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Heavy Oil
Long chain of Hydrogen and carbon atoms
Light oil
Small chain of Hydrogen and carbon atoms
Liquefied Natural Gas (LNG) Primarily compressed methane Liquefied Petroleum Gas (LPG) Pressure or refrigeration liquefies lighter hydrocarbons, such as propane, butane, pentane, and mixtures of these gases Petroleum Generic name for hydrocarbons, including crude oil, natural gas and their products. BBL Barrel of oil, a volume of 42 U.S. gallons (0.16 m3)
Gallon The imperial (UK) gallon was legally defined as 4.54609 L The US liquid gallon is legally defined as 231 cubic inches, and is equal to exactly 3.785411784 L The US dry gallon is 2150.42 cubic inches, it is equal to exactly 268.8025 cubic inches or 4.40488377086 L.
OPEC
Organisation with 12 members countries founded in the year 1960
Upstream operation
Exploration and production
Midstream operation
Gathering, field processing transportation and storage
Downstream operation
Refining and marketing
Value Chain
Upstream
Midstream
Downstream
EXPLORATION: Using technology to find new resources DRILLING Bringing oil to the surface using natural and artificial methods Drill a hole to obtain crude oil and natural gas from under the earth's surface. Engineers make this hole using a rotary drilling rig. The rotary drilling rig uses a drill bit to cut through the earth and create a hole. As the hole gets deeper, pipe is added to the drill bit to allow it to dig further. The pipe is connected to an engine that turns the drill bit to cut the hole. The rotary rig operates the same as a hand-held electric drill. The electric drill has a motor that turns the drill bit and sufficient weight must be applied to keep the drill in contact with the bottom of the hole.
Production
Completing the Well Installing casing pipe in the well. The production casing runs to the bottom of the hole or stops just above the production zone.
Tubing and Packers After cementing the production casing, the completion crew runs a final string of pipe called the tubing. The well fluids flow from the reservoir to the surface through the tubing. A packer is a ring made of metal and rubber that fits around the tubing. It provides a secure seal between everything above and below where it is set. It keeps well fluids and pressure away from the casing above it. Subsurface Safety Valve The valve remains open as long as fluid flow is normal. When the valve senses something amiss with the surface equipment of the well, it closes, preventing the flow of fluids.
Production(Continued)
Starting the Flow Before oil production can begin the drilling mud must be removed from inside the casing. Salt water is pumped into the tubing to remove this mud. Sometimes after starting the flow the well does produce at a fast enough rate. In this situation, flow from the reservoir may be increased by stimulation. Stimulation is one of several processes that enlarge or create channels in the reservoir rock so that the oil and gas can move through it and into the well.
Fracturing
Hydraulic fracturing is a technique used to allow natural gas and crude oil to move more freely from the rock pores where it is trapped to a producing well so it can be brought to the surface at higher rates. Specially engineered fluids are pumped at high pressure and rate into the reservoir interval to be treated, causing a vertical fracture to open. The wings of the fracture extend away from the wellbore in opposing directions according to the natural stresses within the formation. Proppant, such as grains of sand of a particular size, is mixed with the treatment fluid to keep the fracture open when the treatment is complete.
Transportation
Moving oil to refineries and consumers with tankers, trucks and pipelines
Crude oil tankers are used to transport crude oil from fields in the Middle East, North Sea, Africa, and Latin America to refineries around the world. Product tankers carry refined products from refineries to terminals. Tankers range in size from the small vessels used to transport refined products to huge crude carriers. Tanker sizes are expressed in terms of deadweight (dwt) or cargo tons. The smallest tankers are General Purpose which range from 10 to 25,000 tons. These tankers are used to transport refined products. The Large Range and Very Large Crude Carriers (VLCC) are employed in international crude oil trade.
Refining
Converting crude oil into finished products Refineries are composed of many different operating units that are used to separate fractions, improve the quality of the fractions and increase the production of higher-valued products like gasoline, jet fuel, diesel oil and home heating oil. The basic refining operations are described in the following sections. It is done through : Crude oil distillation Vacuum Gas Distillation Catalytic reforming Catalytic cracking
Marketing
Distributing and selling refined products Refined products are moved to markets using pipelines, tankers and tank trucks. Pipelines are the lowest cost method. Once the products reach their destination, which is usually a supply terminal, they are distributed to gasoline stations, airports and homes by tanker trucks. Companies mix their additive packages into gasoline at these facilities.
Sales Related Demand Risk Supply Risk Product risk Price Risk
Strategic
Financial
Operational
Project Related
Reserve Depletion Reserve Replacement Development Acquisition Geological Risk Change in Demand
Interest Rate Currency Capital Intensity Foreign Exchange Funding Asset Liquidity Financial Governance and Policies Cash Management Price related Commodity Accounting Capital Structure
Fluctuating production Poor performance of worker Transportation Poor performance of supplier Accidental leak out Fire Explosion Pipeline breakdown Human Skills New Technology
Terrorism & Criminal Natural Calamities Weather risk Global Economic Slowdown Resource Nationality Geopolitical Developments
RISK MAP
Pipeline breakdown Reserve Replacement, Government Policies Acquisition, Design Geological risks, Government Policies
Forex Risk
It varied with operations of each operations. In exploration it had exposure in local currency but in international trading it had exposure in US dollar and again during retail sales it again had exposure to local currency.
Cash Management
Each unit was engaged in more activity than needed if done in Pooled basis. Could not obtain best prices for their deals because both their trading volume and credit rating were lower than parent company
Decentralization
Centralization
Earlier
Each subsidiary has its own finance division Loans in one dept are not offset by another department Decentralized Forex trading Decentralized cash management
Now
A central treasury department A single loan portfolio handling all demands Central Forex trading Centralized cash management
Obstacles to Centralization
1. Divergence of operations
1. It was present in end to end operations through hundreds of subsidiaries. (you write here ) Presence in more than 100 countries each having different culture, ideology and thinking.
At Present. Centralized treasury Group is created to provide financial risk management service across the group This is divided into two phases
Phase 1 Phase 2
Core capability established with Euro conversion and significant Vol Discount
Transportation Risk
The company was present in end to end solutions and hence had huge transport network of pipelines and tanker (road and sea) services.
Storage Risk
While transporting from one place to another the oil was stored at several places and there were safety measures that were strictly followed at each storage unit
Processing Risk
The risks associated at different stages of processing of crude oil.
Backwardation Risk
Backwardation is the name for the condition that the market quotes a lower price for a more distant delivery date, and a higher price for a nearby delivery date.
Forward Contracts
A forward contract is an agreement between two parties (counterparties) for the delivery of a physical asset (e.g., oil or gold) at a certain time in the future for a certain price that is fixed at the inception of the contract. Forward contracts can be customized to accommodate any commodity, in any quantity, for delivery at any point in the future, at any place.
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Counterparties: Buyers and Seller Asset/Commodity: Crude oil Delivery/Payment Time: 6 weeks Priced Fixed: $75 Buyer: ABC (long position) Seller: Global oil company (short position) Trading Volume: 1000 barrel
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Future Contracts
Futures contracts are highly uniform and wellspecified commitments for a carefully described good (quantity and quality of the good) to be delivered at a certain time and place (acceptable delivery date) and in a certain manner (method for closing the contract).
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Buyer
Seller
Chapter 1
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FORWARD
No No No No No No Yes Yes
FUTURES
Yes Yes Yes Yes Yes Yes No No
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1-48
Example: GOC buys an FRA that locks in the first interest payment (due at the end of year 1) at 5% p.a.
If LIBOR rises above 5% at the end of year 1,GOC receives a payment for the differential interest rates, If LIBOR falls below 5% at the end of year 1, GOC makes a payment for the differential interest rates.
EXAMPLE:
An Australian Importer needs to pay USD100,000 in 3 months time for goods bought overseas. The importer can buy the USD in 3 months time but then it cannot budget the right amount of AUD because the exchange rate in 3 months time is unknown. Assume current AUD/USD spot exchange rate is 0.6500.
If the AUD/USD exchange rate went up (the AUD appreciates), You will need less AUD when it comes time to pay for the USD. Assume the exchange rate rises to 0.6600, then the importer will pay AUD 151,515.15. If the AUS/USD exchange rate goes down (AUD depreciates), You would pay more AUD. Assume for this example that the rate falls to 0.6200, then the Importer would pay AUD161,290.32.
The importer can eliminate its exposure to exchange rate risks by entering into a FEC. A Financial Intermediary, could offer the Importer a FEC guaranteeing the exchange rate to be used in 3 months time for their purchase of USD100,000 against AUD. This guaranteed future exchange rate valid for the AUD USD is called the Forward Exchange Rate. Again, assume the current spot exchange rate is 0.6500. The 3-month forward margin is -USD0.0130, which when applied to the current spot exchange rate, results in a 3month forward exchange rate of 0.6370. In 3 months time You will buy from Travelex the USD100,000 at the forward exchange rate of 0.6370 and You will pay AUD 156,985.87
Balance between new development opportunity and worsening fiscal downs. Performing enterprise risk assessment to asses exposure across all segment. Adopting a flexible shorter lead time structure which allow peak supply during excessive demand period
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