oil and gas

Note: Sample Data 2006
Oil and GasFigure 11.1
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Figure 11.1

At the end of 2004, the world oil reserves replacement ratio was at 18%.

Oil and Gas

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Oil and GasFigure 4.4[e]
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Figure 4.4[e]

World Oil: Change in Production Vs Reserves

Oil and GasFigure 11.2
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Figure 11.2

The crude oil R/P ratio has decreased from 40.58 yrs in 2000 to 40.57 yrs in 2004, whereas the natural gas R/P ratio increased from 65.69 yrs to 66.70 yrs.

Oil and GasFigure 11.3
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Figure 11.3

Since 2000, the cost of finding and developing new sources of oil has risen about 15% annually.

Oil and GasTechnology Reducing Cost...
Directional and extended-reach drilling technology is playing a critical role in reaching and hitting the reserves with greater accuracy and reducing development costs.
Oil and GasBenefits of Integration....
Vertically integrated companies enjoy significantly higher profits in both upstream and downstream operations.

Reserve Replacement Ratio

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The reserve replacement ratio is a measure of the magnitude of reserve additions. It is calculated by dividing the net reserve additions in a year by the annual production rate. A company’s reserve balance will decline if it does not add as many reserves as it produced during the year. A reserve replacement ratio of at least 100% means the company is at minimum maintaining its reserve base. Data available till 2004 indicate that the world oil reserves replacement ratio was 18% at the end of 2004 (Figure 11.1) .

In terms of companies, ExxonMobil Corporation’s additions to its worldwide proved oil and gas reserves totaled 1.7 billion barrels of oil-equivalent (boe) in 2005. It replaced 129% reserves of its oil and gas reserves in 2005. The Corporation's ten-year average reserves replacement is 114%, with liquids replacement at 118% and gas at 110%.

An increase in the reserve replacement ratio generally comes from acquisitions or new discoveries. For example, ConocoPhillips added 1.5 billion boe to its proved reserves during 2005. The company’s reserve replacement ratio was 230%, based on a production of 675m boe, bringing ConocoPhillips’ total reserves to 9.4 billion boe. The improvement in 2005 over 2004 is on account of extensions and discoveries from the projects in Qatar, the US and the Asia Pacific region, as well as their re-entry into Libya and their increased equity ownership in Lukoil.

BP’s reserve replacement ratio for the year 2010 was 106% – making 2010 the eighteenth consecutive year of reserve replacement of at least 100%. ExxonMobil Corporation also has 100% replacement ratio for the last 17 consecutive years.  Its proved reserves in 2010 totaled 24.8 billion oil-equivalent barrels. The company’s 10-year average reserves replacement is 112%, with liquid replacement at 99% and gas at 131%.

The overall picture of world replacement can be seen in (Figure 4.4 [e]).



Reserve Life

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Reserve life is a measure of the longevity of reserves, that is, the number of years the reserve base will continue to produce at its present rate. It is calculated by dividing the total reserves by the annual production rate. Reserve life is also represented as reserve to production (R/P) ratio. The crude oil R/P ratio has decreased marginally from 40.58 years in 2000 to 40.57 years in 2004, whereas the natural gas R/P ratio, during the same period, increased from 65.69 years to 66.70 years. The trend in global oil and gas reserve life for the past five years is outlined in (Figure 11.2) .

The Houston Exploration Company reported its 2005 natural gas reserves as 860.82 billion cubic feet (bcf) and production as 114.311bcf (both onshore and offshore). Its R/P ratio therefore comes out to be 7.5 years. Edge Petroleum Corporation’s estimated total proved reserves was 103 bcf for 2005 and production was 16.4 bcf giving an R/P ratio of 6.28 years.

The crude oil R/P ratio was 45.7 in 2010 whereas the natural gas R/P was 62.8. 

Finding and Development Costs

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Finding costs are the costs of adding proven reserves of oil and natural gas through exploration and development activities and the purchase of properties that might contain reserves. It is measured as the ratio of exploration and development expenditures to proven reserve additions over a specified period of time. Since 2000, the cost of finding and developing new sources of oil has risen about 15% annually, according to the John S Herold consulting firm. (Figure 11.3) compares the average cost of production per barrel for ExxonMobil and Chevron Corporation. It is evident that ExxonMobil, whose average cost of production per barrel was $5.36 in 2005, benefits from a cost advantage over Chevron Corporation, whose average cost of production per barrel was $6.32 in 2005.

Technology

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Technological advances in both exploration and development have been key factors in overcoming three interlocking probabilities involved in these processes - the probability that a given geologic structure contains hydrocarbons, the probability that the hydrocarbons will be located and the probability that once located, the hydrocarbons can be produced optimally. The four areas where new and improved technologies have dramatically added to the world’s oil and gas reserves over the last 25 years are:


• Seismic and Advanced Reservoir Modeling
• New and Emerging Drilling Capabilities
• Integrated Deepwater Development Systems
• Value-chain Liquefied Natural Gas Innovations

Advancements in seismic technology have enabled engineers to locate hydrocarbons below the surface. Reservoir and geological modeling have enhanced the possibility of determining the best well locations and well designs to maximize the amount of oil and gas recovered.

Directional and extended-reach drilling technology is playing a critical role in reaching and hitting the reserves with great accuracy and reducing development costs. In the past, natural gas had some limitations with storage and long-distance pipeline transportation. However, advancements in liquefied natural gas (LNG) technologies are rapidly changing the case, with gas markets becoming global in nature. Technology has made gas supplies from the Middle East competitive in the consuming markets of Asia, Western Europe and the US.

Apart from the above-mentioned areas, technology also plays a key role in the following:

Business continuity and disaster recovery: Oil and gas companies have to automate areas of the platform if they want to keep operations running during a crisis, for example, hurricanes. If an oil well is damaged, the company should know where and how to make up for lost production.


Security: The increased use of digital systems will be required on all levels, including data and communications. Electronic-access control systems, Radio Frequency Identification (RFID) tags and electromagnetic locking systems are used to provide access to the rig by appropriate personnel.


Mobility: Even the smallest delay in communicating information from onshore and offshore locations can cost a company millions of dollars. Wireless platform phones, Personal Digital Assistants and machine-to-machine communications using RFID are some of the devices used to transfer critical data.

Technology has made it possible to discover and develop oil and gas resources. Technologies like three-dimensional (3D) seismic technology with enhanced computational capability allow the industry to accurately search out new deposits. Technology has also enabled the industry to economically develop large oil and gas deposits off-shore. At every step of the value chain, technology has enabled the industry to grow from strength to strength. Companies have therefore increasingly employed new technology to attain competitive advantage and enhance performance as a whole.

The use of technology has become more pertinent than ever before. ExxonMobil, for example, has made a significant investment in refining technology to manufacture low sulfur fuels and in projects to reduce nitrogen oxide and sulfur oxide emissions that are a cause of environmental degradation. In 2009, ExxonMobil’s environmental expenses for all such remediation and preventive steps totaled USD5.1 billion. This includes about USD2.5 billion in capital expenditure (mostly towards technology) and about USD2.6 billion in operating expense. 

The company has also been actively using technology in its upstream sector. Exxon-Mobil maintains the industry’s largest proprietary upstream technology research and development effort, investing more than USD200 million annually. Upstream technology application goes into basin analysis, seismic acquisition, processing and interpretation, reservoir modeling and simulation, drilling and facilities design. These technologies support the full spectrum of upstream activities, from initial exploration to enhanced recovery and field depletion and are applied to the full range of the world’s largest and most diverse upstream portfolio. BP Plc. continues to innovate and apply leading-edge technology in its day to day operations, such as aeromagnetic and seismic technology which enables BP’s exploration team to find new reserves.

Chevron Corporation’s Energy Technology Company, meanwhile, delivers integrated technologies and services to upstream, downstream and gas-based businesses. These activities are varied and include deepwater exploration and production systems, reservoir management and optimization, heavy oil recovery and upgrading, shallow-water production operations, gas-to-liquids processing, improved refining processes, and safe, incident free plant operations.

Integration Levels

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The oil industry is made up of a multitude of coexisting companies with varying degrees of vertical integration. The degree of vertical integration refers to the extent to which a company performs different successive stages in the production of a particular product. A fully integrated oil company is involved in the upstream as well as downstream segments of the industry.

Vertically integrated companies enjoy significantly higher profits in both upstream and downstream operations. For example, Canada’s five biggest integrated oil companies increased their combined profits by 34% in 2005 to $9.6 billion because these integrated energy companies were able to take advantage of record oil and natural gas prices, as well as high refining margins in their downstream businesses that process oil into fuels, which are in turn sold through their gas station networks.

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