PETROLEUM EONOMICS
PE 451
DR. SARKODIE
COURSE OUTLINE
• LECTURE 1- INTRODUCTION- HISTORY OF THE OIL AND GAS
INDUSTRY
• LECTURE 2- DEMAND AND SUPPLY OF CRUDE OIL & OIL AND
GAS TRADING
• LECTURE 3 – TIME VALUE OF MONEY
• LECTURE 4 – DEPRECIATION OF OIL AND GAS ASSETS
• LECTURE 5- FINANCIAL MEASURES AND PROFITABILITY
ANALYSIS
• LECTURE 6- FISCAL REGIMES IN THE OIL AND GAS INDUSTRY
• LECTURE 7 – CASH FLOW MODELS
ASSESSMENTS
• 6- QUIZZES 15%
• 3 ASSIGNMENTS 15%
• MIDSEMESTER 20%
• FINAL SEMESTER EXAMINATION 50%
• TOTAL 100%
History of the Oil and Gas industry
LECTURE OBJECTIVES
• To introduce students to
• The oil and gas business concepts
History of the Modern Oil Industry
➢ The modern history of the oil and gas industry started in 1847, with a discovery made
by Scottish chemist James Young when he first observed the seepage of natural
petroleum in the Riddings coal mine. After successful distillation, He patented these
oils and paraffin wax.
➢ Not only Young’s but also, Abraham Pineo Gesner, a Canadian geologist also refined a
liquid from coal, oil shale, and bitumen that was cheaper and burned more cleanly
than other oils in 1846.
➢ In 1850, Young formed a partnership with geologist Edward William Binney and this
partnership became the first truly commercial oil refinery and oil works in the world,
manufacturing oil and paraffin wax from locally mined coal
History of the Modern Oil Industry
▪ The invention of the first modern steam engine, at the beginning of the 18th century,
signaled the transformation from an agrarian to an industrial economy.
▪ This is because steam engines were powered by either wood or coal but coal became the
preferred fuel and led to massive growth in the scale of industrialization.
▪ Machines powered by coal enabled breakthroughs in productivity while reducing the time
and cost of inland transportation
▪ In the beginning of the 20th century, environmental concerns and new technologies led to
another energy source shift from coal to oil
History of the Modern Oil Industry
▪ The first oil well drilled was in the town of La Brea, Trinidad in 1857. It was
drilled to a depth of 280ft by the American Merrimac Company.
▪ The first modern oil well in America was drilled by Edwin Drake in
Titusville, Pennsylvania in 1859 and Spindletop discovery in Texas in 1901
set the stage for the new oil economy.
▪ The discovery of petroleum in Titusville led to Pennsylvania ‘oil rush’,
making oil one of the most valuable commodities in America.
▪ Petroleum was much more adaptable and flexible than coal and its products (e.g.
kerosene) provided reliable and relatively inexpensive alternative to “coal-oils”
▪ oil emerged as the preferred energy source in the 20th century due to the technological
breakthroughs.
▪ One of the key drivers of that transformation were the use of electric light bulb and the
automobile. Because they demand oil for their operations
▪ natural gas that was produced along with oil was burned (or flared) as a waste
by-product in 1920s. But it value was realized and became a prized product in its own
right
▪ The late 18th century and the early 19th century marked the creation of major oil
companies that still dominate the oil and gas industry today.
▪ The first oil corporation was the Pennsylvania Rock Oil Company which was formed to
exploit oil found floating on water surfaces near Titusville, Pennsylvania.
▪ John D. Rockefeller and the Standard Oil Company, within a decade, dominated the oil
industry both in Titusville and across the nation. They were controlling about 90% of
America’s refining capacity and a number of its gathering systems and pipelines. They
began exploration, production and marketing
▪ ExxonMobil became the successor company to Standard oil company after it was
dissolved in 1911, and it is the world’s ninth largest company by revenue today
▪ The Nobel and Rothschild families were competing for control of production and
refining of Russia’s oil riches
▪ Rothschild family commissioned oil tankers to expand their oil operations and
reach more overseas customers from British trader Marcus Samuel.
▪ His first vessel, the Murex became the first oil tanker to pass through the Suez
Canal connecting the Mediterranean Sea to the Red Sea.
▪ Royal Dutch Petroleum got its start in the Dutch East Indies in the late 1800s, and
by 1892 had integrated production, pipelining, and refining operations. In 1907,
Royal Dutch and Shell Transport and Trading agreed to form the Royal Dutch
Shell Group
▪ The discovery of oil in Masjed Soleyman, Iran by William Knox D’Arcy led to the
incorporation of the Anglo-Persian Oil Company (APOC) in 1907
▪ Anglo-Persian Oil Company became British Petroleum in 1954, known today as BP,
which is currently the sixth largest oil and gas company in the world.
▪ ExxonMobil, Shell, and BP—are considered the original “supermajors.”
▪ The discovery of the Spindletop field in Texas in 1901 eventually mothered
companies such as Gulf Oil, Texaco, and others .
▪ Oil became a strategic energy source and a tremendous geopolitical prize as World War I
began
▪ So Gulf Oil, BP, Texaco, and Chevron in 1930s were involved in concessions that made
major discoveries in Kuwait, Saudi Arabia, and Libya
▪ Based on those discoveries, a cartel of seven companies know as the Seven sisters was
formed that controlled the world’s oil and gas business.
▪ This Seven sisters consist of Exxon (originally Standard Oil), Royal Dutch/Shell, BP, Mobil,
Texaco, Gulf, and Chevron.
▪ numerous shifts in the oil market moved influence from
generally “Big Oil” and oil-consuming countries to oil-producing
countries in the latter part of the 20th century.
▪ The oil-consuming countries ( Integrated Oil Companies)
operating in the oil-production countries were seen
as instruments of their countries by the governments of the oil-
producing countries
▪ This led to the formation of Organization of the Petroleum
Exporting Countries (OPEC) in 1960 in response to both
economical and geopolitical reasons
▪ Today, OPEC has 13 member countries with the governments of Venezuela,
Saudi Arabia, Kuwait, Iraq, and Iran been the founders of the Organization with
the intentions of negotiating with IOCs on matters of oil production, oil prices,
and future concession rights.
▪ OPEC and it members are contributing to approximately 44% of global oil
production and 81.5% of the world’s oil reserves.
▪ Today, members of OPEC are Algeria, Angola, Congo, Gabon, Iran, Iraq, Kuwait,
Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela
▪ OPEC had little impact during its first decade but the tide turned in the early 1970s
with the convergence of rising energy demand, re-negotiation of terms of business.
▪ Saudi Arabia has the majority of OPEC reserves, followed closely by Iran and
Venezuela
▪ OPEC strength has not only shifted control of production and pricing from Western
IOCs but also signal the beginning of today’s National Oil Company (NOC) era.
▪ The oil and gas industry is still thriving today despite competition from
renewable sources of energy
• The world is becoming more complex and political, with Venezuela and Russia as
representative examples
• The growing dominance of national oil companies is due to the growing demand
on crude oil , tightening supplies, natural gas prices, and a changing geopolitical
climate
• The Russia government has strengthened the position of Gazprom, the state-
controlled gas conglomerate, to the point of reneging on contracts with IOCs
• Today the NOCs are now controlling 73% of a much larger pie of world oil and
gas production.
FOSSIL FUEL CONSUMPTION BY COUNTRIES
HISTORY OF WORLD OIL PRODUCTION
PER CAPITA OIL CONSUMPTION
Country Oil Reserves (millions) Percentage(%)
Venezuela 299,953 18.2
Saudi Arabia 266,578 16.2
Canada 170,863 10.4
Iran 157,530 9.5
Iraq 143,069 8.7
Kuwait 101,500 6.1
United Arab Emirates 97,800 5.9
Russia 80,000 4.8
Libya 48,363 2.9
Nigeria 37,070 2.2
United States 35,230 2.1
OPEC : OPEC Share of World Crude Oil Reserves
▪ In the last 15 years, there has been technological breakthroughs in
unconventional oil and gas production especially the North America
▪ These technological breakthroughs have come in the fields of horizontal drilling,
subsea engineering, and hydraulic fracturing.
▪ Hydraulic fracturing is the process of injecting water, chemicals, and sand into
wells. The resulting fractures in surrounding shale rock formations allow for
hydrocarbons to escape.
▪ The new era of unconventional oil and gas is shifting power away from OPEC and
other exporters as countries look toward domestic production and energy
independence.
▪ Over the next ten years, this technique was perfected and coupled with advancements
in horizontal drilling.
▪ The resulting production, combined with the global economic slowdown at that time,
led to an 85% drop in domestic natural gas price from over $13.00 per MMBtu in 2008
to under $2.00 in 2012.
▪ Other effects of persistently low natural gas prices include
o rapid switch away from coal to gas-fired power plants
o Accelerated conversion to natural gas as a transportation fuel for commercial fleets
o Adverse effect on the economics of renewable energy as gas-fired plants operate
inexpensively and cleanly relative to coal
GHANA’S CRUDE OIL PRODUCTION
• As of March 2022, the crude oil production capacity in Ghana stood at
173 thousand barrels per day. The volume was below what was
measured in October 2020, when the country's capacity reached 186
thousand barrels per day. Since March 2020, the volume of crude oil
that can be produced in Ghana has followed a downward trend.
• Nonetheless, oil production in the country reached 173 thousand
barrels per day in 2020.
Decreasing oil revenue
• Decreasing oil revenue
In January 2021, revenue from oil covered 0.1 percent of the
country's Gross Domestic Product (GDP), and this reached zero and
0.1 percent in May and June 2021, respectively. In real oil monetary
inflow, the country accumulated around 512.7 million Ghanaian cedis
(GHS) in January 2021 (the equivalent of 83 million U.S. dollars), while
in May and June 2021, roughly no value and 620 million GHS (100.4
million U.S. dollars), respectively, were attained by the
nation.(www.statista.com/statistics)
THANK YOU
