THE UNIVERSITY OF SALFORD

SCHOOL OF COMPUTING, SCIENCE AND ENGINEERING

MSC PETROLEUM & GAS ENGINEERING
COURSE MODULE: PETROLEUM ECONOMICS AND PROJECT
MANAGEMENT
ASSIGNMENT
Lecturer: DR. L. AKANJI
Presented
By
OSEGHALE DONALD OKOH
Roll No.: @00347583

MARCH 2014

Table of Contents
Table of Contents .......................................................................................................................................... 2
1.0 A Discussion on the contribution of the Organization of Petroleum Exporting Countries (OPEC) in
Global Petroleum Economic Stabilization, Efficient Supply and Crude oil Policy of member and nonmember nations ............................................................................................................................................ 4
1.1 INTRODUCTION ................................................................................................................................... 4
1.2 PRE OPEC ERA/REASONS FOR FORMATION........................................................................................ 7
1.3 OPEC POLICIES..................................................................................................................................... 7
1.4 POLICY ON GLOBAL PETROLEUM ECONOMICAL STABILIZATION, EFFICIENT SUPPLY AND CRUDE OIL
POLICY OF MEMBER AND NONE MEMBER COUNTRIES ........................................................................... 7
1.4 REALITY OF THEIR IMPACT ON PETROLEUM ECONOMICAL STABILITY, EFFICIENT SUPPLY AND
CRUDE POLICY OF MEMBER AND NON MEMBER COUNTRIES ................................................................. 8
1.4.1 PETROLEUM ECONOMICAL STABILITY. ........................................................................................ 8
1.4.2 EFFICIENT SUPPLY ........................................................................................................................ 8
1.4.3 CRUDE POLICY OF MEMBER AND NON MEMBER COUNTRIES .................................................... 8
1.4 CONCLUSION ....................................................................................................................................... 9
QUESTION 2 ................................................................................................................................................ 10
2.0 Discussion on the short run level deviation from the long run level of domestic petroleum
utilization initiated by changes in autonomous spending due to local fuel consumption ..................... 10
Discussion on the short run level deviation from the long run level of domestic petroleum utilization
initiated by changes in autonomous Global demand. ............................................................................ 13
QUESTION 3 ................................................................................................................................................ 15
3.0 OIL AND GAS PROJECT; DEFINATION AND CHARACTERISTICS.......................................................... 15
3.1 FACTORS AFFECTING THE DECISION TO FARM-IN OR FARM-OUT OF AN OIL AND GAS PROJECT ... 17
REFERENCES ................................................................................................................................................ 18

Figure 1.0: OPEC MEMBERS PETROLEUM PRODUCTION IN BARRELS PER DAY FOR 2013 ........................... 6
Figure 2.0: Graph showing the short run level of domestic petroleum utilization initiated by change in
autonomous spending due to reduction in local fuel consumption........................................................... 11
Figure 3.0: Graph showing the short run level of domestic petroleum utilization change by an increase in
autonomous spending due to increase in local fuel consumption. ............................................................ 12
Figure 4.0: Graph showing the short run level of domestic petroleum utilization change by an increase in
autonomous global demand. ...................................................................................................................... 13
Figure 5.0: Graph showing the short run level of domestic petroleum utilization change by an increase in
autonomous global demand. ...................................................................................................................... 14

1.0 A Discussion on the contribution of the Organization of Petroleum

Exporting Countries (OPEC) in Global Petroleum Economic Stabilization,
Efficient Supply and Crude oil Policy of member and non-member
nations
1.1 INTRODUCTION
"OPEC, in full Organization of the Petroleum Exporting Countries, multinational organization that was
established to coordinate the petroleum policies of its members and to provide member states with
technical and economic aid." (OPEC, 2014)
It was created on the 10th to 14th of September 1960, its original member countries included Iran, Iraq,
Kuwait, Saudi Arabia and Venezuela.
Since its conception, members have varied, there has been addition of new members and exit of two
members, new members include;
Qatar (1961);
Indonesia (1962) suspended its membership from January 2009;
Libya (1962);
United Arab Emirates (1967);
Algeria (1969);
Nigeria (1971);
Ecuador (1973) suspended its membership from December 1992-October 2007;
Angola (2007);
Gabon (19751994).
Originally its headquarters was located in Geneva, Switzerland but was relocated to Vienna Austria in
1965. (BRIEF HISTORY, 2014)
Presently OPEC accounts for 44.5% of the world's crude oil, and possess more than 81% of the world's
total proven crude oil reserves. (CNN Library, 2014).

Figure 1.0: OPEC MEMBERS PETROLEUM PRODUCTION IN BARRELS PER DAY FOR 2013

(OPEC ANNUAL STATISTICAL BULLETIN, 2013)

1.2 PRE OPEC ERA/REASONS FOR FORMATION

The Third world petroleum economy prior to the formation of OPEC was largely dominated by the
"Seven Sisters" a name conceived by the then head of the oil company Eni, Enrico Mattei to refer to
seven major oil companies;

The Royal Dutch Shell

Anglo-Persian Oil Company (now BP)
Gulf Oil,
Standard Oil of California (SoCal)
Texaco (now Chevron)
Standard Oil of New Jersey (Esso)
Standard Oil Company of New York (Socony) (now ExxonMobil).

These companies monopolized the African/Arab State oil market, setting oil prices and production
volumes. They entered Concessionary agreements with majority of their host countries, who at that
time lacked the capital and technology to carry out oil exploration or production.
In time however nationalist within these countries started movements that accused these companies of
exploitation and advocated control of the oil market.
These companies exerted little control over the supply leading to drop in the actual cost of dollars per
barrel in 1960, seeing this as threat to their bargaining power when dealing with first world countries,
two third world countries in particular Venezuela and Iran rallied fellow Arab countries, Iran, Kuwait and
Saudi Arabia to form the Organization of the Petroleum Exporting Countries(OPEC) on the 10th to 14th
of September 1960 at a conference in Baghdad.

1.3 OPEC POLICIES

OPEC released its Statute in 1961, a set of rules governing its objectives, operations and leadership and
in 1968 released a Declaratory Statement granting member countries sole ownership of all natural
resources within their bodies with the purpose of member countries' development.

1.4 POLICY ON GLOBAL PETROLEUM ECONOMICAL STABILIZATION, EFFICIENT

SUPPLY AND CRUDE OIL POLICY OF MEMBER AND NONE MEMBER COUNTRIES
OPEC's policy on global petroleum economical stabilization and efficient supply can be adequately
addressed by Article 2 of the OPEC Statute which states
"Article 2
A. The principal aim of the Organization shall be the coordination
and unification of the petroleum policies of Member Countries
and the determination of the best means for safeguarding their
interests, individually and collectively.
B. The Organization shall devise ways and means of ensuring the
stabilization of prices in international oil markets with a view to
eliminating harmful and unnecessary fluctuations.

C. Due regard shall be given at all times to the interests of the producing
nations and to the necessity of securing a steady income
to the producing countries; an efficient, economic and regular
supply of petroleum to consuming nations; and a fair return on
their capital to those investing in the petroleum industry."
(OPEC STATUTE, 2012)
There has also issuances of Solemn Declaration reverberating these sentiments, these declarations
issued in Summits aimed at taking a step back to reevaluate the role of OPEC in the Global Petroleum
Market, they summits took place in Algeria in 1976, Venezuela in 2000 and Saudi Arabia in 2007.

1.4 REALITY OF THEIR IMPACT ON PETROLEUM ECONOMICAL STABILITY,

EFFICIENT SUPPLY AND CRUDE POLICY OF MEMBER AND NON MEMBER
COUNTRIES
1.4.1 PETROLEUM ECONOMICAL STABILITY.
OPEC regardless of policy have sometimes strayed from the objectives outlined in their policy, an
evident example of such a case of their negative impact on Global Petroleum economic Stability is the
incidence of Arab-Israeli war, in retaliation to America's support of Israel, the price of crude per barrel
was raised from $3 to $12 (CNN Library, 2014), this destabilized the global petroleum economy, drove
demand through the roof and led to wide spread inflation affecting global economy.
Subsequent illogical increases in price of crude per barrel over the decades have led to reduction in the
demand of crude and exploration into alternative sources of energy by consumer nations.
OPEC has proved to have fared no better than the organization that they once criticized as having no
control over global petroleum economic trend.
1.4.2 EFFICIENT SUPPLY
The subsequent embargo placed on the Unites States and Netherland after increase in the price of crude
per barrel failed to deter the West's support of Israel caused a shortage that drove demand so high,
alternative supply of crude had to be discovered, also improper management of cost of per barrel meant
alternative suppliers of crude had to be explored.
Presently OPEC accounts for 44.5% of the world's crude oil, this when compared to having above 81% of
the world's total proven crude oil reserves obviously demonstrates that OPEC is operating at a greatly
reduced capacity.
There is however a push by countries with greater reserves to increase supply but this is still at its
preliminary stage with countries with reduced reserves pushing against it.
1.4.3 CRUDE POLICY OF MEMBER AND NON MEMBER COUNTRIES
OPEC Policy requires member countries meet a specified allocation production quota per annum
dependent on that particular countries' estimated reserves, continued membership in OPEC is
dependent on the capability of member countries to continually meet this allocated production quota.
Member countries are strictly demanded to not exceed this quota in order to maintain a fixed balance
between OPEC's global demand and supply in the global petroleum market.
There is a tendency for individual countries however to cheat this in order maximize sales and profits.

Relationship between OPEC member countries over the years can be best described as complicated,
wars between member countries such as the Iran-Iraq War (198088), Persian Gulf War (199091) have
undermined the unity of the association and this in turn has shifted the policy of member countries to
defend their market share rather crude oil prices.
There are constant arguments over the yearly production quota allocated, recently Saudi Arabia has
pushed for increase in production to fight increasing oil prices and other countries already producing at
their maximum production capability seeing a drop in oil prices as unfavorable.
OPEC'S crude policy on non-member countries is not fully economically dependent and can be politically
motivated, the Decision to sell to countries and price per barrel has been known to be affected by this,
the incident of Arab-Israeli war is quite evident of this, OPEC is not a completely Arab only association
and if for purely economical reasons should naturally not have interfered to such a degree in that war.
Recently individual member country's market share has mostly been a determining factor unofficially in
the relationship between OPEC and non member countries

1.4 CONCLUSION
The role of OPEC as an economic power has greatly reduced over the years, though they still exercise a
substantial degree of control over global petroleum economy.
The recent in-fighting within OPEC, (the Saudi Arabians on one hand with larger reserves pushing for
increase in production quota, therefore a drop in oil prices against other members represented by the
Iraqis and Iranians on the other with smaller reserves and already producing at their maximum
capability) will be a determining factor on the future relevance of OPEC and maybe even the oil industry.
A new Resolution supporting the Saudi Arabians will see a drop in oil prices and hence a reduction in the
trend towards better, more environmentally friendly source of energy while steady increase in price
advocated by opposing member countries will hasten an end to the reign of oil as a primary source of
energy.
It happened to wood, it happened to coal, given adequate time, it will happen to oil.

QUESTION 2
2.0 Discussion on the short run level deviation from the long run level of
domestic petroleum utilization initiated by changes in autonomous spending
due to local fuel consumption
Autonomous spending can be defined as a characteristic of essential products in which they experience
no change in quantity demanded when there is a corresponding change in the price of these products,
Petroleum is one of such essential product, regardless of changes in fuel price to a certain level, there
will be little change to its demand. it is to an extent a necessity.
When an eventual change in this characteristic of an essential product occurs, there is bound to be a
deviation from the predicted long run utilization of this product.
Consider for example, a neighborhood decides to become more environmentally aware, they realize all
the men work at the same factory and decide rather than drive separate cars to work, they can form a
carpool association, there is therefore a reduction in the number of cars running that particular route by
as much three quarter of the original number of cars running that route.
In this case, there will be no change in the price of petroleum but a reduction in domestic petroleum
utilization initiated by a reduction in autonomous spending on petroleum brought about by a reduction
in the local fuel consumption.

Figure 2.0: Graph showing the short run level of domestic petroleum utilization initiated by change in autonomous spending
due to reduction in local fuel consumption

Observation from the graph above

1. The price of petroleum was constant at P1 but the quantity demanded by the neighborhood dropped
from Q1 to Q2, shifting the demand curve downwards.
2. The new demand curve intercepts the supply curve forming a new equilibrium point with a new price
(P2) and with the ideal quantity supplied being Q2.
This graph shows that for a reduction in utilization of petroleum, the ideal supply target strategy will be
to reduce the supply output to match utilization level .
There will a reduction in the price of petroleum encouraged by a decrease in the local taxation on oil
producing countries by oil consuming countries, this is done to persuade an increase in demand.
Consider an opposite of the previous example, A neighborhood not practicing carpooling has majority of
its men serving as workforce for a factory that has recently been relocated to a farther location. There
will be an increase in fuel consumption.

Figure 3.0: Graph showing the short run level of domestic petroleum utilization change by an increase in autonomous
spending due to increase in local fuel consumption.

Observation from the graph above

1. There was an increase in petroleum utilization from Q1 to Q2 while the price remained constant, this
caused an upward shift in the demand curve.
2. The new demand curve intercepted the supply curve forming a new equilibrium point with a new
equilibrium price (P2) and equilibrium quantity (Q3).
From this graph we can conclude that an increase in fuel consumption, hence a change in autonomous
spending will result in supply target strategy that increases output from Q1 to Q3, the output will be less
than the utilization level Q2, this will create an artificial scarcity that will cause petroleum price to go up.
An Ideal local tax strategy will see an increase in the taxation of producing countries by consuming
countries to curb increasing demand and reduce output.

Discussion on the short run level deviation from the long run level of domestic
petroleum utilization initiated by changes in autonomous Global demand.
Alterations in global demand of petroleum is evident in any individual country as either a reduction or
increase in that particular country's supply output.
The impact of an increase in global demand on a country will see a decrease in the supply of petroleum
to that country.
:

Figure 4.0: Graph showing the short run level of domestic petroleum utilization change by an increase in autonomous global
demand.

Observation from the graph above

1. There was an increase in price from P1 to P2 while the petroleum utilization level remained constant,
this caused an upward shift in the supply curve.
2. The new supply curve intercepted the demand curve forming a new equilibrium point with a new
equilibrium price (P3) and equilibrium quantity (Q2).
From this graph we can conclude that an increase in Global demand will result in supply target strategy
that decreases output from Q1 to Q2, the output will be less than the initial utilization level Q1. this is
ideal to tackle any initial reduction in petroleum demand due to increase in price.

The local tax strategy will see a decrease in the taxation of producing countries by consuming countries
to decrease the fuel price from P2 to P3.
A decrease in global demand of petroleum on the other hand will see the supply to individual countries
increase:

Figure 5.0: Graph showing the short run level of domestic petroleum utilization change by an increase in autonomous global
demand.

Observation from the graph above

1. There was an decrease in price from P1 to P2 while the petroleum utilization level remained constant,
this caused an downward shift in the supply curve.
2. The new supply curve intercepted the demand curve forming a new equilibrium point with a new
equilibrium price (P3) and equilibrium quantity (Q2).
From this graph we can conclude that an decrease in Global demand will result in supply target strategy
that increases output from Q1 to Q2, the output will be more than the initial utilization level Q1. this is
because there will be more crude available for individual countries.
The local tax strategy will see an increase in the taxation of producing countries by consuming countries
causing an increase in the fuel price from P2 to P3

QUESTION 3
3.0 OIL AND GAS PROJECT; DEFINATION AND CHARACTERISTICS
A project is any activity that has resources expended on it and ends only when the objective of that
activity has been achieved within a pre-fixed time frame.
Attributes of a typical oil and gas project include;

It has an objective
This is the extraction and sale of the recoverable oil and gas in place
it exists within a time frame
it is developed progressively, it's steps become detailed as the project progresses
it requires resources
It has a sponsor
This is usually the government or company board
It is subject to risk and uncertainty
A fundamental phase process

A typical oil and gas fundamental process can be characterized by the following Phases;

Project Conception
Exploration for Crude
This involves the use of geological and geophysical methods to locate an oil field, this is an
important characteristics of an oil and gas project. There are various settings that can result in
the accumulation of crude; faults, oil traps and even salt domes. Geological and geophysical
exploration ensures that locations are tested for the characteristics exhibited by these particular
settings.

Project Definition
In the phase, the following steps takes place

The oil in place is estimated by the geologist and Reservoir engineers

The Environmental officers need to evaluate the environmental impact of the project and
review the environmental condition and laws of the land.
Logistic personnel and Engineers need to ascertain the viability of the drilling process.
The accounting unit of project managerial team then ascertain the cost of the entire project, the
decision to farm in or farm out is then taken after a review of the officers listed above.

o
o

Project Planning/Scheduling
Acquisition of area of drilling/Setting up of Rig;
This is dependent on the government of the Country in which the area to be drilled is located. It
involves the Legal unit of the project managerial team to set up lease agreements with land
owners, draw up Royalty contracts and settle all other legal issues pertaining to acquiring the
land.
All required equipments and personnel for the project are obtained and the rig is set up in
preparation for the project.

Project Launch / Execution

Drilling and Production Process

Project Closure

Post-Project Evaluation

3.1 FACTORS AFFECTING THE DECISION TO FARM-IN OR FARM-OUT OF AN OIL

AND GAS PROJECT
The decision to farm-in or farm-out of an oil and gas project is based on the following

The Recoverable oil/gas in place

Initial Cost of the investment
Payout time of the project
Risk of undertaking the project
o Government Policy/Country Stability
o Technological viability of the project

The Recoverable oil/gas in place;

The Recoverable oil/gas in place is an important determinant in the decision to farm-in or farm-out, it
determines the amount of profit to be realized from an oil and gas project, a particular recoverable
volume which is ideal for a particular company to consider farming into a project might be considered
too small to generate sufficient profit for another larger company. Alternatively a very large recoverable
volume might be too much for a smaller company to efficiently extract, meaning they will have to draw
up a farm out agreement with a larger company.
Initial Cost of Investment;
The Initial capital required to initiate the project might be too large for a smaller oil and gas company,
the cost of acquiring the ideal equipments to efficiently drill and produce from a well is a large chunk of
initial cost, for particular oil fields, this cost can be huge, in cases when the cost cannot be loaned, it is
best to farm out and for a more financially stable company to farm-in
Payout time of the project;
The payout time of a project weighs in on the decision to farm in or farm out of a project, A financially
large company can afford to execute a project with a very long payout time but a smaller farmor might
decide that same payout time might be too long and executing such a project might shut down the
company. In such a case the smaller farmor will sign a farm-out agreement with a larger company.
Risk of undertaking the project
The Risks involved with a particular project determines the decision to farm in or farm out, this can be in
the form of new unfavorable government policies towards a particular company or lack of the
technology to tackle a particular geological or environmental terrain.

REFERENCES
OPEC 2014. Encyclopedia Britannica Online. Retrieved 19 February, 2014, from
http://www.britannica.com/EBchecked/topic/454413/OPEC
BRIEF HISTORY OF OPEC (2014), Retrieved 19 February, 2014, from
http://www.opec.org/opec_web/en/about_us/24.htm
OPEC STATUTE (2012). Retrieved 20 February 2014, from
http://www.opec.org/opec_web/en/publications/345.htm
CNN LIBRARY,.(2014). OIL AND GAS FAST FACTS. Retrieved 20 February, 2014, from
http://edition.cnn.com/2013/07/30/world/oil-and-gasoline-fast-facts/index.html
OPEC ANNUAL STATISTICAL BULLETIN (2013), Retrieved 20 February 2014, from
http://www.opec.org/opec_web/en/publications/202.htm