Europe United Kingdom Oil & Gas Integrated Oils Oil & Gas for Beginners A guide to the oil & gas industry

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Europe United Kingdom Oil & Gas Integrated Oils Oil & Gas for Beginners A guide to the oil & gas industry
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  Europe United Kingdom  Oil & Gas Integrated Oils   7 January 2008 Oil & Gas for Beginners A guide to the oil & gas industry Lucas Herrmann, ACA Research Analyst (44) 20 754 73636 lucas.herrmann@db.com Jonathan Copus Research Analyst (44) 20 754 51202 jonathan.copus@db.com James Hubbard, CFA Research Analyst (44) 20 754 57905 james.hubbard@db.com Deutsche Bank AG/London All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research is available to customers of DBSI in the United States at no cost. Customers can access this IR at http://gm.db.com, or call 1-877-208-6300 to request that a copy of the IR be sent to them. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1 Primer Fill 'er up, please Deutsche Bank's overview of the global oil & gas industry. Structured in three parts, this layperson's guide includes details on the workings of the oil & gas industry, key oil producing countries and a summary of the assets and portfolios of the leading European and US oil & gas companies.    C  o  m  p  a  n  y    G   l  o   b  a   l   M  a  r   k  e   t  s   R  e  s  e  a  r  c   h    Europe United Kingdom  Oil & Gas Integrated Oils   7 January 2008 Oil & Gas for Beginners A guide to the oil & gas industry Lucas Herrmann, ACA Research Analyst (44) 20 754 73636 lucas.herrmann@db.com Jonathan Copus Research Analyst ( 44) 20 754 51202 jonathan.copus@db.com James Hubbard, CFA Research Analyst (44) 20 754 57905 james.hubbard@db.com Fill 'er up, please Deutsche Bank's overview of the global oil & gas industry. Structured in three parts, this layperson's guide includes details on the workings of the oil & gas industry, key oil producing countries and a summary of the assets and portfolios of the leading European and US oil & gas companies. Deutsche Bank AG/London All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research is available to customers of DBSI in the United States at no cost. Customers can access this IR at http://gm.db.com, or call 1-877-208-6300 to request that a copy of the IR be sent to them. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1 Primer European Oil Gas Research Lucas Herrmann (44) 20 754 73636 lucas.herrmann@db.com James Hubbard (44) 20 754 57905 james.hubbard@db.com Jonathan Copus (44) 20 754 51202 jonathan.copus@db.com Christyan Malek (44) 20 754 58429 christyan.malek@db.com Elaine Dunphy (44) 20 754 59138 elaine.dunphy@db.com US Oil Gas Research Paul Sankey (1) 212 250 6137 paul.sankey@db.com Ryan Todd (1) 212 250 8529 ryan.todd@db.com Richard Voliva (1) 212 250 5696 richard.voliva@db.com Shannon Nome (1) 713 409 4367 shannon.nome@db.com Mike Urban (1) 212 250 3113 michael.urban@db.com Chief Energy Economist Adam Sieminski (1) 212 250 2928 adam.sieminski@db.com The strategic commodity As the dominant source of our energy needs for the better part of the last sixty years, crude oil has held influence over the politics and economic strategies of nations more than any other commodity, frequently proving the source of instability, dispute and war. From the birth of Standard Oil through the expropriation of Yukos, the oil industry has similarly found itself the subject of frequent controversy, with the companies involved often achieving profits and wielding power greater than the nations in which they are based. For an industry that, at its most basic involves little more than drilling a hole in the ground in the hope of finding the ‘black stuff’, the modern day oil industry is a remarkable amalgam of politics, economics, science and technology. Huge and diverse, it is also one that can at times prove bewildering, and not just for the uninitiated. The industry, the countries and the companies – all in one With this in mind, the global oils team at Deutsche Bank has sought to create a product that might prove of use for beginners and old hands alike. Oil & Gas for Beginners   is not intended to be read from cover to cover but is meant to be kept on your shelf as an easy to use reference guide. Structured in three parts it contains contributions from Deutsche Bank’s global team of oil & gas analysts, many with backgrounds in the industry as well as drawing on Deutsche Bank’s longstanding relationship with Wood Mackenzie, one of the industry’s leading research houses. In the initial Industry section we look at what shaped today’s industry, the geology of oil, and its applications together with how it’s found, how it’s extracted & refined and how it’s taxed. In the second Countries Section we review the oil & gas production outlook and histories for the leading OPEC and non-OPEC producers including details of the major fields, their tax systems, energy infrastructure and, of course, the status of their reserves. Finally, in the Companies section we review the portfolios of thirteen of the leading international oil companies that comprise the bulk of the oil & gas sector’s stock market capitalisation, providing asset value breakdowns and an overview of their major business activities and growth projects. For the uninitiated and more learned reader alike Although Oil & Gas for Beginners   is intended as a beginners guide we hope that it will also find favour with the more experienced reader. Overall, we trust that our audience will find it a useful document and entrust it with a permanent slot on an already overcrowded desk. So for those of you who want to know more about the life cycle of a basin, the Earth’s geologic clock or any number of industry relevant themes read on. We hope that what you find will prove both interesting and informative.  7 January 2008 Integrated Oils Oil & Gas for Beginners Page 2 Deutsche Bank AG/London Table of Contents A Brief History of Oil .........................................................................7   From biblical times…….............................................................................................................7   Setting the scene......................................................................................................................8   IOCs and NOCs.......................................................................................................................12   The IOC Sisters – 100 years in the making .............................................................................13   The International Oil Companies.............................................................................................14   The IOCs Compared ........................................................................17   The major NOCs .....................................................................................................................20   OPEC.................................................................................................23   A brief history..........................................................................................................................23   How does OPEC work?..........................................................................................................24   Why is OPEC able to influence prices?...................................................................................25   What price does OPEC want?.................................................................................................26   The OPEC basket....................................................................................................................27   What is the western IOCs’ exposure to OPEC?......................................................................27   In the beginning …..........................................................................28   A brief summary .....................................................................................................................28   Geologic time and rock record................................................................................................29   Basic geology..........................................................................................................................30   Hunting for sand…..................................................................................................................32   Working hydrocarbon system.................................................................................................34   Source rocks...........................................................................................................................36   Migration.................................................................................................................................38   Reservoir quality .....................................................................................................................39   The trap and seal.....................................................................................................................41   Reservoir volumetrics.............................................................................................................43   Getting it out....................................................................................44   The Life Cycle of a Basin.........................................................................................................44   Field Operations......................................................................................................................49   Land Seismic...........................................................................................................................49   Offshore seismic.....................................................................................................................51   Assessing risk and reward......................................................................................................53   Field Operations - Drilling........................................................................................................54   Directional wells......................................................................................................................58   Land and offshore rigs............................................................................................................58   Drilling day rates .....................................................................................................................60   Field Operations - Evaluation ..................................................................................................62   Field Operations - Development.............................................................................................66   Onshore – oil is usually straight-forward… .............................................................................66   Offshore – as usual, deeper is tougher...................................................................................67   Extending the field life ............................................................................................................69   Recovery factors.....................................................................................................................70   Primary recovery.....................................................................................................................70   Depositional controls on recovery factor................................................................................71   Secondary recovery… waterflood...........................................................................................72   Tertiary recovery techniques...................................................................................................72   Oil Services – What are they and where do they fit?..............................................................73   Oil & Gas reserves...........................................................................76   A cautionary tale .....................................................................................................................76   A company’s lifeblood ............................................................................................................76   SEC Reserves – Proven developed and proven undeveloped. ...............................................77   SPE definitions - Proven, probable and possible.....................................................................80    7 January 2008 Integrated Oils Oil & Gas for Beginners Deutsche Bank AG/London Page 3 Reserve revisions....................................................................................................................82   Reserves: What do they actually tell us? ................................................................................83   Reserves Accounting– FAS 69........................................................85   Disclosure of proved oil and gas reserves..............................................................................85   Disclosure of capitalised cost relating to oil and gas producing activities ..............................85   Disclosure of costs incurred in oil and gas property acquisition.............................................85   Disclosure of operational results.............................................................................................86   Disclosure of discounted future net cash flows......................................................................86   Disclosure of current cost information....................................................................................86   So how do analysts use FAS 69 information?.........................................................................87   Reserves - Where and what?..........................................................90   So how much oil has been extracted?....................................................................................90   What is Peak Oil?....................................................................................................................92   A critical weakness - simple economics ignored ....................................................................93   So when will a peak occur and does it matter? ......................................................................94   Oil & Gas Taxation...........................................................................95   Concessions & contracts – An overview.................................................................................95   Tax & Royalty Concessions.....................................................................................................97   Production Sharing Contracts (PSCs)......................................................................................98   Working through an IRR based PSC .....................................................................................104   Buy Backs .............................................................................................................................107   Oil & Gas Taxation – Some Key Terms..................................................................................109   World Oil Markets .........................................................................110   The oil price...........................................................................................................................110   Oil Demand...........................................................................................................................111   Oil Supply..............................................................................................................................115   Inventories............................................................................................................................116   The forward curve.................................................................................................................116   World Gas Markets........................................................................117   Gas Pricing............................................................................................................................117   Gas demand..........................................................................................................................118   Gas Supply............................................................................................................................120   Oil & Gas Products........................................................................124   What is crude oil? .................................................................................................................124   Definitions.............................................................................................................................124   Trends in crude oil.................................................................................................................126   Key Global Blends.................................................................................................................127   Refining Overview.........................................................................128   The Black Sheep of the family...............................................................................................128   The curse of the investment cycle........................................................................................131   What is Refining?...........................................................................132   What do refineries make?.....................................................................................................132   The stream of oil products....................................................................................................133   How does a refinery work?...................................................................................................134   Key variables impacting refinery performance......................................................................138   Configuration and complexity ...............................................................................................138   Choice of Crude – Heavy, sour, sweet and light...................................................................141   Location................................................................................................................................143   Other factors.........................................................................................................................143   Regional balances and market structure...............................................................................145   Measuring Refining Profitability............................................................................................147    7 January 2008 Integrated Oils Oil & Gas for Beginners Page 4 Deutsche Bank AG/London US margins ($/bbl).................................................................................................................148   NWE margins ($/bbl).............................................................................................................148   Asian margins ($/bbl).............................................................................................................148   Gasoline/fuel oil crack spreads US/Europe............................................................................149   What drives refining margins? ..............................................................................................149   Refining Industry Structure ...................................................................................................151   Petroleum Administration for Defence Districts (PADDS) ....................................................151   Marketing.......................................................................................153   Stability in a cyclical world ....................................................................................................153   The wholesale/retail chain.....................................................................................................155   Removing capital, containing costs.......................................................................................156   What’s in a litre of fuel? European Retail Data......................................................................157   What’s in a litre of fuel? US Retail Data................................................................................157   Biofuels...........................................................................................158   What are biofuels?................................................................................................................158   Why use biofuels? ................................................................................................................158   Where are biofuels produced and used?..............................................................................159   The regulatory framework.....................................................................................................160   Key legislative measures.......................................................................................................160   Bioethanol.............................................................................................................................162   Biodiesel ...............................................................................................................................164   Criticisms of biofuels ............................................................................................................165   Long-term developments in biofuel......................................................................................166   Petrochemicals ..............................................................................167   Part of the integrated chain...................................................................................................167   The olefin plant (cracker).......................................................................................................168   Petrochemical Industry profitability.......................................................................................170   Olefin and Aromatic Building Blocks and their Chains ..........................................................172   Ethylene – C2 Olefin..............................................................................................................172   Propylene – C3 Olefin...........................................................................................................172   Butadiene – C4 Olefin...........................................................................................................173   Benzene – C6 Aromatic.........................................................................................................173   Paraxylene – C8 Aromatic....................................................................................................174   The Major Plastics or Polymers ............................................................................................175   Polyethylene (PE)..................................................................................................................177   Polypropylene.......................................................................................................................177   Purified Terephthalic Acid (PTA)............................................................................................177   Conventionals & Unconventionals...............................................179   Conventionals .......................................................................................................................179   Unconventionals ...................................................................................................................179   Liquefied Natural Gas (LNG) ........................................................180   Overview...............................................................................................................................180   LNG - The process and the chain..........................................................................................182   LNG – returns across the chain.............................................................................................183   Pricing of LNG.......................................................................................................................185   Costs of LNG Production......................................................................................................187   Shipping of LNG....................................................................................................................188   Re-gasification of LNG..........................................................................................................189   Existing LNG facilities and facilities planned 2006-12................191   LNG - The IOCs Portfolios and Positions ..............................................................................193   The IOC majors compared....................................................................................................195  
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