MGMT 1035 Week 11 - Oil and Gas Industry PDF

MGMT 1035 - Week 11 Part 1 - The history of the Oil and Gas industry What is gasoline? Initially gasoline was a byproduct of the refining of oil into kerosene Prior to the internal combustion engine, it had limited use In the USA in the 1800s it was routinely dumped, often into nearby r...

MGMT 1035 - Week 11 Part 1 - The history of the Oil and Gas industry What is gasoline? Initially gasoline was a byproduct of the refining of oil into kerosene Prior to the internal combustion engine, it had limited use In the USA in the 1800s it was routinely dumped, often into nearby rivers Internal Combustion In Germany internal combustion cars were developed in the 1870s and by the mid 1880s Karl Benz had begun commercial production The necessity to use gasoline created a new market for what had been discarded in the past Bertha Benz journey Ways to consider gasoline’s impact One way to look at this influence is to consider individuals who benefited from the increasing importance of gasoline William Knox Darcy who developed the oil industry in Persia and elsewhere in the middle east Founded what became British Petroleum John D.Rockefeller The American example Founded Standard Oil Had used gasoline as a fuel to heat oil in the refining process Internal combustion gave him a huge new market Standard Oil becomes a virtual monopoly Technology The power of gasoline made internal combustion engines much superior to other types Henry Ford’s Model T made the car more widespread In agriculture tractors replaced steam engines Society Cars need highways Cars allow more suburban spread Cars require the expansion of networks of gas stations Changes in the oil business Increased markets for gasoline mean increased exploration for sources In Canada this means exploration in Alberta In the US the shift to Texas, Oklahoma  Globally the Middle East becomes more important War Gasoline becomes an essential tool of war Tanks, ships, planes and transport all need it As a strategic resource it becomes a cause of conflict as well Politics American and British roles in the August 1953 coup against Iranian Premier Mohammad Mossadeq In 1953 the CIA and the U.K. organized a coup in Iran to replace the popular government with one more amenable to the oil and gas industry. This is one example of the influence of the industry on world events OPEC The Organization of Petroleum Exporting Countries The oil embargo they launched in 1973 caused a recession in the western economies Environment Not just use in cars Production in refineries Transportation of product ○ Tankers, pipelines, etc Land issues with pipelines Canada Oil and gasoline are still critical to the Canadian economy One way of looking at this is to look at companies and individuals Imperial Oil, a branch of Rockefeller’s Standard Oil Petrocanada Started as a Crown Corporation during the economic crisis in the 1970s Was to be a “window on the industry” Eventually privatized Article: What is petroleum? What Is Petroleum? Definition: A naturally occurring liquid found beneath the Earth’s surface, refined into fuel, plastics, and other products. Formation: Created over millions of years from decomposed organic matter under high heat and pressure.  Usage: Powers vehicles, heating units, machines; also used in plastics. Key Takeaways 1. Energy Source: Non-renewable fossil fuel critical to the global economy and geopolitics. 2. Industry Influence: Drives global politics and economy due to its wide applications. 3. Environmental Impact: Toxic emissions contribute to global warming and environmental damage. 4. Alternatives: Solar, wind, and biofuels are being explored. Petroleum Industry Categories: ○ Upstream: Exploration and extraction of raw materials. ○ Midstream: Transportation and storage. ○ Downstream: Refining and marketing of petroleum products. Classification: ○ Based on origin, sulfur content, and API gravity (density measure). Top Oil Reserves (2022): Venezuela, Saudi Arabia, Canada. Pros and Cons of Petroleum Pros: ○ Stable energy source. ○ High power output and ease of transportation. ○ Multiple uses (fuel, plastics, etc.). Cons: ○ Carbon emissions harm the environment. ○ Drilling and transport can cause ecological damage. ○ Non-renewable, with a finite supply. Investing in Petroleum Options: Oil futures, ETFs, and mutual funds in the energy sector. Popular Funds: ○ Vanguard Energy Fund (VGENX). ○ Fidelity Select Natural Gas Fund (FSNGX). ○ ETFs like Invesco Dynamic Energy (PXE). Alternatives to Petroleum Renewable Energy: ○ Wind: Uses turbines for energy. ○ Solar: Harnesses the sun.  ○ Biofuels: Derived from organic materials like vegetable oils. The Bottom Line Petroleum remains vital but has significant environmental drawbacks. The shift towards renewable energy is essential for long-term sustainability. Part 2 - The oil and gas marketplace Article 1 - Oil and petroleum products explained Supply and Demand Dynamics Economic Growth: Drives energy demand, particularly for transportation and industrial needs. Global Energy Consumption: Petroleum accounts for one-third of global energy use; heavily relied on for transportation, heating, and electricity. Role of OPEC Influence on Prices: Sets production quotas for member countries, controlling 72% of global reserves (2021) and 37% of production. Factors Affecting Influence: ○ Member compliance with quotas. ○ Consumer responses to high prices. ○ Competition from non-OPEC producers. ○ Efficiency of OPEC production vs. others. Spare Capacity: Acts as a buffer during supply disruptions; Saudi Arabia holds the largest spare capacity Geopolitical Events and Supply Disruptions Major Disruptions: ○ Arab Oil Embargo (1973–74). ○ Iranian Revolution and Iran-Iraq War. ○ Persian Gulf War (1990–91). ○ Conflicts in Libya, Venezuela, and the Middle East. Market Response: Low spare capacity and inventories amplify price volatility during disruptions Weather Impacts Hurricanes and Cold Weather: Disrupt production and strain supply chains, leading to seasonal price spikes. Market Dynamics Global Auction: Crude oil prices are determined by worldwide bidding in tight (high demand/low supply) or loose (low demand/high supply) markets. Spot vs. Futures Markets: ○ Spot Market: Immediate delivery at current prices. ○ Futures Market: Contracts to buy or sell oil at a fixed future price; used for hedging or speculation. Price Volatility Inelastic Supply and Demand: Limited short-term ability to adjust production or consumption leads to sharp price changes. Market Signals: ○ Rising prices indicate supply shortages. ○ Falling prices indicate excess supply. Price Outlook Uncertainty: Oil prices are influenced by a complex mix of economic, political, and environmental factors, making long-term projections challenging. Article 2 - OPEC Formation of OPEC (1960) Founding Members: Iran, Iraq, Kuwait, Saudi Arabia, Venezuela. Purpose: Stabilize global oil markets, ensure fair oil prices, and guarantee a steady supply. Reason for Creation: Response to falling oil prices due to competition with Soviet oil and dominance of "The Seven Sisters" (major oil companies like Esso, BP, Mobil, etc.). Early Challenges (1960s) Internal Disputes: Members struggled to agree on export limits; flooding the market reduced prices, conflicting with OPEC’s goals. Geopolitical Issues: ○ Six-Day War (1967): Arab members failed to agree on boycotting Israel, causing division. ○ Declaration of Sovereignty (1968): Asserted member nations' rights over their oil resources, aligning with decolonization efforts. New Members: ○ Qatar (1961), Indonesia (1962), Libya (1962), UAE (1967), Algeria (1969).  Competition: New oil discoveries (Nigeria, North Sea, Alaska) challenged OPEC’s market share. The 1970s: Rise in Influence Oil Embargo (1973): ○ Triggered by U.S. support for Israel in the Yom-Kippur War. ○ OPEC’s Arab members embargoed oil to the U.S., UK, Canada, Japan, and others, causing global shortages and soaring prices. ○ Shifted economic power toward OPEC nations but revealed their reliance on Western companies for refining and distribution. Market Share Growth: OPEC supplied 56% of global oil by 1973, gaining influence but not total control. Limitations: Other nations adjusted supply chains, reducing the embargo's long-term effects. The 1980s: Declining Control Iranian Revolution & Iran-Iraq War (1979-1988): Reduced oil production from Iran; other OPEC members compensated. Competition and Alternatives: ○ Exploration in the Gulf of Mexico, North Sea, and Siberia reduced OPEC’s market share. ○ Countries shifted to alternative energy (coal, nuclear power, natural gas) to reduce dependence. Internal Conflicts: Quota disagreements led to oversupply and a price crash in 1986. Recovery: Prices rebounded but remained below pre-1986 levels. The 1990s to Present Iraq-Kuwait Conflict (1990): ○ Iraq invaded Kuwait, disrupting oil production. ○ Other OPEC members, especially Saudi Arabia, filled the supply gap. Post-Cold War Dynamics: ○ The USSR’s collapse (1989) disrupted global oil production and reduced competition. ○ Ecuador and Gabon temporarily left OPEC, seeking freedom from production quotas. Ongoing Challenges: ○ Conflicts in Libya, Nigeria, Iraq, and Syria caused periodic supply disruptions. ○ OPEC faced increasing pressure from non-OPEC producers and alternative energy development. Key Takeaways Influence: OPEC can manipulate global oil prices but lacks full market control. Internal Challenges: Member disagreements and external competition reduce effectiveness. Global Impact: Geopolitical events, energy alternatives, and technological advancements continually shape OPEC’s role in the oil market. Article 3 - Explaining price differences Key Oil Price Benchmarks 1. Brent Oil: ○ Global benchmark from North Sea oil fields. ○ Light, sweet oil with easy access to coastal ports for global transport. ○ Commands high prices due to quality and accessibility. 2. West Texas Intermediate (WTI): ○ U.S. benchmark, produced in landlocked regions like Oklahoma. ○ Light oil but trades at a discount to Brent due to transport challenges and U.S. export restrictions. ○ Oversupply in the Midwest further lowers its price. 3. Western Canada Select (WCS): ○ Canadian benchmark for heavy oil mixed with bitumen and diluents. ○ Heavier and lower quality than WTI, located farther from markets, leading to further price discounts. Alberta’s Oil and Pricing Oil Sands Products: ○ Includes blends like “dilbit” (bitumen + diluents). ○ Heavier than WCS, priced even lower. Bitumen Pricing: ○ "Bitumen netback" = Price after deducting transport and diluent costs. ○ Lower prices affect producer revenues and royalties. Impact on Alberta's Royalties Royalties depend on the value Albertans receive from oil production. Challenges: ○ Lower oil quality and geographic distance result in unavoidable price discounts. ○ Limited access to global markets increases discounts further. Solution: Improved market access can reduce discounts and increase resource value.