Understanding oil and gas industry and its dynamics
UNDERSTANDING OIL AND GAS INDUSTRY AND ITS
This article will give you a
basic understanding about the
oil and gas industry and the
dynamics that move this
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
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
Global Oil & Gas
Exploration & Production
global the industry is
expected to make revenue
of $4 trillion in 2013.
Oil and Gas Industry
and production, E&P's
marketing, processing, storing
and refining companies.
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.
Oil and gas can be derived from two different sources i.e.
conventional and non-conventional methods.
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
Extracting and refining oil
from these sources has a
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%
Transportation industry is
expected to grow at a rate
of 37% by 2016 according
to global transportation
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
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.
- 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%
12.0% 13.1% 14.8%
Nuclear Energy 5.7% 5.4% 5.7%
Source: International Energy Agency
Factors affecting oil
and gas price
Political Instability Positive
Economic slowdown Negative