Understanding the oil business PSO


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Understanding the oil business PSO

  1. 1. “ Understanding the Oil Business” Or “ Economics of Crude Oil” Bilal Ilahi PSO nov. 2010
  2. 2. BILAL ILAHI Educational Qualification: 1977: Masters in Business Administration .(U.S.A). 1973: B Com. Punjab University (Hailey College).
  3. 3. 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.
  4. 4. 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.
  5. 5. 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.
  6. 6. 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.
  7. 7. FORTUNE 500 - GLOBAL. 2008.
  8. 10. Energy security Food security Water security These 3 are connected !!
  9. 11. Energy Equation <ul><li>Energy = </li></ul><ul><li>Crude oil </li></ul><ul><ul><ul><li>Natural gas </li></ul></ul></ul><ul><ul><ul><li>Coal </li></ul></ul></ul><ul><ul><ul><li>Nuclear </li></ul></ul></ul><ul><ul><ul><li>Renewable energy </li></ul></ul></ul><ul><li> (hydro electric + wind+ solar+ hydrogen fuel cell) </li></ul><ul><ul><ul><li>Alternative fuels </li></ul></ul></ul><ul><li> (ethanol + bio fuels+ tar sands also . . called synthetic crude) . </li></ul>
  10. 12. Some Related Definitions and Terms <ul><li>Fossil fuel: Crude oil + Natural Gas + Coal </li></ul><ul><li>Hydro-carbons: Release their energy when burnt e.g. Crude Oil + Natural Gas . </li></ul><ul><li>Bio-fuels: Ethanol + Bio-diesel </li></ul><ul><li>Alternative fuels: Ethanol + Bio-diesel + tar sands </li></ul><ul><li>Renewable Energy: Hydro-electric + Solar + Wind + Hydrogen fuel-cell. </li></ul>
  11. 13. World Energy Consumption 0.7 1.9 Korea 0.5 2.5 Canada 1 2.6 U.K 0.9 2.9 France 16.6 3.1 India 1.3 3.9 Germany 2.1 5.8 Japan 2.5 7.0 Russia 21.2 9.9 China 4.6 25.0 U.S.A % of World Population % of Energy Consumed Country
  12. 14. CRUDE OIL
  13. 15. <ul><li>The share of CRUDE OIL in Pakistan’s total imports is 23 %.We import 82 % of our needs. </li></ul><ul><li>Pakistan’s CRUDE OIL import is the prime cause of our TRADE DEFICIT and CURRENT ACCOUNT DEFICIT. </li></ul>
  14. 16. 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 !
  15. 17. <ul><li>Increase in the price of oil (64 % in ’07) contributes to global inflation . </li></ul><ul><li>Eg. increased petrol & transport cost & higher prices of 4,000 bye-products like plastics , polyester, PET bottles, bitumen, coal-tar etc. </li></ul>
  16. 18. 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.
  17. 19. Crude oil <ul><li>Uses </li></ul><ul><ul><li>Refined into gasoline or petrol. </li></ul></ul><ul><ul><li>Refining by-products are LPG, kerosene etc. </li></ul></ul><ul><ul><li>Non-fuel by-products are lubricants, asphalts etc </li></ul></ul><ul><ul><li>End products are 4000 plus e.g. plastics, synthetic fibers, chemicals, fertilizers …. etc. </li></ul></ul>
  18. 20. Types of Oil <ul><li>There are 161 different internationally traded crude oils. They have different characteristics quality and market penetration. </li></ul>
  19. 21. Cont… <ul><li>West Texas Intermediate (USA). ……..Underlying oil for NY Light Sweet. </li></ul><ul><ul><li>API gravity (density) 39.6 (light crude) </li></ul></ul><ul><ul><li>Sulphur contents 0.24% (sweet) </li></ul></ul><ul><ul><li>A very high quality oil. Excellent for refining, a larger portion of gasoline </li></ul></ul><ul><li>Brent (UK-North Sea) </li></ul><ul><ul><li>API gravity 38.3 degrees (light crude) </li></ul></ul><ul><ul><li>Sulphur contents 0.37% (sweet) </li></ul></ul><ul><ul><li>Less sweet than WTI ideal for making gasoline and middle distillates. </li></ul></ul>
  20. 22. <ul><li>Contd… </li></ul><ul><li>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 </li></ul><ul><li>Worlds Heavy oil reserves are twice as much as Light crude oil. </li></ul>
  21. 23. Cont… <ul><li>Brent and New York Light Sweet are benchmark oils. The underlying commodity for N.Y. Light Sweet is WTI. </li></ul><ul><li>Prices for other crude oils are set at differential to them. </li></ul>
  22. 24. 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.
  23. 25. Measurement of Oil <ul><li>1 Barrel = 159 liters </li></ul>
  25. 27. Reserves <ul><li>Total Endowment 2 trillion barrels approx. </li></ul><ul><li>Drilled to date 850 billion barrels </li></ul><ul><li>Reserves (proven) + 950 billion barrels </li></ul><ul><li> </li></ul><ul><li>Located and found = 1,800 billion barrels </li></ul>
  26. 28. Cont… <ul><li>66 % of reserves are in Muslim countries while USA has 3% only. </li></ul><ul><li>Saudi-Arabia and Iran have 25 % and 10% respectively. </li></ul>
  27. 29. <ul><li>Production. </li></ul><ul><li>Arrival of worlds PRODUCTION PEAK…..88 mn. bpd. Beginning of the final energy crisis ? </li></ul><ul><li>Slack in production capacity provided by mostly Saudi Arabia. </li></ul>
  28. 30. 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.
  29. 31. 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.
  30. 32. In USA : Primary methods =40% of production. Secondary methods = 50%. .. Tertiary methods = 10%
  31. 33. Drilling Cost <ul><li>Drilling costs are different in different areas 2006. </li></ul><ul><ul><li>Africa = $ 4 per barrel </li></ul></ul><ul><ul><li>USA = $ 7 per barrel </li></ul></ul><ul><ul><li>- Canada = $ 8 per barrel </li></ul></ul><ul><ul><li> </li></ul></ul>
  32. 34. 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.
  33. 36. <ul><li>Consumption </li></ul><ul><li>2007 Consumption 86 million bpd. </li></ul><ul><li>USA consumes 25 % of worlds production,60% of which is imported. </li></ul><ul><li>40% of worlds supply comes from OPEC. Daily ceiling of 27 mn. bpd. </li></ul>
  34. 37. Price <ul><li>Internationally the price of oil is set in US dollars per barrel, by the forces of demand and supply. </li></ul><ul><li>The most important oil market is NYMEX (New York Mercantile Exchange). </li></ul>
  35. 38. 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.
  36. 40. Demand Factors. contd.. <ul><li>USA summer driving season (memorial day to labor day) </li></ul><ul><li>US north east winter season </li></ul><ul><li>China </li></ul><ul><li>India </li></ul>
  37. 41. 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.
  38. 42. Contd.. China. Expected to overtake Japan as the 2 nd largest crude oil importer. Doubling time for oil demand was 7 years. India.
  39. 43. Speculators . Hedge funds & Pension Funds. Investment Banks for diversification. Drove up oil prices beyond $100 in 2008. July ’08 oil touched $147 per barrel
  40. 44. <ul><li>Supply Factors </li></ul><ul><li>Supply interruption of more than 5% for over 6 months creates a crisis in the oil markets. </li></ul>
  41. 45. Supply Factors <ul><li>Saudi Arabia. </li></ul><ul><li>Iraq, Iran, Nigeria. </li></ul><ul><li>OPEC. </li></ul><ul><li>Venezuela. </li></ul><ul><li>Choke points </li></ul><ul><li>Hurricane season. </li></ul><ul><li>Tanker capacity & Refinery capacity. </li></ul><ul><li>Strategic reserves of USA, Japan & India. </li></ul>
  42. 46. <ul><li>OPEC </li></ul><ul><li>13 members. </li></ul><ul><li>Produces 40 % of worlds oil. </li></ul><ul><li>Mostly Muslim countries. </li></ul><ul><li>Also Venezuela, Angola and Ecuador. </li></ul><ul><li>Iraq, now not part of production quotas. </li></ul>
  43. 47. Supply Factors <ul><li>Saudi Arabia. </li></ul><ul><li>Iraq, Iran, Nigeria. </li></ul><ul><li>OPEC. </li></ul><ul><li>Venezuela. </li></ul><ul><li>Choke points </li></ul><ul><li>Hurricane season. </li></ul><ul><li>Tanker capacity & Refinery capacity. </li></ul><ul><li>Strategic reserves of USA, Japan and India. </li></ul>
  44. 48. CHOKE POINTS Oil consumption occurs mainly in the industrialized west 0il production takes place largely in the middle east. Huge oil volume traded internationally By pipe line 40% - transcontinental By tankers 60% - intercontinental (3500 tankers)
  45. 51. 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 piracy Effects of closing of choke points are increased costs because of transit time increase and tankers capacity tie up.
  46. 53. Strait of Hormuz <ul><li>It has two 1-mile-wide channels for traffic. </li></ul><ul><li>Only passage to the Indian ocean. </li></ul><ul><li>40 % of world's oil supply passes . </li></ul><ul><li>US receives 12% of its oil and Western Europe & Japan get 25% & 66% of their oil respectively. </li></ul><ul><li>Also 15% of the world's commerce is routed through Hormuz. </li></ul>
  47. 55. Straits of Malacca <ul><li>The Straits of Malacca is a narrow, 500 miles stretch of water between peninsular Malaysia and Indonesia. </li></ul><ul><li>50,000 vessels a year pass through. </li></ul><ul><li>One-fourth of the world's sea trade and 11 million barrels a day pass. </li></ul><ul><li>At Phillips Channel near Singapore, the Strait narrows to 1.5 miles. </li></ul><ul><li>80 % of japan oil supplies passes here. </li></ul>
  48. 57. Bab-el-mandab <ul><li>A strategic strait, 17 miles wide, between Arabian Peninsula & Africa. </li></ul><ul><li>It links Red Sea with Gulf of Aden. </li></ul><ul><li>The distance across is 20 miles. </li></ul><ul><li>Two channels, of which the eastern is 2 miles wide , while the western has a width of about 16 miles. </li></ul>
  49. 58. Supply Factors <ul><li>Saudia Arabia. </li></ul><ul><li>Iraq , Iran, Nigeria. </li></ul><ul><li>OPEC </li></ul><ul><li>Venezuela </li></ul><ul><li>Choke points </li></ul><ul><li>Hurricane season </li></ul><ul><li>Tanker capacity & Refinery capacity </li></ul><ul><li>Strategic reserves of USA, Japan & India </li></ul>
  50. 59. 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
  51. 61. Hurricane Categories
  52. 62. Important Hurricanes <ul><li>“ U.S. Hurricane Season” from 30 th June to 30 th November. </li></ul><ul><li>“ Katrina” in August 2005. </li></ul><ul><li>Katrina’s impact on U.S. gasoline markets; initially taking out 25% of U.S. crude oil production 15% of U.S. refinery capacity. </li></ul>
  53. 63. Important Hurricanes Hurricane Katrina Bahamas , South Florida , Cuba , Louisiana (especially Greater New Orleans ), Mississippi , Alabama , Florida Panhandle , most of eastern North America Areas affected $81.2 billion (2005  USD ) $84 billion (2006 USD) (Costliest Atlantic hurricane in history) Damages ≥ 1,836 total Fatalities 902  mbar ( hPa ; 26.65  inHg ) Lowest pressure 175  mph (280  km/h ) (1-minute sustained) Highest winds August 31 , 2005 Dissipated August 23 , 2005 Formed
  54. 64. Supply Factors <ul><li>Saudi Arabia </li></ul><ul><li>Iraq, Iran,Nigeria </li></ul><ul><li>OPEC </li></ul><ul><li>Venezuela </li></ul><ul><li>Choke points </li></ul><ul><li>Hurricane season </li></ul><ul><li>Tanker capacity & Refinery capacity </li></ul><ul><li>Strategic reserves of USA, Japan and India. </li></ul>
  55. 65. Tanker Capacity <ul><li>There are 3500 oil tankers in the world </li></ul><ul><li>ULCC – ultra large crude carriers </li></ul><ul><li>VLCC – very large crude carriers </li></ul><ul><li>(2 million barrels of oil) </li></ul><ul><li>ULCC and VLCC cannot cross Suez canal </li></ul><ul><li>A tanker journey from middle east to USA takes 20 to 30 days </li></ul>
  56. 66. REFINERY. <ul><li>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. </li></ul>
  57. 67. 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 .
  58. 68. REFINERY— contd. <ul><li>The refinery site often has a refinery section and a terminal. Sometimes there is a chemical plant as well. </li></ul><ul><li>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. </li></ul>
  59. 69. OIL REFINERIES <ul><li>World's Largest Refineries (Barrels/Day) </li></ul><ul><ul><li>Paraguana Refining, Venezuela - 940,000 </li></ul></ul><ul><ul><li>SK Corporation, South Korea - 817,000 </li></ul></ul><ul><ul><li>Reliance I, India - 661,000 </li></ul></ul><ul><ul><li>GS Caltex, South Korea - 650,000 </li></ul></ul><ul><ul><li>Exxon Mobil, Singapore - 605,000 </li></ul></ul><ul><ul><li>Reliance II, India (proposed) - 580,000 </li></ul></ul><ul><ul><li>Exxon Mobil, Baytown, USA - 557,000 </li></ul></ul>
  60. 70. COMMON PROCESS USED <ul><li>Desalter Unit (washes out salt from the crude oil before it goes into the atmospheric distillation unit) </li></ul><ul><li>Atmospheric Distillation Unit (distills crude oil into fractions) </li></ul><ul><li>Vacuum Distillation Unit (further distills residual bottoms after atmospheric distillation) </li></ul><ul><li>Naphtha Hydrotreater Unit (desulfurizes naphtha from atmospheric distillation. Must hydro treat the naphtha before sending to a Catalytic Reformer Unit.) </li></ul>
  61. 71. 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 $. ………………………………………………
  62. 72. <ul><li>Gasoline / Petrol </li></ul><ul><li>Price of gasoline / petrol more volatile as compared to other commodities because consumer cannot substitute eg. like food items. </li></ul><ul><li>Transportation sector worldwide is 95% dependent on ie. petrol ,diesel etc. </li></ul><ul><li>In the US .. gasoline / petrol accounts for 17% of the total energy consumed. </li></ul>
  63. 73. <ul><li>US refineries make gasoline year round and deliver through pipelines etc to 167,000 retail pumps. 3 main grades regular, mid-grade and premium. </li></ul><ul><li>4-5 years to build a refinery. Global refinery capacity did not keep pace with demand especially China and India. </li></ul>
  64. 76. 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?
  66. 78. 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.
  67. 79. <ul><li>Refineries earning windfalls. Singapore refineries earning $3 / barrel. Pakistan refineries earning $9 / barrel. </li></ul><ul><li>All stakeholders interests should be watched. </li></ul><ul><li>Rs.50 bn. profits in the oil industry due to faulty decisions. </li></ul>
  68. 80. THANK YOU …… [email_address]