Oil and gas management
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6154 Downloads I Published: 30 Jan ,2018
Operators- There is main role of operators in oil and gas industry because they execute the planning procedures in order to achieve aims and objectives. Success of oil and gas projects is based on the activities of operators. In order to achieve proposal provided by the contractor, company is required to recruit skilled and efficient operators. It will assist them in providing assurance to the contractor that work will be accomplished in effective manner.
Investors- Investors provides funds for the operational activities to the company. They are required to provide sufficient funds for the completion of contract on timely manner. Contractor will not allot the project to the organization until they have sufficient funds for the purpose of completion of operational activities.
Duty holders- As a duty holder, individual or entity is obliged to accomplish their responsibilities in an effective manner. They are required to assure quality in the delivery of final product. This aspect will work as positive point for the company in order to win proposal. If duty holders are skilled and reliable then contractor will be attracted to the provided bid by company.
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Oil and gas industry in UK is expanding their operations in order to enhance their contribution in the economic development. For this purpose, they are entering in global mergers and acquisitions. They are developing new projects to support their strategies. To avail the contract from contractor, our company will provide both monetary and non monetary benefits. For this purpose company will prepare management strategies in order to grab the contract with an African NOC to build a LNG plant in their country. In our planning strategy, we will cover the aspects of both British and African economy. Core of our bidding will be attractive price and sustainable finance package. In addition to this factor, we will cover the following areas in order to make bid more competitive-
1.Engineering and design services- Initially, company will provide full-field development plans which will cover the brief overview of strategy. In this plan of action, process will be described that is the way in which company will achieve their aims and objectives. It will include the commercial, technical and risk studies. This planning document will be supported by FEED services and design packages.
2.Description of material and services- Company will provide the description of procurement of all materials and equipment. Description of quotations of prices will be supported by their quality. It will also include the information regarding transportation of material and labour. By this information, contractor will be able to assess pricing strategy of the company to make viable decision. Quotations of material will be according to the competitive market prices. Cost advantage will be enjoyed by both the parties.
3.Allocation of risk between owner and contractor- This is the most primary aspect on which company will focus. In this part, description will be provided regarding allocation of risk between parties in order to prevent the future contradictions. Level of risk and involvement will vary according to economic conditions of countries. Further, roles and responsibilities will be described regarding cost, schedule and quality. There will be no mark up price on the contractual cost as concept of shared risk is implemented in the bid of tender.
4.Flexible approach- In the bidding proposal, flexible approach will be implemented by the entity so easy modifications in terms and conditions can be made. For this purpose, rigidity and complexity will be avoided in the tender agreement. With this strategy, contractor will be assured that terms that are described by them will also be inserted in the contract in order to create win-win situation for both the parties.
5.Regulatory regimes- Proposal provided by the company will be in accordance with the legal norms of UK and Africa. For effective proposal, international regimes will be followed in order to prevent the contradiction of legislation. In this manner, company will be able to accomplish their objectives without facing restrictions due to legal provisions. In addition to this, company will take benefit of international law which is not covered in the provisions of domestic law. By using this strategy, company will be able to provide additional benefit to the contractor as they will not have to follow legal formalities for the accomplishment of commercial activities.
6.Clause of escalation- Company will insert escalation clause according to the changes in economy or industry. By this strategy, contractor will be assured that company is not taking undue advantage of escalation clause in order to earn unjust benefits. Fixed rate of escalation clause will not be stated in the contractual agreements so, both parties can have equal opportunity to negotiate with the rate of escalation clause.
Contractual agreements can widely vary in their details. However, all the contractual agreements are required to establish to two basic issues that is the manner in which profits will be distributed between contracting parties and similarly the way in which cost will be allocated. Thus, it is essential to select an appropriate contract in order to accomplish the operational tasks in effective manner.
If bid of company is selected by the contractor, then contractual agreement will be formed by considering the Production sharing agreements (PSAs). It is also known as the Production Sharing Contracts (PSCs). In this type of contract, agreement is signed between government and resource extraction company. According to this agreement, extraction or production cost will be shared between parties for the completion of operational activities. Production sharing agreement has been selected for the present contract because in this, government of the two countries allow shipping of material and labour at free of cost. Moreover, production output can be transferred from one country to another without incurring the tariff cost. In the situation of extraction of oil and other similar minerals, company will be able to accomplish their extraction in easy manner as it will be paid by the government.
Company will be able to optimize their cost structure of the contract as they do not have to pay tariff expenses. Generally, such kind of contract will be executed with the relevant ministers and NOC on the behalf of government. As a consequence, they do not require taking regulatory permission for the execution of operational activities. Furthermore, in PSA arrangement, operational and financial risks rests with the international oil companies. In this type of contractual agreement, there will be less intervention of government. This aspect will also reduce the possibility of situation of conflict between contracting parties.
Production sharing agreements will also be supported by the domestic government because there is no risk for them other than the cost of negotiation. If there will be lack of sufficient profit, then also there will be no material losses to the government. In addition to this, if PSA is assessed by legal regimes than it can be noticed that agreement will provide legal security for the international oil companies. Thus, to avail the above described benefits, PSA has been selected by company for the completion of performance that is stated in the contractual agreement.
In the deed of contract, roles and responsibilities of contracting parties will be described in order to prevent thefuture conflicts. Deed of the contract will comprise following information-
By considering all the described aspects, contractual agreement will be prepared by the company. With the inclusion of all these factors, firm will be able to clarify the obligations and rights of all the parties.
Petroleum Economics And Taxation Regimes, Legal Arrangements And Contractual Relationships
As an oil and gas major, company is required to assess advantages and disadvantages of joint venture prior to enter into contractual relationship with government of a fully developed country. Joint venture can be simply defined as the willingness of two or more parties in order to achieve common goals and objectives. Joint venture in oil and gas industry refers to the partnership of government and corporate entity in order to accomplish the contractual performance. There is no common structure of JV. It is because of the common format of basic agreement between oil company and a host government. In this type of contract, it is required that host government and corporate entity will work together to achieve their aims. If they failed to do so, then negotiation between parties will be painstaking and there would be the situation of disagreement. Thus, to make viable decision, comparison of joint venture with the other alternatives is as follows-
Concession is the most traditional form to create agreement in oil and gas industry. This concept has been developed during the oil boom in United States in the 1800s. At that time, this concept was introduced around the globe. According to the concession arrangements, these are one sided contracts as it provide benefits only to the company. Agreements of concession are based on the American concept in which owner owns all the resources that are required to be utilized. In this arrangement, land is granted for the operational activities. It is similar to the joint venture to some extent. In both the agreements, contractor has the right to explore resources in order to earn the benefits. In addition to this, contractor can avail advantages of concession in regulatory regimes as government is interested in the operations of company.
In concession, there is lack of intervention of government in comparison to joint venture. It is because, in joint venture, government is participating in operating activities while in concession, they are only assessing the operations. Contract of concession is more advantageous for the government because this arrangement is more straightforward in comparison to other alternatives. They have to provide less support to the companies. This advantage to the government will be adverse to the company. Thus, selection of joint venture will be beneficial for the firm. It is because they can take financial and non-financial support of government to complete their work in effective manner.
Major risk that has to be faced by the organization is sharing of losses and other damages. As a general rule of joint venture, company is eligible for profits but they are also liable for all the losses. Strength of concession is that owner can make decisions on their own as they do not have to take permission from regulatory authorities. While on the other hand, in joint venture, decisions are taken by mutual consent of government and corporate entity. Due to this aspect, scope of profitability has been reduced. Main weakness in the concession agreement is that entire financial risks regarding development and costs of exploration has to be borne by the contractor. This weakness is covered in the agreement of joint venture. It is because, such kind of risks will be shared by the contracting parties and as a consequence, loss will be distributed.
Other crucial area that has to be focused in concession agreement is that companies are required to be more cautious in their bids for the contract tend. It is because of the higher risk in concession agreements. If oil and gas are not able to prove their incurred expenses then there will be no guarantee of recovery of company costs. However, in the case of joint venture, government is contributing in all operating activities thus, there will be no such requirement of approval and cost recovery.
Production sharing agreements (PSAs) is also known as Production Sharing Contracts (PSCs). In this contract, agreement is signed between government and resource extraction company. In this agreement, ownership does not rely with the contractor and it remains with the state. Concept of Production sharing agreement has been introduced in Indonesia in 1966. Objective of this concept was the retention of resources with government. Some terms of production sharing agreements is similar to the terms of Joint venture. In both the agreements, ownership relies with the government. However, in product sharing agreement, complete ownership relies with the government while in joint venture, government has the partial ownership. In addition to this, PSA promotes distribution of total production of oil in systematic manner as per the tenets and stipulations which are stated in the contract. In contractual agreement of joint venture, similar strategy is adopted as well as production outputs and profits are distributed in accordance with the deed of partners.
Joint venture is conducted in two forms i.e. primary and secondary. In primary form, venturing parties (i.e. government and IOC) works together wherein each party will have the share in profits. In secondary form of joint venture, government and IOC work together on the basis of their share in equity. By considering present global practices, it can be noticed that government prefers to hold majority of share instead of equal share. It is because of availing power of decision making in operational process. According to the type of joint venture, risk and profitability will also vary for the company. If primary form is considered by the company, then there will be equal risk of parties while in secondary form, risk will be allocated in accordance with the share of equity.
In order to start up oil and gas production it is necessary to make adequate amount of investments. It is seen that investment is required for the first four years to start up mining process in oil and gas field. However, due to uncertainties in construction market the prices may increase during the development period. It is therefore essential to judge project sensitivity in context of rate of cost escalation. It is expected that the cost of capital or discount rate for investment to be 8%. It is assumed that the investor is expected to invest when the project provides them return of minimum 16% (double of discount rate). It can be said that the investor wants to earn minimum return of 8% after accounting for time value of money. Henceforth, investment on part of investor will be made at internal rate of return of 16%. In present case, it was assumed that operating cost and construction cost will increase at rate of 2%. This in generates internal rate of return at 23.3% with discount rate of 8%. However, the return may reduce with increase in rate of cost escalation. The same has been changed during development period that is for capital expenditure. It is with escalation of various capital expenditures by 20% that IRR reduces to 14.9%.
It is seen that rate of escalation if increases at rate of 20% per annum the Internal rate of return is arrived at 14.9%. This in turn makes investment unattractive in nature for foreign oil company. It can be therefore said that the investment turns to be unattractive when rate of cost escalation increases by 20%. However, the same is unrealistic in nature due to higher rate of inflation within an economy. It is in the worst situation that capital expenditure increases by 20% so as to make investment unattractive in nature. It can be therefore said that the project is capable of fulfilling expectations of foreign oil company. The investors’ expectations will not be met when rate of cost escalation increases to 20%. Nevertheless, the increase in rate of escalation from 2% to 20% is highly unrealistic in nature. The inflation rate although is significantly lower in United Kingdom. The rate of price increase as per consumer price index for transportation, construction, gas and fuel moves in range of approximately 14% to 16%. It can be therefore said that in worst situation when the rate of cost escalation increases to 20% investment loses its worth. In other case, the investment is highly profitable and feasible for foreign oil companies to invest.
Review the risks faced by the industry and means of identifying and managing them
Cost risk- This is the primary risk that has to be faced by companies operating in oil and gas industry. There are continuous fluctuations in the pricing of materials and other resources in oil and gas industry. This risk can easily be transferred by company to the contractor. It is because responsibility of material supply relies with the company and quotations of material price is managed by the escalation clause. By using this clause company can transfer this risk to the contractor for the management of fluctuation in the prices. In this manner, company will be able to secure their return from operational activities.
Risk of supply and demand- For oil and gas industry supply and demand shocks are real risk. It is because of the higher consumption of capital and time in completion of operational activities. Volatility in the industry cannot be managed by the manual efforts. It is due to dependency of production and price on nature. Other macro economic factors also enhances the risk because financial crises can dry up the capital which can lead to the price issues. This risk can be transferred to the contractor as their production output is highly depends on the supply and demand factors. Contractor will manage the time lag in accordance with the condition of supply and demand.
Geological risk- This risk can be defined as issue in extraction and possibility of lower accessible reserves in comparison to the expectation. This risk cannot be completely transferred to the contractor but shared approach can be implemented. In this manner, company has not to borne entire loss. Risk of uncertain accessible reserves will be shared by the contracting parties.
Risk management is integral part of daily operating activities in oil and gas industry. Oil and gas companies has to face high risks due to volatile commodity prices. There is high impact of macroeconomic factors in comparison to microeconomic factors. Initially risk management strategy for the companies can be management of information. It is essential for all oil and gas companies to get right information at right time in order to make viable decisions. Timely access of relevant information is also vital to deal with catastrophic events. Further, organisations can implement strategy of prevention of non-compliance. In the present era, regulatory pressure is continuously increasing. Due to this aspect, oil and gas companies cannot afford the risk of being non-compliant. For this purpose company can appoint legal experts who can provide suitable advice in order to prevent these issues. For management of financial risks, company should keep additional margin. With this strategy company will be able to manage situation of shortage in resources. Organisations operating in oil and gas industry should use updated technology for the operational activities to prevent errors. By using the above described strategies, company will be able to mitigate risks for better activities.
Awareness of future oil and gas sources and social responsibility and climate change issues
By considering the reviews of BP Statistical it can be noticed that there is continuous increase in other recoverable reserve despite of growing annual consumption of oil and gas. The UK’s continental shelf (UKCS) still has significant amount oil and gas reserves despite the fact that they have produced more than 40 billion barrels of oil equivalent (boe) in the previous four decades.
The oil and gas consumption of the industry is increasing along with the increase in reserves. It is because the existence of oil and gas is in danger. Extracting these two has become very difficult for the firms. They are concentrating on creating reserves because the rate of consumption of oil and gas is very high. These products are being used on wide scale. Creating reserves will help in saving the stock for the future and to achieve equilibrium between demand and supply.
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