Oil and Gas Management Report
Question 1: The following question concerns the roles of the various organisations involved in the oil & gas industry and the relationships between them.
Describe the key features and the advantages and disadvantages of the following types of commercial relationships between an oil company operating a field and a Tier 1 contractor running an oil field (as a contract operator) on behalf of the Operator (20%)
a) Conventional list price plus an incentivisation bonus
The conventional list price is a commercial relationship in oil and gas industry in which the price that is supposed to begiven to the external contract operator or partner is centred on the actual production or delivery cost(Yusuf et al. 2016). The incentive-based relationship, together with the conventional list price is essential since the costs or prices associated with the moral hazard, monitoring, adverse selection, and many others decrease with the utilisation of this relationship.
The main advantage of the conventional list price plus an incentivisation is the calculation simplicity (Ozer & Robert 2012).Although there are many calculation methods used in determining the price and the costs, little information is needed in using this contract relationship because ofthe price changes according tothe costs of the delivery of the project(Haque 2020). Oil, as well as gas industry,uses the conventional list price plus incentive-based bonuses in justifying the increases in price as the costs rise and this offers the simplest way of the businesses setting up the product pricing (Naumov 2015). In addition,the conventional list price enables the provider to be protected from the unpredicted costs(Ozer & Robert 2012). The disadvantage of the conventional list price plus incentivisation bonus mainly ignores the role played by the buyers. Accuracy is a very important component in the conventional list price relationship, and it relies on the variable costs as well as sales approximate (Haque 2020). And if any of the estimates or approximates is inaccurate, the cost structure also becomes inaccurate. The conventional list price plus incentivisation bonus requires that the business overhead be estimated or approximated appropriately (Haque 2020). The providers in this commercial relationship have a little incentive that helps in reducing or controlling the costs since as the costs increase, profits or revenues increase, making the buyer pay a possibly inflated rate for the production or service.
b) Gainshare based on a target operating cost for the year
Gain share based on the target operating cost per year refers to a relationship in which all the parties in the oil and gas industry agrees on the fixed price to be given to the external contractor for the service or the product delivery. In several cases, bargaining the price after the signing has been done is not allowed in this commercial relationship. Furthermore, the cost of production does not change the price (Haque 2020). The main advantage of this commercial relationship is that it enables the buyers to set up the exact or precise budget in advance. The gain share based on the target operating cost is a commercial relationship that also allows the buyers to be aware of the cumulative costs before starting the project. It restricts the number of changes that happen during production. Under this commercial relationship, detailed knowledge about the costs as well as the price of delivering the service or the product is required (Ghandi and Lin 2016). The contract is normally written in detail concerning costs, pricing, roles and responsibilities, processes and inputs.
The disadvantage of the gain-share based on the target operating cost per year is that it is less flexible in managing new requests or changes. Any new changes that arise in the execution process may result in a renegotiation of price as well as changes to the program. In addition, the excessive focus of maintaining the fixed price may be expensive since the expense quality, timelines and creativity and value of the project becomes less important. This kind of commercial relationship in the oil and gas industry may be more expensive to the buyer more than predicted if the project is completed early (Haque 2020).
c) “At cost” pricing for day to day operations plus the contractor has a 10% equity stake in the field
The performance-based contracts underline the outcome, output as well as the quality of service or product delivery rather than advocating on how the service is delivered. Pricing for the day to day operations in the oil and gas industry gives a clear separation between the expectations of the buyer and the implementation of the contractor (Alramahi 2015. And it is normally characterized by less contractual detail since the focus is always on the contractor’s outcome. The high degree of the contractor rewards such as a 10 per cent equity stake is linked to the performance; therefore the organization is reliant on the contractor and has an interest in choosing right external contractors (Alramahi 2015). Under this kind of commercial relationship, the total compensation to the contractor consists of the base price as well as incentives that may be higher.
Question 2: The following questions concerns petroleum economics & taxation regimes, legal arrangements & licencing regimes.
a). Indicate the type of licencing regime (e.g. Concession, PSA, JV) you think is most appropriate for a government of a country to adopt for a newly developing oil & gas industry and why you think this. (20%)
Oil and gas industry is an important industry because of its significant impacts on almost all business aspects. All countries globally are affected by the oil and gas industry in a certain way, either as consumers or producers (Arezki et al. 2017).Several companies enter into contracts in acting together to share the risks, financing, and costs in executing an oil exploration project (Hunter 2015).The relationship existing between them is managed or governed by several types of agreements. Once the agreement principles between the participants in the oil and gas industry have been established, the business model control needs to be more detailed in accommodating the specific or particular issues as well as conditions concerning every project.
The licensing regime that is the most suitable for the government to implement for developing the oil and gas industry is the production sharing agreements (PSA) (Bindemann 2016).The PSA does not confer the ownership rights of petroleum production or exploration on the firm or contractor that completes the agreement. It instead, allows the firm to get a share of the petroleum products, and the remaining share of the production goes to the host country (Easo 2015). Under this agreement, the firm provides capital and technical expertise and accepts project risks (Radon 2016). The host country owns the installations and equipment, and unless it is stated otherwise in the PSA, the firm pays the income tax on the profits (BDO United Kingdom 2019). The other types of agreements are concession agreements and risk service agreement. Under the concession agreements, the petroleum company that is selected carries out the exploration activities (Likosky 2009). The ownership of the production is taken when the exploration is done and only gives royalty to the hosting country, and this could be through cash. It could also through paying income taxes on the profits. This type of commercial relationship gives the holder the express right of exploring and exploiting petroleum, own as well as market the petroleum production.
Under the risk service contract agreement, the host hosting country merely hires or uses the services the petroleum company to benefit from its technical expertise and financial (Yúnez & Chapa 2017). The company assumes or shoulders the risks as well as the liability, and it is reimbursed through service fee, normally paid in cash.
b). Using the evaluation model spreadsheet provided, and assuming a T&R Regime (check cell F16), identify and report the impact on the investing company NPV of varying oil production operating efficiency and gas production efficiency factor (in turn) through a range of +10/-20% from current values (adjust cells F26 and F34). How important do you consider production efficiency to be to sensitivity analysis for an oil & gas development and why? (10%)
Basing on the -10%/+20 change, the best option from the calculation of the spread sheet is the one that has the maximum NPV and the calculation of the NPV provides the answer on the efficiency of the oil and gas industry. The different discount rates as illustrated from the spreadsheet yield different values. Assuming the T&R Regime, according to cell F16 from the spreadsheet, several reasons may make companies refrain or delay from investing in certain projects that contain positive NPV. The oil companies have reduced the investment budgets in reaction to the dramatic reduction in the cash flow, and this is because of the reduction in oil prices. And therefore, since companies funding a significant part of the new deal from their cash, they reduce capital spending.
Sensitivity analysis or evaluation is widely used in the oil and gas industry as compared to production efficiency and this is because it provides a deep understanding of the risks. The deep understanding, coupled together with experienced engineers and scientists, provide important solutions to risks in the oil and gas industry (Ahiaga-Dagbu et al. 2017). The best way of managing risks is by understanding and preparing for the potential risk. The most reliable method of preparing the project risks is by using the risk register. The risk register summarizes all the risks that are associated with a particular petroleum production project.Question 3: The following question concerns the risks faced by the industry and means of identifying and managing them.
An oil company faces five broad categories of risk through the life of an oil or gas field development – Technical, Economic, Commercial, Organisational, Political (the TECOP framework).
Discuss how the significance of each risk changes through the exploration, development and production phases of an oil field development (20%)
Question 4: The following question concerns future oil and gas sources and climate change issues.
Various carbon budgets have been calculated, indicating the number of years that it might take at present rates of emissions to reach 1.5°C, 2.0°C and 3.0°C. Describe and discuss the major contributors to mankind’s annual carbon emissions, and describe the changes that will have to be made to enable mankind to stay within the 2.0°C carbon budget (15%)
Question 5: The following question concerns the planning and execution of oil and gas field decommissioning.
Outline the steps to be taken by an oil & gas operator (from 5 years before production ceases until commencement of the work to meet the requirements for approval from the UK regulator to proceed with a programme for decommissioning an oil & gas field. (15%).
References
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