Fundamentals - Oil Business

Question 1

What are the 4 ‘Rs’ in the oli business?

Answer 1

Risk of exploration success Uncertainty of resource size Rate of production Return

Question 2

What are the seven stages in the exploration and production life cycle?

Answer 2

1. New venture - regional evaluation, assess acreage 2. Exploration – Success or Fail 3. Appraise 4. Develop – Yes or No 5. Production – first oil 6. Infrastructure – Lead, exploration, developments 7. Decommission

Question 3

Explain this diagram

Answer 3

Loss is made in exploration and appraisal phase, after development expected to make cash surplus. Will peak at plateau then decline. When production is no longer financially viable then decomissioned.

Business risk tolerance decreases dramatically with reduction in technical risk.

Rate of production mirrors cash flow. When production begins to fall then decomissioning takes place.

Question 4

What is meant by the term ‘peak oil’?

Answer 4

The maximum rate of production in any area under consideration, recognising it as a finite resource subject to depletion

Question 5

What are the two key drivers for growth in energy demand?

Answer 5

1. Poulation growth - world population = 8.3 bn by 2030
   - Low and medium economies account for over 90% growth
2. Wold income - doubled by 2030
   - Rapid industrialisation, urbanisation and motorisation will contribute 70% GDP growth and over 90% global enregy demand growth

Question 6

What is the expected growth in primary energy consumption by 2030?

Answer 6

30%

Question 7

Describe oil consumption in terms of production per day now and 2030, proven conventional reserves and how long will oil last at current consumption rate?

Answer 7

90 MMBOPD produced currently, 120 MMBOPD by 2030

Proved conventional reserves: 1400 Gb

At current rate of consumption will last 50 years

Question 8

How long will gas last at the current rate of consumption? Why is it less of an issue than in oil?

Answer 8

60-100+ years

Less of an issue as continued reserve growth

Question 9

What is the dominant fuel in:

Asia Pacific?
Europe/Eurasia?

All other regions?

Answer 9

Asia Pacific - Coal

Europe/Eurasia - Natural Gas

Rest of World - Oil

Question 10

What is meant by the terms conventional and unconventional oil and gas? What percentage of world oil to date is conventional?

Answer 10

Conventional: hydrocarbons that flow freely, are in accessible locations and do not require complex and expensive technology to produce

Unconventional: everything else. e.g. ultra deep water, tar sands, tight oil, coal bed methane, oil shale

95% of world oil to date is conventional

Question 11

What is the average factor for oil and for gas?

Give two influenes on recovery factor

Answer 11

Average RF in Oil - 20-40%

Average RF in Gas - 80-90%

Dependent on reservoir complexity (more complex = lower recovery) and on production rate and filed management

Question 12

Give an advantage and disadvantage of secondary oil recovery

Answer 12

+ Can add 5-10% recovery

• Increases costs

Question 13

Name 5 difficulties in estimating world resources

Answer 13

Difficulties in:

• Reliability of published figures
• Uncertainty (geological and political)
• Changing technology with time
• Increased recovery: reserve growth
• Politics: accessible resources

Question 14

What are ‘proved reserves’?

Answer 14

Quantities that with reasonable certainty can be recovered in the future from known reservoirs under existing economic and operating conditions

Question 15

Briefly describe the ‘Hubbert Peak.’ Why was he wrong?

Answer 15

Hubbert predicted peak production in US to occur in 1956 but occurred in 1970

He did not account for new discoveries (e.g. Alaska)

Question 16

What is the name of the typical pattern of field discoveries for a basin? Describe it?

Answer 16

Fractal pattern: few very large fields, many smaller fields

Question 17

What influences production peaks? Why was there a second peak in the mid 1990s?

Answer 17

Production peaks influenced by economics, geology and technology

Second production peak due to new 3D seismic technology

Question 18

How many unconventional resources are there?

Why have they benefitted recently?

Why are they financially less profitable than conventional oil?

Answer 18

Equal resources to conventional

Benefitting from improving technology

Reduced profitability due to higher production costs and lower rates of production, needs high oil price as huge investment

Question 19

What are the four major challenges of producing shale gas in the US? (not environmental)

Answer 19

Production rate and economic viability

Many plays now looking for shale oil

Locating ‘sweetspots’

Gas price

Question 20

UK currently imports gas. What would be the benefits of shale gas to the UK? (5 things)

Answer 20

Boosts economy - jobs, taxation revenue

Security of surplus

Potential for lower energy costs

Emissions neutral (replacing gas that would be imported)

Increases speed of use of renewable: boosts economy and GDP, reduces energy costs => allows subsidies for renewables

Question 21

What are the risks to the UK of shale exploration? What can be done/why minimal?

Answer 21

Earthquakes: UK very stable, low risk and intensity

Water contamination: minimal risk when well regulated

Environmental damage

• Traffic pollution (temporary can be minimised)
• Drill site (temporary, reduced surface footprint with improved tech)

Question 22

What are the key issues of shale gas in the UK? (6 things)

Answer 22

Shale distribution in basin, organic content, lithology

Mechanical properties of lithology (silica or carbon rich matrix)

Maturity and maturation history

Sweet spot identification

Technology and fracking proceedure

Fracking fluids

Question 23

Explain the Funnel Theory

Answer 23

As oil becomes more difficult to find costs increase, at high prices alternative fuels become economic to produce, but need time to bring other resources on stream

Question 24

Why is oil price important to governments? Why is it less of a concern to UK, US + Norway?

Answer 24

Many governments dependent on oil revenues for GDP (middle east), low oil proces eats into their cash reserves and failing economies

Oil revenue is only small proportion of GDP in UK, US + Norway

Question 25

Give 4 benefits of a lower oil price

Answer 25

• Fall in competition for new licenses
• Cheaper seismic
• Deep water rates halved
• Exploration costs down a thrid