A draft of the presentation for the Petrotech2010 business simulation

1. An overview of the Oil & Gas
Industry
For Participants of the PETROTECH
2010 Business Simulation Game

2. • Background
Contents • O&G Products
• Upstream Process
– Simulation Parameters
• Downstream Process
– Simulation Parameters
Please note that the terms and
• Financial Parameters
concepts described in this simulation
are inspired from their real life
equivalents. However, the specific
• Crude Prices
definition and usage are specific to this
simulation. Whereever there is a
divergence between conventional
• O&G product prices
understanding and the simulation
implementation, the simulation
implementation will hold good.
• Performance Criteria
2

3. • You are in APAC – an
Background (1/5)
economic zone consisting
of several independent
governments with a variety
regulatory regimes that
impact your company
• The other markets you
operate in (buy, sell, etc)
are EMEA and Americas –
two other economic blocks
3

4. Backgroun (2/5) • The APAC Market has high GDP growth
rate (6-10%) and is increasingly large
APAC consumer of O&G products. This region
has several potential oil reserves which
are only just starting to be thrown open
for exploration and production. You
should look forward to bidding for these
reserves in the course of the next few
quarters.
• The market for all petroelum products
in this market are competitive. While
price competition is somewhat
depressed due to government
regulations, firms must look for non
price factors to further their sales
4

5. Backgroun (3/5):
• This is an adjacent zone is a potential
market for O&G products from APAC.
EMEA The infrastructure for distribution has
been build over decades and is available
for use.
• This market is fairly competitive with
several local players. However, the
demand supply gap provides an
opportunity for you to service this
market.
• The price based regulations are lesser
than in APAC – although high customer
awareness and laws related to
consumer protectionforces firms to
regulate themselves in terms of price
here
5

6. Backgroun (4/5) • This market provides opportunities
to you primarily due to the high
Americas cost nature of this market. As a
result, local refiners are becoming
too expensive and this provides a
market opportunity for you.
• Stable growth, but opportunities
to eat into local refiners’ market is
the primary incentive for APAC
O&G companies
• Fewer but tougher regulations is a
characteristic of this market.
• Transportation costs to this market
are significantly higher - but the
sum total of APAC refining costs +
transport costs still enable you to
compete in this market
6

7. • Crude Oil
Oil & Gas – This is sold directly to other
refineries (ex your marketing outlet
Products in APAC)
• CNG
– This is sold directly to customers (ex
your marketing outlet in APAC)
• MS or Petrol
– Primarily used for Motor Vehicles
• HSD
– Primary Energy Production
• ATF
The unit of trade used in this
simulation is the MT for all products. – Jet Fuel for Aviation Industry
While it is recognized that industry
practices would be very different, we
• FO
have chosen to use this unit for all – Industrial and Domestic Heating
products for the sake of convenient. and Energy
You may assume that the calorific
value of all the products – especially
• Bitumen
used for energy production – is – Used in construction
approximately the same.
7

8. Upstream Processes
Wildcatting Bidding Exploratory Production
Drilling
8

9. • Wildcatting is the process of
exploring for oil in a reserve.
Wildcatting • Output of a wildcatting exercise
(which takes 1 quarter duration)
is the following pieces of
Reserve : A Potential geographical area
which is known to have oil. In this
information:
simulation all reserves up available for
wildcatting are P10 reserves.
Well type: P10, P50 or P90
Estimated OIl Reserve
Probability of striking oil is Gas to OIl Ratio
P10
at least 10% • Based on this info teams may
Probability of striking oil is make their decisions regarding
P50 bidding for this reserve.
at least 50%
Probability of striking oil is
Wildcatting results have a 80%
P90 success rate ie 80% of their
at least 90%
predictions have been correct.
9

10. • Bidding involves deciding the price the
price teams are willing to pay for
Bidding owning the reserve and getting legal
rights to drill in in the reserve.
• The local government will fix a
minimum price. If bids are below the
minimum price, the reserve is not
allocated. There will be an agreement
to share a percentage of the oil and gas
Wildcatting is not a prerequisite for out put from the well each quarter
bidding. You can bid for a reserve which is binding on the teams.
without doing any wildcatting in the
areas. In such cases you are willing to • The reserve is awarded to the highest
accept the chances that you may be
paying higher for a reserve that has
bidder. In case of tie between two or
lesser oil reserves more bids, the bid process is cancelled
and the reserve is available for bidding
in the next quarter.
The winning bidder will be allowed to
• No joint bids are allowed.
capitalize the bid amount which will • You can bid only of reserves that come
show up as an intangible asset in the
balance sheet. up for bidding in the quarter.
10

11. Exploratory • Once a team wins the bid and is
designated as the owner of the
Drilling reserve, they may initiate
exploratory drilling.
• This step involves, drilling to set
up an oil well to start
production.
• This step will provide
information on the size of the
proven reserve, the actual Gas
oil ratio and the optimal
production rate per quarter.
• In the quarter of drilling, oil is
produced at 50% of the
Drilling involves capital expenditure in production rate.
setting up rigs and other production
equipment.
11

12. • Production of oil in a well is
based on the rate defined during
Production the exploratory drilling process.
• This will determine the oil and
gas production rate for the well.
• Teams can change the oil and
gas production rate by
instituting projects that will
either reduce on enhance
Your production rate for each oil well
production rates.
will be printed in your company ‘s
quarterly report • These projects have a 1 quarter
gestation period after which the
There is a fixed lifting cost associated
with the production of each MT of Oil new rates will be operational.
or Gas. This includes several costs
related to the exploration and
production process.
12

13. Upstream
Parameters
Parameter Description Vaues/Remarks
Cost of a Wildcatting Project 100000
Duration of a wildcatting project 1 Quarter
Cost of Initial Exploration - Traditional Approach 150000
Cost of Initiaial Exploration - Adaptive© Drilling process 250000
Duration of Initial Exploration 1 Quarter
Cost of Enhancing/Decreasing Production Rate 50000
Gestation Period for enhancing or decreasing production rate 1 Quarter
Increase/Decrease in Production Rate 0.15
Lifting Cost per MT of Crude/Gas
Slab 1 (0 - 20000) 5
Slab2 (20001 - 40000) 4
Slab3 (40001 - 50000) 3
Slab4 (50000 +) 2
Exploration & Production Overheads 100000 per Reserve
13

14. Sample Summary
of Reserves
ID Reseve Name Type Share Bidding Min Bid
Quarter Amount
1-10 West Assam P90 70% -1 500000
2-20 East Assam P50 70% 0 400000
21 Sarayu Delta - 1 P10 60% 1 600000
22 Sarayu Delta - 2 P10 60% 1 600000
23 Sarayu Delta - 3 P10 60% 1 600000
24 Sarayu Delta - 4 P10 60% 1 600000
25 Sarayu Delta - 5 P10 60% 1 600000
14

15. The Downstream Process
Sourcing Refining Distribution Marketing
Crude and Sales
15

16. • Crude can be procured short term
SOURCING contracts (default option), spot, Long
CRUDE term contracts.
In this simulation, you will be able to
buy one of the following crudes – in
• Forecast of crude prices available
addition to crude from you own wells.
• Dubai
• Crude price is at refinery
• Nigerian • Crude can be stored in inventory
• Malay
• Brent
prior to refining
• Each type of crude has a different
Crude prices vary internationally. In
your part of the world, the BombaY yield of the various fractions –
Merchants EXchange rate is widely
used (BYMEX). The BYMEX rate is depending on how ‘sweet’ or ‘sour’
based on a basket of crudes available
in the area. Research over years has
it is.
shown that a principle benchmark
crude used to fix prices in the spot
market is the WAI – West Assam
Intermediate. Prices of the Crude
from your own wells is reasonably
correlated with the WAI
16

17. Price Forecast for Crude OIl
X axis represents the quarter no and Y axis the Price of Crude per MT in
CU
17

18. Prices of CNG
The X axis represents the quarter number and Y axis the price in CU/MT
18

19. Price of Crude - short term contracts See Graph on following 2 slides
Will be 10-20% Higher than short
Price of Crude - Spot Markets
term contract price
+/- 50 % over previous quarter
Availability of Crude - Short term contracts
contract proocurments
Based on Information supplied in
Long Term Contracts for Crude
Gazettes
Inventory cost for crude
Slab1 (0 -20000) End Quarter Closing
2
Inventory)
Slab2(20001 - 30000) 3
Slab3 (30000+) 4
19

20. •Refining capacity able to handle all crude.
Procurement of Crude automatically
Refining defines your blending decision
•Refining gives fractions based on yield
table
•There may be some refining losses and
Capital costs of refining are usually gains as well during the process of refining
expressed in Output/time. Commonly
used measures are $ per complexity •Refining productivity, safety and quality of
barrel. However, in this simulation we
shall use a measure of CU per MT of end products can be enahnced by capital
crude processing capacity per quarter. investment (Impacting the refineries
Therefore, current capacity of your
refinery will be (say) 25000 Nelson Index)
MT/quarter.
•Refined products are immediately
There is a refining cost per MT ton of despatched ot markets. No inventory at
petroleum product output which
would include the cost of several
refinery of end products
catalysts, agents, and services. There
is a fixed overhead cost for refineries
per quarter.
20

21. Refining
Parameters
Refining Overhead Costs
Slab1 (0-25000 MT of Crude Capacity) 100000
Slab2 (25001 to 50000) 150000
Slab3 (50000+) 160000
2.5 Million per Refinery of
New Refinery Costs (Complexity @ 6-7 Nelson) 25000 MT Refining per Q
Gestation Period for New Refinery 1 Quarter
Current Nelson Index for Refineries 6 to 7
Current Refining Capacity MT/Quarter 25000
Refining Cost per MT of Refined Products
Slab 1 (0 - 20000) 5
Slab2 (20001 - 40000) 4
Slab3 (40001 - 50000) 3
Slab4 (50000 +) 2
21

22. Crude Type
Refined
Product Own Dubai Nigerian Malay Brent
Petrol 40% 41% 44% 42% 45%
HSD 23% 20% 21% 21% 19%
ATF 10% 11% 12% 11% 12%
FO 12% 11% 12% 14% 12%
Bitumen 9% 8% 8% 7% 8%
Total 94% 91% 97% 95% 96%
Yield Table for Refining
The refining wastage is a combination of products whose removal cost is
equal to their market price and hence ignored in this simulation
22

23. • An important part of the O&G value
chain is the cost distributional logistics.
Distribution • This involves the setting up of a large
number of distribution assets (storage
facilities, fleets of specific kind of
vehicles, pipelines, etc)
The cost of distribution in this
simulation will be given in the form of
• Over the last few decades, third party
MT moved from refinery to your logistics has emerged as a key service
market. In the short run these costs industry that supports the oil sector.
are fixed as they are based on
agreement with your distribution • These third party logistic companies
service provider. However, in the long make adequate investments, based on
run, you may make changes to these
by making making investment decision long term contracts with companies like
– based on proposals that will come to yours, to provide these services on the
you - to change the mode and or per
unit cost of transportation.
basis of per MT – distance moved.
• You may invest in various modes –
In this simulation you will have to trucks, rail, ship, pipeline each comes
specify the percentage of the output
that would be shipped to each of your with various costs and benefits
markets
23

24. Distribution
Parameters
Procurement of Refined Products
Cost of Procurement of all Refined
See Graph
Products
Maximum 2000 MT for all Refined
Upper Limit of Procurement
Products
Transportation Cost for all Products
(Cu/MT)
To APAC 5
To EMEA 8
To Americas 10
24

25. • Sales occur through outlets in each
Marketing and geography
Sales • More number of outlets enhances
customer satisfaction
• Outlets may be owned by your company
or be run by a franchisee
• Sales is a function of price, customer
satisfaction, quality, brand image etc of
In this simulation you will have to fix each team.
the price of the petroleum product in
each product market. Hence, you will • Lost sales in a quarter will result in drop
have to specify market prices for ATF in customer satisfaction.
for APAC, EMEA and the Americas .
• Unsold stock cannot be moved between
The minimum - maximum price ranges markets. They will be available at the
for petroleum products are closely same market for the next quarter
guided by the prevailing Crude prices.
• Click here to see the demand
There may be large vendors who may projections in each product – market
wish to procure products through a
contract bidding process.
25

26. Marketing
Parameters
Cost of setting up a new Owned Outlet 50000
Cost of setting up a new Franchised Outlet 40000
Lag time for setting up a new outlet 1
Fixed Cost per quarter for Owned outlet 20000
Fixed Cost per quarter for a Franchised outlet 10000
Variable cost per Cu of Sales Owned Outlet 2
Variable cost per Cu of Sales Franchised Outlet 4
Cash Sale as a Percent of Total Sale 10%
Credit Policy
TCP - Collections in quarter of Sale 70%
SCP - Collections in Quarter of Sale 50%
26

27. 115
110
105
100
95
90
85
80
0 2 4 6 8 10 12 14
Quarter
Cyclical Trends in the Global O&G Market
The Y axis represents and Index number
27

28. Seasonality Index Number
105
104
103
102
101
100
99
98
97
96
95
1 2 3 4
Quarter
APAC EMEA Americas
Seasonality of Petroleum Product Demand
The X axis represents quarters of the year
28

29. The Nature of the demand function for Petroleum
Products
29

30. Financial Equity
Face Value of an Equity Share 10
Parameters
Total Number of Equity Shares Outstanding 10,00,000
Your company has been financed by a
group of professionals who are being
supported by a PE fund. Equity Value 1,00,00,000
Loans
Duration (in Raising Foreclosing Interest
Type Quarters) Charges Charges Rates
Bank Overdraft 4 0 0
8 Quarter term Loan 8 10000 1 See Graph
40 Quarter Bond 40 20000 1
Other Financial Data
Minimum Cash to be maintained at the end of each quarter 100000
Maximum permissible debt equity ratio 1:1
Shark Loan Interest rates 4 times
Income Tax Rates 30%
Maximum permissible % of receivables that can be discounted 40%
30

31. Cash Payout
List of Costs and their Payouts Payout in Quarter
incurred*
Crude Costs 70
Refining Costs 100
Inventory Costs 50
Lifting Costs 100
Overheads 100
Transportation Costs 100
Marketing Expenses 100
Procurement of Refined Product 80
Loan Processing Costs 100
Loan Foreclosing Costs 100
Penal Interest Costs 0
* Numbers are %age of incurred costs that will have to be paid out in the quarter in
which incurred. The remaining amount will have to be paid out in the immediate next
quarter 31

32. Investments and
their Treatment
Type Depreci Life Method
Capital Expenditures ation
Investments in acquiring economic Intangible Usage
rights for oil reserves
Investment in Oil Production Tangible Time 20 SLM
equipment (rigs etc.)
Building additional Refinery Capacity Tangible Time 40 SLM
Building company owned marketing Tangible Time 10 SLM
outlets
Investments in building pipelines for Tangible Time 20 SLM
crude/gas transportation
Investment in procuring fleet Tangible Time 10 SLM
(rail/sea/road) for transportation
32

33. Prime Lending Rates
12
10
8
6
4
2
0
-2 0 2 4 6 8 10 12 14
Forecast of Prime Lending rate
X –axis is Quarter number
Y axis is Interest rate per annum in percentage
33

34. Performance Criteria for the Simulation
Each team’s performance will be
Weightage
Parameters assessed by a combination of 6
measures shown alongside.
15 Return on Capital Employed (RoCE)
The scores on each will be
15 Free Cash Flows (FCF) computed using definitions
given later. Since these are not
15 Cumulative Market Share in Cus
of the same dimension, teams
20 Reserves to Production (R/P) will be ranked on each measure.
Cumulative customer orders not The ranks will then be multiplied
15 fulfilled by weights given here to achieve
a single overall performance
20 Safety Index
measure.
34

35. Appendix
35

36. A view of a Sample Decision Sheet
36

37. 60
50
40
Dubai
30 Nigerian
Malay
20
Brent
10
0
0 2 4 6 8 10 12
Forecast of Crude Prices in CU
X –axis is Quarter No
Y – axis is in CU
37

38. 14000
12000
10000
8000
6000
4000
2000
0
0 2 4 6 8 10 12 14 16
APAC EMEA GAR
An Analysts view of Demand for Motor Spirit
X Axis represent Quarters
Y axis is in MT of quarterly demand. This is based on forecast of crude
prices as supplied by BYMEX
38

39. 50000
45000
40000
35000
30000
25000
20000
15000
10000
5000
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
An Analyst’s view of the demand for CNG in APAC
X Axis Quarters
Y Axis MT/Quarter
39

40. 50000
45000
40000
35000
30000
25000
20000
15000
10000
5000
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
An Analysts View of Demand for Domestic Crude in
APAC
X axis – Quarters
Y axis – MT Per Quarter at prevailing crude forecasts supplied by BYMEX
40

41. 14000
12000
10000
8000
6000
4000
2000
0
0 2 4 6 8 10 12 14 16
APAC EMEA GAR
An Analysts view of demand for HSD
X axis – Quarters
Y axis – MT Per Quarter at prevailing crude forecasts supplied by BYMEX
41

42. 14000
12000
10000
8000
6000
4000
2000
0
0 2 4 6 8 10 12 14 16
APAC EMEA GAR
An Analysts view of demand for ATF
X axis – Quarters
Y axis – MT Per Quarter at prevailing crude forecasts supplied by BYMEX
42

43. 14000
12000
10000
8000
6000
4000
2000
0
0 2 4 6 8 10 12 14 16
APAC EMEA GAR
An Analysts view of Demand for Fuel Oil
X axis – Quarters
Y axis – MT Per Quarter at prevailing crude forecasts supplied by BYMEX
43

44. 14000
12000
10000
8000
6000
4000
2000
0
0 2 4 6 8 10 12 14 16
APAC EMEA GAR
An Analysts View of Demand for Bitumen
X axis – Quarters
Y axis – MT Per Quarter at prevailing crude forecasts supplied by BYMEX
44