Deutsche Bank. Marketing Research. Oil and Gas for Beginners

496 Pages·13.826 MB·English

Deutsche Bank
Markets Research

Europe Industry Date
United Kingdom Oil & Gas for 25 January 2013
Oil & Gas
Beginners Industry Update
Integrated Oils

Research Team
European Oil & Gas Research
Lucas Herrmann
([phone]
[email protected]
Mark Bloomfield
([phone]
[email protected]
Phil Corbett
([phone]
[email protected]
Sebastian Yoshida
([phone]
[email protected]

US Oil & gas Research
Paul Sankey
([phone]
[email protected]
Stephen Richardson
([phone]
[email protected]
Ryan Todd
([phone]
[email protected]
Mike Urban
([phone]
[email protected]

Asian Oil & Gas Research
John Hirjee
([phone]
[email protected]
David Hurd
([phone]
[email protected]

A guide to the oil & gas industry Russian Oil & Gas Research
Pavel Kushnir
([phone]
[email protected]
The basics of the 'Black Stuff'
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
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. DISCLOSURES AND ANALYST
CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 072/04/2012.
Deutsche Bank
Markets Research
Europe Industry Date
United Kingdom Oil & Gas for 25 January 2013
Oil & Gas
Beginners Industry Update
Integrated Oils

A guide to the oil & gas industry

The basics of the 'Black Stuff' Research Team
Deutsche Bank's overview of the global oil & gas industry. Structured in three
European Oil & Gas Research
parts, this layperson's guide includes details on the workings of the oil & gas
Lucas Herrmann
industry, key oil producing countries and a summary of the assets and
([phone]
portfolios of the leading European and US oil & gas companies. [email protected]
Mark Bloomfield
The strategic commodity
([phone]
As the dominant source of our energy needs for the better part of the last 60
[email protected]
years, crude oil has held influence over the politics and economic strategies of
Phil Corbett
nations more than any other commodity, frequently proving the source of
([phone]
instability, dispute and war. From the birth of Standard Oil through the [email protected]
expropriation of Yukos, the oil industry has similarly found itself the subject of Sebastian Yoshida
frequent controversy, with the companies involved often achieving profits and ([phone]
wielding power greater than the nations in which they are based. For an [email protected]
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 US Oil & gas Research
remarkable amalgam of politics, economics, science and technology. Huge Paul Sankey
and diverse, it is also one that can at times prove bewildering, and not just for ([phone]
the uninitiated. [email protected]
Stephen Richardson
The industry, the countries and the major companies – all in one
([phone]
With this in mind, in January 2008 the Global Oil & Gas Team at Deutsche
[email protected]
Bank first published a document that we hoped would prove of good use for Ryan Todd
beginners and industry old hands alike – Oil & Gas for Beginners. Some five
([phone]
years and several reprints later, we have mustered the strength to update and [email protected]
expand our original text. Structured in three parts it contains contributions Mike Urban
from Deutsche Bank’s global team of oil & gas analysts, many with ([phone]
backgrounds in the industry as well as drawing on Deutsche Bank’s [email protected]
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 Asian Oil & Gas Research
industry, the geology of oil, and its applications together with how it’s found, John Hirjee
how it’s extracted & refined and how it’s taxed. In the second Countries ([phone]
Section we review the oil & gas production outlook and histories for the [email protected]
leading OPEC and non-OPEC producers including details of the major fields, David Hurd
their tax systems, energy infrastructure and, of course, the status of their ([phone]
reserves. Finally, in the Companies Section we review the portfolios of the [email protected]

leading international oil companies that comprise the bulk of the oil & gas
Russian Oil & Gas Research
sector’s stock market capitalisation, providing asset value breakdowns and an
overview of the major business activities and growth projects. Pavel Kushnir
([phone]
For the uninitiated and more learned reader alike [email protected]
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, why
an Indian bean has proven key to unconventional extraction or any number of
industry relevant themes read on. We hope that what you find will prove both
interesting and informative.
________________________________________________________________________________________________________________
Deutsche Bank AG/London
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. DISCLOSURES AND ANALYST
CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 072/04/2012.
25 January 2013

Integrated Oils
Oil & Gas for Beginners

Table Of Contents
Section I: The Oil & Gas Industry ................................................... 9
A Brief History of Oil ..................................................................... 10
From biblical times… ........................................................................................................ 10
Setting the scene .............................................................................................................. 11
IOCs and NOCs ................................................................................................................. 15
The IOC Sisters – 100 years in the making ...................................................................... 16
The International Oil Companies ...................................................................................... 19
The IOCs Compared ..................................................................... 21
The major NOCs ............................................................................................................... 23
OPEC ............................................................................................ 27
A brief history ................................................................................................................... 27
How does OPEC work? .................................................................................................... 28
Why is OPEC able to influence prices? ............................................................................ 29
What price does OPEC want? .......................................................................................... 30
The OPEC basket .............................................................................................................. 31
What is the western IOCs exposure to OPEC? ................................................................ 31
In the beginning ….. ..................................................................... 32
A brief summary ............................................................................................................... 32
Geologic time and rock record ......................................................................................... 33
Basic geology ................................................................................................................... 34
Hunting for sand… ........................................................................................................... 36
Working hydrocarbon system .......................................................................................... 38
Source rocks ..................................................................................................................... 39
Migration .......................................................................................................................... 41
Reservoir quality ............................................................................................................... 42
The trap and seal .............................................................................................................. 44
Reservoir volumetrics ....................................................................................................... 46
Getting it out ................................................................................ 48
The Life Cycle of a Basin .................................................................................................. 48
Field Operations ................................................................................................................ 53
Land Seismic .................................................................................................................... 53
Offshore seismic ............................................................................................................... 55
Assessing risk and reward ............................................................................................... 57
Benchmarking exploration success rates ........................................................................ 58
Field Operations - Drilling ................................................................................................. 61
Directional (incl. horizontal) wells .................................................................................... 65
Land and offshore rigs ..................................................................................................... 66
Field Operations - Evaluation ........................................................................................... 68
Field Operations - Development ....................................................................................... 72
Onshore – oil is usually straight-forward… ...................................................................... 72
Offshore – as usual, deeper is tougher ............................................................................ 73
Peering deeper .................................................................................................................. 75
Extending the field life ...................................................................................................... 77
Recovery factors ............................................................................................................... 78
Primary recovery ............................................................................................................... 78
Depositional controls on recovery factor ......................................................................... 79
Secondary recovery… waterflood .................................................................................... 80
Tertiary recovery techniques ............................................................................................ 80
Oil Field Service Companies – where do they fit? ............................................................ 81
Global oil service chain – representative competitive landscape .................................... 82
Key sector drivers & leading indicators ............................................................................ 85
Rig Counts ........................................................................................................................ 86
Day-rates........................................................................................................................... 86

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Integrated Oils
Oil & Gas for Beginners

Table Of Contents (Cont'd)
Sizing the global service market ...................................................................................... 87
So what is in the cost of a barrel of oil? ........................................................................... 88
How much does it cost to extract a barrel of oil? ............................................................ 90
Where to from here? ........................................................................................................ 93
Oil & Gas reserves ........................................................................ 95
A cautionary tale ............................................................................................................... 95
A company’s lifeblood ...................................................................................................... 95
The industry view: SPE definitions – Reserves & Resources; Proven, probable and
possible ............................................................................................................................. 96
The accounting view: SEC Reserves – Proven developed and proven undeveloped. ..... 98
Reserve revisions ............................................................................................................ 101
Reserves: What do they actually tell us? ....................................................................... 102
Reserves Accounting– FAS 69 ................................................... 104
Disclosure of proved oil and gas reserves ..................................................................... 104
Disclosure of capitalised costs relating to producing activities ..................................... 104
Disclosure of costs incurred in oil and gas property additions ...................................... 104
Disclosure of operational results .................................................................................... 105
Disclosure of discounted future net cash flows ............................................................. 105
Disclosure of current cost information ........................................................................... 105
So how do analysts use FAS 69 information? ............................................................... 106
Reserves - Where and what? ..................................................... 109
So how much oil has been extracted? ........................................................................... 109
What is Peak Oil? ........................................................................................................... 111
A critical weakness - simple economics ignored ........................................................... 111
So when will a peak occur and does it matter? ............................................................. 112
Oil & Gas Taxation ...................................................................... 113
Concessions & contracts – An overview ........................................................................ 113
Tax & Royalty Concessions ............................................................................................ 115
Production Sharing Contracts (PSCs) ............................................................................. 117
Working through an IRR based PSC .............................................................................. 122
Buy Backs ....................................................................................................................... 126
World Oil Markets ...................................................................... 129
Fundamentals, physical and financial ............................................................................ 129
Key exchanges and benchmarks .................................................................................... 129
The oil price .................................................................................................................... 130
Oil Demand ..................................................................................................................... 132
Oil Supply ....................................................................................................................... 135
Inventories ...................................................................................................................... 137
OPEC Spare Capacity ..................................................................................................... 138
Product Prices ................................................................................................................. 139
Physical vs. Financial ...................................................................................................... 139
World Gas Markets..................................................................... 143
In a state of flux .............................................................................................................. 143
Global Gas Demand ........................................................................................................ 144
Global Gas Supply .......................................................................................................... 146
Gas Pricing - US .............................................................................................................. 150
Gas Pricing - Europe ....................................................................................................... 152
Gas Pricing – Asia & LNG Markets ................................................................................. 156
Oil & Gas Products ..................................................................... 159
What is crude oil? ........................................................................................................... 159
Definitions ....................................................................................................................... 159
Key global crude blends & resultant product slates ...................................................... 160

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Oil & Gas for Beginners

Table Of Contents (Cont'd)
Trends in the crude oil slate ........................................................................................... 161
Refining Overview ...................................................................... 163
The Black Sheep of the family ........................................................................................ 163
The curse of the investment cycle ................................................................................. 166
What is Refining? ....................................................................... 167
What do refineries make? .............................................................................................. 167
The stream of oil products ............................................................................................. 168
How does a refinery work? ............................................................................................ 169
Key variables impacting refinery performance .............................................................. 173
Configuration and complexity ........................................................................................ 173
Choice of Crude – Heavy, sour, sweet and light ............................................................ 176
Location .......................................................................................................................... 178
Other factors ................................................................................................................... 178
Regional balances and market structure ....................................................................... 180
Measuring Refining Profitability ..................................................................................... 182
US margins ($/bbl) .......................................................................................................... 183
NWE margins ($/bbl) ...................................................................................................... 183
Asian margins ($/bbl) ...................................................................................................... 183
Gasoline/fuel oil crack spreads US/Europe .................................................................... 184
What drives refining margins? ....................................................................................... 184
Petroleum Administration for Defence Districts (PADDS) ............................................. 185
Refining Industry Structure ............................................................................................ 186
Summary statistics – Capacity and players 2012 .......................................................... 187
Marketing ................................................................................... 188
Stability in a cyclical world ............................................................................................. 188
The wholesale/retail chain .............................................................................................. 190
Removing capital, containing costs ............................................................................... 191
What’s in a litre of fuel? European Retail Data .............................................................. 192
What’s in a litre of fuel? US Retail Data ......................................................................... 192
Biofuels ....................................................................................... 193
What are biofuels?.......................................................................................................... 193
Why use biofuels? .......................................................................................................... 194
Where are biofuels produced and used? ....................................................................... 194
The policy & legislative framework ................................................................................ 195
Bioethanol ....................................................................................................................... 196
Biodiesel ......................................................................................................................... 198
Criticisms of biofuels ...................................................................................................... 199
Long-term developments in biofuel ............................................................................... 200
Petrochemicals ........................................................................... 202
Part of the integrated chain ............................................................................................ 202
The olefin plant (cracker) ................................................................................................ 203
Petrochemical Industry profitability ............................................................................... 205
Olefin and Aromatic Building Blocks and their Chains .................................................. 206
Ethylene – C2 Olefin ....................................................................................................... 206
Propylene – C3 Olefin ..................................................................................................... 207
Butadiene – C4 Olefin ..................................................................................................... 208
Benzene – C6 Aromatic .................................................................................................. 208
Paraxylene – C8 Aromatic .............................................................................................. 209
The Major Plastics or Polymers ...................................................................................... 209
Conventionals & Unconventionals ............................................. 214
Conventionals ................................................................................................................. 214
Unconventionals ............................................................................................................. 214

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Integrated Oils
Oil & Gas for Beginners

Table Of Contents (Cont'd)
Liquefied Natural Gas (LNG) ....................................................... 215
Overview ......................................................................................................................... 215
Atlantic Basin vs. Pacific Basin ...................................................................................... 218
LNG - The process and the chain ................................................................................... 219
Costs of LNG Production ................................................................................................ 219
LNG – returns across the chain ...................................................................................... 221
Pricing of LNG ................................................................................................................ 222
US exports – a potentially significant new supply source ............................................. 225
Cargo flexibility – FOB and DES (or CIF) ........................................................................ 227
Shipping of LNG ............................................................................................................. 227
Re-gasification of LNG – facilitating access ................................................................... 229
Floating LNG (FLNG) – Exactly what it says on the tin .................................................. 230
Existing LNG facilities and facilities planned 2013-18 ............... 231
LNG - The IOCs Portfolios and Positions ........................................................................ 233
Comparing and contrasting the LNG majors – Side by Side ......................................... 235
Deepwater .................................................................................. 236
Peering into deepwater .................................................................................................. 236
NGLs and condensates .............................................................. 240
A valuable by-product .................................................................................................... 240
Canada’s Oil Sands .................................................................... 241
A huge unconventional resource ................................................................................... 241
Methods of Extraction – Mining ..................................................................................... 243
Methods of Extraction – In-situ ...................................................................................... 243
Upgrading ....................................................................................................................... 245
Costs – The highest marginal cost barrel on the globe ................................................. 246
Gas to Liquids (GTL) ................................................................... 248
An expensive alternative to LNG .................................................................................... 248
Background .................................................................................................................... 248
Commercial GTL plants are limited ................................................................................ 249
There are positives .......................................................................................................... 251
An uncertain future at this time ..................................................................................... 251
Coal Bed Methane ...................................................................... 252
Exactly what it says on the label .................................................................................... 252
Tight & Shale Gas ....................................................................... 254
Huge potential resource ................................................................................................. 254
Extracting the gas ........................................................................................................... 256
Economics – quick out, low depth, at current gas prices .............................................. 258
Tight Oil ...................................................................................... 261
Changing the fundamentals of oil supply ...................................................................... 261
Extraction Process .......................................................................................................... 262
US at the Forefront ......................................................................................................... 263
Production ...................................................................................................................... 264
US Logistics and Infrastructure ...................................................................................... 266
Economics ...................................................................................................................... 267
Active Companies ........................................................................................................... 268
A look outside the US ..................................................................................................... 269

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Oil & Gas for Beginners

Table Of Contents (Cont'd)
Section II - The Countries
Major Non-OPEC producers ....................................................... 270
Argentina .................................................................................... 271
Australia ..................................................................................... 277
Azerbaijan ................................................................................... 283
Brazil ........................................................................................... 289
Canada – Oil Sands .................................................................... 295
Kazakhstan ................................................................................. 301
Mexico ........................................................................................ 307
Norway ....................................................................................... 313
Russia ......................................................................................... 319
United Kingdom ......................................................................... 327
US Alaska ................................................................................... 333
US Deepwater Gulf of Mexico .................................................... 339

Major OPEC Producers ............................................................... 345
Angola ........................................................................................ 347
Iran ............................................................................................. 353
Iraq ............................................................................................. 359
Kuwait ........................................................................................ 367
Libya ........................................................................................... 373
Nigeria ........................................................................................ 381
Qatar ........................................................................................... 389
Saudi Arabia ............................................................................... 395
United Arab Emirates ................................................................. 401
Venezuela ................................................................................... 407

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Integrated Oils
Oil & Gas for Beginners

Table Of Contents (Cont'd)
Section III: The Major Companies .............................................. 415
The European
BP ............................................................................................... 417
Royal Dutch Shell plc ................................................................. 421
Total SA ...................................................................................... 425
ENI .............................................................................................. 429
Statoil ......................................................................................... 433
BG Group .................................................................................... 437
OMV ........................................................................................... 441
Galp Energia ............................................................................... 445
Repsol ......................................................................................... 449
Tullow Oil .................................................................................... 453
The US
ExxonMobil ................................................................................. 457
Chevron ...................................................................................... 461
Conoco ....................................................................................... 465
Anadarko .................................................................................... 469
EOG Resources ........................................................................... 473
Sector Investment Thesis ........................................................... 476
Outlook ........................................................................................................................... 476
Valuation ......................................................................................................................... 476
Risks ............................................................................................................................... 476
Deutsche Bank Energy Coverage List ........................................ 477
Companies by sub-sector and coverage analyst ........................................................... 477
Glossary ...................................................................................... 480

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Oil & Gas for Beginners

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Page 8 Deutsche Bank AG/London
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Integrated Oils
Oil & Gas for Beginners

Section I: The Oil & Gas
Industry

Deutsche Bank AG/London Page 9