1. Where Modern Petroleum Industry Got Its Start
“Colonel” Edwin Drake became the first person to drill successfully for oil near Titusville, Pennsylvania in
Demand for oil was busted by Civil War and later Growing Sales of Automobiles
End of 1800s - Huge gusher blew in at Spindletop, hill in East Texas:
TEXAS BECOMES HUB OF USA OIL PRODUCTION

2. Industry Trends and Latest Developments
Energy sector is cyclic in nature and cycles are long. Indicator of industry cycles – upstream spending.
Temporary slowdowns:
Asian economic crisis and drop in worldwide demand
Depressed post 9/11 period, when economic disruption hurt oil&gas demand.
Current fundamentals support higher prices on oil&gas
Growing margins on upstream outweigh decline in downstream profits.
Popularity of natural gas has been growing due to environmental advantages versus coal and oil.

3. Major Segments of Oil&Gas Industry
Upstream Activities
Exploration and production of oil and natural gas
Midstream Activities
Transportation, storage and trading of crude oil, refined products and natural gas.
Downstream Activities
Refining and marketing of crude oil
Local distribution companies
Participants
Majors – integrated oil and gas companies, which are involved in every aspect of the business integrated
Pure-play companies in various areas.

4. Upstream Operations: Oil&Gas Exploration and Production Process
Search for oil and natural gas by geologists and geophysicists
Once such areas are found, subsurface conditions are investigated using seismological or other techniques
Drilling & Logging
To drill – only way to know about the presence of resources
Move to next stage, if commercial amounts are encountered
Continue if the well contains commercial quantities.
Completion
One or more flow paths must be constructed for the hydrocarbons to travel between the reservoir and Earth’s surface.
Lifting
Bringing energy resources to Earth’s surface

5. Upstream Production Boom Continues
IEA: Key Energy Statistics, 2003

6. Upstream Production Boom Continues
IEA: Key Energy Statistics, 2003

7. Production Boom Driving Factors
Global Economic Growth
Forecast of GDP Growth Through 2010 – 3%;
Expected Worldwide Oil & Gas Demand Growth – 2%-3%;
Limited Excess Capacity Of Producing Nations
Annual worldwide field decline rate – 4%-6%;
Estimated capital investments in world exploration to meet the growing demand - $100 billion annually;
Higher Oil&Natural Gas Prices
Structural changes in the market (increased supply and trading liquidity – NYMEX trading from 1990) have raised the mean prices for global crude oil and US natural gas

8. Midstream Operations: Transportation and Storage of Oil&Gas
Once Extracted, crude oil&gas must be moved from the wellhead to the refinery or distributors.
Transportation Methods (means):
Internationally:
Oil: Crude Tankers or barges. Global tanker fleet – 2750 tankers with total capacity of 287,400 dead weight tones (As of October 2002 )
Gas: Occasionally natural gas is liquefied and transported internationally in LNG tankers.
On Land
Oil: Delivered to refineries with pipeline, truck or rail
Gas: Delivered to LDCs with trunk pipelines
Storages
Essential function of an efficient and reliable pipeline network, managing fluctuation in supply and demand

9. Downstream Operations: Refining and Marketing of Oil Products
Crude Oil - Complex Mixture Of Hydrocarbons
Refining – creating a variety of final products
Refining Steps: Hydro treating, Cracking, Reforming, Alkylation
Gasoline Marketing
Direct marketing by integrated oil companies at a retail station bearing the company’s name and emblem
Selling gasoline through independent marketers
Self-Serve business
24-hour point-of-sale terminals, Self service gas station

10. IEA: Key Energy Statistics, 2003

11. IEA: Key Energy Statistics, 2003

12. Downstream Operations: LDC – Gas Utilities
LDC – pipeline transmission services that bring natural gas to LDCs and other in direct consumers
LDCs own local distribution pipeline system

13. Natural Gas: The Fuel Of Choice
Environmental advantages versus coal& oil
Supporting Acts:
Clean Air Act Amendments
National Energy Policy Act of 1992
Its share in the OECD energy mix reached 23% in 2001, and is projected to increase to 28% by 2030.
However, exploiting the world’s gas resources will require massive investments in production facilities and infrastructure.

14. Key Statistics: Estimated World Oil Reserves

15. Key Statistics: Estimated World Gas Reserves

16. Organization of Petroleum Exporting Countries (OPEC) Wields Worldwide Power
Cartel, consisting of 11 nations heavily reliant on oil revenues as their main source of income.
Founded in 1960, Headquarter – Vienna, Austria
Objectives
Coordinate and unify the petroleum policies of its members, Safeguard their individual and collective interests;
Stabilize the price of oil;
Provide an efficient economic and regulated petroleum supply to oil-consuming nations
Provide a fair return on capital to those investing in the petroleum industry

17. Estimated World Oil&Gas Reserves
Oil Reserves
Year 2002
Natural Gas Reserves
Year 2002

18. Oil Price History

19. Oil Prices Today OPEC Reference Basket price:
October 29 – November 6
OPEC Reference Basket price:
Arithmetic Average Of Seven Selected Crudes
November 6 - $27.84/bbl
OPEC:

20. Natural Gas Prices

21. Natural Gas Prices Fluctuate Widely
Worsened price volatility can be attributed to:
A tightening of supply and demand conditions
Distressed trading fundamentals
Drying up of credit,
Declining liquidity,
Reduced price transparency
Weather influences natural gas prices
With the growing influence of new gasfired electrical plants gas prices and demand are more sensitive to summer temperature

22. Key Industry Ratios Prices of Oil, Gas and Refined Products GDP Growth
Most closely watched factors in the energy business
Highly important information for net exporters
GDP Growth
Energy products play a central role in economic activity, providing energy for industry, commerce and transportation
On the other hand, economic growth has an impact on demand for oil, gas and refined products

23. Key Industry Ratios (Cont’d)
Oil&Gas supply and demand
Critical factor in assessing the oil&gas industry’s outlook
US Demand on Oil
Year 2002 – mln b/d,
Expected levels: in 2003 – mln b/d,
Forecast for 2004 – 1.9% growth
US Demand on Natural Gas
Year 2002 – 21.71Tcf, 1.4% decline
Expected levels: in 2003 – 2.3% increase,
Forecast for 2004– 3.8% growth

24. Key Industry Ratios (Cont’d)
Oil&Gas inventory
Oil versus gas breakdown: company’s relative sensitivity to oil&gas prices
Refinery Capacity Utilization
Important measure of the health of refining sector
In general, high utilization rates are indicative of strong demand
Heating and Cooling Degree Days
Natural gas is consumed in proportion to extremes in temperature

25. How To Analyze Oil&Gas Company
The fortune of oil&gas industry companies are tied to overall supply/demand issues and price level;
Company Specific Factors
Oil versus gas
oil versus gas breakdown of company activity helps to understand company’s relative sensitivity to oil&gas prices.
Production volumes
Production volumes tend to fluctuate from year to year, depending on prices and economic developments
Multinational oil&gas companies tend to work for long term plans

26. How To Analyze Oil&Gas Company (Cont’d)
Reserve quality
Quality is determined by such factors as:
Geographic location of reserves relative to its potential markets,
Political and financial risk associated with exploiting them
Reserve Replacement
Measures the extent to which a company replenishes its reserve base as it is depleted by production
Reserve Life
Measures how long a company’s reserves are expected to last based on current production levels.

27. How To Analyze Oil&Gas Company (Cont’d)
Upstream performance ratio
Managing the costs of finding, developing and producing reserves is of the utmost importance to oil companies;
Finding costs – expenses of searching for new oil&gas reserves
Development cost – expenses in preparing reserves for production by obtaining access to reserves and building facilities needed
Lifting costs - efficiency of the company’s oil&gas production, the extent to which the company controls its operating costs
Costs (expressed per barrel or per-Mcf terms) are usually analyzed for 3-5 years to reflect long-term cycles
Accounting methods used to estimating costs:
Successful-efforts method
Full-cost method

28. Question?

29. IEA: Key Energy Statistics, 2003

30. IEA: Key Energy Statistics, 2003