Oil and Gas Exploration and Production: Reserves, Costs, Contracts [Centre for Economics and Management, Jonathan Pearse] on inglobseclucog.cf *FREE*. They are costly, as the investments for exploration and production represent more than half of all investments in the oil and gas sector. Moreover, exploration is a. Petroleum: a strategic product. 2. Oil and gas exploration and production. 3. Hydrocarbon reserves. 4. Investments and costs. 5. Legal, fiscal and contractual.
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Oil and gas exploration and production: reserves, costs, contracts. Edition/ Format: eBook: Document: English: 3rd ed., rev. and updView all editions and. Request PDF on ResearchGate | On Jun 26, , Subhes Bhattacharyya and others Oil and Gas Exploration and Production: Reserves, Costs, Contracts. Oil and Gas Exploration and Production: Reserves, Costs, Contracts. Front Cover Editions TECHNIP, - Petroleum industry and trade - pages.
This book sets out to tackle all aspects of hydrocarbon research and production concisely, but also exhaustively. It does so by describing this activity an activity that is often seen as somewhat mysterious by looking at all the major themes involved. The first chapter contextualises the role played by oil in a world which is dependent on it, and which shall continue to be dependent on it for a number of years to come.
It looks back over the history of this raw material, investigates the changes in its price over the years and the changes in the way in which the whole oil industry has been structured.
The second chapter adopts a more technical approach and describes the expertise and technologies that are used both in the search for hydrocarbons and in their production. The third chapter looks at the concept of reserves and discusses it, along with the various classifications and modes of assessment involved. The fourth chapter puts forward a detailed analysis of the investments and costs involved in this highly capital-intensive industry.
The fifth chapter deals with the legal, contractual and fiscal considerations which govern the ways in which income is shared among the various stakeholders involved. The sixth chapter looks at the economic criteria which are used when investment decisions are made in this sector.
The seventh chapter looks at specific accounting features and other useful indicators that are used for analysing competition. The eighth and last chapter investigates problems to do with safety, the environment and ethics problems which are fundamental nowadays.
If this book succeeds in providing readers with a better overview of this industry of which Colonel Drake was the pioneer, then we will have succeeded in our aim. We would like to extend our warmest thanks to all the people who were involved in the first edition of this book. For the update, in addition to all those involved in the first edition including Denis Guirauden who has been ever present by our side , we called upon a number of specialists who were tasked with looking out for errors and putting forward recommendations for changes and improvements.
Finally, we would like to thank Total, Shell and BP who were kind enough to provide us with the photographs without which such a book would not have been possible. It has been a long time since a reference book on the exploration and production of oil and gas was last published. This book therefore meets a genuine need: It also provides essential information for the public at large on the relationships between energy and the environment, which involve many complex issues and stir public debate.
This book stresses the economic aspect of petroleum activities and provides a solid understanding of the technical and contractual issues which underpin relations between the petroleum industry and the producing countries, a wise choice since the economics of the sector cannot be understood without a solid grounding in the technical, legal and political aspects.
I should like to pay tribute to the IFP and the IFP School for having taken the initiative to compile this book, particularly valuable because of two features: The book therefore sets a ne example in our rapidly changing world, and should be instrumental in attracting new talents to a sector which will remain exciting and vital for at least the next 50 years and probably longer.
I hope this book is rewarded with the success it deserves. Oil and gas exploration and production. Sedimentary basins. Petroleum geology. Petroleum system. Hydrocarbon reserves. Investments and costs. Legal, fiscal and contractual framework. Forms in which exploration and production can be undertaken. Regulatory options. The content of petroleum legislation.
The objectives of the parties involved. Reconciling objectives and sharing the economic rent. Types of contract. Breakdown of petroleum contracts by type. Middle East. Former USSR. Decision-making on exploration and production. Equivalent cost. Financing mix and the equity residual method. Acquiring participations, valuing a project. Annexe to Chapter 7 Basic principles of financial accounting. The balance sheet.
Profit and loss account. Cash flow statement. The consolidated accounts. References to petroleum literally oil from stone or more precisely bitumen, asphalt or even pitch, can be found in writings going back to earliest antiquity. These texts effectively describe the heavy and viscous residue which remains when petroleum reaches the earths surface and loses its lighter fractions as a result of natural evaporation.
This residue has many uses, in particular the caulking of ships. It is said that Mosescradle may have been tarred to prevent it from sinking on its journey down the Nile. Over the centuries up until the dawn of the modern era petroleum was used for two other important purposes: Box 1. In those days, the sons of our warriors did not learn how to read. They did not go to school but they understood the language of the birds and of all the animals that the Great Spirit had created in the sky, the waters, the prairie and the forest.
They learned without a teacher everything they needed to live.
Often, in the forest or in the mountains, they came across black lakes, whose waters seemed to be poisonous. Yet, the hunters claimed that, in the evening, many animals would come to drink from these thick waters. It was as if they were attracted from afar by the smell which rose above these lakes and spread far away through the air. Our brothers, the Senecas, were the rst to think: Why not do like these birds and these mooses? The bears that want to live through the harsh winter without feeling the cold lick the grease from their paws; for us, if we drink these oily waters, we will gain much strength for walking, hunting, ghting and to combat the cold.
The Great Spirit, who placed these waters in our path, did not do it just to tempt us. They drank and they found that indeed the water from the black lakes proved to be a powerful remedy against all the ailments which threaten a warrior during his lifetime. Those who drank from these waters no longer suffered headaches or stomach aches; they saw the worms which incessantly gnawed away at mans liver and entrails leave their bodies.
Those who poured it over their heads felt their hair grow longer; those who applied it to their wounds were cured more quickly than with the balsams of our medicine men. Those who rubbed it on their bodies were protected against snakebite; even the Iroquois claimed that if they mixed a little of the water from the black lakes with their tattoos, they would never again fear arrows.
The Indians had repeated these wonderful tales from one side of the continent to the other. Now, they were ghting with each other over the black lakes. They dug holes in the ground where salt was plentiful, on the surface of the earth.
They threw their woollen blankets in these holes. At sunset, they prayed to the Great Spirit for mercy. And often, in the morning, they would nd their blankets soaked with miraculous oil. They would offer them to their friends. My father often told me that one of our ancestors had shown one of these black lakes to a paleface who came to this country, many years ago, when the Indians knew no other master than the Great Spirit, between earth and sky.
The ailments which it was supposed to cure were numerous: Petroleum is also combustible, and therefore an instrument of war: But the modern development of petroleum is mainly attributable to the invention of the oil lamp Fig. This lamp provided exceptional lighting, and caught on very quickly. From our vantage point in the new millennium, these lamps, very varied in size and shape, testify vividly to the daily life of our forefathers.
Originally they often used whale oil. But apart from endangering the survival of their prey, whalers were not able to meet the needs of consumers. It was replaced by parafn, or kerosene, a petroleum product.
However natural seepage rapidly became insufcient to meet growing demand, prompting subsurface exploration to increase production.
On 27 August Colonel Drake carried out the rst drilling 2. This was successful. At a depth of 23 metres the bottom of the pit lled with precious petroleum see Fig.
The methods used to manufacture kerosene from crude oil were rudimentary. The distillation techniques practised at that time allowed the heavy fractions to be separated and used as lubricants, but part of the crude was deliberately discarded; environmental constraints were not yet what they were to become a century later! Increases in the consumption of kerosene led to a rapid growth in the demand for crude oil. By the turn of the century oil lamps were being progressively replaced by the electric light bulb, and the consumption of kerosene began to decline.
But declining demand for kerosene was offset by growing demand for petrol for cars, and later diesel. This was of course the time when the automobile industry was expanding. Some time later the heavy fuel oil market became an important outlet for the rening industry.
Winston Churchill, rst Lord of the Admiralty , urged the adoption of this fuel by the British eet whose eventual agreement made an important contribution to the development of petroleum. Yves Lacoste claimed that geography is used to make wars. We could paraphrase him by adding that so does oil. It would be possible to do without metals or certain agricultural products for a fairly long period.
It would be unthinkable to do without petroleum products.
Indispensable in the transport sector, petrol is of vital national importance in times of peace, but also in times of war. The purpose of the offensive on the Eastern front was to gain control of the Russian oilelds of the Volga. Berlin later directed its forces towards the Middle East where large deposits of oil had been discovered in Saudi Arabia and Kuwait just before the onset of war.
Petroleum is therefore a strategic commodity, i. Georges Clemenceau declared at the end of. Until the Second World War, however, the consumption of petroleum remained limited Fig. It was only after the war ended in that oil was to become the energy of reference. Consumption rose from Mt in to over 1 Gt in , over 2 Gt in and over 3 Gt in Now at the beginning of the 21st century consumption is close to 3. The rst company to become very large in the oil sector belonged to John D.
He initially headed up a wholesale business, one of whose products was petroleum, and built the rst renery in Pennsylvania, then a second, progressively extending his activities to cover the entire range of activities of the burgeoning petroleum industry. He acted according to a number of simple but effective principles: Rockefeller eschewed production, which he considered anarchical, preferring to download in his crude, which was then available on the market at a very competitive price.
On 10 January , he created Standard Oil together with his brother and some friends. The name Standard reected the desire to sell a product of constant and high quality.
But the successand sizeof Standard Oil provoked deance and hostility not only amongst its competitors but also amongst some sections of the public and the authorities. In order to defuse these attacks the company formed itself into a trust in The shares in the various operating companies in the group were presented as being no longer the property of a single company but rather as being held in trust on behalf of their owners, the shareholders of the main company. The Standard Oil Trust issued shares, distributed 1.
This section was inspired particularly by tienne Dalemont and Jean Carri: Histoire du ptrole. Presses Universitaires de France, WW1 Petroleum is as necessary to the economy as blood to the human body. But the examples of Japanese and Korean industrialisation show that it is control over the supply of petrol rather than its possession as such which is really the issue. Oil is likely to maintain its vital role in the future, particularly in the transport sector, where its hegemony is virtually unchallenged.
Alcohols and gas LPG, compressed natural gas and LNG may make some inroads into the market for auto fuels, but the only serious rival is electricity.
However technological and economic problems mean that it is likely to be many years or even several decades before electricity begins to make major headway in the auto fuel market. It should also be noted that, even if electricity were to become a serious contender, it would probably still be necessary to have recourse to petroleum or gas as energy source in the fuel cells.
For the moment there is no prospect of replacing oil products. Meanwhile another oil product is likely to continue to grow: Figure 1. The cartoonist was carried away by his enthusiasm here, showing oil gushing forth from a drillhole, whereas the oil actually only owed out slowly into the bottom of the hole drilled by Colonel Drake. This was the dawn of a new era for mankind. The group continued to be run by a small team led by Rockefeller. Against a background of rapid growth in the demand for lighting, heating, lubricants and greases, Standard Oil continued to grow, maintaining its rm grip on the rening, transport, distribution and retail of petroleum.
After it felt the need to increase its presence in oil production in order to guarantee its supplies of crude. This strategy of developing its production capacity proved particularly judicious when in a chemist employed by Standard Oil perfected a rening process which permitted sulphur to be removed from oil products, particularly kerosene.
Hitherto kerosene with a high sulphur content had been impossible to sell because of the odour produced when it burned. This invention meant that new high-sulphur crudes could be used. Having become a trust in , Standard Oil was forced to transform itself after anti-trust legislation was enacted Sherman Act, In a new holding company, the Standard Oil Company of New Jersey, was created, bringing under its umbrella all the companies then constituting the group.
The new company continued to represent a great concentration of power, attracting hostility not only from the authorities, who sought to promote competition, but also from 6. Of the 34 companies which made up the Standard Oil group, 5 ceased operations, 8 turned to other activities and 21 continued their development, in some cases downloading out their competitors.
Amongst the companies still recently in existence were: It should be noted that the mergers between Exxon and Mobil, and between BP, Amoco and Arco further reduced by several companies the number of offspring companies of Standard Oil. The strategy adopted by Standard Oil illustrates the constant concern of industry to control the entire chain of its activity. Furthermore this desire for control rapidly translated itself into a nancial obligation, the demands of technological and industrial development imposing investments on companies which only the largest could bear.
This was conducive to the emergence of a vertically integrated and oligopolistic industry. Although in the rst twenty years of its existence the petroleum industry was American, and dominated by Standard Oil, it rapidly became an international industry, even though the U.
The growth in the consumption of kerosene, followed by gasoline, diesel-oil, and fuel oil was a worldwide phenomenon. Not only Europe but also Russia and Asia became important markets. New oil companies were created e. A series of articles published at the turn of the century by the journalist Ida Tarbell, subsequently compiled into a book, The history of Standard Oil, had a tremendous impact. Eventually action was taken in the courts, and in the Federal Court ordered the break-up of Standard Oil.
Despite delaying tactics employed by the company, the ruling was conrmed in The group divided up into 34 separate companies see Box 1. Travellers had been struck by the permanent res fuelled by natural sources of petroleum. There was a thriving trade in naphtha nefte is the Russian word for petroleum between the shores of the Caspian and the Far East.
It was transported by camel in goatskins. The early discoveries of oil in the U. Oil production grew rapidly, attaining 1 Mt in , 4 Mt in and 10 Mt in At that time this was half of world production, and exceeded U. Among the rst to download up land on the banks of the Caspian were Robert and Ludwig Nobel, brothers of Alfred, the inventor of nitroglycerine and dynamite, and creator of the prize which bears his name.
They rapidly developed oilelds, reneries and transport facilities. They arranged for the bulk transport of oil across the Caspian Sea, launching the rst oil tanker, the Zoroastra, in , and became the largest producers in the region. Of course a problem which rapidly presented itself was how the oil was to be transported out of Azerbaijan, across Georgia to the Black Sea. The isolation of the oil resources in the Caspian, already a critical problem at the end of the nineteenth century, continues to be relevant to this day.
The latter already had interests in the oil industry: He agreed to participate in nancing the pipeline, and went on to establish a company, BNITO, which was to become one of the largest in the region. The Nobels and the Rothschilds rapidly sought to sell their product to external markets: Europe and the East.
While the Nobel brothers controlled much of the Russian market, the Rothschilds were much more dependent on foreign markets. The latter therefore turned to Marcus Samuel Fig.
Chapter 1 Petroleum: For many years there was erce competition between Standard Oil and the Caspian producers.
But there was a rapid deterioration in economic and social conditions in Russia, the Tsarist administration proving weak and inept. A revolution in failed, but in the Bolsheviks took power and overthrew the Tsar. During this whole period the Baku region was being shaken by a whole series of strikes and industrial unrest caused by the deplorable working conditions.
One of the leaders of these actions was a certain Jossef Djugashvili, later to become the notorious Stalin. In the face of this situation, the Rothschilds decided in to sell most of their interests to Royal Dutch Shell, which had been set up in In the new Soviet regime nationalised the entire oil industry.
The last remaining Nobel was stripped of all his assets, which Standard Oil of New Jersey nevertheless bought from him, doubtless convinced that it would one day be able to resume operations on Russian territory.
This hope was dashed, because despite the adoption of a new and more liberal New Economic Policy in the s, none of the companies which had been nationalised ever managed to resume any signicant activity. Standard Oil of New York, on the other hand, was later to contract to download Russian products. By , however, it had regained the level it had enjoyed before the outbreak of the war, the government being in dire need of foreign currency earnings from oil exports.
These exports beneted from a small discount relative to the international price. In order to nd new markets in the East the Rothschilds, seeking new transport possibilities, turned, as we saw, to Marcus Samuel. Marcus Samuel gradually built up his oil interests, and in he created the Shell Transport and Trading Company Limited to manage these activities.
The company prospered, trading not only kerosene but also, after when Karl Benz invented the internal combustion engine, gasoline.
In order to diversify his sources of supply, Marcus Samuel acquired concessions in the Dutch East Indies East of Borneo , where he produced crude which was rened in a factory in the Balikpapan region. He also acquired interests in oil produced in Texas from the Spindletop oileld, discovered in Shell therefore became the rst company with oil sources throughout the world.
Aware of the threat posed by its competitor, Standard Oil attempted to download Shell out, but was turned down by Marcus Samuel. The company Royal Dutch was developing at the same time. It was created in by Aeilko Gans Zijlker, a former head of the East Sumatra Tobacco Company who, on discovering traces of a parafn-rich petroleum on the island, decided to throw himself into oil exploration.
Oil & Gas Exploration and Production Reserves, Costs, Contracts
After rst drilling a dry well without oil , he was successful on his second drilling attempt. In June there was a gusher from the Telaga Tunggal 1 well in Sumatra, which had been drilled to a depth of metres; the oilwell continued to produce oil for another 50 years. When he died, several years later, his mantle was taken on by Jean-Baptiste Auguste Kessler. Part of the production was exported, putting Royal Dutch into direct competition with Standard Oil. From , the latter made Many attempts were made to combine Royal Dutch and Shell; and in a working relationship was established whereby.
Marcus Samuel became the Chairman and Henry Deterding, who had taken over from Kessler on the latters death in , became Managing Director. Deterding also took on the day-to-day management, which was his wish. The Rothschilds became associated with this new organisation when the Asiatic Petroleum Company was created also in , bringing together these three interests who nevertheless retained their autonomy.
It was not until that a more comprehensive agreement was signed between Royal Dutch and Shell. The formation of this new Anglo-Dutch group ushered in a new chapter in the competition with Standard Oil. In order to avoid falling victim to the power of the American company, Henry Deterding decided to gain a foothold in the American market by downloading the American Gasoline Company and the Roxane Petroleum Company. It introduced millions of oil lamps onto Asian markets particularly China at derisory prices, or even gave them away.
Competition was also intense with Marcus Samuel who owned a renery virtually next door to that of the Royal Dutch in Balikpapan. Gulf, Texaco Many companies were formed in the United States at the end of the 19th century. Two of them played a particularly important role: Gulf which disappeared in when it was bought out by Chevron and Texaco.
Gulf was created by the Mellon family around From they began to download up oilwells in the West of Pennsylvania, using these as the basis for an integrated operation. But in the family decided to sell all its installations to Standard Oil, which showed every sign of wishing to achieve an unchallenged position in the American oil industry.
The Mellon family resumed its interest in oil when the rst explorations were being conducted in Texas, nancing a drilling operation. This was at Spindletop in , and on 10 January , when a depth of metres had been reached, an oil gusher destroyed all the drilling equipment, hurling rocks, sand and earth into the air!
The well produced several tens of thousands of barrels per day, and it took weeks to staunch the ow of hydrocarbons. This discovery had a number of consequences. First of all the resulting glut of oil led to a fall in prices. The large oil companies, including Standard Oil and Shell, bought oil from Texas in order to take advantage of the low prices.
But after 18 months the ow from Spindletop collapsed. In the Mellons raised further capital and founded another integrated company, also called the Gulf Oil Corporation.
Their efforts were rewarded, because Gulf went on to become one of the worlds largest oil companies. Another company, the Texas Company or Texaco, was formed in , based on a production facility in Texas. Like its competitors, Texaco developed an integrated structure, with a renery in Port Arthur, a number of sources of crude and a distribution network.
The lone red star logo the symbol of Texas was increasingly seen throughout the U. But there were many indications that the Middle East was potentially rich in hydrocarbons. Exploration started in Persia now Iran , followed by Turkey. The Shah of Persia was very keen to develop his countrys hydrocarbon resources. At the beginning of the century, William dArcy negotiated the rights of exploration in Persia. The project got off to a bad start. The rst four exploration wells all proved dry, also drying up the funds which had been made available by the promoters of the operation.
A new capital injection by Burmah Oil, a company which developed in India, allowed work to continue. The fth attempt, which lasted many months, was successful. In , oil gushed forth from the exploration well see Figs. But in order to turn a discovery of oil into a commercial venture, major investments are needed for the production, transport and rening facilities.
More capital was needed. In the Anglo-Persian Company was established to realise this objective. Burmah Oil remained a partner. The new company required considerable capital to nance its development in consumer markets. Ultimately the British government, nally responding to the campaign of the rst Sea Lord, Admiral Sir John Fisher, and subsequently, Churchill, to use fuel oil for the eet, provided the necessary nance. Oil was rst discovered in Mexico in , and in there was a spectacular gusher in the Dos Bocas oileld.
Mexico became the worlds second largest producer. But in the s a number of conicts between the Mexican government and the oil companies set back production. In the oil industry was nationalised. Pemex Petroleos Mexicanos was created and took control of all oil-related activities in Mexico.
However It was at that time that large new discoveries allowed Mexico to become one of the worlds leading exporters.
Venezuela followed close behind Mexico, and in the s became the second oil producer in Latin America. The rst discovery was made in , in Mene Grande. Venezuela rapidly became the worlds second largest oil producer, in front of the USSR, retaining this ranking until It also served as a clear reminder of the strategic importance of oil another example is the support given to Royal Dutch by the Netherlands government when it was created.
For consumer countries the problem is to secure reliable supplies of a vital product.
France is another good illustration of the concern and the energy which a major industrial country largely devoid of hydrocarbons will mobilise in developing and protecting an industry capable of ensuring its national independence. During the rst world war there was a rapid motorisation of the troops, mainly unmotorised at the outset of the war. Motor-driven vehicles replaced the horse for transport, assault tanks appeared in and aviation began to show its military potential. The battle of the Marne was a decisive episode which revealed how important motorised vehicles could be Fig.
It was only by mobilising the famous Marne taxis that the troops could be conducted to the front, thereby avoiding a German breakthrough which could have endangered Paris. The importance which oil assumed in the rst world war is encapsulated in two quotations. The allied cause oated to victory on a sea of oil. Senator Henry Branger, who controlled the import and distribution of oil in France during the war, concluded a speech with a phrase which continues to resonate: The blood of the earth was the blood of victory.
In , at the request of the French government, Ernest Mercier set up a private, independent company, funded mainly by French capital. This company, with a capital of 25 million francs, was founded on 28 March , the main shareholders being a number of large banks and the main French petroleum distributors, of which Desmarais was the most important.
Despite the scepticism of the industrial community about the nancial viability of enterprises of this kind, the direct involvement of the government considerably modied the nature of the market. The French state became a participant in a market expanding rapidly in response to the rise of the automobile, but which was largely being driven by developments beyond Frances national frontiers.
After the Second World War there was a tendency for the state to continue its support, direct or indirect, for the national oil industry in importing countries, both in Europe with the creation of ENI in Italy and Elf Aquitaine in France and in the U. Until the Great War, French oil supplies depended on private, independent companies linked to the major American, British, Russian and Romanian producers.
Before the war, France was one of the largest oil consumers in Europe. But the onset of war caught the government by surprise. On the one hand the oil companies sought to maintain the regime of competition characteristic of the sector. On the other hand, the international situation meant that French supplies of Russian and Romanian oil were interrupted. The only source was therefore American.
Furthermore the attacks by the German navy on oil tankers in the Atlantic were interfering with fuel supplies, to the point that in the private companies were not able to meet French needs.
Clemenceau had to make an appeal directly to Wilson for the necessary shipments to be increased. The war therefore demonstrated to France that the outcome of the war depended on the large oil companies, mainly American and British: The French government realised that it was crucial to increase French independence in relation to energy supplies, in particular by ensuring that it participated in international oil concessions such as those in Mesopotamia, where the British were very active and the Germans also had active interests.
The British were fairly favourably disposed to France participating in the TPC, as this would act as a counterbalance to the inuence of the American companies. This agreement proved particularly useful to Paris since the American companies decided after the war to stop supplying France, based on the decision of the authorities to maintain control over oil activities after the end of hostilities.
During the war the efforts of these same companies, as members of the Petroleum War Service Committee, had allowed France to satisfy its needs. But once the war ended, the French government concentrated on trying to eliminate this dependence. Apart from its efforts to gain direct access to crude oil, the French government took other measures relating to the transport, rening and sale of products.
Important decisions were also taken with regard to scientic research and training. The National Ofce for Liquid Fuels, set up by an Act of Parliament of 10 January , sought to regulate the industry without actually nationalising it.
Its aim was not only to promote oil exploration in other countries by French companies, but also to encourage exploration in France. At the same time the Act encouraged the development of the French rening industry and allowed the expansion of a eet of tankers which would guarantee national supplies in the event of war. Laws enacted in provided for monopolies on rening and distribution to be granted by the state.
The state authorised companies, either private or public, French or foreign, to import and rene crude for a term of ten years, and to import and distribute oil products for a period of three years. Between the wars 2: The example of the Turkish Petroleum Company. Amongst its concessions, those for the regions of Mosul and Baghdad were the most promising.
During the war the Deutsche Bank shares were frozen by the British government and at the same time discussions started between the British and French governments. These negotiations resulted in the French acquiring the Deutsche Bank shares in Moreover the United States, desirous of gaining access to oil resources outside its own territory acquired, by invoking the open doors policy oil concessions throughout the world must be open to all the allies , shares for Standard Oil of New Jersey and Standard Oil of New York in the TPC.
The shareholdings were then distributed as follows: Compagnie Franaise des Ptroles: Exploration got underway rapidly, and led to the discovery at Bala Gurgur, on 14 October , of the very large Kirkuk oileld Fig. The Company ran rapidly into serious difculties. There proved to be a divergence of interests between the CFP for which the IPC was the only source of crude and its American partners in particular.
The so-called Red Line agreement, which stipulated that the partners in the IPC should act in concert in all the former Ottoman Empire territories, resolved these difculties in However the problem resurfaced in It reected the desire of the oil companies to avoid competing so ercely that their interests would be harmed, and established a form of cooperation between them. We will consider this agreement in greater detail in Section 1.
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The agreement is so named because, after long discussions, C. Gulbenkian grabbed a map and drew a red line around the territories within which the partners in the TPC later the IPC would be obliged to act in concert. Around the geologist Frank Holmes published evidence pointing to the presence of oil in the Bahrain region, and obtained concessions in that Emirate, as well as in Kuwait and Saudi Arabia.
However, short of money, he sold all these concessions to Gulf in The rst discovery was made in This was fairly modest in size, and the production of the Emirate did not exceed several million tonnes per year, but it conrmed the promise of this zone. Kuwait was the only country situated outside the Red Line. Gulf and Anglo-Persian jointly obtained a concession for 75 years.
In the Burgan oileld was discovered. Its initial reserves were estimated at 10 billion tonnes, making it at the time by far the largest oileld yet discovered. The new king, Sultan Ibn Saud preferred to negotiate with the Americans and granted Socal a year concession in In the Ghawar oileld was discovered, still the largest ever discovered. At an early stage Socal formed a joint venture with Texaco in order to develop its resources in Bahrain. The latter controlled major outlets in Europe and Asia, whereas Socal.
This region accounts for twothirds of the worlds oil reserves. Socal and Texaco established two new companies: The war interrupted oil extraction activities in Saudi Arabia. The full potential of the Arabian peninsula only became fully apparent after the war. But the investments needed to develop the resources of the Wahhabite kingdom were considerable. Socal and Texaco sought partners. The other IPC partners, who could have demanded to participate in Aramco, obtained increased interests in Iraqi production.
After WWII: Automobile transport was developing rapidly, and demand for domestic and heavy fuel oil was increasing steeply. These two fuels were making major inroads into the traditional markets of coal. Supply remained abundant, however, thanks to large discoveries not only in the Middle East Fig. Russian exports were also increasing. However the entry of new producersthe American independentsonto a market hitherto controlled by the majors current term used to designate the large oil companies increased and modied the nature of the competition.
These new companies sought to counter the declining protability of American operations by internationalising their operations and gaining a foothold in Libya, in particular. European governments were also taking an increasing stake in oil and creating national companies such as ENI Ente Nazionale Idrocarburi , Elf and Fina, intended to increase national energy-independence. These companies grew rapidly. The Second World War changed the nature of the relationship between the producers and the international oil companies: They wanted a greater share of the rewards arising from the extraction of their oil wealth.
Negotiations in Iran in to revise the terms of the Anglo-Iranian concession got off to a difcult start. The young Shah had to contend simultaneously with the very inuential religious community and a powerful communist party. The rst proposals for modifying the concession were rejected by the Iranian parliament, which demanded nationalisation.
The then Prime Minister announced to parliament that he rejected nationalisation, and urged instead modication of the concession. He was assassinated several days later. After many troubled months the Iranian authorities negotiated an agreement with the oil companies led by the American companies: Production, rose rapidly to achieve Mt in By the outbreak of war, this company was of comparable size to the local subsidiaries of foreign companies operating in Italy.
At the end of the war Enrico Mattei, an industrialist who had fought with the Resistance, was appointed to head up AGIP, whose installations had suffered severe war damage. Dynamic and ambitious, Mattei sought to develop AGIP and allow it to play a major role in guaranteeing Italys oil supply. However capital was needed.
The discovery of major reserves of natural gas in the Po valley met this need. The ENI was formed in , bringing together various companies in the hydrocarbons sector, most of which were run by Mattei. In order to guarantee access to petroleum resources, Mattei pursued a policy of maintaining active contacts with producing countries.
Failing to secure an interest in the major oilelds of the Middle East from the seven sisters Mattei is reputed to have coined this sobriquet himself he negotiated an agreement with Iran. Although Mossadegh had partially failed, several years earlier, in his assault against the oil companies, the oilelds had still been nationalised, and the state had more exibility in its negotiations with foreign companies. This was a rst in the oil sector. Until his death in in an aircraft accident, Mattei sought to diversify his companys supply sources.
The creation of ELF, a second national French oil company In addition to supporting the CFP the French government was anxious, particularly after , to promote exploration and production in France and other territories under its sovereignty. Several companies were created and oil and gas discoveries were made in the south of France, in Gabon and in Algeria. These companies progressively merged into the Elf group today part of Total. The IFP arose out of the desire of the French government to support its national petroleum industry and to limit its dependence on imported processes, equipment and technology, particularly from the U.
The brief of the IFP is to foster scientic and technical research into all aspects of exploration, production, transformation rening and petrochemicals , applications e. The IFP developed rapidly, reaching something like its present size in the early s. Its success in realising its objectives can be measured in terms of the number of its proprietary rening and petrochemical processes it has sold. In more than process units in many countries including Japan and the U.
The IFP has also played a major part in the creation of a world-class petroleum services industry in France. Technip and Coexip, for example, originally set up by the IFP, and which recently merged, are amongst the worlds leaders in their respective elds.
Until it accounted for half the worlds crude production. But consumption grew much faster than production.
The U. By this gure had doubled. These imports were attractive because the price of Middle Eastern oil in New York was lower than that of American oil. The American authorities, worried about this competition, started by calling for voluntary restrictions, and in imposed compulsory restrictions: The American market was therefore partially protected from the world market, leading to price rises.
Prices outside the U. In order to increase their crude sales, oil companies widely adopted the practice of discounting the posted prices, which continued to be the reference price for the calculation of royalties and taxes.
But competition also led to companies seeking to reduce the posted prices. These reductions produced an automatic reduction in the incomes of producing countries per barrel sold. The main objective of this new organisation was successfully achieved: In the nationalisation of the Suez Canal resulted in its closure.
While everything was restored to normal within several months, and good cooperation between the consuming countries limited the effects of the crisis, these events marked the emergence of third world countries as a political force. Two years later, in , a military coup dtat in Iraq swept General Kassem to power. In the new government decided to withdraw IPCs concessions except where there were already productive wells. While this embargo only lasted a few weeks, it marked a new stage in the use by producing countries of oil as a weapon.
Furthermore the reclosure of the Suez Canal see Fig. North African oil was therefore at a premium because of its transport advantage, a factor which would become signicant in the following years. During the s Algeria and Libya became important oil producers. But in King Idris of Libya was replaced by Colonel Gadda, who became the rst leader of a producing country to seek to cut production in order to conserve resources.
Economic climate Oil consumption had increased Figs. There was another cause for disquiet: It was feared that oil resources might be largely exhausted by This was the backdrop against which the famous report of the Club of Rome entitled Limits to Growth was published in This report warned of the dangers of the depletion of natural, non-renewable resources, as a result of economic development.
The report called for economic growth to be slowed so as to save raw materials and protect the environment. Of course there was no simpler way to limit consumption than to increase prices. At the same time, new air quality legislation in the U.
But initiatives to open up new resources situated in ecologically fragile areas Alaska, California coast, Gulf of Mexico were delayed following actions taken by environmental protection groups. This led to a somewhat paradoxical situation, since it made the U.
In order to protect the interests of domestic producers, who were at a cost disadvantage compared with their foreign competitors, quotas were introduced. But these proved difcult to administer. In President Johnson, who had been very close to Texan oil interests, was replaced by the Nixon 3.
Sales were increasing and equipment was being modernised all over the world by kind permission of BP. Administration, which decided to change course. American producers would be protected by raising prices; this would not only allow quotas to be abolished because it would make American producers protable, but it would also guarantee adequate revenues to the producing countries Venezuela, Gulf states , thereby stabilising the existing regimes, which were necessary partners of the U.
By , the politico-economic climate was at last turning favourable to an increase in oil prices. The main actors with the important exception of the major consuming countries without oil resources saw nothing but benet from such a development.
The event which actually triggered the price rise was the decision by Libya, which demanded that the oil companies reduce production by more than one million barrels per day. At the same time, Algeria nationalised the six oil companies and unilaterally set the price of its oil. Libya obtained higher tax rates and an increase in the posted prices from the oil companies. But most was still to come. In practice, two separate negotiations led to signicant price increases, which in turn produced an increase in the incomeper barrelfor producing countries.
The Teheran Agreement February related to the Gulf countries. Finally, following the devaluation of the dollar in August , two successive conferences in Geneva in and , led to increases in posted prices to compensate for the loss in value of the American currency. Even more importantly, a fourth conict broke out between Israel and the Arab countries. This time the war was started by Egypt and Syria, who attacked Israel during the festival of Yom Kippur, on 6 October.
Initially events moved against Israel before reaching a balance of force. The war ended on 25 October without a victor.
This war nonetheless had a considerable impact on the oil industry: On 16 October the six Gulf states decided on an enormous increase in the posted. The spectacle of Dutch motorways closed to trafc at weekends to save fuel was a powerful image which remained engraved on European imaginations for long thereafter. During the s a wave of nationalisations by OPEC member countries gathered momentum. Over a few years most of these countries nationalised the assets of foreign companies, and in most cases declared a state monopoly on all activities related to petroleum.
OPEC, by providing its members with the opportunity to take concerted action to strengthen their negotiating position, acted as a catalyst to a movement which arose from age-old demands. In producing countries petroleum has often been considered a natural resource which belongs to the people, and must be used in their interests.
This is sometimes actually written into the national constitution. During the period between the Second World War and this concept reached its climax. Many countries became independent either after the war or during the s, and acquiring control over their natural resources, particularly oil, symbolised national sovereignty.
Although several countries: Russia , Mexico , Iran , India nationalised their oil industry earlier, the great wave of nationalisations occurred between and In the Mediterranean countries nationalisations often occurred on a company-bycompany basis: In negotiations between the oil companies and OPEC led to the participation agreements New York Agreements , which envisaged the progressive acquisition of concessions by producing countries.
Only some of the Gulf States signed this agreement, and the nationalisations in fact occurred much faster than envisaged in the agreement: Kuwait and Qatar in , Venezuela in and Saudi Arabia in stages between and One clear consequence of the concept of petroleum as the property of the people is that the national public should have access to oil products at as low a price as possible. In Venezuela, Nigeria and Saudi Arabia petrol prices are very low, often below the international price excluding taxes and distribution costs.
This encourages very high consumption, to the detriment of exports, and therefore of vital foreign currency earnings. These concepts only changed at the end of the s, with the fall of the Berlin Wall and the collapse of communism. The oil shock of marked the start of an economic crisis in Western countries as well as a major turning-point in the development of the petroleum market.
Firstly, a new type of actor in the oil market began to emerge beside the Western oil companies and the major importing countries: These countries acted either individually or in some cases through OPEC. Secondly, a split developed in the oil industry at the global level, with oil production, now under the control of state companies, remaining separate from rening and distribution, most of which was still in the hands of the Western oil companies.
The objectives of the IEA were: To set up an information system on the international oil market, as well as consultations with the oil companies.
To cooperate with producing countries and other oil-consuming countries in stabilising international energy markets to ensure that the worlds energy resources are managed and used rationally, in the interests of all countries.
To create a plan which would prepare countries for a possible major disruption of supplies and for sharing the available oil in the event of a crisis.
The IEA is also an important centre for publications on the energy sector. Prices were xed by OPEC at periodical meetings. The prices of other crudes were derived from that for Arab light as a function of their quality API, sulphur content and location.
At the end of political and social discontent in Iran Fig. At rst other counties increased their production to make good the Iranian shortfall. But Saudi Arabia subsequently decided to place a ceiling on its production signicantly lower than its level of December The free market, still relatively undeveloped, spiralled out of control.
Demand far exceeded supply, exacerbated by the scramble by operators to By the end of spot prices see Section 1. At the same time the OPEC countries began to pursue a policy of setting the ofcial price close to the spot price. In October the commencement of hostilities between Iraq and Iran led to a large reduction in the output of these two countries, provoking a new, although brief, upsurge in prices.
In fact energy conservation measures taken by consumer countries were beginning to show their effectiveness: Other zones were also the object of extensive development, for example in the republics of Central Asia around the Caspian Sea. Before the oil shock of and the wave of nationalisations, the large western oil companies had chosen their supply sources essentially on commercial considerations.
The expectations of governments played little part. Outside of the communist block the growth in production, which extended from to , therefore took place in zones with low production costs, that is basically the countries which founded OPEC in or which joined subsequently.
Even countries such as India and Brazil, which were actively committed to an independent, state-controlled approach to development, preferred to import growing quantities of petroleum products produced cheaply by the multinationals rather than develop their own production. It was regarded there as elsewhere as the antithesis of sound economics to use scarce nancial resources to encourage an uncompetitive national production.
The attractiveness of OPEC oil and particularly that from the Gulf states was considerably reduced as a result of its policy of high prices.
There were also doubts as to the reliability of OPEC supplies. Political instability in the region made Western countries increasingly wary of Middle Eastern oil.
Most oil-importing countries were pursuing a policy of diversifying supplies. The IOC may also be engaged to provide equipment and training employees to operate the petroleum facilities. Accessed on 15th February 28 Ernest E.
Smith, John S. Article 2 is succinct on the role of the IOCs and the scope of the contract. It states that This Contract is a Technical Service Contract for the rehabilitation of improved production and enhanced recovery of Petroleum from the Rumaila Oil Field in 31 accordance with the provisions herein Risk Assumption: despite the company solely investing its own money in the exploration it is entitled to no payment or compensation unless a viable find is made In some jurisdictions for example Iraq the HG takes over control of the operations Consideration: where the Company has made a successful find and production is undertaken it is entitled to a taxable fixed fee for the service rendered.
In cases of download-back service contracts, the IOC is given priority to download the first tranche of petroleum produced at a reduced rate The comparison will also point out the advantages and disadvantages of the two forms of contracting. Dzienkowski, above n29 pg 40 33 Frank C. In both, the term of the contract is stipulated — at Article 6 of the PSC grants a 7 year period broken down into two phases of 3 and 4 years respectively while under Article 3 of the TSC the contract is to last 20 years.
Both contracts have provisions securing national interest- Article Article Similarly Article 6. While in a PSC the IOC is more of a partner in the venture and shares in the resulting oil as well as control of the operations, the HG through the NOC has absolute ownership of the oil in a SC arrangement and has massive control over the operations.
Besides, in a SC regime, the IOC is more or of a service contractor retained for its services and paid a fixed fee. The IOC is the sole bearer of the financial risk of the operation. In the event that no viable deposit is established out of the exploration, the IOC will recover no costs.
For the benefit and awareness of NE however, the brief also points out some of the known demerits of PSC and the few merits that the SC may have. On the other hand in an SC arrangement the IOC has little or no control over its own operation thereby jeopardizing its technical integrity.
The HG may contribute directly to the venture or in the alternative; the IOC may carry the costs and recover them from cost oil.
This is a safer investment than in a SC arrangement where the IOC bears all the risk with no fall back for recovery in the event that the venture does not yield a profit. Since the IOC has no say on the disposal of the resulting oil, if at the time of production and sale, the market prices of oil are favourable, the HG would unduly benefit at the expense of the IOC.
In any event, download back incentive would only be beneficial if the market prices at the time of such download are relatively high.
Given the volatility of world petroleum prices, this may not be a secure method of payment.Outside periods of sharply rising and falling prices, it has served as a price regulator, by agreeing to be the or the principal swing producer. Annexe to Chapter 7 Basic principles of financial accounting.
Sigonney Total et M. The possibilities for regulation disappear, however, when excess production capacity is inadequate, as was the case in and from to Hydrocarbon reserves. To create a plan which would prepare countries for a possible major disruption of supplies and for sharing the available oil in the event of a crisis.
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