• Petroleum • Crude oil • Natural gas •LNG • Fractionatio n • 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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Petroleum Crude oil Natural gas LNG Fractionation Oil fields Dissolved gas drive Gas-cap drive Water drive OIL EXTRACTION & PRODUCTION How was oil used.
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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?
OIL EXTRACTION & PRODUCTION
•Regulation of drilling (“drilling mud” and other wastes) and refining (air pollution and other wastes)
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] …”
OIL EXTRACTIONDoes the common law tend to ensure production at the maximum efficient rate of recovery? If not, how might we achieve this goal?
•“unitization” and “pooling” by regulation in U.S., solving the collective action problem. By single (government) owner most everywhere else.
•“secondary recovery”
How did the world oil business change in the 1970s?
How can firms contemplating investment in developing countries predict political risk?
Timeline
Early 20th c: rapid growth of international oil industry
1930s-70s: Latin American nationalizations
1960: OPEC formed
1960s-70s: Middle east nationalizations
1973: first oil crisis in US; price controls instituted
1977: second oil crisis in US
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?
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?
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”?
How can corporate managers manage political risk?
Oil Resources in Developing Countries: Political Risk
• Insurance
• Sharing risk with host nation
Do you think something like the World Bank’s 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?
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
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
Modern Petroleum Agreements
What are the important differences between these different methods of foreign participation in developing domestic oil resources?