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.
Author(s): Xiaoyi Mu
Series: The Economics of Big Business
Publisher: Agenda Publishing
Year: 2019
Language: English
Pages: 240
City: Newcastle upon Thyne
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
