EDS 522 ENGINEERING VALUATION INTRODUCTION • Oil industry is global, capital intensive and technology driven. It is also very risky and volatile and so also its profitability. The stake holders that would be involved need to acquire adequate knowledge of the industry- the structure, the regulatory regime, the operators and the peculiarities so as to be able to participate meaningfully and profitably in the intermediation as it relates to the oil industry. Origin of Petroleum • The most widely accepted hypothesis of the origin of oil and gas is the organic theory. It stipulates that petroleum (hydrocarbons) is formed from organic material including marine plants and animals that lived millions of years ago in low-lying areas—normally in the oceans of the world. Origin of Petroleum • These plant and animal remains were deposited throughout the years, along with layer after layer of eroded particles of igneous rock. The weight and pressure of the overlying layers caused the eroded rock particles to form sedimentary rock. The weight and pressure of overlying layers—and other not fully understood factors, such as chemical and bacterial processes—changed the organic material into oil and gas. • Origin of Petroleum cont. • After formation, oil and gas move upward through the layers of sedimentary rock due to pressure and the natural tendency of oil and gas to rise through water. (Salt water is often contained in the pore space of sedimentary rock.) The petroleum migrates upward through porous and permeable rock formations until it becomes trapped by an impervious layer of rock. The impervious rock that prevents further movement of the oil and gas is called a trap Oil and Gas Exploration . • Oil and gas exploration involves the work of geoscientists using a myriad of geological and geophysical (G&G) techniques to identify areas far beneath the earth’s surface that may contain petroleum reserves. • Geological methods rely on the identification of rocks and minerals on or near the surface and the understanding of the environments in which they were formed. • Also, it involve surface studies, and any number of methods, depending on the size of the area being examined. Oil and Gas Exploration cont. • Oil and gas operations have been classified as being either upstream or downstream. • Upstream activities include exploration, acquisition, drilling, developing, and producing oil and gas. • Upstream activities generally include all of the activities involved in finding and producing oil and gas up to the initial point that the oil or gas is capable of being sold or used. Oil and Gas Exploration cont. • Upstream activities are frequently referred to as exploration and production activities, or E&P activities. • Downstream activities generally include refining, processing, marketing, and distribution of oil. • Classification of oil and gas activities as being upstream versus downstream may seem straightforward initially. However, modern petroleum industry operations often are conducted in exotic locations and have become increasingly complex, making classification of operations into any single category difficult. As a consequence, today some activities that have characteristics of both upstream and downstream activities are actually referred to as midstream Downstream petroleum sub-sector • The sub-sector of the oil and gas industry generally covers all activities undertaken to process oil and gas after the exploration and production stage. It therefore includes industrial activities such as: - petroleum refining into various products like petrol, diesel, kerosene, aviation fuel and several other derivatives - production of petrochemical products such as plastics, carbon black, solvents etc. --- Downstream petroleum sub-sector - gas development and conversion as we presently have in the Nigeria LNG - distribution of various petroleum products - provision of services to the companies engage in above activities Oil and Gas Exploration cont. • Geological studies, this involve surface studies, for example, the use of aerial photography, satellite imaging, imaging radar,t opographical and geological mapping. Such methods aimed at gathering data about surface features that can be used to make inferences regarding the potential existence of petroleum-bearing subsurface formations. Oil and Gas Exploration cont, • Geophysical methods: This involve subsurface studies, aimed at locating and detecting the presence of subsurface structures and the determination of their size, shape, depth, and physical properties in order to identify the presence of certain physical characteristics that are indicative of oil and gas reservoirs. Geophysical methods include gravitational studies, magnetic and electromagnetic evaluation, and seismic studies Remote Sensing method is used to collect data Remote sensing is a method of collecting information about objects without coming in contact with them. Image Source: cimss.ssec.wisc.edu Oil and Gas Exploration cont. • Seismology is one of the most important tools in oil and gas exploration today. These studies provide detailed information about subsurface structures by recording the reflection of sound waves on subsurface formations. Innovations in seismology, such as 3-D seismic studies, have significantly increased drilling success rates. The use of seismic studies has extended beyond exploration, with seismic studies now being used extensively in field development and production planning. Time-lapse, or 4-D seismic, involves repeating a series of 3-D seismic surveys over time Oil and Gas Exploration cont. • Oil and gas activities as being upstream versus downstream may initially be straight forward but modern petroleum industry operations often are conducted in exotic locations and have become increasingly complex, making classification of operations into any single category difficult. As a consequence, today some activities that have characteristics of both upstream and downstream activities are actually referred to as midstream Oil and Gas Exploration cont. • An integrated oil and gas company is one involved in E&P activities as well as at least one downstream activity. • An independent oil and gas company is one involved primarily in only E&P activities. Upstream E&P activities are uniquely characterized by : A high level of risk • A long-time span before a return on investment is received • A lack of correlation between the magnitude of expenditures and the value of any resulting reserves • A high level of regulation • Complex tax rules • Unique cost-sharing agreements Oil and Gas Exploration cont. • Even the best G&G techniques cannot normally guarantee that oil or gas exists in economically producible quantities. Often the only definite way to determine whether an economically viable petroleum reservoir exists is to drill wells into the formation. Oil and Gas Exploration cont. • A successful well is a well that finds reserves in economically producible quantities. • However, even though a well is classified as a success, it may nevertheless be unprofitable.
