Petroleum economics is that branch which deals with the economics and finance of the petroleum industry-oil and natural gas. It significantly helps governments, companies, and investors in making their decisions regarding exploration, production, and sales of petroleum. Here, costs, revenues, risks, and opportunities in this particular process are evaluated so that resources are efficiently and profitably used.
For a better understanding of petroleum economics, it is best to enroll in Petroleum Management offered by the British Academy for Training and Development.
The economics of petroleum are defined by describing how much it costs to produce oil and gas, how much money it earns by their sale, and how it can manage uncertainties. The major branches of petroleum economics are:
Searching for oil and gas reserves below the surface of the Earth.
Building the wells and pipeline system along which the produced petroleum will flow.
Extracting and processing the petroleum for sale.
Delivering the petroleum end products like gasoline and natural gas to the consumer.
Petroleum economics aims to judge whether a project can stand the test of profitability. If the cost of undertaking a project is prohibitive or if the risks were far greater than the profits, the project would not proceed.
The petroleum sector comprises a number of stages, with each stage characterised by its unique cost.
Exploration refers to seeking and determining areas in which oil and gas may be found. Oil and gas companies use highly advanced technological means, such as seismic surveys and exploratory drilling, in finding hydrocarbons. Such activities are expensive and risky, as there are many unsuccessful attempts at exploration without commercial-sized reserves.
It is after the finding of reserves that companies make investments into building up wells, pipes, and processing facilities. In this phase, they are required to make huge investments, and in the event of any delay or technical problem, it can add to the expenses.
It includes running the facility, maintenance of equipment, and remuneration to workers. Production costs differ from site to site depending on the oil or gas and also on the nature of extraction processes it uses.
The field should also be stripped clean of its infrastructure, and the area restored when a field becomes unproductive. Such an operation is very expensive and a must to meet environmental regulations.
Revenues are from the sale of crude oil and natural gas harvested.
Revenues will depend on:
the amount of oil or gas produced and sold.
Oil and gas prices depend on global supply and demand effects, geopolitical events, and market conditions. For example, conflicts in major oil-producing regions increase the prices, while renewable energy advances lower the petroleum demand.
Crude oil can further be refined into gasoline, diesel, jet fuel etc. each with a different price in the market.
High revenue is dependent on the low-cost production of oil and gas and their high-value selling. Therefore, trends in the market should be analysed well enough to enhance the revenues at an optimum level.
The petroleum industry exposes personnel to various risks, including threats to their health and safety. Deliberating on and being aware of these risks is important to ensure that the workers or employees do not suffer losses but make informed decisions.
Oil and gas are hidden under the surface of the earth, making it difficult to establish where they exist. Advanced technology can confirm exploration, but it is no assurance that it will lead to commercially viable reserves.
Oil and gas prices are typically unpredictable. What once looked like a money-making project can become loss-making overnight with a dip in oil and gas prices. Even increased demand may not help during recession or epidemiology where consumption drops sharply and demand subsides.
Because oil and gas projects are often mounted in politically unstable regions, political changes, conflicts, and nationalisation will inhibit operations and, subsequently, cause financial losses.
Oil spills, gas leakage, and other accidents cause damage to the environment and lead to costly clean-up operations and legal liabilities. The increasingly global focus on environment sustainability also adds pressure on the industry to reduce its carbon footprints.
The government taxes, levies royalties, and underlies rules on the petroleum industry. A change in these rules can affect profitability. For example, more stringent environmental provisions will impact operations, thereby necessitating investments in cleaner technologies.
Most of the petroleum extraction operations use high tech. Equipment breakdowns or delay in the introduction of new technologies adds to the cost and inhibits production.
The state of the global economy directly determines the demand for oil and gas. In periods of economic recessions, consumption of energy usually declines and pricing plummets, therefore also affecting the revenue.
There are other unknown threats to health and safety that working in the petroleum industry pose to the workers or employees. Hence, it becomes important to deliberate and be aware of such risks because in the work employee doesn't suffer loss but makes informed decisions.
There are certainly risks associated with this industry, but petroleum has much in store in terms of growth and profit potentials. Companies that can manage risks will be in a better position to survive in this industry.
Horizontal drilling and hydraulic fracturing innovations have made extraction of oil and gas from hitherto inaccessible reserves possible. Apart from that, the technology is improving the ways of efficiency and reducing costs and environmental impact.
Exploration and production opportunities are provided mainly by shale oil, tar sands, and other unconventional resources. They also broaden the scope of petroleum availability and create new markets.
Globally, people are still dependent on oil and gas as their energy supply. A significant part of this increasing energy consumption is taking place in developing nations, and opportunities for fledgling exporters abound.
Thus, petroleum economics is important for cost management, revenue maximization, and risk mitigation, given the volatile nature of this industry. Its uncertain nature can also afford opportunities such as technology, unconventional resources, and increasing worldwide demand to make petroleum economics a lucrative and relevant field. Decision making and risk management contribute significantly to success in this arena.
The British Academy for Training and Development offers courses in Petroleum Economics to equip professionals with the skills needed to thrive in this field.