The Economics of Oil and Gas (The Economics of Big Business)

"The availability of low-cost energy from fossil fuels - in particular oil - has been the driving force behind postwar global economic growth, such that the petroleum industry has some of the world's largest state- and public-owned companies. In 2015, Exxon Mobil had revenues of $394 billion (more than the GDP of South Africa) and posted profits of $32 billion. This book examines the economics of the entire value chain of the oil and gas industry, from exploration, development and production, to transportation, refining and marketing. At each stage, the key economic costs, considerations and appropriate business strategies are explored in order to provide the reader with a comprehensive understanding of the workings of the petroleum industry. The book examines some of the unique economic challenges the industry faces, including negotiating international contracts with host countries (to gain access to hydrocarbons), managing the risks of recovery, implementing cross-border pipelines, dealing with huge variations in the taxation of refined products, and reacting to the effect of price control and subsidization in the OPEC nations which can create massive volatility in pricing. In addition, the search for low-carbon fuels, the impact of shale gas, the prospect of finite reserves, and the global political realities of the competing demands of oil importing and oil exporting countries make the sector high risk, but the economic rewards can be huge. Throughout the book, the economic theory is presented in a form accessible to non-economists, and the needs of readers interested in energy policy as well as energy economics, are kept to the fore. The book is suitable for course use on programmes in energy economics, energy management, energy finance, petroleum law and energy policy, and will be welcomed by professionals working in government, industry and NGOs keen to understand the economics and business environment of oil and gas companies."--Amazon.com Cover Half-title Series information Title page Copyright information Table of contents Preface List of abbreviations 1 Introduction Why petroleum matters Physical characteristics of oil The macroeconomic and political influence of oil Channels of oil influencing the economies of importing countries The “resource curse” for exporting countries Notes 2 Exploration, development and production The technical aspects Basics of petroleum exploration Recovery methods and depletion Economic analysis of petroleum exploration Risks associated with petroleum exploration Prospect risk Contract risk Commercial risk Managing the exploration risk Expected monetary value Decision-tree analysis Development plan, rate sensitivity and the common pool problem Development plan Rate sensitivity The common pool problem and the rule of capture Modelling production Decline in the production rate Cost structure of petroleum production Allocating production over time Notes 3 Licensing and fiscal issues The main types of upstream agreements Concession agreement Production-sharing contracts Risk service contracts Economic analysis of fiscal systems Economic basis of fiscal systems Main fiscal instruments Pre-discovery signature bonuses Post-discovery royalties and production-based instruments Profit-based instruments Specific issues relating to natural gas Financial modelling of the royalty/tax system and PSCs Royalty/tax systems Production-sharing contracts Notes 4 Petroleum transportation Tankers Tanker classification Tanker chartering Flags of convenience Economies of scale in tanker transportation Major chokepoints of international oil transport The Strait of Hormuz The Strait of Malacca The Suez Canal The Panama Canal Pipelines Economic characteristics Differences between oil and gas pipelines Pipelines as a natural monopoly Trans-boundary pipeline issues The setting of transit fees Notes 5 Refining and marketing Technical background of petroleum refining The refining process Crude oil quality and product standard Refinery economics The cost structure of a refinery Economies of scale in investment Crack spread as a measure of profitability Refinery location Marketing and distribution The nature of derived demand Distribution channels Fuel taxation and subsidy Why tax fuels? Fuel price regulation and subsidy Notes 6 Natural gas Natural gas basics Natural gas demand and storage Gas as a constrained fuel Liquefied natural gas The LNG supply chain and cost structure LNG contracts and pricing Evolution of LNG markets Gas to liquids Technical background Commercial GTL plants are limited Natural gas pricing Natural gas price formation mechanisms Natural gas pricing in the United States The deregulation process Natural gas price formation through trading Gas pricing in Europe The development of a spot market in the United Kingdom Requirements for a functioning natural gas market The development of shale gas What led to the shale gas revolution? Mitchell Energy and shale gas development Notes 7 Oil prices and OPEC A brief history of oil prices From the birth of the industry to the Second World War The “As-Is Agreement” and the basing point system Postwar to the 1970s After the 1980s Economic analysis of oil price determination Price determination in a competitive market The impact of an OPEC production cut The dominant firm model Demand elasticity for OPEC’s oil Is OPEC a cartel? Modelling the short- and long-run dynamics of oil prices The two-factor model of commodity prices Modelling the cyclical behaviour of oil prices Pricing mechanisms in physical markets Price formulae in physical trading Benchmarks in formula pricing Setting the price differential Energy derivatives Energy futures The cash-and-carry model for futures prices Notes References List of figures and tables Index "The availability of low-cost energy from fossil fuels - in particular oil - has been the driving force behind postwar global economic growth, such that the petroleum industry has some of the world's largest state- and public-owned companies. In 2015, Exxon Mobil had revenues of 394 billion (more than the GDP of South Africa) and posted profits of 32 billion. This book examines the economics of the entire value chain of the oil and gas industry, from exploration, development and production, to transportation, refining and marketing. At each stage, the key economic costs, considerations and appropriate business strategies are explored in order to provide the reader with a comprehensive understanding of the workings of the petroleum industry. The book examines some of the unique economic challenges the industry faces, including negotiating international contracts with host countries (to gain access to hydrocarbons), managing the risks of recovery, implementing cross-border pipelines, dealing with huge variations in the taxation of refined products, and reacting to the effect of price control and subsidization in the OPEC nations which can create massive volatility in pricing. In addition, the search for low-carbon fuels, the impact of shale gas, the prospect of finite reserves, and the global political realities of the competing demands of oil importing and oil exporting countries make the sector high risk, but the economic rewards can be huge. Throughout the book, the economic theory is presented in a form accessible to non-economists, and the needs of readers interested in energy policy as well as energy economics, are kept to the fore. The book is suitable for course use on programmes in energy economics, energy management, energy finance, petroleum law and energy policy, and will be welcomed by professionals working in government, industry and NGOs keen to understand the economics and business environment of oil and gas companies." --Amazon.com The availability of low-cost energy from fossil fuels – in particular oil – has been the driving force behind postwar global economic growth, such that the petroleum industry has some of the world's largest companies. This book examines the economics of the oil and gas industry, from exploration, development and production, to transportation, refining and marketing. At each stage of the value chain, the key economic costs and considerations are presented in order to provide the reader with a comprehensive understanding of the workings of the industry. The book examines some of the unique economic challenges the industry faces, including negotiating international contracts with host countries (to gain access to hydrocarbons), managing the risks of recovery, implementing cross-border pipelines, dealing with huge variations in the taxation of refined products, and reacting to the effect of price control and subsidization in the OPEC nations which can create massive volatility in pricing. The search for low-carbon fuels, the impact of shale gas, the prospect of finite reserves, and the global political realities of the competing demands of oil-importing and oil-exporting countries are shown to make the sector high risk, but the economic rewards can be huge. The availability of low-cost energy from fossil fuels - in particular oil - has been the driving force behind postwar global economic growth, such that the petroleum industry has some of the world's largest companies. This book examines the economics of the oil and gas industry, from exploration, development and production, to transportation, refining and marketing. At each stage of the value chain, the key economic costs and considerations are presented in order to provide the reader with a comprehensive understanding of the workings of the industry.0The book examines some of the unique economic challenges the industry faces, including negotiating international contracts with host countries (to gain access to hydrocarbons), managing the risks of recovery, implementing cross-border pipelines, dealing with huge variations in the taxation of refined products, and reacting to the effect of price control and subsidization in the OPEC nations which can create massive volatility in pricing. The search for low-carbon fuels, the impact of shale gas, the prospect of finite reserves, and the global political realities of the competing demands of oil-importing and oil-exporting countries are shown to make the sector high risk, but the economic rewards can be huge