rmfd global oil company group 8

8/6/2019 RMFD Global Oil Company Group 8

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Global Oil

Company

By :

Abhishek Birmaan

Manulal K

Pallavi

Rajesh Agarwal



Some facts about Oil Industry

� Total US Imports 11,108,000 barrel per day

� Average Price for a barrel $109.53

� Average acquisition cost for a barrel� Saudi Arabia alone produces 21.9% of total

production

� Total production per day 5.4 million barrels ± Source : api.org/news1



� Gasoline

� Light oil and heavy oil

� LNG AND LPG� Barrel

� Gallon

� OPEC

� Upstream/Midstream/Downstream

Oil Industry Terminology



Oil Industry Terminology

� Gasoline

± Mixture of lighter liquid hydrocarbons used chiefly

as a fuel for internal-combustion engines.

� Heavy Oil

± Long chain of Hydrogen and carbon atoms

� Light oil

± Small chain of Hydrogen and carbon atoms



� Liquefied Natural Gas (LNG)

±

Primarily compressed methane� Liquefied Petroleum Gas (LPG)

± Pressure or refrigeration liquefies lighter hydrocarbons,

such as propane, butane, pentane, and mixtures of these

gases

� Petroleum

± Generic name for hydrocarbons, including

crude oil, natural gas and their products.� BBL

± Barrel of oil, a volume of 42 U.S. gallons (0.16 m3)



� Gallon

±

The imperial (UK) gallon was legally definedas 4.54609 L

± The US liquid gallon is legally defined as

231 cubic inches, and is equal to

exactly 3.785411784 L ± The US dry gallon is 2150.42 cubic inches, it is

equal to exactly 268.8025 cubic inches

or 4.40488377086 L.



� OPEC

±Organisation with 12 members countries foundedin the year 1960

� Upstream operation

± Exploration and production

� Midstream operation

± Gathering, field processing transportation and

storage

� Downstream operation

± Refining and marketing



Value Chain

Exploration,

drilling, andproduction of crude oil

Upstream

Transportation and

trading of crude oilto refineries

Midstream

Refining of crude

oil Storage of crude oil

Distribution andmarketing

Downstream



EXPLORATION:

Using technology to find new resources

DRILLING

� Bringing oil to the surface using natural and artificial methods

� Drill a hole to obtain crude oil and natural gas from under the earth'ssurface. Engineers make this hole using a rotary drilling rig.

� The rotary drilling rig uses a drill bit to cut through the earth and create ahole. As the hole gets deeper, pipe is added to the drill bit to allow it to digfurther.

� The pipe is connected to an engine that turns the drill bit to cut the hole.The rotary rig operates the same as a hand-held electric drill. The electricdrill has a motor that turns the drill bit and sufficient weight must beapplied to keep the drill in contact with the bottom of the hole.



ProductionCompleting the Well

� Installing casing pipe in the well.

� The production casing runs to the bottom of the hole or stops just above the production zone.

Tubing and Packers

� After cementing the production casing, the completion crew runs a final string of pipe called the tubing. The well fluids flow from the reservoir to the surfacethrough the tubing.

� A packer is a ring made of metal and rubber that fits around the tubing. It provides asecure seal between everything above and below where it is set. It keeps well fluidsand pressure away from the casing above it.

� Subsurface Safety Valve

The valve remains open as long as fluid flow is normal. When the valve sensessomething amiss with the surface equipment of the well, it closes, preventing theflow of fluids.



Production(Continued)

� Starting the Flow

� Before oil production can begin the drilling mud must be removed from inside the casing. Salt water is

pumped into the tubing to remove this mud.� Sometimes after starting the flow the well does produce

at a fast enough rate. In this situation, flow fromthe reservoir may be increased by stimulation.Stimulation is one of several processes that enlarge or create channels in the reservoir rock so that the oil andgas can move through it and into the well.



Fracturing

� Hydraulic fracturing is a technique used to allow natural gasand crude oil to move more freely from the rock poreswhere it is trapped to a producing well so it can be broughtto the surface at higher rates.

� S pecially engineered fluids are pumped at high pressure andrate into the reservoir interval to be treated, causing a

vertical fracture to open.

� The wings of the fracture extend away from the wellbore inopposing directions according to the natural stresses withinthe formation.

� Proppant, such as grains of sand of a particular size, ismixed with the treatment fluid to keep the fracture openwhen the treatment is complete.



Transportation

� Moving oil to refineries and consumers with tankers, trucks and pipelines

� Crude oil tankers are used to transport crude oil from fields in the Middle

East, North Sea, Africa, and Latin America to refineries around the world.

Product tankers carry refined products from refineries to terminals.

� Tankers range in size from the small vessels used to transport refined

products to huge crude carriers.

�Tanker sizes are expressed in terms of deadweight (dwt) or cargo tons. Thesmallest tankers are General Purpose which range from 10 to 25,000 tons.

These tankers are used to transport refined products. The Large

Range and Very Large Crude Carriers (VLCC) are employed in international

crude oil trade.



Refining� Converting crude oil into finished products

� Refineries are composed of many different operating units that are used to

separate fractions, improve the quality of the fractions and increase the

production of higher-valued products like gasoline, jet fuel, diesel oil and

home heating oil. The basic refining operations are described in thefollowing sections.

� It is done through :

� Crude oil distillation

� Vacuum Gas Distillation

� Catalytic reforming

� Catalytic cracking



Marketing

� Distributing and selling refined products

� Refined products are moved to markets using pipelines, tankers and tank trucks. Pipelines arethe lowest cost method. Once the products reachtheir destination, which is usually a supplyterminal, they are distributed to gasoline stations,

airports and homes by tanker trucks. Companiesmix their additive packages into gasoline at thesefacilities.



Risks Across value ChainExploration

Design

Technology

Environmental

Political

HR Risk

Production

Process related

Resource related

Environmental

Labor Issue

Refining andmarketing Risk

Construction

Regulatory

Licensing

Financial

Delay Decommissioning

Transportation

Pipelinebreakdown

Weather risk

Sales Related

Demand Risk

Supply Risk

Product risk

Price Risk



International Vs Domestic Operation

� Legal/Regulatory Risk

� Currency Related

�Transportation

� Employee Related issues

� Quality

� Resource nationalty



Strategic

Reserve

Depletion

Reserve

Replacement

Development

Acquisition

Geological Risk

Change inDemand

Financial

Interest Rate

Currency

CapitalIntensity

ForeignExchange

Funding

Asset Liquidity

FinancialGovernance

and Policies

Cash

Management

Price related

CommodityAccounting

CapitalStructure

Operational

Fluctuating

production

Poor

performance of worker

Transportation

Poor

performance of supplier

Accidental leak

out

Fire

Explosion

Pipeline

breakdownHuman Skills

New Technology

Event Extra

ordinary

Terrorism &

Criminal

Natural

Calamities

Weather risk

Global Economic

Slowdown

Resource

Nationality

Geopolitical

Developments

Project Related

Site selection

Constructiondelay

Designing



HIGH FREQUENCY HIGH IMPACT

Fire and explosion

Accidental leak out

Site selectionCapital intensity

Funding

Commodity pricing

HIGH FREQUENCY LOW IMPACT

Price related risk, Transportation, FluctuatingProduction

Poor performance of workers

Poor performance of supplier

Weather risk

Competition for reserves

Currency risk

Foreign exchange risk

Geopolitical Developments

LOW FREQUENCY HIGH

IMPACT

Natural calamities

Terrorism and criminal

Global economic slowdown

Demand Change

Pipeline breakdown

Reserve Replacement, Government Policies

Acquisition, DesignGeological risks, Government Policies

LOW FREQUENCY LOW IMPACT

Resource nationality

Construction delay

RISK MAP



PRESENT 10 MAJOR SOURCE OF RISK



Financial Risks (Case specific)

� Interest rate Risk

± Financed billions of dollars for its project financing and itshundreds of subsidiaries needed capital for their dailyactivities for which each one raise money from their

respective local market and manage insurance premium etc.

� Risk at decentralized treasury ± Each operating unit had different treasury department of its

own to manage cash management, Forex exposure and

short term borrowing needs. They had to operate withinspecified guidelines and had little freedom.



� Forex Risk

± It varied with operations of each operations. Inexploration it had exposure in local currency but ininternational trading it had exposure in US dollar and again during retail sales it again had exposureto local currency.

� Cash Management ± Each unit was engaged in more activity than

needed if done in Pooled basis.

± Could not obtain best prices for their deals because both their trading volume and credit rating werelower than parent company



RISK -DERISK ING STEPS TAK EN



Earlier Each subsidiary has its own finance

division

Loans in one dept are not offset byanother department

Decentralized Forex trading

Decentralized cash management

Now A central treasury department

A single loan portfolio handling all

demands Central Forex trading

Centralized cash management

Decentralization Centralization



Obstacles to Centralization

1. Divergence of operations1. It was present in end to end operations through hundreds of

subsidiaries.

2. Capital barriers and withholding tax issues1. (you write here )

3. Geographical diversification1. Presence in more than 100 countries each having different

culture, ideology and thinking.

4. Poor IT Infrastructure



De Risking steps Across Value Chain

� Advance use of computers, operation risk

model to provide enhanced risk capability.

� Simulation Models were used to helpconfigure the operations.

� Marker risk measures like VaR has been

incorporated and used extensively.

� Price insurance from the liquid market



Operations Risk ( Case S pecific)



� Transportation Risk

± The company was present in end to end solutions andhence had huge transport network of pipelines andtanker (road and sea) services.

� Storage Risk ± While transporting from one place to another the oil

was stored at several places and there were safetymeasures that were strictly followed at each storageunit

� Processing Risk ± The risks associated at different stages of processing of

crude oil.



� Manage huge volume of daily trade

± Global Oil Corp. transfers about 5 million barrels of crude oil through the chain to finished petroleum products

� Optimal utilization of other resources

± Global Oil had considerable resources other the oilresources like refineries, tanker fleets, storage facilitiesand pipelines etc. which were to be managed

effectively and optimal utilization of these resourceswas also required



Operation Risk Mitigation Technique



� Creation of Oil Trading Centre

± It was created to support the core business. In thisthe corp. used external markets to manage its

portfolio of exposure from flow of oil.

± It was responsible for managing all risks related to

movement (whether oil was sourced from inside or

outside) taking advantage of aggregate traded

physical volume.

±

Due to aggregate treatment of oil the risk ismanaged on a portfolio basis.



Measurement of oil Price risk on three dimensions

� Outright Price risk ± To mitigate this when a physical quantity of a product is bought,

the company sells the equivalent quantity of futures. When a product is sold to the ultimate customer on a fixed price basis, it buy back the futures sold earlier to close the hedge

� Exposure to main Market Price differentials ± To avoid this a contract for difference is done between two

parties. In this the difference between the current price and thecontract price is paid by either the buyer or seller dependingupon whether the price is currently more or less than the contract

price

�

Backwardation Risk ± Backwardation is the name for the condition that the market

quotes a lower price for a more distant delivery date, and ahigher price for a nearby delivery date.



Mitigating the financial risk

using Derivative



FRAMEWOR K FOR FINANCIAL

RISK



RISK MANAGEMENT FLOW



VARIOUS FINANCIAL RISK

PRICE RISK :

FORWARD ,FUTURE,OPTIONS

EXCHANGE RATE RISK :

FORWARD EXCHANGE CONTRACT, SWAP

INTEREST RATE RISK :

INTEREST RATE SWAP



43

Forward Contracts

� A forward contract is an agreement betweentwo parties (counterparties) for the delivery of a physical asset (e.g., oil or gold) at a certain

time in the future for a certain price that isfixed at the inception of the contract.

� Forward contracts can be customized toaccommodate any commodity, in any quantity,for delivery at any point in the future, at any

place.



44

� Counterparties: Buyers and Seller

� Asset/Commodity: Crude oil

� Delivery/Payment Time: 6 weeks

� Priced Fixed: $75

� Buyer: ABC (long position)

� Seller: Global oil company

(short position)� Trading Volume: 1000 barrel



Chapter 1 46

Forward versus future

� Obligations without a clearinghouse

Buyer

SellerBuyer

Seller

Clearing-

house

Obligations with a clearinghouse



47

Forward Versus Futures

COMPARISON FORWARD FUTURES

Trade on organized exchanges No Yes

Use standardized contract terms No Yes

Use associate clearinghouses to

guarantee contract fulfillmentNo Yes

Require margin payments and daily

settlementsNo Yes

Close easily No Yes

Regulated by identifiable agencies No Yes

Any quantity Yes No

Any product Yes No



1-48

� A f orward rate agreement (FRA) is an interbank-tradedcontract to buy or sell interest rate payments on a

notional principal. Maturities of the contracts aretypically 1, 3, 6, 9 and 12 months.

Management of IR risk: forward rate

agreement



� Example:

� GOC buys an FRA that locks in the first interest payment(due at the end of year 1) at 5% p.a.

±

If LIBOR rises above 5% at the end of year 1,GOCreceives a payment for the differential interest rates,

± If LIBOR falls below 5% at the end of year 1, GOC makesa payment for the differential interest rates.

� A series of FRAs is an interest rate swap.



1-50

� S waps are contractual agreements to exchange or

swap a series of cash flows.

� These cash flows are most commonly the interest payments associated with debt service.

± interest rate swap: Exchange fixed interest rate payments for

the floating interest rate payments.

± currency swap: Exchange currencies of debt service obligation(e.g. from SF loan to $ loan).

± interest rate and currency swap: A single swap may combine

elements of both.

Management of IR risk: interest rate

swaps



1-51

� Suppose ABC Inc holding a floating-rate debt

conclude that interest rates are about to rise.� The finance manager of ABC may wish to pa y f ixed and to receive f loating interest pa yments.

� If XYZ concludes that interest rates will fall.

Then XYZ may wish to pa y f loating and toreceive f ixed interest pa yments on their fixed-ratedebt.

� There is an incentive for the two parties to enter

into an interest rate swap.

� Interest rate swap exploits a mispricing in twomarkets.

IR risk: Why interest rate swaps?



FORWARD EXCHANGE

CONTRACT

� A FEC is a binding agreement between two

parties in which one currency is sold or bought

against another currency at an agreed forward

exchange rate for settlement on a specified

date (beyond two (2) business days) in the

future.



EXAMPLE:

� An Australian Importer needs to pay USD100,000 in

3 months time for goods bought overseas. The

importer can buy the USD in 3 months time but then

it cannot budget the right amount of AUD because

the exchange rate in 3 months time is unknown.

� Assume current AUD/USD spot exchange rate is

0.6500.



Enterprise wide Risk Management

� Adopting an organised approach to aggregate political , legal and general public about theneed for consistant energy policy.

� Investing time and resources to understand theenvironment related risk.

� Company need to strengthen alliances and

partnerships with NOCs� Management of cost reduction programme and

better communication across the company



�

Thank You

rmfd global oil company group 8

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