Challenges in the oil and gas sector overview and outlook,History of Energy & Oil & Gas Exploration,From Exploration to Production,Oil Economics

1. Challenges in the Oil & Gas Industry ,
Overview & Outlook
Maxwell AKERELE

2. Table Of Contents
• History of Energy & Oil & Gas Exploration
• Origin of Hydrocarbons
• From Exploration to Production
• Current Realities
• Supply and Demand
• Oil Economics
• Industry Challenges
• Mitigating Factors
• Expert Roles
• Conclusion

3. History Energy & Oil & Gas Exploration
Our development has always been closely linked to energy consumption, We have always used energy and its different forms to transform improve the quality of life,
surroundings and well being and this will continue to remain so in the near future. Indeed as Human Population continues to grow , so we will witness an exponential
growth in consumption and need for energy resources. It is pertinent however to point out that that there are several types and sources of energy and often times
they compete or act as complementary to one another to satisfy our energy requirements.
Since the early 19th century , when coal first replaced wood form of energy ,the world has since moved to Oil , as the pre-eminent source , but with the oil boom of the
early 1970s , and newer technologies and politics , we have also seen greater increase of the market share by electricity ,natural gas ,nuclear energy etc.
However due its largely economic and efficient nature , fossil resources of energy looks likely to be the dominant player as source of our energy use , even though the
end of oil in the near future has been predicted , new discoveries and reserves are daily being added due to exploration works ongoing as well as influence of market
prices , which determine the proftability or otherwise of exploration and development activities.
Discoveries of Oil and Natural Gas continues to occur , espiecially in places like the middle east , with the gulf countries topping the charts , also places like north
America in Venezuela and Canada . In recent years also , there has been increased discoveries in Sub Saharan Africa , espiecially in the gulf of guinea nations like angola,
Nigeria ,DRC ,Congo ,etc.
It is important to note that two thirds of the oil produced is for export. The main exporting regions are the Middle East, the Former Soviet Union, and West Africa. The
main regions relying on foreign imports for their oil supply, are Europe, China, and the United States. Although the US, has recently reduced its imports with the local
development of unconventional production and shale oil.
To extract crude oil or natural gas from underground and transform it into usable petroleum products, ready to satisfy the final consumer needs, the oil & gas industry
needs efficient markets capable of connecting supply and demand from everywhere in the world in the most optimal way. This is a crucial step along the oil & natural
gas chain .

4. Origin of Hydrocarbons
Accumulation and decaying of large amounts of rich organic sediments takes place over hundreds of millions of years. The transformation of the organic matter
into oil and gas is made possible because of the high levels of pressure and temperature within the subsurface , Such a transformation of the organic matter
contributes to over-pressurizing the source rock itself until micro-fracturing of the matrix occurs, allowing the oil and the gas to be expelled, with more and more
gas as depth increases.

5. Steps in Oil & gas Field Development
Major Steps in the O & G Field Development Life Cycle :
Discovery
Evaluation
Development
Production
Abandonment

6. Commercial Petroleum Products Life Cycle
Prospecting
Leasing /Acquiring Process
Drilling Operations
Developing and Producing
Transporting
Processing & Refining
Marketing & Sales

7. From Exploration to Production
Steps in the Exploration to Production process
Exploration (Regional Evaluation, seismic imaging and hydrocarbon discovery,
Reservoir Characterization and Modeling
Reservoir engineering
Production Mechanisms and Hydrocarbon Recover
Simulation Model and Field Development Strategy
Drilling
Completion and well performance
Flow assurance (from the well head to the process)
Offshore
Refining Processes
Oil logistics: storage depots
Oil logistics: transporting hydrocarbons
Gas logistics

8. Current Realities
Declining oil prices have taken a toll on the global oil and gas industry. WTI (West Texas
Intermediate) Crude Prices have dropped from over $ 100 per barrel to less than $50 per
barrel,with brent following suit .This slide has persisted abated, with oil prices even dipping
below $45 per barrel threshold before making modest recoveries , the oil glut amidst declining
demand is a major source of concern for traditional suppliers as well as their host governments.
Politics and Geo politics seems to be the name of the game now , North America is moving
towards energy independence with the US, Canada, and México the major driving force behind
that , Russia is having increasingly declining market share ,with China and India the new beautiful
bride the major players are courting now.
OPEC, the oil cartel is seeking new buyers and frontiers at a time its market share and influence is
being greatly challenged and even internally member states are all pushing their own different
agendas , sometimes working at cross purposes with the cartel.

9. Supply and Demand
The Rise of Shale Oil and improvements in drilling and hydrocarbon technology has contributed
in no small way to significant changes in oil and gas demand and supply economics.
The United States has thus been able substantially boost its oil production capacity to nearly nine
million barrels per day (MMbbl/d). Also contributing to these changes in oil and gas supply
fundamentals is the middle east market. Output from Iraq and Iran is forseen to ramp up in the
coming years as sanctions are eased ,while in South America, Brazil continues to see its reserves
and oil production grow despite some political upheavals.
While in Russia , sanctions and disputes with Ukraine has seen a shift in some of its traditional
consumer markets ,as Europe starts to see a diversification from its products , supply has
gradually begun to turn to Asia and countries on the Gulf of Guinea like Angola and Nigeria.
Traditional oil suppliers like Saudi Arabia and countries within the gulf region of the middle east
areas are going to great lengths to protect their market share ,they have kept up huge production
volumes in order to stifle shale oil producers from the US markets and other new would be
entrants into the market.

10. Oil Economics
As demand and Supply for oil and gas continue to evolve,there are discernible emerging global trends and
patterns that are emerging.We see evolving trading blocks ,emerging markets and the continous decline of the
influence and reach of OPEC in the new global oil order.
Trading Blocs :
Due to the cultural, geopolitical and proximity of the US ,Canada ,and México , these nations continue to
operate as a self sufficient trading bloc ,moving towards building a more regional trade. This has largely been
driven by shale oil technology in the states, easing of regulation restrictions in Mexico and cross border
infrastructure.
Russia / China / India :
For its part , Russia is actively seeking new buyers , espiecially as China and India strive for greater supply
diversity , there is likelihood of more reliance on Russia´s production .Russia now supplies about 12 % of China
´s crude imports and was China´s fourth largest crude oil supplier in recent years. With the IEA predicting that
China´s natural gas demand will rise 60 % per year through 2035, this will give Russia access to one of the
world´s fastest growing natural gas markets.

11. Industry Challenges
 Political Risk / Handling Government Pressure
The primary way that politics can affect oil is in the regulatory sense, but it's not necessarily the only way.
Typically, an oil and gas company is covered by a range of regulations that limit where, when and how
extraction is done. This interpretation of laws and regulations can also differ from state to state. That said,
political risk generally increases when oil and gas companies are working on deposits abroad.
Oil and gas companies tend to prefer countries with stable political systems and a history of granting and
enforcing long-term leases. However, some companies simply go where the oil and gas is, even if a
particular country doesn't quite match their preferences. Numerous issues may arise from this, including
sudden nationalization and/or shifting political winds that change the regulatory environment. Depending
on what country the oil is being extracted from, the deal a company starts with is not always the deal it
ends up with, as the government may change its mind after the capital is invested, in order to take more
profit for itself.
 Geological Risk / Frontier acreage and access to reserves
Frontier acreage’ challenge represents exploration and development of new fields that previously regarded as
too difficult, too expensive or too politically unstable to justify operations. I would add also the remote
locations, with newly discovered reserves, like Arctic, far North Sea, pre-salt basins in deep water of Brazil
etc. Access to reserves involves competition for access to proven reserves what became more difficult in
comparison to decades ago due to expansion of government role . Many of the easy-to-get oil and gas is
already tapped out, or in the process of being tapped out. Exploration has moved on to areas that involve
drilling in less friendly environments - like on a platform in the middle of an undulating ocean. There is a
wide variety of unconventional oil and gas extraction techniques that have helped squeeze out resources
in areas where it would have otherwise been impossible.

12. Industry Challenges
 Price Risk / Price volatility and role of speculators
Beyond the geological risk, the price of oil and gas is the primary factor in deciding whether a reserve is
economically feasible. Basically, the higher the geological barriers to easy extraction, the more price risk a
given project faces. This is because unconventional extraction usually costs more than a vertical drill down
to a deposit. This doesn't mean that oil and gas companies automatically mothball a project that becomes
unprofitable due to a price dip. Often, these projects can't be quickly shut down and then restarted.
Instead, O&G companies attempt to forecast the likely prices over the term of the project in order to
decide whether to begin. Once a project has begun, price risk is a constant companion. The role of
speculators involves huge debate between the leading energy agencies, as well as investment institutions
and governments. However, this is only one of the influencing factors on oil and gas prices. The
fundamental economy drivers play currently main role in reaching the equilibrium in natural gas prices. As
we see, the abundance of supply today leads to lower prices. US is a perfect example
 Supply and Demand Risks / Rising emerging market demand.
Supply and demand shocks are a very real risk for oil and gas companies. As mentioned, operations take a lot
of capital and time to get going, and they are not easy to mothball when prices go south, or ramp up when
they go north. The uneven nature of production is part of what makes the price of oil and gas so volatile.
Other economic factors also play into this, as financial crises and macroeconomic factors can dry up
capital or otherwise affect the industry independently of the usual price risks . As per the Energy Institute,
51% of oil and gas respondents reported making significant investments to achieve growth in emerging
markets, i.e. China and other Asian economies. Since performance in emerging markets mostly is
dependent on government pricing policy, a significant risk is involved for any foreign direct investments
and creates the issue of ‘bargaining power’ of the state.

13. Industry Challenges
 Improving safety standards
The EU introduced a new Directive in June 2013 that is aimed at ensuring oil and gas companies are
maintaining the highest safety standards possible.
Oil rigs are notoriously dangerous places to work and firms have always fought an uphill battle to offer the
maximum protection to their employees. The new regulatory framework has been established to protect
marine life and coastal environments against pollution and European businesses are expected to have
clear contingency plans in place should an accident occur.
 Worsening Fiscal terms.
The fluctuation of fiscal regime in Host-Governments makes enormous pressure on oil companies, creates
insecurity for the entire company financial strategy and investment policy. According to the first meeting
of UK OIl and Gas Fiscal Forum, (Oil and Gas UK), the industry needs secure and predictable fiscal regime
as there is £2.3 billion drop in expected tax revenues due to dramatic fall in exploration drilling and
production. Thus, measures to stimulate investment need to be introduced as a matter of urgency. Brazil
might be another example of concerns with oil and gas industry fiscal regimes, as current tax policy is
extremely complex and impedes the growth of the industry. Innovation in tax regimes is another
‘headache’ for Operating companies. China recently introduced experimental resource tax on crude oil
and natural gas products with 5%-10% on sales.
 Alternative fuels, including second generation biofuels.
The environmental pressure and market demand that oil companies experience today force them to explore
new industries, i.e. renewables. According to Petroleum Review, 47% of respondents had already invested
in ‘clean technology’. This urge requires additional resources, company policy and revised strategy.

14. Mitigating Factors
The upstream petroleum industry today faces unprecedented waves of added costs and new regulatory
challenges as it tries to navigate the shoals of risk management toward preserving its bottom line .
The historical risk factors—e.g., commodity price volatility, geopolitics, etc.—facing the industry have become
more complex. Oil and gas price movements are now tethered more to macroeconomic influences than they
are to physical supply and demand factors; that makes hedging through commodity-related financial
derivatives—a key risk management tool—a dicier proposition . At the same time, huge capital costs have
grown even larger, given the industry’s increasing proclivity for mega-projects that leverage economies of
scale. Mega-projects have become commonplace in the upstream oil and gas industry, as activity fans out in
more challenging physical environments. With the expanding project scope comes bigger challenges to manage
project risk. Offshore oil and gas development increasingly tilts toward the mega-project scale because of the
burgeoning exploratory success the industry is enjoying in ultra-deep waters, where development project costs
routinely run into the billions and schedules can span half a decade or more.
Such projects entail enormous challenges in logistics, planning, scheduling, communications, data
management, and risk analysis. With mega-projects comes a great need to better collaborate and share
information across the value chain that ultimately will drive down costs and increase the accuracy of delivery
dates. Owner-operators, contractors, and suppliers working in the upstream petroleum industry all must find
innovative solutions to minimize complexity and risk in these massive undertakings, as it becomes a top
priority to have all players on a project team work more closely together.
All of these factors and more are adding costs or reducing revenues and creating new risk management
challenges for oil and gas companies.
Add to those concerns a greatly heightened regulatory oversight and public scrutiny regarding environmental
and safety risks.

15. Mitigating Factors
For the upstream side of the oil and gas industry, these solutions provide a marvelous suite of collaborative
tools that help an E&P company answer the question, “To drill or not to drill,” by enabling the operator to:
Identify and select the right projects;
Predict and manage risk;
Reduce project complexity through interactive dashboards;
Control and manage project portfolios in real time;
Manage project change and quickly resolve issues;
Improve collaboration;
Implement earned-value management; and
Control contracts and documents.

16. Conclusion
As the oil and gas industry grapples with change in every sector and at every level, including an expanding
regulatory oversight infrastructure, cost savings and operating efficiencies have become more important than
ever.
The best tools for gleaning those benefits are those that provide standardized project planning and portfolio
management; enterprise-wide unified reporting; optimized resource use; facilitated, real-time data exchange;
comprehensive risk analytics; and simple integration to asset management and enterprise resource planning
systems.
In the end, it’s all about smartly using an approach, that helps companies reduce costs at the project, portfolio,
and enterprise levels through the project lifecycle.
The oil and gas companies that are able to implement the best approach to managing risk to their operations in
the most cost-effective way will be the ones to best weather another tumultuous decade to come for the oil
and gas industry.
There is little doubt that the oil price drop was the headline story this past year .Lower commodity prices have
already taken a toll on the oil and gas sector and continues to spur retrenchment and reduction of exploration
and production budgets and activities.
Yet the cyclical nature of of the oil and gas industry is not a new one .Over the long term ,price fluctuations are
unlikely to affect significantly the trajectory of the industry , although it may speed up up some of the some of
the already unfolding trends.

17. Sources
OPEC Oil Market Report February 9 2015 www.opec.org
U.S Energy Information Administration ,U.S Department of Energy International Energy Outlook 2014
www.ela.gov/forecasts
U.S Energy Information Administration ,Countries Japan updated Janaury 2015 www.ela.gov/countries/cab
The Economist Intelligence Unit , The business of cheaper oil 2014
Deloitte Center for Energy Solutions 2015 Outlook on Oil and Gas 2014
www2deloitte.com/content/dam/deloitte/us/documents/energy-resources/us/er-2015
OSEA 2016 APAC to account for 70 % of global oil demand by 2020 september 12 2014 www.osea-
asia.com/apac-to-account-for-70-of-global-oil-demand-by-2020/
International Gas Union World LNG Report -2014 Edition www.lgu.org/sites/default/files/node-page-
field_field/lgu%20world%20LNG%20Report%20-%202014%Edition.pdf

18. FPSO

19. FPSO 2

20. Offshore Drilling

21. Offshore Drilling Platforms - 2

22. Offshore Drilling Platforms