A1260943014duOJQ

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• Petroleum
• Crude oil
• Natural gas
• LNG
• Fractionation
• Oil fields
• Dissolved gas drive
• Gas-cap drive
• Water drive

OIL EXTRACTION PRODUCTION

• How was oil used after its discovery in western
  PA? What products did it replace?
• How geologists find oil now?

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OIL EXTRACTION PRODUCTION

• Regulation of drilling (drilling mud and other
  wastes) and refining (air pollution and other
  wastes)

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OIL EXTRACTION
Common law Rule of capture
Monogahela case (PA, 1907) every landowner or
his lessee may locate his wells wherever he
pleases He may crowd the adjoining landowner

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OIL EXTRACTION
Does the common law tend to ensure production at
the maximum efficient rate of recovery? If not,
how might we achieve this goal?

• correlative rights
• proration by regulation (pooling or
  unitization) in U.S., solving the collective
  action problem. By single (government) owner
  most everywhere else.
• secondary recovery

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Peak Oil? Hubberts peak Figure
Source www.peakoil.ie
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Source BP
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Nationalization 1917 Russia 1931 Mexico ?
PEMEX 1970s Libya, Iran
Do nations have a legal right to nationalize
private assets?
act of state doctrine in international law
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• OPEC and Oil Prices
• 10/73-3/74 OPEC embargo more than doubles world
  prices
• Israeli-Egypt war
• 1979-83 price more than doubles again
• Iranian revolution
• OPEC price controls
• Post 1983 declining OPEC power
• What is OPECs goal in supply/price-setting?
• What is impeding OPECs ability to control prices
  now?

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Major Production Companies Source The
Economist Majors vs. NOCs Is major a
misnomer?
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• For next time
• Be sure you understand how western majors
  participate in exploration and production in
  Africa, Asia and South America.
• Who owns the oil they produce? Into what sort of
  property and contractual arrangements must these
  majors enter with the host nation?

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Oil Resources in Developing Countries
Political Risk
What is political risk? What sort of
political risks can undermine the value of a
firms investment?
Nationalization/expropriation
Policy change (regulatory monetary)
Terrorism/war/civil strife
concessions Lease term lessee duty to
produce Absolute ownership of subsurface
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Timeline Early 20th c rapid growth of
international oil industry 1930s-70s Latin
American nationalizations 1960 OPEC formed
How can firms contemplating investment in
developing countries predict political risk?
1960s-70s Middle east nationalizations 1973
first oil crisis in US price controls
instituted 1977 second oil crisis in US
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Oil Resources in Developing Countries
Political Risk

• Assessing/Predicting Risk
• Grand Tours approach
• Old Hands approach
• Quantitative analysis
• Qualitative analysis Delphi technique

Do you think political risk is predictable?
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Oil Resources in Developing Countries
Political Risk
corporate managers came to view risk analysis as
an ivory tower exercise, rooted in academic
theory rather than managerial practice.
HBS Note on Political Risk
Then how do companies (or their investors or
insurers) decide when political risk is too
great? What characteristics do you think are
correlated with political-legal stability, or
negatively correlated with political risk?
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Oil Resources in Developing Countries Political
Risk
What should investors look for? 1. Veto points in
the policy process (e.g., divided government,
separated powers, federalism)? 2. System
stability, but political change? 3. Strong
independent bureaucracy judiciary? In other
words, credible commitments against arbitrary
policy changes e.g., takings clause?
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Oil Resources in Developing Countries Political
Risk
How can corporate managers manage political risk?

• Insurance
• Sharing risk with host nation

Do you think something like the World Banks risk
guarantee for investment in electric
infrastructure could work for oil exploration?
Is it needed? Should the World Bank be in the
business of reducing investor risk?
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Modern Petroleum Agreements 3 approaches

1. Legislatively-prescribed terms
2. Delegation to national oil company
3. Hybrid system

Standardization ? equal treatment
Rigidity (how?)
Government bargaining power?
Flexibility ? best deal (how?)
Comparison problems ? potential corruption or
discrimination
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Modern Petroleum Agreements
Selecting contractor/developer

• What are the differences between these
  approaches? What are the advantages/disadvantages
  of each?
• Discretionary licensing
• Auction
• Open Competition

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Modern Petroleum Agreements

• What are the important differences between these
  different methods of foreign participation in
  developing domestic oil resources?
• Licensing/concession
• Joint venture
• Production sharing agreement
• Service contract