SECTION I: Facts about Crude Oil and Gas Industry

Facts about Crude Oil and Cas Industry

Oil and Gas Industry Overview

1.1 INTRODUCTION

The oil and gas industry is one of the largest sectors in the world in terms of dollar value, generating an estimated $3.3 trillion in revenue annually. Oil is crucial to the global economic framework, especially for its largest producers: the United States, Saudi Arabia, Russia, Canada, and China.

Oil price increases are generally thought to increase inflation and reduce economic growth. In terms of inflation, oil prices directly affect the prices of goods made with petroleum products. In economics terminology, high oil prices can shift up the supply curve for the goods and services for which oil is an input. As always, there are headwinds and tailwinds, risks and opportunities, uncertainties, and foreseeable trends. We will now explore the oil and gas trends through the year 2020.

To avoid uncertainties, risks, and other opportunities that may include weakening economic growth and intensifying trade tensions all the way to political risks, one must explore global oil and gas trends. To set an example over the past decade, we have seen the heights of bullish optimism and seemingly limitless investment during the years of the $100 per barrel world, from 2011 to mid-2014, and the lows of the price crash and extended oil downturn, from mid-2014 to 2017. How do we assess the oil and gas performance in coming years and its prospects in the future?

As 2018 ended, it’s the time where it can be analyzed to figure out the status of both the oil and gas sector as well as the chemicals sector. The oil and gas sector recovered, especially the oil markets from the depths of the post 2014 downturn. Since 2016, oil prices have recovered from $40, reaching $67 in September, 2018. The recovery happened due to several factors. One of them is the success of the production restraint agreement between Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC countries, which is in force since the beginning of first half of 2017. Other factors that influenced the recovery of the oil and gas markets are the less oil coming to the market from challenged producers and the ongoing global demand growth estimated by the Energy Information Administration (EIA); the global demand grow'th for 2018 was estimated at 1.6 million barrels per day (mb/d).

1.2 CORONAVIRUS (COVID-19)

The impact of the new coronavirus (COVID-19) on demand, slowing supply growth in the United States and other non-OPEC countries, has to be considered. At the same time, global energy transitions are affecting the oil industry. Follow'ing decarburization. refiners face a big challenge from weaker transport fuel demand.

In other words, the outbreak of the COVID-19 has added a major consideration of uncertainty to the oil market forecast. Global oil demand is expected to contract for the first time since the global recession of 2009.

In addition, it is anticipated to say that a contraction in 2020 and an expected sharp rebound in 2021, global oil demand growth is set to weaken as consumption of transport fuels increases more slowly. Between 2019 and 2025, global oil demand is forecast to grow at an average annual rate of just below 1 mb/d.

It is worth to state the following observations:

  • • Exploration and production (E&P) in some parts of the world looking for oil may require complex and cutting-edge technology making exploration difficult, expensive, and highly risky. Large companies, who are well-equipped technologically and are strong financially, will venture in such cases.
  • • The prospects of the petroleum industry will be increasingly competitive in the future; which may be in line with the super majors as they possess more technical know-how and are well-prepared financially. Nevertheless, the nationally owned companies (NOCs) may be a strong match for them as they are supported by their state governments and also have the wherewithal to seek for concession.
  • • The strong desire of some countries to create their own national oil companies and the concern about energy security is likely to increase resource nationalism in the near future.
  • • From the popular saying, “change is the only constant thing in nature”, the petroleum industry has had its fair share of structural and organizational changes over the past years.
  • 1.3 GLOBAL OIL AND GAS ANALYSIS

This we may call a bird’s eye view to dig out some information on global oil and gas production and demand as well (Figure 1.1).

Global oil demand growth, 2011-2020. Source

FIGURE 1.1 Global oil demand growth, 2011-2020. Source: Oil 2020 IEA (International Energy Agency).

Regional shale development has driven increases in U.S. crude oil and natural gas production

FIGURE 1.2 Regional shale development has driven increases in U.S. crude oil and natural gas production.

Source: U.S. Energy Information Administration, March 2016.

1.3.1 Liquid Fuel Production

EIA estimates that global liquid fuels production averaged 91.8 mb/d in the second quarter of 2020, down 8.6 mb/d year over year (Figure 1.2).

1.4 GLOBAL ENERGY PRODUCTION

World energy production continued growing in 2019 (+1.5%), but stayed below its historical trend (2%/year). This is given by the Global Energy Statistical Yearbook, as shown next (Figures 1.3 and 1.4).

Global energy production

FIGURE 1.3 Global energy production.

Global liquid fuel consumption and components of annual change

FIGURE 1.4 Global liquid fuel consumption and components of annual change.

1.5 OIL PRODUCTION, 2019

List of countries by oil production

Country

Oil production 2019

(bbl/day)

01

United States

15,043,000

02

Saudi Arabia (OPEC)

12,000,000

03

Russia

10,800,000

04

Iraq (OPEC)

4,451,516

93 more rows

Following a contraction in 2020 and an expected sharp rebound in 2021, global oil demand growth is set to weaken as consumption of transport fuels increases more slowly. Between 2019 and 2025, global oil demand is forecast to grow at an average annual rate of just below 1 mb/d.

1.5.1 The Top Ten in Oil Reserves

Here are the top 10 largest oil reserves in the world by country.

  • Kuwait: 101.5 Billion Barrels. ...
  • Russia: 103.2 Billion Barrels....
  • Iraq: 150 Billion Barrels....
  • Iran: 157.8 Billion Barrels....
  • Canada: 172.9 Billion Barrels....
  • Saudi Arabia: 267 Billion Barrels....
  • Venezuela: 298.3 Billion Barrels.

More items... • Jun27,2019

Venezuela has the largest amount of oil reserves in the world with 300.9 billion barrels.

1.5.2 Top Ten in Natural Gas Production

Country Comparison > Natural gas - production > TOP 10

Rank

Country

Natural gas - productior (cubic meters)

1

United States

772,799,987,712

2

Russia

665,600,000,000

3

Iran

214,499,999,744

4

Qatar

166,400,000,000

6 more rows

1.6 STRUCTURE AND ORGANIZATION OF THE OIL AND GAS INDUSTRY

There are basically three phases of oil production:

  • 1. Pre-drilling activities (upstream)
  • 2. Drilling (upstream)
  • 3. Production (midstream and downstream)

It is noticed that the longest and typically most expensive phase is pre-drilling activities. Drilling itself occurs in two phases: drilling down to below the water table and then encasing the well hole in cement to prevent groundwater and soil contamination; and then drilling to the required depth and taking the necessary steps to stimulate upward oil flow.

The oil and gas industry involves three stages

FIGURE 1.5 The oil and gas industry involves three stages.

The oil and gas industry is best illustrated by Figure 1.5.

The stages are described as follows:

a. Upstream Unit - It consists of companies involved in the exploration and production of oil and gas. These are the firms that search the world for reservoirs of the raw materials and then drill to extract that material. These companies are often known as “E&P” for “exploration and production”.

The upstream segment is characterized by high risks, high investment capital, extended duration as it takes time to locate and drill, as well as being technologically intensive. Virtually all cash flow and income statement line items of E&P companies are directly related to oil and gas production.

b. Midstream Unit - Activities are focused on transportation, and involve moving the (separated fluids) extracted raw materials to refineries to process the oil and gas. The midstream segment is also marked by high regulation, particularly on pipeline transmission, and low capital risk. The segment is also naturally dependent on the success of upstream firms.

c. Downstream Unit - This is the refining stage which involves upgrading the products by treatment to bring them to specifications such as gasoline, jet fuel, heating oil, and asphalt.

We conclude this chapter by observing the trends that could shape the rest of 2020, setting the ground for a challenging 2021 and a nascent recovery in the early-to-mid 2020s. How can oil and gas organizations remain competitive and emerge stronger in the wake of the COVID-19 pandemic?

As we said earlier, the spread of COVID-19 has disrupted global financial and commodity markets, as well as the U.S. oil and gas industry. The year 2020 poses great challenges to oil and gas industry.

 
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