
1960: OPEC formed
1960s-70s: Middle east nationalizations
1973: first oil crisis in US; price controls instituted
1977: second oil crisis in US
Oil Resources in Developing Countries: Political Risk
Assessing/Predicting Risk:
• “Grand Tours” approach
• “Old Hands” approach
• Quantitative analysis
• Qualitative analysis: “Delphi” technique
Do you think political risk is predictable?
Oil Resources in Developing Countries: Political Risk
“corporate managers came to view risk analysis as an ‘ivory tower exercise,’ rooted in academic theory rather than managerial practice.”
HBS Note on Political Risk
Then how do companies (or their investors or insurers) decide when political risk is too great? What characteristics do you think are correlated with political-legal stability, or negatively correlated with political risk?
Oil Resources in Developing Countries: Political Risk
What should investors look for?
1. Veto points in the policy process (e.g., divided government, separated powers, federalism)?
2. System stability, but political change?
3. Strong independent bureaucracy & judiciary?
In other words, “credible commitments against arbitrary policy changes”: e.g., “takings clause”?
How can corporate managers manage political risk?
Oil Resources in Developing Countries: Political Risk
• Insurance
• Sharing risk with host nation
Do you think something like the World Bank’s risk guarantee for investment in electric infrastructure could work for oil exploration? Is it needed? Should the World Bank be in the business of reducing investor risk?
Modern Petroleum Agreements: 3 approaches
1. Legislatively-prescribed terms
2. Delegation to national oil company
3. Hybrid system
Standardization equal treatment Rigidity (how?) Government bargaining power?
Flexibility best deal (how?) Comparison problems potential corruption or discrimination
Modern Petroleum Agreements
Selecting contractor/developer:
What are the differences between these approaches? What are the advantages/disadvantages of each?
• Discretionary licensing
• Auction
• Open Competition
Modern Petroleum Agreements
What are the important differences between these different methods of foreign participation in developing domestic oil resources?
• Licensing/concession
• Joint venture
• Production sharing agreement
• Service contract