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Implications on Petroleum Resource Development in the US Gulf of Mexico OCS Study MMS 2006-064 Coastal Marine Institute Capital Investment Decisionmaking and Trends: Implications on Petroleum Resource Development in the U.S. Gulf of Mexico U.S. Department of the Interior Cooperative Agreement Minerals Management Service Coastal Marine Institute Gulf of Mexico OCS Region Louisiana State University OCS Study MMS 2006-064 Coastal Marine Institute Capital Investment Decisionmaking and Trends: Implications on Petroleum Resource Development in the U.S. Gulf of Mexico Authors Mark J. Kaiser Allan G. Pulsipher October 2006 Prepared under MMS Contract 1435-01-99-CA-30951-18178 by Louisiana State University Center for Energy Studies Baton Rouge, Louisiana 70803 Published by U.S. Department of the Interior Cooperative Agreement Minerals Management Service Coastal Marine Institute Gulf of Mexico OCS Region Louisiana State University DISCLAIMER This report was prepared under contract between the Minerals Management Service (MMS) and Louisiana State University’s Center for Energy Studies. This report has been technically reviewed by MMS. Approval does not signify that the contents necessarily reflect the view and policies of the Service, nor does mention of trade names or commercial products constitute endorsement or recommendation for use. It is, however, exempt from review and compliance with MMS editorial standards. REPORT AVAILABILITY Extra copies of the report may be obtained from the Public Information Office (Mail Stop 5034) at the following address: U.S. Department of the Interior Minerals Management Service Gulf of Mexico OCS Region Public Information Office (MS 5034) 1201 Elmwood Park Boulevard New Orleans, Louisiana 70123-2394 Telephone Number: 1-800-200-GULF 1-504-736-2519 CITATION Suggested citation: Kaiser, M.J. and A.G. Pulsipher. 2006. Capital investment decisionmaking and trends: Implications on petroleum resource development in the U.S. Gulf of Mexico. U.S. Dept. of the Interior, Minerals Management Service, Gulf of Mexico OCS Region, New Orleans, LA. OCS Study MMS 2006-064. 130 pp. iii ABSTRACT Many factors impact the demand for and supply of oil and natural gas, influence how and where energy companies invest their capital, and determine the manner in which countries compete to attract foreign investment. World oil supply derives from the investment decisions of individual companies, the political decisions of countries in regard to licensing and degree of foreign investment, and a multitude of other variables that influence system dynamics, including price, inventory levels, geopolitics, market psychology and manipulation, OPEC policy, exchange rates, unexpected events, and resource availability. The purpose of this report is to examine the factors that impact the oil and gas exploration and capital markets. We begin with a general overview of the oil and gas industry and product demand and supply, provide background information on oil and gas resources, and describe the defining characteristics of exploration and capital markets. The factors that impact supply and demand, investment decisions, and country competitiveness are then reviewed. We conclude with a summary outline of the fiscal systems used in the exploration and production industry. v TABLE OF CONTENTS Page LIST OF FIGURES ......................................................................................................... xiii LIST OF TABLES.............................................................................................................xv 1. EXECUTIVE SUMMARY.....................................................................................1 2. INDUSTRY CHARACTERISTICS........................................................................3 2.1. Business Functions.......................................................................................3 2.2. U.S. Upstream..............................................................................................3 2.3. U.S. Downstream.........................................................................................4 2.4. Business Characteristics...............................................................................4 2.5. Industry Structure.........................................................................................6 2.5.1. Integrated Oil Companies ................................................................6 2.5.2. Independents....................................................................................6 2.5.3. National Oil Companies...................................................................6 2.6. Mergers and Acquisitions ............................................................................7 2.7. Corporate Strategies.....................................................................................7 2.8. Corporate Goals ...........................................................................................9 2.9. Capital Budgeting Process ...........................................................................9 3. PRODUCT DEMAND AND SUPPLY.................................................................11 4. OIL AND GAS RESOURCES ..............................................................................13 4.1. Fossil Fuels................................................................................................13 4.1.1. Coal................................................................................................13 4.1.2. Crude Oil and Natural Gas.............................................................13 4.2. Market Value.............................................................................................14 4.3. Reserves and Resource Estimates..............................................................15 4.4. World Proved and Undiscovered Reserves................................................16 4.5. Unconventional Resources.........................................................................17 4.5.1. Heavy Oil.......................................................................................17 4.5.2. Tar Sands (Bitumen)......................................................................17 4.5.3. Oil Shale (Kerogen).......................................................................17 5. OIL AND GAS MARKETS ..................................................................................19 5.1. Oil and Gas Are Commodities...................................................................19 5.2. Prices Are Determined by Supply, Demand, and Inventory Conditions ...19 5.3. Crude Prices Exist in Many Forms ............................................................19 5.3.1. Benchmarks....................................................................................19 5.3.2. In-Situ vs. Wellhead Prices............................................................20 5.3.3. Spot Prices.....................................................................................20 vii TABLE OF CONTENTS (continued) Page 5.4. Oil Supply and Demand Imbalance ...........................................................20 5.5. Oil Markets Are Global, Gas Markets Are Regional.................................20 5.6. Oil and Gas Prices Are Volatile.................................................................21 5.7. Price Spikes................................................................................................21 6. DATA SOURCES, DATA QUALITY, AND PROBLEMS OF INTERPRETATION..................................................................................23 6.1. Data Sources..............................................................................................23 6.2. Data Quality...............................................................................................23 6.3. Problems of Interpretation.........................................................................24 6.3.1. Microeconomic vs. Macroeconomic Perspective ..........................24 6.3.2. Aggregation....................................................................................24 6.3.3. Omitted Variables..........................................................................25 6.3.4. Factor Types...................................................................................25 7. FACTORS THAT IMPACT SUPPLY AND DEMAND......................................27 7.1. Economic Activity.....................................................................................27 7.2. Inventory....................................................................................................28 7.3. Price...........................................................................................................28 7.4. Geopolitics.................................................................................................28 7.5. Geology......................................................................................................29 7.6. Access to Reserves.....................................................................................29 7.7. Technology................................................................................................30 7.8. Exchange Rates..........................................................................................30 7.9. Depletion (Existing Fields)........................................................................30 7.10. Discovery Rate (New Fields).....................................................................31 7.11. OPEC Policy..............................................................................................31
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