Understanding the oil business PSO
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“Understanding the Oil Business” Or “Economics of Crude Oil” Bilal Ilahi PSO nov. 2010
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Transcript of Understanding the oil business PSO
“Understanding the Oil Business”
Or
“Economics of Crude Oil”
Bilal IlahiPSO
nov. 2010
BILAL ILAHI
Educational Qualification:1977: Masters in Business Administration .
(U.S.A).1973: B Com. Punjab University (Hailey
College).
Work Experience:2006-Present: Business Consultant & Trainer.1991-2005: Self-Employed. CEO, Granada Textile Mills (19, 000 spindles ).1988-1991: Self-Employed. CEO, METROCON (Construction Firm). 1980-1988: Self-Employed. Owned and managed motels/hotels in U.S.A.1978-1980: Officer, BCCI.
Teaching Experience:2002- Present: Taught MBA, EMBA , BBA , classes at LUMS, Beacon house Business School / Curtin University Lahore, Government College University Lahore & ICBS Lahore, as part of their visiting faculty.
Also on the visiting faculty of The Civil Services Academy and NIPA.
Corporate Training Experience:2007-Present: Conducted Seminars and Workshops for Institute of Chartered Accountant’s of Pakistan, MCB, Bank of Punjab, UBL, Bank Alfalah, ABL, NBP, HBL, NIBAF and PSO.
Other:Global markets analyst for CNBC Pakistan, Business Plus, Dawn TV, Aaj TV etc.
Crude Oil Price 1. Supply. 2. Demand.
GASOLINE / PETROL PRICES
Demand for Cars 1. China,& the world based on GDP growth. 2. Peak Pollution in 2015 ie. Global warming.
378,799.
372,824.
355,782.
291,438.
230,200.
210,783.
201,516.
187,279.
182,347.
178,558.
177,167.
176,656.
172,468.
U.S.A
U.S.A
NETHERLANDS
BRITAIN
JAPAN
U.S.A
NETHERLANDS
FRANCE
U.S.A
U.S.A
GERMENY
U.S.A
U.S.A
WAL – MART STORES
EXXON MOBILE
ROYAL DUTCH SHELL
BP
TOYOTA MOTORS
CHEVRON
ING GROUP
TOTAL
GENERAL MOTORS
CONOCOPHILLIPS
DAIMLER
GENERAL ELECTRIC
FORD
1
2
3
4
5
6
7
8
9
10
11
12
13
$countrycompanies#
FORTUNE 500 - GLOBAL. 2008.
Energy security
Food security
Water security
These 3 are connected !!
Energy EquationEnergy = Crude oil
+Natural gas +Coal +Nuclear+Renewable energy (hydro electric + wind+ solar+ hydrogen fuel cell)+Alternative fuels (ethanol + bio fuels+ tar sands
also . . called synthetic crude) .
Some Related Definitions and Terms
• Fossil fuel: Crude oil + Natural Gas + Coal
• Hydro-carbons: Release their energy when burnt e.g. Crude Oil + Natural Gas .
• Bio-fuels: Ethanol + Bio-diesel • Alternative fuels: Ethanol + Bio-
diesel + tar sands• Renewable Energy: Hydro-electric +
Solar + Wind + Hydrogen fuel-cell.
World Energy Consumption
Country % of Energy Consumed
% of World Population
U.S.A 25.0 4.6
China 9.9 21.2
Russia 7.0 2.5
Japan 5.8 2.1
Germany 3.9 1.3
India 3.1 16.6
France 2.9 0.9
U.K 2.6 1
Canada 2.5 0.5
Korea 1.9 0.7
•The share of CRUDE OIL in Pakistan’s total imports is 23 %.We import 82 % of our needs.
•Pakistan’s CRUDE OIL import is the prime cause of our TRADE DEFICIT and CURRENT ACCOUNT DEFICIT.
Globally 1% economic growth (GDP growth) needs more than 1% growth of energy use. Energy consumption growth is led by CRUDE OIL and gas.
Pakistan’s case ?
Our sustainable GDP growth !
•Increase in the price of oil (64 % in ’07) contributes to global inflation.
Eg. increased petrol & transport cost & higher prices of 4,000 bye-products like plastics , polyester, PET bottles, bitumen, coal-tar etc.
Decoupling from CRUDE OIL (and emphasizing alternate sources) is long term plan and impossible without economic slump and mass unemployment. Future of “internal combustion engine”.
Crude Oil is a one time resource and therefore a depleting resource.
Crude oilUses
–Refined into gasoline or petrol.–Refining by-products are LPG,
kerosene etc.–Non-fuel by-products are
lubricants, asphalts etc–End products are 4000 plus e.g.
plastics, synthetic fibers, chemicals, fertilizers …. etc.
Types of Oil
There are 161 different internationally traded crude oils. They have different characteristics quality and market penetration.
Cont…• West Texas Intermediate (USA).
……..Underlying oil for NY Light Sweet.– API gravity (density) 39.6 (light crude)– Sulphur contents 0.24% (sweet)– A very high quality oil. Excellent for refining,
a larger portion of gasoline• Brent (UK-North Sea)
– API gravity 38.3 degrees (light crude)– Sulphur contents 0.37% (sweet)– Less sweet than WTI ideal for making
gasoline and middle distillates.
Contd…
Light sweet crudes are preferred by refiners because of their low sulfur content and relatively high yields of high-value products such as : 1.gasoline 2.diesel fuel 3.heating oil 4.jet fuel
Worlds Heavy oil reserves are twice as much as Light crude oil.
Cont…
Brent and New York Light Sweet are benchmark oils. The underlying commodity for N.Y. Light Sweet is WTI.
Prices for other crude oils are set at differential to them.
Other oils are Saharan blend (Algeria), Minas (Indonesia), Bonny Light (Nigeria) Arab light (Saudi-Arabia), Fatah (Dubai).
Classified as light medium or heavy according to API gravity.
Measurement of Oil
1 Barrel = 159 liters
RESERVES
PRODUCTION
CONSUMPTION
Reserves
• Total Endowment 2 trillion barrels approx.
• Drilled to date 850 billion barrels
• Reserves (proven)+ 950 billion barrels
• Located and found=1,800 billion barrels
Cont…
• 66 % of reserves are in Muslim countries while USA has 3% only.
• Saudi-Arabia and Iran have 25 % and 10% respectively.
%age Oil Reserve
25%
10%
10%
10%9%
6%
6%
5%
3%
2%
2%
2%
10%
Sudi Arabia
Iraq
UAE
Kuwait
Iran
Former USSR
Venezuela
Mexico
USA
China
Libya
Nigeria
Others
Production.
Arrival of worlds PRODUCTION PEAK…..88 mn. bpd. Beginning of the final energy crisis ?
Slack in production capacity provided by mostly Saudi Arabia.
Exploration / Finding Costs . . (to develop oil fields) Vary substantially by region. Range from $5.26/barrel in the Middle East . .. to $63.71/barrel for U.S. offshore.
Drilling / Production Method
Primary methods. .. Natural lift, based on natural pressure eg Mid-East sufficient over long period. .. Artificial lift, by mechanical pumps. Secondary methods. .. Water flood, ie injection of water Tertiary methods. .. Injecting steam, carbon dioxide etc.
In USA : Primary methods =40% of production. Secondary methods = 50%. .. Tertiary methods = 10%
Drilling Cost Drilling costs are different in different areas
2006.
- Africa = $ 4 per barrel
- USA = $ 7 per barrel
- Canada = $ 8 per barrel
Off-shore drilling (On Continental Shelf )
Compliant Towers. With piled foundation. For depths of 1,500-3,000 ft.
Semi-submersible Platforms. Floating with buoyant legs + cable anchors. Can be moved. For depths of 600-6,000 ft.
Jack-up Platforms. Can be jacked up above sea using legs. For low depths.
Floating production systems / Drillships.
Consumption
2007 Consumption 86 million bpd.
USA consumes 25 % of worlds production,60% of which is imported.
40% of worlds supply comes from OPEC. Daily ceiling of 27 mn. bpd.
Price
• Internationally the price of oil is set in US dollars per barrel, by the forces of demand and supply.
• The most important oil market is NYMEX (New York Mercantile Exchange).
Demand Factors
Oil demand is dependent on:
1.Global economic growth.
2. Falling $. Makes oil more attractive for holders of appreciating currencies like Euro. Hence demand goes up.
3.Changes in technology ie. solar power.
Demand Factors. contd..
• USA summer driving season (memorial day to labor day)
• US north east winter season
• China
• India
USA.
US summer driving season. Extra volumes are made for “summer driving season”. Prices go up by 20 cents ( Jan-May) even when crude oil is stable.
US Northeast winter season.
Contd..
China.
Expected to overtake Japan as the 2nd largest crude oil importer.
Doubling time for oil demand was 7 years.
India.
Speculators.
Hedge funds & Pension Funds. Investment Banks for diversification.
Drove up oil prices beyond $100 in 2008. July ’08 oil touched $147 per barrel
Supply Factors
Supply interruption of more than 5% for over 6 months creates a crisis in the oil markets.
Supply Factors• Saudi Arabia.• Iraq, Iran, Nigeria.• OPEC.• Venezuela.• Choke points• Hurricane season. • Tanker capacity & Refinery capacity.• Strategic reserves of USA, Japan &
India.
OPEC
13 members.
Produces 40 % of worlds oil.
Mostly Muslim countries.
Also Venezuela, Angola and Ecuador.
Iraq, now not part of production quotas.
Supply Factors• Saudi Arabia.• Iraq, Iran, Nigeria.• OPEC.• Venezuela.• Choke points• Hurricane season. • Tanker capacity & Refinery capacity.• Strategic reserves of USA, Japan and
India.
CHOKE POINTSOil consumption occurs mainly in the industrialized west
0il production takes place largely in the middle east.
Huge oil volume traded internationallyBy pipe line 40% - transcontinental By tankers 60% - intercontinental
(3500 tankers)
Choke point is a geographical feature. Same as a bottle neck. They are narrow and theoretically can be blocked. Threat comes from hostile governments, terrorist groups, and piracyEffects of closing of choke points are increased costs because of transit time increase and tankers capacity tie up.
Strait of Hormuz • It has two 1-mile-wide channels for
traffic.
• Only passage to the Indian ocean.
• 40 % of world's oil supply passes .
• US receives 12% of its oil and Western Europe & Japan get 25% & 66% of their oil respectively.
• Also 15% of the world's commerce is routed through Hormuz.
Straits of Malacca• The Straits of Malacca is a narrow,
500 miles stretch of water between peninsular Malaysia and Indonesia.
• 50,000 vessels a year pass through.
• One-fourth of the world's sea trade and 11 million barrels a day pass.
• At Phillips Channel near Singapore, the Strait narrows to 1.5 miles.
• 80 % of japan oil supplies passes here.
Bab-el-mandab
• A strategic strait, 17 miles wide, between Arabian Peninsula & Africa.
• It links Red Sea with Gulf of Aden.
• The distance across is 20 miles.
• Two channels, of which the eastern is 2 miles wide , while the western has a width of about 16 miles.
Supply Factors• Saudia Arabia.
• Iraq , Iran, Nigeria.
• OPEC
• Venezuela
• Choke points
• Hurricane season
• Tanker capacity & Refinery capacity
• Strategic reserves of USA, Japan & India
Hurricane Season
A Hurricane is a severe tropical cyclone originating in the equatorial regions of
the Atlantic Ocean or Caribbean Sea or eastern
regions of the Pacific Ocean
Hurricane Categories
Important Hurricanes “U.S. Hurricane Season” from 30th June to 30th
November. “Katrina” in August 2005.Katrina’s impact on U.S. gasoline markets; initially taking
out 25% of U.S. crude oil production 15% of U.S. refinery capacity.
Important Hurricanes Hurricane Katrina
Formed August 23, 2005
Dissipated August 31, 2005
Highestwinds
175 mph (280 km/h) (1-minute sustained)
Lowest pressure 902 mbar (hPa; 26.65 inHg)
Fatalities ≥1,836 total
Damages $81.2 billion (2005 USD)$84 billion (2006 USD)(Costliest Atlantic hurricane in history)
Areasaffected
Bahamas, South Florida, Cuba, Louisiana (especially Greater New Orleans), Mississippi, Alabama, Florida Panhandle, most of eastern North America
Supply Factors• Saudi Arabia
• Iraq, Iran,Nigeria
• OPEC
• Venezuela
• Choke points
• Hurricane season
• Tanker capacity & Refinery capacity
• Strategic reserves of USA, Japan and India.
Tanker Capacity
• There are 3500 oil tankers in the world• ULCC – ultra large crude carriers • VLCC – very large crude carriers (2 million barrels of oil)• ULCC and VLCC cannot cross Suez
canal• A tanker journey from middle east to USA
takes 20 to 30 days
REFINERY.• An oil refinery is a large industrial site usually the size of a large village. Its job is to turn crude oil into a whole range of useful substances.
An oil refinery is an industrial process plant where crude oil is processed and refined into petroleum products, such as gasoline, diesel fuel, asphalt base, heating oil, kerosine, and liquefied petroleum gas.
REFINERY— contd. •The refinery site often has a refinery section and a terminal. Sometimes there is a chemical plant as well.
• The crude oil is usually brought in by sea tanker or pipeline. It is split up in the distillation tower. The products, are taken away by another pipeline, a road tanker or another ship.
OIL REFINERIES
• World's Largest Refineries (Barrels/Day)
– Paraguana Refining, Venezuela - 940,000
– SK Corporation, South Korea - 817,000
– Reliance I, India - 661,000
– GS Caltex, South Korea - 650,000
– Exxon Mobil, Singapore - 605,000
– Reliance II, India (proposed) - 580,000
– Exxon Mobil, Baytown, USA - 557,000
COMMON PROCESS USED
• Desalter Unit (washes out salt from the crude oil before it goes into the atmospheric distillation unit) • Atmospheric Distillation Unit (distills crude oil into fractions) • Vacuum Distillation Unit (further distills residual bottoms after atmospheric distillation) • Naphtha Hydrotreater Unit (desulfurizes naphtha from atmospheric distillation. Must hydro treat the naphtha before sending to a Catalytic Reformer Unit.)
In 2008 oil prices impacted both by supply- demand mismatch and speculation.
Experts feel beyond $100,in 2008, it was not demand but speculation.
Oil touched $147 in July ‘08.
In 2009 and 2010 oil price determined by demand and falling US $.
………………………………………………
Gasoline / Petrol
Price of gasoline / petrol more volatile as compared to other commodities because consumer cannot substitute eg. like food items.
Transportation sector worldwide is 95% dependent on ie. petrol ,diesel etc.
In the US .. gasoline / petrol accounts for 17% of the total energy consumed.
US refineries make gasoline year round and deliver through pipelines etc to 167,000 retail pumps. 3 main grades regular, mid-grade and premium.
4-5 years to build a refinery. Global refinery capacity did not keep pace with demand especially China and India.
Between 2004 and 2005 crude oil prices going up
To control petrol prices in USA, US government brought down Taxes . Oil companies brought down distribution and marketing costs by creating efficiencies.
Pakistan….Government ? ………….Companies?
OIL MARKETING COMPANIES
Pricing mechanism needs to be rationalized to remove anomalies : 1.Import Price Parity. 2.Deemed Custom Duty. 3.Petroleum Development Levy. PDL. 4.Inland Freight Equalization Charge. 5.Marketing Margin. 6.Dealer Margin.
Refineries earning windfalls. Singapore refineries earning $3 / barrel. Pakistan refineries earning $9 / barrel.
All stakeholders interests should be watched.
Rs.50 bn. profits in the oil industry due to faulty decisions.
