Oil Exploration And Development - Essay Example

Possessing oil rich fields, ripe for development, no longer equals huge overnight profits. Although international energy companies are shifting their attention from Europe and North America to developing countries, most projects do not take off because of the difficulties of securing sufficient financing. Political, legal and economic conditions need to be researched in depth before deciding whether or not to join forces with the oil industry. POLITICAL CONDITIONS AND CONSIDERATIONS The issue of Political Risk should be addressed at the outset of project preparation. Most investors and financiers are convinced that commercial risks can be effectively addressed when the time comes, but they feel that political risks cannot be 1 controlled by anyone. 1 Project risks are bottlenecks, HosseinRazaui 2 Ruritania, considered a developing country, has been under the same dictatorship for over thirty years and their internal political asylum is very stable. However, neighboring countries that have Ruritania land-locked from large bodies of water, are not so predictable. Known as ‘the axis of evil’ by several peaceful governments, Urbania and Translavia border both sides of Ruritania, blocking export opportunities for the inland country. Creative negotiations will have to take place with one or both of these countries in order to work out land rights if a pipeline were considered. OIL EXPLORATION AND DEVELOPMENT Intense study of oil exploration is a first step in realizing the right conditions for an oil trap. The right source rock and reservoir rock entrapment can only be done by an experienced team of geologists. The project/asset lifecycle that normally includes Field Development Planning, Conceptual/Feasibility, FEED, Detailed Design, Procurement, Construction Support and Commissioning can run into the tens or hundreds of billions of 2 Dollars. Actual costs depend on such factors as the location of possible oil reserves, how large the oil field is expected to be, how detailed the exploration information must be and the type and structure of the rock below the ground. 2 Genesis Oil & Gas Consultants 3 Exploration of the core requires careful mapping of the surface in order to locate suitable sites, deep formation surveys, and test drilling. It is not easy to determine a 3 typical cost of such activities. Several companies offer advice to partners and operators on optimal infill drilling Schemes, development drilling schemes, recompilation programs, water flood or gas injection patterns but OPEC has the lowest average cost in the oil industry with several programs worth contemplating. FINANCIAL CONDITIONS AND CONSIDERATIONS Designing a financial plan for exploration, as well as development, is essential. State owned companies, which have traditionally financed their projects through government budgets or official government-sponsored borrowing, are now turning to commercial sources of finance, such as commercial bank loans, private bond placements, and sales of equity in stock markets. The World Bank, in cooperation with other World Bank Group members-the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA)-includes technical assistance, lending and guarantees. This can be very helpful in the complex process of designing an ownership structure, security package and 4 a financing plan. 3 Investment Requirements/OPEC 4 The Role of the World Bank, Hossein Razaui/pg 4 4 Since September 1994, the Bank has been offering two different types of guarantees as a way of “leveraging” private investments in key projects: (1) a partial risk guarantee covering governmental nonperformance of contractual obligations in a project (such as selling inputs to the project, buying end products, or making certain related investment); and (2) a partial credit guarantee that typically extends maturities beyond what creditors would otherwise provide, for example, by guaranteeing late-dated 5 repayments. Governments and willing sponsors of oil and gas projects in developing countries Can gain much insight by studying the practices of other countries with regard to fiscal Systems and the parameters of regulatory regimes. This is another area in which the World Bank and other multilateral institutions can be beneficial. Assuming political, financial and protection policies are able to be put in place with bordering countries and locally effected residents, the planning, building and operation of a pipeline brings with it a new set of requirements and problems to consider. 5 The Role of the World Bank, Hossein Razuvi/pg 5 5 THE PIPELINE INDUSTRY The primary players in the crude petroleum pipeline industry continue to be the giant, multinational or state-owned oil companies. Given the commitment of the multinational companies to maintaining control over the entire process of production, capital maintenance and development of crude pipeline are likely to continue at a pace calculated to maximize return on investment. Similarly, state-owned oil companies possess the capability to take advantage of large-scale operations and are able to 6 utilize their unique position to expand operations. Entry into the pipeline industry is restrictive, as is indicated by the relatively small number of firms operating with headquarters in the United States. In the early 2000s, control of the domestic pipeline industry lie with 25 to 40 companies, employing only 14,000. The small number of employees reflects the capital-intensive nature of crude petroleum pipeline companies, where the emphasis is on capital rather than labor. The actual pipeline construction also requires a great deal of planning, con- sultation and preparation. Companies must determine market demand and confirm customer support before investing in a project. Although three-fourths of the world’s petroleum reserves are owned by state firms rather than private companies, the investment of constructing a pipeline can run into the tens of billions of dollars. 6. Business Opportunities/Hossein Razavi 6 Moving ahead with a project, the company must then assess alternative routes for the pipeline, and select a final proposed route. Issues such as what communities need service; what size pipeline is needed; what natural resources might be impacted; what environmental areas and population centers might be intersected; and what other infrastructure systems lie along the route are just a few considerations that enter into the process. One small catch could be detrimental to the project. For example, construction of the trans-Alaska crude pipeline did not begin for more than nine years after oil was discovered on the North Slope because objections to the project on environmental grounds delayed government approval. Other projects often are delayed because of financing problems and/or an inability to reach agreements with neighboring states providing a needed right-of-way. As a rule, pipeline construction around the world is done by a construction contractor rather than by the pipeline owner. The need for costly, highly specialized equipment and specialized talent makes this the best approach. Pipeline owners could not afford to own and maintain the required equipment and use a construction staff for only intermittent construction work on their own systems. The pipeline contractor can utilize his equipment and staff more efficiently by doing work for many pipeline owners. 7 The amount of pipeline construction depends in part on the number of oil and gas discoveries and their location and on where markets are growing. Construction activity is also related to the need to obtain permits, political obstacles, and the availability of 7 equipment and supplies. Pre-construction surveying, clearing and grading, stringing, trenching, pipe bending, welding, coating, lowering in, backfilling, hydrostatic testing, and 8 restoration of the land is a major project for the building of a pipeline but nothing compared to the operation and maintenance once up and running. A monitoring company to the non-stop operation of a pipeline system is essential. Strict requirements have to be met to guarantee the transportation of crude oil. A modular system such as SCADA (Supervisory Control And Date Acquisition) is an example of a supervisory system of all renown automation manufacturers and used widely in the pipeline industry. Planning for the operation of oil pipelines is a must to monitor all unloading processes, pumping processes and delivery to output terminals. At the same time, tank stock and pipelines must be constantly updated, compliance with contamination tables monitored, and conflicts in processes avoided. 7. Oil and Gas Pipeline Fundamentals-key industry statistics 8. SIC4612 Pipelines, crude petroleum 8 Planning for the operation of oil pipelines is a must to monitor all unloading processes, pumping processes and delivery to output terminals. At the same time, tank stock and pipelines must be constantly updated, compliance with contamination tables monitored, and conflicts in processes avoided. Further, leak detection and localization application has to be implemented by a patented and certified application for pipeline operators to register all abnormal 9 imbalances. ENVIRONMENTAL CONCERNS Pollution prevention and control programs need to be in place to reduce oil spills, soil contamination, wastewater discharges and minimizing air emissions. Crude pipelines are routinely cleaned by pigging operations, which can lead to spills 10 and the generation of sludge containing heavy metals. With the oil industry gaining global appeal, both domestic and international organizations have become politically active in an attempt to protect the environment from excessive industrialization. The Oil Pollution Liability Act of 1990 was designed to oversee and regulate industrial activities in order to control environmental pollution but has also led to an increase in the risk of litigation and higher operational costs. 9. SCADA system 10 Business Opportunities/Hossein Razavi 9 With the oil industry gaining global appeal, both domestic and international organizations have become politically active in an attempt to protect the environment from excessive industrialization. The Oil Pollution Liability Act of 1990 was designed to oversee and regulate industrial activities in order to control environmental pollution but has also led to an increase in the risk of litigation and higher operational costs. Statistics prove that drilling for crude oil is on the rise. In December 2006, 1065 new potential sites were reported being explored and 3925 developed worldwide for the year. Footage drilled for 2005 was 48274. December 2006 claims 36,758 11 thousand barrels of crude for the month were pumped and transported. The oil industry has not slowed down and expects a 36% increase from 1995 to 2010. The oil industry has virtually evolved into a world of its own. It takes years of education, skill and experience in each given field’s area of expertise to adequately work with an entire country or region in designing and implementing a profitable margin to market in the industry. Interviewing and hiring a consultant in the petroleum development industry is a must for any chance of achievement. Several agencies cater to developing countries, such as Ruritania, where oil is abundant but the population is less than educated on its existence and what to do with the supply but ultimately, a pipeline will be owned and controlled by one of the major oil companies due to the fact that they possess the capital needed to invest. 11. Oil and Gas Development (Onshore) 10 The oil industry has virtually evolved into a world of its own. It takes years of education, skill and experience in each given field’s area of expertise to adequately work with an entire country or region in designing and implementing a profitable margin to market in the industry. Interviewing and hiring a consultant in the petroleum development industry is a must for any chance of achievement. Several agencies cater to developing countries, such as Ruritania, where oil is abundant but the population is less than educated on its existence and what to do with the supply but ultimately, a pipeline will be owned and controlled by one of the major oil companies due to the fact that they possess the capital needed to invest. One major aspect to look for in choosing a petroleum development firm is reputation. Past clients and a history of success stories with like-minded societies can offer answers to questions that would otherwise be side stepped. Extensive experience of the international oil and gas industry gained through working for the oil companies and agencies such as the World Bank and the European Commission, are 12 a plus since these are companies in which a repor must be established. 12. Petroleum Development Consultants 11 SECONDARY OPTIONS Intense study, patriot support, and consulting firms are recommended for initial first steps in a community change of this magnitude. Plus, other options have surfaced in the last decade with alternative fuels requiring much less money and a less stressful jump into global affairs. Local governments are growing supportive of these designer fuel additives and offer tax incentives for those willing to participate on a local level. With the rural areas and endangered group of animal species that consider Ruritania their home, alternative fuels may be worth investigating in addition to crude oil. CONCLUSION Making the choice to join the worldwide oil industry is not just an addition of a business or a creation of jobs but a different way of life for everyone in that nation. A transition that will be in the making for years to come has to be realized with the role of the state, environmental concerns and public marketing. REFERENCES 1 Financing Oil and Gas Projects in Developing Countries; by Hossein Razavi; Finance & Development/June 1996-pg. 3 (Project Risks are Bottlenecks) 2. Genesis Oil & Gas Consultants-What We Do/Products/Services http://www.genesisoilandgas.com/_what_we_do.asp?menu=2&type=2&id=30 3. OPEC-What Investment is required for oil exploration? 2007 Organization of the Petroleum Exporting Countries 4. Financing Oil and Gas Projects in Developing Countries; by Hossein Razavi; Finance & Development/June 1996-pg. 4 (The Role of the World Bank) 5. Financing Oil and Gas Projects in Developing Countries; by Hossein Razavi; Finance & Development/June 1996-pg. 5 (The Role of the World Bank) 6. Financing Oil and Gas Projects in Developing Countries; by Hossein Razavi; Finance & Development/June 1996-pg. 5 (The Pipeline Industry) 7. Oil and Gas Pipeline Fundamentals, by John L. Kennedy, Second Edition, 1993 pg.9-12 8. Williams-Pipeline Construction http://www.williams.com/sentinel/construction.asp 9. PSI Oil and Gas/SCADA system/Operational Planning/Leak Detection http://www.psioilandgas.com 10. Oil and Gas Development (Onshore); Pollution Prevention and Abatement Handbook; WORLD BANK GROUP; Effective July 1998 11. Energy Information Administration/Costs of Crude Oil Crude Stocks 206072 Jan. 2007 12. Petroleum Development Consultants; How does PDC assist the International oil & gas industry? http://www.pdc.uk.com Read More