FOX PETROLEUM : OIL CONTRACTS: We
put it in our car. It heats wer house. Flies planes. One day we might be beyond
it, but today we are not. Petroleum Products – are not for solace its light for
life. The material behind these critical
functions that literally fuel the world, is made up of strings of carbon and
hydrogen, known as hydrocarbons, formed from the compression of organic matter
over hundreds of millions of years. Old stuff that drives the modern age. Oil,
gas, petrol, diesel, butane they all come from hydrocarbons beneath the
earth's surface that are then are refined to make them more useful to us. But
today, I will talk about my experience related the contracts that make finding
and producing these substances possible right now.
The
first thing that will probably come into our mind when we think about products
that could be made out of all that petroleum is probably fuel. However, there
are numerous other materials and products that contains oil or gas, e.g. toothpaste,
candles, medicines, or even computers. This also explains why currently petroleum
is of utmost importance to our lives today.
Historically,
petroleum contracts were designed with crude oil in mind, and this continues to
dominate the logic and structure of contracts today. Gas has only recently also
become a valuable resource. As the old industry saying went: "What is
worse than not finding oil? Finding gas!" This is not true any more, as
gas becomes increasingly marketable. But not all contracts around the world
have, as yet, caught up to this reality.
Natural
gas, or just gas, is usually classified within contracts as either nonassociated
gas and associated gas. Nonassociated gas refers to gas reservoirs that contain
only gas and no oil, whereas associated gas is found together with crude oil.
The implications of these can be far reaching and will affect environmental, social,
political, fiscal and technological considerations. Countries with significant gas
deposits will typically address these considerations in far greater details in
their contracts than countries with primarily crude oil reserves.
Note
: In 2011 88 million barrels of oil were produced per day worldwide; one barrel
is roughly 160 litres or about 44 US gallons. 317 billion cubic feet (bcf) of
natural gas was produced daily. Now it is 48 times more;
Contract
depends on drilling on land or in water; Let me explain - Petroleum operations
can be either onshore or offshore. Some countries have separate contracts for
onshore and offshore, whereas others treat them differently within the
contract. In what might be one of the most straightforward terms used in daily
talk of oil and gas, onshore operations refer to operations taking place on
land, while offshore, or subsea, operations take place in the sea and through
the seabed.
The following diagram shows the three types
of petroleum extraction and their comparative costs.
Offshore
operations are more expensive than offshore operations because of the type of
facilities and structures required. Deepwater drilling is much more expensive
than shallowwater drilling because the platforms are technically more difficult
to construct. These considerations are addressed in contracts by providing financial
incentives (e.g. tax reductions) for those operations and stages of production
that are more challenging, riský and costly to the contractor.
Conventional
vs Unconventional : Flipping through the newspapers, you read about protesters
upset about "unconventional" oil being developed on pristine farm
land. Or France is considering banning it. But what is unconventional oil? For
that matter, what is conventional oil? The distinction between conventional and
unconventional operations refers to the manner, ease and cost associated with
extracting the petroleum.
Conventional oil extraction employs
traditional oil wells, and unconventional, the new and emerging technologies
and methodologies allowing access to more inaccessible reserves, such as those
found in oil shale and oil sands.
Conventional gas is typically free gas trapped in rock formations and is
easier to extract. Unconventional gas reservoirs include tight gas, coal bed methane,
gas hydrates, and shale gas (which sits in sand beds). Drilling for unconventional
gas can be more expensive compared to conventional gas. The supply of and
interest in gas extracted from unconventional reservoirs is growing rapidly,
mainly due to technological advances ....but as of the writing of this article,
most contracts do not provide for the unique attributes of unconventional gas.
In
any contract Price of the Commodity is the main importance of the agreement :
Price of the Petroleum :- The price of petroleum is another headline grabber.
We all know it is out there, but we probably do not stop to think about the
details too terribly often.
“*What does "Oil is at $100 a barrell
mean"? All oil? Some oil? The answer to this is, "some oil".*”
Petroleum is being bought and sold at many
different prices all over the world though they tend to be compared or
"benchmarked" off certain common standards. For Oil, West Texas
Intermediate (WTI) or Brent crudes or blends and commonly used.
For
Gas, Henry Hub is common. These benchmarks, which are the prices that make the
headlines, are used to determine the price of oil and gas produced elsewhere.
This will be discussed in more detail later in the "Valuing Oil" in
the next session of this article.
BUT
FOR ME BOTH ARE MAN MADE GAME; FUTURE PRICE OF OIL & GAS THAT’S SURROUNDS UNCERTAINTITY
ABOUT THE FUTURE PRICE OF OIL & GAS IS SOMETHING CONTRACTORS AND COUNTRIES
KNOWS IN ADVANCE. THEY TRY TO ACCOUNT FOR IT IN BOTH FINANCIAL SYSTEM AND
PETROLEUM CONTRACTS SO THAT STAKE HOLDERS MAY PROFIT FROM ANY MARKET CONDITIONS
AND ALSO BE PROTECTED WHERE THESE CONDITIONS CHANGE;
Future
pricing is like trying to become oil astrologer; But I never failed to make
effective forecasting; A critical and heavily debated question is what will the
future price of petroleum be? Unfortunately, there is no single or easy answer
to this question. What drives oil prices is a subject of much debate about;
global oil consumption, economic growth patterns, technological innovation, and
political dynamics in oil producing countries. This is not the subject of this article,
however, and will be something we'll leave to the experts. Real experts are the
daily used of the products;
When
OIL & GAS has FUTURE PRICING than WHAT is FUTURE trends of Contract - The price of oil
has, historically, driven fundamental shifts in the oil business and the
contracts that underpin it. In late 1960s and 1970s, the famous first wave of nationalisation
of natural resources led to the creation of a new form of contract The
Production Sharing Contract.
Nowadays, with the price of oil being high,
there is an increasing movement of people in resource rich countries wanting
visual proof that their natural resources are directly benefiting them. From
their position as citizens of the country and therefore as coowners of the
resource, there is a call for renegotiation of contracts and the formation of
new contracts that address this.
LIKE
INDIA GOVERNMENT CALLED FOR QATAR GAS RENEGOTIATION AND IT HAS HAPPENED WITH
HUGE GAIN TO INDIA SIDE; THE BIGGEST GAME PLAYED BY PRIEM MINISTER TO
RENEGOTIATE THE CONTRACT;
What does all of this mean for oil contracts,
the subject of this ATICLE? Who knows, is the short answer. It would seem to
suggest that the search for petroleum will continue, at least in the short
term, with developing extraction technologies. Maybe this will produce a flurry
of new oil contracts between companies and governments that address these new
methods of extraction. But they might not.
The oldest contracts, from the days of Edwin
Drake in Pennslyvania back in 1859, did not look terribly different, at the
most fundamental level, than many of the contracts today. Is it time to race
forward? Keep what we have got? A combination of the two?
We
do not claim to know and it probably depends on who you're asking, but we do hope
that this book enables you to engage in such a discussion and ask questions
that could lead you to an answer. The contracts and laws in the petroleum sector
are often reformed for various policy reasons and this book is designed to help
the reader actively engage in this process.
TO BE CONTINUED : ----- TO NEXT PART
Great Post Sir.
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