Integrated Oil and Gas: Investing Essentials

If you were to transport someone from 100 years ago to today, he or she would not recognize much, except perhaps the oil and gas industry. The basic principles of this industry have remained the same over the last century, and the largest players in the space --ExxonMobil, Chevron, Royal Dutch Shell -- were just as prominent then as they are now.  

Despite initiatives such as electric vehicles and alternative energy generation, oil and gas remain critical pillars of the global economy and will likely remain that way for many years to come. Since they are such critical aspects to our everyday lives, integrated oil and gas companies are an ideal place for long-term investors to park their money and not worry about it for decades. Why else would Warren Buffet invest billions in ExxonMobil?

Integrated oil and gas companies look like difficult companies to analyze, but in reality just a couple select areas are key for monitoring the health of the industry or a company. Let's take a brief look at this industry and what you absolutely need to know about it before investing a single dollar in the space. 

What is the integrated oil and gas industry?

There are several names for this particular industry -- Big Oil, super majors, integrated majors -- but essentially any company that is considered part of this space deals with the entire value chain of oil and gas. Their roles stretch from finding the initial oil or gas reservoir all the way to putting gasoline in your vehicle to supplying natural gas to your local utility. They have assets related to exploring and drilling for new sources of hydrocarbons, pipelines and other transportation infrastructure, refining and petrochemical manufacturing, and retail sales from the gas stations we see all over the place.

The concept of the integrated oil and gas company began in the 1890s with the formation of the Standard Oil Trust. Many of today's integrated oil and gas companies, including ExxonMobil, Chevron, and Amoco (now part of BP), emerged when Standard Oil was broken up by the Sherman Antitrust Act in 1911. Today, integrated oil and gas companies have operations on every continent aside from Antarctica, and spend billions of dollars every year to grow production. You can bet that once someone finds oil or gas somewhere in the world, integrated oil and gas companies will be the first to set up shop.  

How big is integrated oil and gas in the world of oil?

The global oil and gas market is complex. It involves publicly traded companies that can operate in just one sub-industry, or they can be behemoth national oil companies that are responsible for every hydrocarbon molecule in that particular country from the day it is taken from the ground to the day it is exported or consumed. ExxonMobil is one of the largest integrated oil and gas company, with a market capitalization of nearly half a trillion dollars; however, it's still only the fourth-largest oil company in the world, behind a few of these national oil giants.

Since integrated oil and gas companies have their fingers in so many pies, it's difficult to give a full market size when compared to the entire oil and gas market. Instead, here are a few factoids that will give an idea of their size and scale. The 10 largest integrated oil and gas companies traded on the U.S. stock exchanges are responsible for approximately one-fifth of the world's oil and gas production and nearly one-fourth of global refining capacity. 

How does the integrated oil and gas industry work? 

Integrated oil and gas companies operate in several business segments. Here is a brief description of each segment of the business:

Exploration and production units -- known as the upstream side of the business -- extract hydrocarbons from the ground and sell them to refineries and petrochemical manufacturers under either supply contracts or on the spot market.

Pipelines and other transportation infrastructure segments - called the midstream business -- charge fees to move or store crude oil, natural gas, or even refined products. These fees are normally based on long-term contracts.

Refining and petrochemical manufacturing operations -- called the downstream business -- produce the usable products from crude, ranging from gasoline and diesel to plastics and asphalt, and get profit on the margins between the price of crude and the price of refined products.

Retail and marketing units -- also part of the downstream business -- buy from refiners and then sell to companies and everyday consumers through wholesale contracts or retail purchases at gas stations.

Since production at integrated oil and gas companies is so large, they have to bring on hundreds of thousands of barrels per day of new production just to replace the declining production at older wells. This means they take on huge development projects that can cost billions of dollars. As the easy-to-access oil and gas reservoirs have become fewer and farther between, the per-barrel development costs of these projects have been slowly eating at the rates of returns of these companies for the past several years. 

What are the drivers of integrated oil and gas?

The price of oil and gas, plain and simple.

OK, so that is probably a little too simplistic, but it is by far the most important driver of their business. All integrated oil and gas companies generate at least 75% of their total profits from oil and gas drilling and production. For these companies, a $1 change in the price of Brent crude -- the international benchmark price -- can alter hundreds of millions of dollars' worth of net operating income. This means that just about every decision related to capital allocation is linked to the price of oil and gas. 

There are way too many things that can impact the price of oil on a daily, weekly, or even monthly basis to keep track of, and correctly predicting that price is just dumb luck. So for investors, it's better to focus on two simple things: demand and development costs. Global oil demand has grown 2.2% on a compounded annual basis since 1965; that growth level appears likely to persist for many years, as demand in non-OECD countries is expected to double between now and 2030. Oil demand is basically the bellwether for economic health, so as long as global economic health is maintained, oil demand will increase.

Development costs will be the major determining factor in profitability for an individual company. There are plenty of sources of oil out there, but it is becoming more expensive to develop them, and several companies in the space have seen major development project costs blow past original estimates. These expenses can have a profound impact on the return on capital for these companies, so investors should keep a watchful eye on whether companies are delivering new projects on time and on or near budget. 

Source: Motley fool

City Gas to lower household gas prices from Aug to Oct

The gas tariff for households using City Gas will decrease by 0.1 per cent from next month until the end of October.

City Gas, which supplies town gas to almost 90 per cent of residents living in new Housing Development Board estates and private properties, said that the gas tariff for households will decrease from 21.08 cents per kilowatt hour (kWh) to 21.06 cents per kWh.

This is due to a drop in fuel costs compared to the previous quarter.

City Gas reviews the gas tariff based on guidelines set by the Energy Market Authority (EMA), the gas industry regulator.

Source: todayonline

Natural gas could reshape global energy landscape

New innovations in the extraction of natural gas, particularly from shale, have dramatically increased world reserves. Now it looks like a long-term boom in both the supply and demand for natural gas could reshape the global energy landscape.

Pierre Fournier, analyst at National Bank Financial, points to several trends, such as the increasing transportation of liquefied natural gas (LNG), growing demand for gas in both China and India and the worldwide expansion of infrastructure for drilling and pipelines.

Recent developments seem to strengthen the case for gas, including the current instability in the Middle East, which could drive countries to diversify away from oil.

Other trends are converging, like the emergence of Mexico as a gas superpower and a continued transition away from coal in the U.S.

Transportation is the only industrial sector where natural gas is not widely used but that’s poised to change, Fournier noted in a report to clients this week.

According to The International Energy Agency, the share of natural gas in transportation will double over the next five years.

While more than 90 per cent of the world’s transportation fleet is still powered by oil, the need for natural gas will become more pressing as the number of light-duty vehicles in the world is expected to double over the next 25 years.

So far, costs and lack of supporting infrastructure have held back the adoption of natural-gas vehicles. There are 15 million in use worldwide, including just 142,000 in the United States.

With these vehicles often costing thousands of dollars more than conventionally fuelled ones, it can take five to eight years for purchasers to recoup upfront costs. And fuelling stations are hard to find.

The prospects are much brighter in the bus and trucking sectors, the analyst says. Unlike passenger vehicles, local fleets owned by governments and companies can refuel at a central depot. A fifth of America’s buses now run on natural gas as do a growing number of garbage trucks and delivery trucks operated by courier companies like UPS and FedEx.

“A significant switch to natural gas in the trucking sector would have a major impact on America’s oil consumption.”

Even the growing trend for plug-in electric vehicles will benefit natural gas because it is used to generate electricity*.

Another sector where natural gas should make inroads is shipping, because of new regulations on sulphur emissions that govern ships operating within 200 miles of the coast. Most ships now use unrefined crude, which contributes substantially to pollution emissions.

Regulations in Europe and North America mandate reductions of 20 per cent in sulphur emissions by 2020 and 50 per cent by 2050.

The real potential for growth in the use of natural gas is in China, where reducing the country’s dependence on oil is an environmental and economic necessity. Emissions from vehicles and coal-fired power plants are the main contributors to the pollution and smog that plague Chinese cities.

The sulphur levels produced by diesel trucks alone are at least 23 times worse than those in the United States, according to one estimate. The number of cars on China’s roads is set to increase by five times within the next 15 years.

It’s the world’s largest oil importer so China sees natural gas as a way to reduce its huge oil bill. It already has about ten times as many natural gas vehicles on the road as the U.S. and government planners have set lofty goals for continued growth in vehicles, fuelling stations and gas-fired power plants.

The big issue is geopolitical risk. “Unrest in the Middle East will help keep oil prices high and provide added motivation for countries to diversify their energy consumption away from oil,” the analyst says.

Major producers like Iraq, Libya, Nigeria and Sudan are experiencing political turmoil, while future oil output in Russia and Sudan is clouded by sanctions.

All this raises interesting issues for Canada’s natural gas sector. As a result of massive discoveries in the U.S., natural gas exports to the U.S. are at their lowest level in nearly 20 years.

The Canadian gas industry needs new markets and will turn increasingly towards LNG terminals and markets in Asia, Fournier predicts.

Source: montrealgazette.com

Committee of Secretaries approves gas policy rejig; city gas firms like Indraprastha Gas to get priority

A Committee of Secretaries has approved a rejig of natural gas allocation policy, giving city gas distribution firms like Indraprastha Gas Ltd top priority for allocation of domestically produced fuel. 

The CoS approved a proposal of Oil Ministry for changes in priority ranking for gas allocation, official sources said. The issue will now go to the Cabinet Committee on Economic Affairs ( CCEA) for final approval. 

At present, urea-manufacturing fertiliser plants have the first right over the domestically produced gas, followed by liquefied petroleum gas (LPG) plants and power stations. City gas distribution (CGD) projects are ranked fourth in the priority list. 

The CoS agreed to change this priority listing to give CGD firms like IGL, which sells CNG to automobiles and piped gas to households in the national capital, top priority, they said. 

CGD firms like IGL currently get 8.32 million standard cubic meters per day of gas out of total domestic supplies of about 77 mmscmd. 

As city gas projects get rolled out in new cities, the requirement of the sector will grow and so the government is now giving it top priority. 

Sources said compressed natural gas (CNG) and piped natural gas (PNG) are clean fuels and will help replace subsidised diesel in automobiles and LPG in households respectively. 

According to the new allocation policy, additional requirement for CGD will be first met by imposing proportionate cuts in the domestic gas presently being supplied to sectors other than priority sectors as decided by the Oil Ministry. 

Plants providing inputs to strategic sectors of atomic energy and space research will get the second priority, followed by plants that can extract higher fractions from natural gas. 

Gas-based urea plants will rank fourth in the priority list and power stations fifth. 

Since domestic gas production is now stagnant, it is being proposed to freeze allocation to all sectors expect CGD and LPG sector, at supply levels of 2013-14. 

In 2013-14, fertiliser plants received 29.79 mmscmd of gas. Power plants got 25.59 mmscmd while LPG extraction plants received 1.83 mmscmd. Petrochemical plants received 3.32 mmscmd while refineries got 1.89 mmscmd and steel plants 1.32 mmscmd. 

Sources said incremental production from NELP blocks like KG-D6 and Gujarat State Petroleum Corp's (GSPC) Deendayal gas will be allocated as per the decision taken in the meeting of an Empowered Group of Ministers (EGoM) on August 23, 2013. 

The EGoM had decided that incremental gas would go to power plants. 

The requirement of CGD project is quite small compared to power and fertiliser sectors and can be met through proportionate cuts, they said. 

Source: ET

Expert group may be set up to study gas pricing

The government plans to consult a group of eminent people possibly led by former minister Suresh Prabhu or a "specialised agency" to review natural gas pricing, including the UPA-approved Rangarajan Formula that would have doubled gas rates to $8.4 per unit in April if the Election Commission had not vetoed it.

Some officials say engaging organisations having "generic expertise" in this matter would be time consuming and the government would miss the September 30 deadline, hence a committee under Prabhu should be asked to revisit the entire gas pricing issue. Other names proposed for the panel are Pratap Bhanu Mehta, chief executive of the Centre for Policy Research, and Bibek Debroy, a faculty member in the same institution.

The Cabinet Committee on Economic Affairs on June 25 decided to "comprehensively review" the issues related with gas pricing in public interest, and asked gas producers to keep selling at the old price of $4.2 per unit until the end of September.

Officials familiar with the matter said the task is enormous and efforts would be made to ensure that the job is completed quickly, so that the government can take a decision before the end of September.

The government is studying various aspects of gas pricing including Reliance's move to initiate arbitration against the government on the issue of delay in implanting the Rangarajan formula. Also, the Supreme Court is hearing a public-interest litigation on the matter. In this background, the oil ministry may consult the law ministry's opinion before taking any decisive step, official sources said.

Source: ET

Energy security India’s top priority: Sutherland

Energy Security is India’s top priority now, which is why the India-Canada Energy Forum was convened jointly by Canada-India Business Council (C-IBC), Alberta School of Business (University of Calgary) and India’s Petrotech, in Calgary July 17-18.

The forum, C-IBC President Peter Sutherland said, brought together leaders and experts from both countries to discuss oil and gas investment, crude oil trading and refining, unconventional gas development and oil and gas sourcing from Canada.

In an exclusive interview to The Indian Diaspora, Sutherland, former Canadian High Commissioner to India, said 34 high profile delegates from oil industry and allied sectors came from India. They included Petrotech President, Rahul Dhir, Director-General Ashok Anand and Managing Director and CEO, Dr AK Baylan.

They also included Akhil Verma, of ONGC Videsh Ltd, Anand Kumnar, Director, Petrotech, Debasis Basu, General Manager (Production) of ONGC and Darshan Hiranandani, Director of Hydrocarbon Energy.

Indian companies represented at the forum included Hydrocarbon Energy; Oil and Natural Gas Commission, Indian Oil Company, Petronet, Indian Oil Corporation and ONGC Videsh Ltd.

From the Canadian side, there were representatives of Industry Canada, Natural Resources Canada, Government of Alberta and several oil companies, Trans Canada, Alberta Petroleum Marketing Commission, Irving Oil, Canadian Society of Unconventional Resources, Canadian Association of Petroleum Producers, etc.

India has now become fourth largest energy consumer in the world, after China, the United States and Russia. “Its need for energy supply continues to climb as a result of the country’s dynamic economic growth and modernization over the past several years,” the US Energy Information Administration says in its June “India” profile.

In the International Outlook 2013, International Energy Agency projects that India and China will “account for about half of global energy demand growth through 2040, with India’s energy demand growing at 2.8% per year.”

It is because of this growing demand, Sutherland says, Indian oil companies have purchased equity stakes in oil and gas fields in many countries. Along the line, Canada is encouraging Indian oil companies to invest in Canadian oil and natural gas and energy sectors, as the investment in Canada is secure, there’s security of the energy sector, of oil and gas sector in Canada.

C-IBC joined hands with the Calgary School of Business and Petrotech of India to organize this forum? 

Yes. We were happy that 34 high-profile people came from India. The forum was part of the program of the University of Alberta Business School. And C-IBC and Petrotech co-sponsored the forum. That was the core group. Then there were executives of some Indian companies and several Canadian companies and some individuals as well in the area.

And what was the main objective of organizing this forum?

The main objective was to seek opportunities and dialogues about ongoing energy discussions between India and Canada. We had the first Canada-India Energy Forum in May last year. And then in November at the business forum in India, we had another discussion on energy, and now this was the third round. Our idea is to continue with the dialogue and get more Indian and Canadian companies talking and working together in this field.

This forum was fallout of former Minister of Natural Resources Joe Oliver’s visit to India in January when he extensively spoke about energy security?

As I said, energy security is a very important issue for India. And in Canada, we are looking for new markets. Our market so far is the United States. So, it is a natural fit – we are looking for new markets and India needs so much energy – oil and gas, LNG – expertise in services. We can cooperate.

India is importing 70 per cent of its energy requirements?

India is importing 70 percent of its oil consumption. Oil comes from the Middle East. They want to diversify it.

For Canada to export oil to India, distance becomes a negative factor.

Oil from the East Coast, New Brunswick and Nova Scotia, is more economical than from the West Coast. The first shipment of the Canadian oil to India was in January from the East Coast.

How much oil Canada is exporting to India?

That was the first shipment and so far the only shipment of oil to India. Oil from Alberta will be shipped to the East Coast by pipelines and it could then be exported to India.

What did visitors from India suggest?

There’s very strong potential, oil and natural gas... what they are looking for is to get oil from Alberta to East Coast to West Coast. All of our export of oil so far is to the United States.

You are also encouraging Indian companies, like Oil and Natural Gas Commission to buy energy assets here?

We are encouraging Indian companies to come and invest in Canada in oil and gas sectors. We can expand our relationship in the energy market. Secondly, we want to cooperate with India... We can explore the third (world) markets together. Canadian expertise and technology and together with India, we can explore African and some other markets.

So much is being said about the Modi’s government being pro-business. How optimistic you are that Canada will be able to expand its business relationship with India?

I am very optimistic. It is a majority government and that makes all the difference. There won’t be any hindrance at the political level in the new government being able to pursue its agenda, its own policies. They can take action. It is pro-business. Indian companies thus are assured to internalize their business. I think it all augurs well from the business perspective.

What about the comprehensive Free Trade Agreement?

I hope they will resume the discussions. Mr Modi is being briefed on this file. It is a good time for the Canadian side to take initiative (so) that discussion resumes.

How far the discussions have actually reached?

They had eight rounds of negotiations. Things came to a standstill because of the election.

These negotiations should resume soon.

Source: theindiandiaspora.com/

India's RIL making more from US shale gas than domestic production

India’s Reliance Industries Limited is doing exceptionally well when it comes to its shale gas business in the US, from which it garnered a revenue of INR 1,617 crore in the first quarter of the current financial year, compared to INR 1,557 crore from domestic oil and gas production.

Reliance has also become the first company in the private sector in India to post USD 1 billion net profit in a quarter.

According to a press release:

Reliance’s Shale Gas business continued on its growth path. During 1Q FY15, revenues were at USD 270 million and EBITDA was at USD 201 million reflecting Y-o-Y growth of 26% and 22% respectively.

Net sales volume (Reliance share) stood at 41.4 BCFe, up 28% Y-o-Y and 10% Q-o-Q. Sequential growth in revenue and profits were impacted by higher basis differentials for natural gas and condensate. This was partially offset by lower operating costs.

Gross JV production is now averaging above 1 Bcfe/day and Reliance share of production at 48.6 Bcfe in 1Q FY15. Strong growth in production was driven by impressive rise in producing well count and continued strong well performance across JVs.

Pioneer JV continued on liquid focused development in Eagle Ford, producing 676Mmcfe/d (including ~64,500 bbl/d of condensate) at gross JV level. Production at Chevron Marcellus JV stayed strong at 312 Mmcfe/d, while improvement in midstream situation and market conditions enabled production at Carrizo to reach new levels of 176 Mmcfe/d during the quarter.

Overall capex for the quarter was at $ 331 million and cumulative investment across all JVs stands at $ 7.36 billion. Substantial part of Pioneer and Carrizo JV capex are met through cash from respective JV operations. Chevron JV capex continues to account for the substantial part of funding needs.

Source: youroilandgasnews.com