Oil Investment Research Articles

The New Equilibrium of Cheap Oil

The fall in oil prices (-40% in June 2014) in the stock market disappears these days from the headlines. British Petroleum currently has the lowest price/earnings ratio in the industry with only a factor of 7. If we focus not only on stocks, but in speculate portfolio mix with oil, gold or commodity investments, then 2014 was not a good year. The price of oil has shocked many investors in recent months. Anyone who has experienced it a few years ago, when oil climbed to $150 per barrel, did not even think that it could perhaps a slip below the mark of $100 or more. Since oil is still the lubricant of the global economy, the impact of the current price drops goes far beyond the personal area and gasoline prices. The powerful lobby organization of oil exporting countries has further lowered the demand forecast for oil for 2015. So OPEC only expected demand for its own oil of 28.9 million barrels a day. The black gold (electricity and fuel) is not used only to produce energy, but also is needed in the chemical industry for the production of plastics and numerous chemical products. Sooner or later the stabilization is likely. Against this background, it could pay for brave investors to look even closer in the hard-hit values from the oil industry.

Oil and Gas Exploration Valuation and the Value of Waiting

The timing flexibility of investments in oil and gas assets can potentially add value. In this article, we examine the value of waiting in exploration projects and propose a real option–based valuation method using least-squares Monte Carlo simulation. We show that the dynamics of the oil and gas prices have a large impact on the value of the option to wait, especially for projects with long lead times and durations. The uncertainty in the forward price curve is modeled using a two-factor stochastic price process. The article also presents the valuation method in the form of MATLAB functions and routines that can be used as an efficient test and analysis platform using the industry-standard input formats.

Pain without gain? Reviewing the risks and rewards of investing in Russian coal-fired electricity

Coal use—and thus investment—is expected to grow considerably in the Russian Federation over the next few decades. Projections suggest that at least $200 billion of investment will be needed to modernize existing coal-fired power plants by 2030, but the bulk of this financing is to come from the private sector or foreign enterprises. This study asks: what are the possible investment risks and rewards of pursuing this expansion of coal in the Russian power sector? To provide an answer, the study uses a mixed methods approach consisting of elite semi-structured interviews and a review of English and Russian peer-reviewed literature. The study provides a brief overview of the Russian electricity sector before discussing five distinct rewards to investing in coal such as low production costs, competitive returns on investment, rural modernization, expansion of exports, and the acceleration of innovation. These benefits however are offset by five risks: inferior performance to investments in oil and gas, development challenges, air pollution and climate change, social degradation from mining, and a tradeoff with existing policies incentivizing renewable energy and energy efficiency. The study concludes by analyzing what these disparate risks and rewards mean for policymakers and energy analysts.

From anticipation to anxiety in a market for lottery-like stocks

Purpose – The purpose of this paper is to investigate a unique sample of lottery-like stocks and contextualize their short-run price behavior with respect to behavioral principles. Design/methodology/approach – The authors conduct a short-run event-study of the abnormal returns for stock market investments in Australian small-cap oil and gas (O & G) explorers centered on the drilling commencement (spudding) of 157 wildcat oil or gas wells drilled between January 2000 and June 2010. Findings – Small-cap stock market investments associated with newly spudded wildcat O & G wells are negative NPV gambles rather than fair (zero NPV) investments. Once a wildcat well is spudded, the 30-day expected abnormal return is 6-8 percent: wealth-maximizing stockholders are advised to sell upon news of spudding, but gamblers may wish to hold on for the chance of a 10.6 percent 30-day average abnormal return (if the well is not plugged and abandoned). In the lead-up to each gamble the authors observe a significant pre-spudding stock price run-up on average, perhaps indicative of positively affected investors aroused by an easily imagined successful wildcat gusher as per evidence on the influence of image and affect on investors’ decisions (MacGregor et al., 2000; Loewenstein et al., 2001; Rottenstreich and Hsee, 2001; Peterson, 2002). Originality/value – The wildcat drilling events considered in this paper are lottery-like by nature, and spudding represents the distinct moment when the gamble is unambiguously on, following shortly on from which investors either strike it lucky or strike out. The specifically small-cap wildcatters are typically heavily vested in one well at a time, therefore the sample stocks are uniquely lottery like. This differs from other studies which infer the lottery-like nature of their sample stocks from characteristics such as price and idiosyncratic volatility.

Foreign investment in Iran's upstream oil and gas operations: a legal perspective

Foreign investment in Iran's upstream oil and gas operations: a legal perspective

Catch and Release

Catch and Release

ASSESSMENT OF SOCIAL-ECONOMIC EFFICIENCY OF INVESTMENTS

In this article, the author highlights the issue of attracting investments in oil and gas sector with the aim to maxim-ize the development of deposits. Rationalization of the development processes of oil and gas deposits is of top-ical importance today due to the increasing exhaustion of the resource base. In order to increase the oil recovery factor of the deposits, it is supposed to use different methods intensifying and enhancing oil recovery. Rede-velopment of the deposits is possible only with the use of highly efficient and cost-effective intensification methods of oil and gas production.

Empirical Testing of Real Option in the Real Estate Market

Abstract Existing researches have used real options valuation (ROV) theory to study investment in energy, oil and gas, and pharmaceutical sectors, yet little works have empirically examined ROV theory to study investment in a real estate market of EU countries that undergone severe economic crisis and now recovering. The aim of this paper is to test empirically ROV application for real estate development project with significant volatility in terms of price and cost and under strict legislation's constraints. Paper illustrates empirical testing of ROV application of the investment project “Sun Village” developed by the ABC Project Ltd Company in Latvia in 2014. We apply three ROV methods: option space matrix “Tomato Garden”, Black-Scholes option pricing model and binominal option pricing model before we presented final research result. The flow chart of ROV application in real estate development projects presented in our research can serve as a “road map” for many similar projects in EU suffering real estate market bubble burst and present uncertainty.

Australian oil and gas: maximising inbound investments—tax risks and opportunities

The ability for Australia to attract and retain foreign capital is crucial to the continued expansion and long-term development and sustainability of Australia’s oil and gas industry. A well-known and accepted competitive advantage, which facilitates inbound investment into the Australian oil and gas industry, is the stability of Australia’s tax and regulatory system. Having said this, inbound investors are faced with numerous challenges in seeking to navigate and understand Australian tax issues associated with not only ensuring the successful completion of a transaction but to also manage their ongoing after-tax return on investment. These investors are exposed to Australia’s complex international tax landscape, given the level of cross-border investment, financing, profit repatriation, transfer pricing and exit/sell down issues. The key is for inbound investors to understand, monitor and pro-actively manage their international tax affairs as efficiently and effectively as possible. This extended abstract is targeted on assisting inbound investors to understand key considerations associated with investment ownership in the Australian oil and gas industry, and to assist those investors in making strategic investment decisions and to better understand tax risks and opportunities. The topics covered will include: Key tax drivers and considerations associated with executing transactions successfully. Structuring inbound oil and gas investments into Australia. Investment funding and profit repatriation strategies. Transfer pricing and related company transactions. Exit and sell down strategies.

Moving Unruly Contemporary Urbanism Toward Sustainable Urban Development in Ghana by 2030

The widely held view that rapid urbanization is occurring across much of Sub-Saharan Africa has been questioned recently, and an alternative perspective has drawn attention to conditions of counter-urbanization and slow urbanization growth rates on the continent. This view has far-reaching implications for the urbanization agenda because the need for central government and metropolitan authorities to prepare for high levels of urbanization is in doubt. Using census data for the period 1970 to 2010, this study critically examines the population dynamics of cities in Ghana, and the key factors shaping these dynamics as well as future growth trajectories through 2030. We argue that without proper planning and investments in cities, Ghana is likely to produce a bipolar urban society marked, on the one hand, by world-class cities with solid infrastructure and services largely inhabited by the middle and upper classes and, on the other, by cities largely composed of informal settlements inhabited by a poor and low-skilled population. Although there is little doubt about Ghana’s urban future, the future pattern remains unclear, especially the potential impact of new urban projects as well as the effects of climate change and new investments in oil and gas on the existing pattern. We conclude that policymakers, city officials, the private sector, and other key actors need to be more proactive and creative in addressing the most salient negative outcomes of urbanization and embolden their policy instruments to deal with mounting urban challenges.

Request for the Formation of an Ad Hoc Committee on Coal and Oil Investments

This white paper argues that the University of Michigan's Board of Regents should form a committee to consider divesting the University’s endowment from coal and oil investments. The paper details the University's three-prong test – created by the school's prior divestments from companies doing business in apartheid South Africa and from tobacco companies – for determining whether to form a committee to consider divestment. The test requires: 1) a consensus on campus surrounding the issue; 2) that the activities of the particular industries must be antithetical to the University’s core values; and 3) that the subject industries must be uniquely responsible for the problem. The white paper explains why coal and oil investments meet this standard. First, there is a consensus regarding climate change across all levels of campus. The Graham Sustainability Institute’s most recent survey found that around 89% of undergraduate students, 93% of graduate students, and 93% of faculty think that climate change is happening. The study found that a similar percentage believed humans are contributing to it, and that the issue is important to them personally. A consensus is further demonstrated by the educational and extra-curricular pursuits of students and the operational changes the University has made to reduce greenhouse gas emissions. Few significant issues, if any, enjoy this level of campus support. Second, the activities of the coal and oil industries are antithetical to the University’s core values. In two ways this is true. These industries offend the University’s core values of sustainability and academic integrity. These were the crucial elements in the University’s choice to divest from tobacco companies in 2002. And third, the coal and oil industries are uniquely responsible for climate change. The pollution from their industries is a chief driver of climate change, and their political and misinformation campaigns have undermined progress on this issue.

Texas refinery air pollution emissions are being severely underestimated

The Houston‐Galveston‐Brazoria region of southeastern Texas is home to heavy industrial investment in oil refining and petrochemical production. Pollutants emanating from the factories and refineries have repeatedly caused the region to fail national and state‐level tests for air quality and ground‐level ozone.

China׳s energy security: Oil and gas

China is currently the largest energy consuming country in the world. Until the early 1990s, China had long been a net energy exporter. The country became a net oil importer in 1993, the first time since the 1960s. For China, energy security first means oil supply security. China turned into a net natural gas importer in 2007 and then a net coal importer in 2009. In other words, China is now a net importer of all three types of fossil energy—oil, natural gas, and coal.In the context of rising oil imports and implementation of China׳s 12th Five-Year Program from 2011 to 2015, this paper examines China׳s energy security strategies with a focus on three leading elements, namely overseas oil investment, strategic petroleum reserves (SPR)and unconventional gas development. Our findings suggest that the Chinese government has promoted overseas investment strongly; its SPR program has been established though the progress for Phase II has been slower than expected and the government intends to boost the unconventional gas sector development. However, the challenges are enormous as well. As for future research, other elements for each dimension of energy security should be reviewed to reach a comprehensive conclusion about how well China has done and what steps are needed to move forward.

The Dominance of Oil Investment and Food Security in Nigeria under the President Obasanjo Civilian Administration

Prior to Nigeria’s independence in 1960, agriculture was the main stay and dominant sector of the economy. It contributed about 70 percent of Gross Domestic Product (GDP), employed about the same percentage of the working population, and accounted for about 90 percent of foreign earnings and Federal Government revenue. However, with the discovery of oil in commercial quantity at Oloibiri in the Niger Delta in 1956, the country’s fortunes have depended on the Oil Industry, which has effectively replaced agriculture in revenue yield. In fiscal terms, oil revenue currently account for about 80 percent of government revenues, 95 percent of export receipts and 90 percent of foreign exchange earnings. This work investigated the link between the dominance of oil investment and food security in Nigeria under the Obasanjo civilian administration. While observing that agriculture had in the past contributed to national prosperity and food security, it was noted that discovery and commercial exploitation of oil resources in Nigeria fundamentally changed the structure of investment in Nigeria resulting in the dominance of foreign capital not only in the Oil Industry, but also in the Nigerian economy. The work clearly demonstrated that the dominance of oil investment in Nigeria not only undermined linkage with other sectors between 1999 and 2007, it is implicated in her food security crisis. DOI: 10.5901/mjss.2014.v5n9p515

Trending Topics in Energy: The Midstream Natural Gas Sector in 2014 and Beyond

With increasing frequency, energy stories are seeping from trade publications and technical journals into the mainstream conscience. Most recently, there has been a deluge of articles focusing on energy transportation: whether it is a story about pipelines (with the Keystone XL pipeline currently taking center stage), the exponential increase in rail activity as a means of shipping oil and gas products, or the need for increased domestic energy supply and security. This article serves to highlight the most critical component of those stories — the midstream sector. Primarily, it focuses on the transformation and growth of the midstream natural gas sector, including the opportunities and challenges that lie ahead — specifically, the importance of collaborative decision-making between all stakeholders, continued capital investment, legal, environmental, consumer, and security protections, and federal and state regulatory involvement. The oil and gas industry is divided into three main sectors: upstream, midstream, and downstream. The midstream oil and gas sector is generally defined as transmission pipelines, storage facilities, and in some parlance, gathering and processing facilities. For the past several years, the largest oil and gas investments have been in the upstream sector, generally defined as exploration and production (E&P). Pennsylvania is one of the states at the epicenter of recent E&P spending because it overlays the Marcellus and Utica Shale Formations. More broadly, North American upstream spending totaled $354.4 billion in 2012 and $354.8 billion in 2013. These E&P expenditures, while impressive, also reveal only a slight rise in recent upstream investment, and more poignantly, mark a shift away from increased capital investment in the upstream sector at this time.

Palm Oil and the Importance of Participation in Sustainability Regulatory Schemes

This paper focuses on three regulatory standard setting schemes: the Performance Standards for environmental and social performance (Performance Standards) published by the International Finance Corporation (IFC); the Equator Principles; and the Roundtable on Sustainable Palm Oil (RSPO). Two palm oil case studies show how the IFC’s Compliance Advisor Ombudsman (CAO) and nongovernmental organizations (NGOs) promote, with mixed success, the responsiveness of the IFC to people affected by projects it supports.The first case concerns IFC investments in the Wilmar Group, which were connected to Wilmar’s oil palm plantations. The CAO’s June 2009 compliance audit report criticized the IFC’s supply chain assessment in light of its Performance Standards, and prompted development of an IFC palm oil sector strategy. World Bank Group palm oil investments were suspended pending development of the strategy. Similar complaints regarding Wilmar to the RSPO received a weak response in which the RSPO aimed to resolve disputes without making adverse findings against Wilmar.The second case concerns the IFC’s April 2009 loan agreement with Corporacion Dinant (Dinant) in Honduras for oil palm plantations, amongst other things. Dinant was allegedly connected to violent evictions of farmers following a military coup in June 2009, yet the IFC executed the first disbursement five months later. The Wilmar case shows how transparency and review measures facilitate the enforcement activities of NGOs and the CAO, which involve interactions with the IFC that set the standards and influence reviews of the Performance Standards. The case studies also demonstrate the relative weakness of the RSPO complaints mechanism, and the lack of transparency under the Equator Principles.The paper argues that the Equator Principles need transparency and review to promote responsiveness to project-affected people whose interests the Principles claim to uphold. The paper also argues that the IFC must advocate for such responsiveness-promoting measures to ensure its legitimacy as a promulgator of sustainability standards.

Extreme dependence between China’s oil market and the world oil market: empirical evidence and implications

In recent years, China’s increasing dependence on oil imports has raised major concerns about energy security and risk management. This paper examines China’s extreme dependence on the global market using time-varying copulas. Using the sample of Daqing (China), West Texas Intermediate (United States), Brent (North Sea), Dubai (Middle East) and Minas (Asia-Pacific) spot oil prices, we find that the dynamic conditional correlation (DCC) Student t copula can more properly describe the dependence between China’s and the global oil market. It indicates that negative and positive extreme results between China’s and the global oil markets are linked with the same intensity. Moreover, for the Daqing–Brent and Daqing–Dubai pairs, there have been significant increases in extreme dependencies in recent years. Among the three subperiods during 2007–11, their extreme dependencies rose more sharply in periods of global economic recession and global economic recovery than in times of global economic boom. For China’s oil investors and energy policy makers, the empirical findings may have important implications for developing hedging strategies and energy pricing.

On oil investment and production: A comparison of production sharing contracts and buyback contracts

Production sharing contracts (PSCs) and buyback contracts are two important contract modes in the upstream oil industry. In this paper, we build a theoretical model to compare investment and production levels under these two contracts. Our model results show that PSCs lead to higher investment levels than buyback contracts. Moreover, investment level increases with international oil companies’ (IOCs') share under buyback contracts. The comparison of optimal oil production depends on IOCs' share under PSCs and the host government's marginal operating costs from oil production under buyback contracts. When IOCs' share of gross revenues or the host government's marginal operating costs are low, optimal oil production is higher under buyback contracts; otherwise, optimal oil production is higher under PSCs. Based on such a comparison, we investigate the host government's best decisions on revenue division under these two contract types. We demonstrate that optimal share ratios exist for the host government to obtain maximum oil revenues under both contract types. We also find that under both contracts the discount factor and oil price positively affect optimal investment and production levels, respectively. Our results can provide policy implications for the host government when selecting upstream oil contracts in international oil cooperation.

Alternative Investments - Energy

Investments in energy, particularly oil and gas investments, can serve as a component of a durable income strategy, and thus may warrant an allocation within a diversified investment portfolio.

Consideration of Voidage-Replacement Ratio in Well-Placement Optimization

Summary Determining the optimum location of wells during waterflooding contributes significantly to efficient reservoir management. Often, the voidage-replacement ratio (VRR) and net present value (NPV) are used as indicators of performance of waterflood projects. In addition, VRR is used by regulatory and environmental agencies as a means of monitoring the impact of field-development activities on the environment, whereas NPV is used by investors as a measure of profitability of oil and gas projects. Over the years, well-placement optimization has been performed mainly to increase the NPV. However, regulatory measures call for operators to maintain a VRR of unity (or close to unity) during waterflooding. A multiobjective approach incorporating NPV and VRR is proposed for solving the well-placement-optimization problem. We present the use of both NPV and VRR as objective functions in the determination of optimal location of wells. The combination of these two in a multiobjective optimization framework proves to be useful in identifying the trade-offs between the quest for high profitability of investment in oil and gas projects and the desire to satisfy regulatory and environmental requirements. We conducted the search for optimum well locations in three phases. In the first phase, only the NPV was used as the objective function. The second phase had the VRR as the sole objective function. In the third phase, the objective function was a weighted sum of the NPV and the VRR. A set of four weights was used in the third phase to describe the relative importance of the NPV and the VRR, and a comparison of how these weights affect the optimized NPV and VRR values is provided. We applied the method to determine the optimum placement of wells to three sample reservoirs: the first with a distributed permeability field, the second being a channel reservoir with four facies, and the third being a slightly heterogeneous reservoir. Two evolutionary-type algorithms—the covariance matrix adaptation evolutionary strategy (CMA-ES) and differential evolution (DE)—were used to solve the optimization problem. Significantly, the method illustrates the trade-off between maximizing the NPV and optimizing the VRR. It calls the attention of both investors and regulatory agencies to the need to consider the financial aspect (NPV) and the environmental aspect (VRR) of waterflooding during secondary-oil-recovery projects. The multiobjective optimization approach meets the economic needs of investors and the regulatory requirements of government and environmental agencies. This approach gives a realistic NPV estimation for companies operating in jurisdictions with a requirement for meeting a VRR of unity.