UNDERSTANDING OIL AND GAS INDUSTRY AND ITS
DYNAMICS
This article will give you a
basic understanding about the
oil and gas...
Understanding the industry
Oil and Gas industry is old as 250 years old .The first successful
oil was drilled in 1857 by E...
Oil and gas can be derived from two different sources i.e.
conventional and non-conventional methods.
Coventional Non-Conv...
Cheap but unstable supply of alternative resources
Over the past few years the world has been experiencing
significant cli...
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Understanding oil and gas industry and its dynamics

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This article will give you a basic understanding about the oil and gas industry and the dynamics that move this industry.

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Understanding oil and gas industry and its dynamics

  1. 1. UNDERSTANDING OIL AND GAS INDUSTRY AND ITS DYNAMICS This article will give you a basic understanding about the oil and gas industry and the dynamics that move this industry.
  2. 2. Understanding the industry Oil and Gas industry is old as 250 years old .The first successful oil was drilled in 1857 by Edwin Drake and the metallurgical revolution after World War II created the opportunities for natural gas a reliable source of energy. So far oil and gas industry is the most mature industry among all. According to market research report of IBIS World’s Global Oil & Gas Exploration & Production global the industry is expected to make revenue of $4 trillion in 2013. The industry is further categorized according to its activities. They are commonly known as upstream, mid-stream and downstream oil and gas industry. This report will cover the upstream oil and gas industry. Exploration industries include those companies which indulge seismic and drilling activities before the development of fields. These fields are located onshore and offshore. Upstream industries include those companies which extract oil and gas from those fields and stabilized it. Together they are known as Exploration and Production Companies (E&P’s). The E&P sector is highly sensitive and move significantly to world economic, politics, environmental, and technology development around the world. I will discuss each of these factors in detail later in this report. Upstream first steps to first locate, test and drill for oil and gas. Later, once reserves are proven, they extract any oil and gas from the reserve. Midstream activities include the processing, storing, transporting and marketing of oil, natural gas and natural gas liquids. Downstream operations can include refining crude oil and distributing the gasoline, natural gas liquids, diesel and a variety of other energy sources down to the retail level. Source: Investopedia Global Oil & Gas Exploration & Production global the industry is expected to make revenue of $4 trillion in 2013. Oil and Gas Industry Upstream: Exploration and production, E&P's Mid-Stream: Wholesale marketing, processing, storing and refining companies. Downstream: Oil marketing companies, OMC's. Offshore refers to oil and gas drilling operations that are conducted in the ocean. Onshore refers to oil and gas drilling operations that are conducted on the land.
  3. 3. Oil and gas can be derived from two different sources i.e. conventional and non-conventional methods. Coventional Non-Conventional Conventional method includes crude oil and natural gas liquids and condensate liquids, which are extracted from drilling and natural gas production. Conventional oil is easier and cheaper to produce than unconventional oil. Non - conventional method includes producing or obtaining oil and gas through techniques other than traditional oil well extraction. Extracting and refining oil from these sources has a negative environmental impact. Industry Dynamics The dynamics of oil and gas industry have remained same over the decades but changes in these dynamics significantly affect the profitability of upstream sector. We will discuss each factor in detail now. Higher than expected consumer and producer confidence Over the last six months consumer and producer are now more confident about the economic future. World Bank chief economist Kaushik Basu believes that there are significant evidences to conclude that the high income economies are moving towards a self-sustaining recovery after the global financial crisis. World Bank predicted global growth rate of 3.2% for 2014. As the economies are expanding manufacturing and industrial sectors from China, India, Indonesia, Brazil, and South Africa are picking up the speed. Population “The hidden treasure” According to UN estimate the world population is expected to grow up to 8 billion by 2024. The impact of population will be transferred on consumer, residential and transport sector. Transport sector will be the major beneficiary of the population growth. According to global transportation service market report the transportation industry is expected to grow at a rate of 37% by 2016. 90% of industry energy requirement is met through oil. China, India and other developing economies will be the icing on the cake for the tremendous growth of this sector. World Bank predicted global growth rate of 3.2% for 2014. Transportation industry is expected to grow at a rate of 37% by 2016 according to global transportation market report.
  4. 4. Cheap but unstable supply of alternative resources Over the past few years the world has been experiencing significant climatic and geological changes which will make alternative resources costly in the long run. Fukushima nuclear plant disaster has raised serious question regarding public safety all over the world. Germany has already announced that it will close all its nuclear plant by 2022. According to UNEP, 2/3 of the world will be facing water stress by 2025 which will make shale resources hard to extract and will make hydel power almost obsolete. Technology Improvement in time and cost saving technology will make E&P industry more efficient and profitable. Stable oil prices in the long run Gap in supply and demand of oil is offset by the price movement. Iran and Libya are preparing to re-enter in oil market after a long time due to sanctions. Political unrest in Ukraine and rapid increase in the production of shale resources in US will put a downward pressure on oil prices in short to medium term. But on other hand, IEA predicted that US shale production will peak by 2020 and will fall thereafter. By 2035, Oil will lose its share to coal in total energy demand of world. Meanwhile gas will continue eating up oil demand by substituting gasoline by CNG and diesel by LNG. Demand for gas for total energy will rise to 26% by 2035. Reference: - Annual Energy Outlook 2014 – EIA - BP Energy Outlook - Work Energy Outlook – IEA - Financial Times – Oil analysis World energy consumption outlook 2010 2020 2035 Oil 32.2% 30.0% 26.3% Natural Gas 22.0% 23.1% 26.0% Coal 27.7% 28.4% 27.2% Renewable Energy 12.0% 13.1% 14.8% Nuclear Energy 5.7% 5.4% 5.7% Source: International Energy Agency Factors affecting oil and gas price Outcome Increase in population Positive Political Instability Positive Economic slowdown Negative Increase in alternative fuel Negative

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