Petroleum Economics Textbook

[Gregory Monty]

Thisbook explains how to apply economic analysis to the evaluation of engineering challenges in the petroleum industry. Discussion progresses from an introduction to the industry, through principles and techniques of engineering economics, to the application of economic methods. Packed with real-world examples and case studies demonstrating how to calculate rate of return, discounted cash flow, payout period, and more, Petroleum Economics and Engineering, Third Edition assists petroleum engineers, chemical engineers, production workers, management, and executives in sound economic decision-making regarding the design, manufacture, and operation of oil and gas plants, equipment, and processes.

The fully revised third edition is updated to reflect key advancements in petroleum technology and expanded to include chapters on middle stream operations, known as surface petroleum operations (SPO), and natural gas processing and fractionation. By looking globally at the hydrocarbon industry, the improved text offers the reader a more complete picture of the petroleum sector, which includes the global processes of exploration, production, refining, and transportation.

Petroleum fiscal systems are arrangements for sharing the economic value from petroleum extraction between the host nation and the companies engaged in the extraction. In most countries, oil and gas resources are under the control of the national Government. The activities of exploiting the resources are undertaken by firms, some of which are owned by the state. Petroleum resource management therefore is an interaction of two key parties: The enterprises which carry out operations of finding and extracting petroleum from the ground, and the Government as custodian of the resources on behalf of the host nation which ultimately owns them.

The book reviews the various instruments which may form the petroleum fiscal system of a jurisdiction, with numerous examples from countries having configured their systems very differently. It also reviews fiscal valuation and control, related cross-border issues, and the economic analysis and design of fiscal systems related to a variety of development scenarios found in modern petroleum operations.

Features & Benefits

About the Authors

Erik T. Jarlsby is a petroleum economist based in Norway and Germany as an independent consultant and lecturer. He has taught master level and professional courses for the University of Stavanger, University of Dar es Salaam, the Petrad Foundation, the Maastricht School of Management, the Eastern and Southern Africa Management Institute and several Chinese universities. He has consulted internationally on issues of petroleum economics and petroleum resource management. He is business manager and partner of Eureka Energy Partners AS, a consultancy. Prior to his consulting career he held several managerial and commercial positions with oil firms Mobil (now part of ExxonMobil), Statoil (now Equinor) and petrochemical firm Borealis Polymers. Dr Jarlsby holds a Ph.D. from the University of Twente, Netherlands, and a licence degree (lic.oec.) in business management and economics from the University of St. Gallen, Switzerland.

Eduardo G. Pereira has been active in the oil and gas industry for over 10 years and is an international expert on joint operating agreements. He has oil and gas practical experience in over 40 jurisdictions covering America, Europe, Africa and Asia. Dr. Pereira concluded his doctoral thesis on oil and gas joint ventures at the University of Aberdeen (Scotland). He conducted postdoctoral research at Oxford Institute for Energy Studies (University of Oxford, UK) and another postdoctoral research at the Scandinavian Institute of Maritime Law (University of Oslo, Norway). He is a professor of natural resources and energy law as a part-time, adjunct and/or visiting scholar in a number of leading academic institutions around the world. He is also a managing editor for the African Journal on Energy, Natural Resources and Environmental Law and an associate editor of OGEL. He is also the author and editor of several leading oil and gas textbooks.

Details

Type: Hardcover

Size: 6 x 9 inches

Pages: 471

Published: January 2019

ISBN: 9781593704803

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This course is part of the Heriot-Watt University Distance Learning MSc Petroleum Engineering program. It is intended to give a broad understanding of the economics evaluation of petroleum projects. This course does not prescribe a particular method or process, but rather focuses on the ideas and principles, which may become incorporated into corporate procedure. Petroleum investment is very long-term and subject to considerable risk, some of these issues are identified and reviewed.

Participants will be introduced to the key economic concepts of supply and demand and how companies, organisations, and governments can seek to influence them. A brief look at how company performance is measured leads to an introduction of the value chain, identifying the stages of value creation from upstream to end retail to the customer.

This section addresses the question of how to assess value creation by an asset, where cash flow modelling is then covered in detail to develop an understanding of the main types. The capital intensive nature and length of projects requires an awareness of why money varies in value over time; through inflation, rates of return from alternative opportunities due to risk.

Course participants will learn how cash flow models can be used to inform a decision and how metrics can be used to compare across a portfolio of projects. Participants will learn what commonly applied measures such as NPV tell them, but also what they cannot do.

Moving away from a deterministic cashflow model, this section will cover the key sources of risk. These will range from the economic impact of incomplete information about the subsurface, through the role of government in the sector, to the impact of price volatility for produced oil.

This final day will commence with looking at ways for another party to take on the project risk, through contracts such as insurance or other financial structures. Not all risk can be transferred, but the effect of that which remains in the project can be minimised. Decisions taken in the presence of the risk need to incorporate this information, for instance through the use of decision trees.

Few people start their academic journeys knowing that they want to be professional economists, and that was certainly true for me. I received my bachelor of science in petroleum engineering from the University of Tulsa. Prior to doing graduate work, I worked as a petroleum engineer in Oklahoma, Texas, and in the United Kingdom. My experiences in the North Sea were especially interesting, as I helped generate early estimates of the sizes of the unprecedentedly large natural gas fields lying between the UK and Norway. I was fascinated by both the massive technological challenges faced in moving from discovery to production, and the enormous economic opportunities that would result from success in that endeavor. From then on I knew that my career would be influenced by both economics and engineering. At Stanford University I earned an M.Sc. and a Ph.D. minor in engineering-economic systems, as well as a Ph.D. in economics. Before coming to Northwestern, I held an appointment as an economist and engineer in the White House Office of Telecommunications Policy.

As a scholar, my research has concentrated on the fields of microeconomics, industrial organization, and public policy. Much of that work has focused on the wave of reform and restructuring that, since the late 1970s, has swept across the face of industries traditionally regulated in the United States or nationalized in Europe. In many of my articles and two of my books, I have analyzed the effects of government policy on prices, market structure, economic welfare and income distribution in various industries, including natural gas, electric power, telecommunications, railroads, pipelines and motor carriers.

Along with Professor David Besanko in the Kellogg School of Management, I have also coauthored a leading intermediate microeconomics textbook, now in its sixth edition in English. The book has also been published in several other languages, including Portuguese, Chinese, Italian, German, Greek, and (in 2022) Korean. It has been adopted in undergraduate economics courses and in graduate business programs at many universities around the world.

I have been fortunate to have held appointments in some wonderful institutions along the way. I have taught at Stanford University and at the California Institute of Technology. I also twice held appointments as a senior research fellow at the Wissenschaftszentrum Berlin (Science Center Berlin), the first in 1982 and 1983 being especially memorable because it involved living in a city surrounded by 600,000 Russian troops and the iconic Wall for fifteen months during the height of the Cold War. For decades I have very much enjoyed productive interactions with the academic community in Europe. In 1997 I was honored to have been elected as the first non-European President of the European Association for Research in Industrial Economics, a leading international professional society in industrial organization.

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