Oil Investment Research Articles

Analysis of sources of assets of the national fund of Kazakhstan and assessment of its efficiency

The article examines the assets of the national fund of Kazakhstan and its dynamics from 2005 to 2020, analyzes the sources of its formation and evaluates the effectiveness of the use of assets. The main sources for the formation of the fund’s assets are direct taxes from organizations in the oil sector and investment income from management. Since 2016, the funds of the national fund in the form of aggregate transfers have already been used and directed to support the country’s economy in the face of an unfavorable price environment for commodities. To assess the performance of the fund and its effectiveness from 2001 to 2020, we calculated such indicators as accumulated profitability, arithmetic and geometric mean returns, portfolio standard deviation, variation coefficient, average risk premium, Sharpe ratio. The key indicators of risk and return of the fund’s foreign exchange portfolio are also compared with the indicators of the Norwegian oil fund. As a result of the comparison, valuable recommendations and conclusions were made on the structure of the fund’s portfolio. The Fund needs to gradually increase the share of investments in risky financial instruments such as shares of foreign companies in order to increase the overall return of the fund. The total transfers of the fund in relation to GDP for the last 10 years have been estimated and the forecast for the size of the fund at the end of 2022 has been made. The size of the fund is still at a sufficient level and is a reliable safety cushion for the economy of Kazakhstan during periods of adverse external factors

Will the regime ever break? Assessing socio-political and economic pressures to climate action and European oil majors’ response (2005-2019)

ABSTRACT The extensive use of fossil fuels in recent decades is a well-known cause of the climate crisis. Climate action inevitably requires the strategic reorientation of industries that are part of the fossil fuel regime. International oil companies are central to this regime and possess the incumbent’s characteristic power and influence to steer this process. However, European international oil companies continue to invest in fossil fuels, even as they acknowledge the climate crisis imperative. Socio-political and economic dynamics can either reinforce the oil regime or pressure firms to take climate action. We aim to comprehensively analyse the dynamics between external socio-political and economic actors’ pressures to climate action on the one side, and the industry response on the other, from 2005 to 2019, using Geels Triple Embeddedness Framework. Drawing on a wide range of qualitative and quantitative longitudinal data (e.g. regulations, oil and renewables market trends, companies’ investments in oil, renewables, and low-carbon technologies), we characterised the pressures and responses of the different analytical categories and established three phases. The results indicate that policy pressure on the oil regime in this period lacked constancy and comprehensiveness. The Kyoto Protocol ratification produced an initial momentum that prompted some companies to invest in alternative fuels and renewables, but efforts faded after 2010. Societal calls for a transition from fossil fuels and divestments from oil companies have risen since 2017. Recent socio-economic pressures combined with policy pledges for net-zero emissions have prompted all companies to invest beyond fossil fuels. However, efforts are still marginal and additional advancements in climate policy are necessary to foster the renewables market and to promote the phase-out of oil. Key policy insights Europe lacks a comprehensive policy framework to support the fast deployment of available alternative fuels. Policies need to foster the development and adoption of alternatives to petrochemical products, alongside their reduction and recycling. Apart from supporting renewable energy and other alternatives to oil, policies also need to target the phase-out of oil and send a clear signal to companies.

The determinant of Chinese foreign direct investments in oil exporting African countries

AbstractThe observed presence of China in the top 18 oil/minerals exporting countries in Africa warrants special interest, as the engagement has extended considerably to appear as an influential, hitherto questionable, South–South cooperation. In this study, the determinants of China's Foreign direct investment (FDI) stock and flow from 2003 to 2017 is examined using Ordinary least squares (OLS), generalized least squares (GLS) and Instrumental Variable 2‐Stage Least Squares techniques. The results indicate that oil/minerals and agricultural imports facilitate more FDI, and political instability spurs more FDI. Overall, this study recommends that policymakers should enhance trade policies to improve the sustainability of China–Africa engagement.

Application of the Delayed Royalty Framework for Onshore Petroleum Investment in Nigeria Using the 1993 Production Sharing Contract

The 1993 production sharing contract (PSC) in Nigeria specifies different royalty rates for oil and gas investment. The royalty rates were fixed. This makes the fiscal arrangement to be regressive in nature. Royalty rate of 20% is to be paid for onshore investment using the 1993 PSC. Hence, there is a need to make the fiscal arrangement progressive. The delayed royalty framework was incorporated into the1993 PSC as a progressive measure to make it dynamic. Two economic models were developed using spreadsheet technique to evaluate the impact of the delayed royalty framework on onshore petroleum investment. The 1993 PSC fiscal framework was used to develop the economic models. The delayed royalty framework was incorporated into one of the models. The delay in royalty payment hinged on the payout period of the investment. It was observed that the delayed royalty framework increased the contractor’s revenue during the period of low oil price. Thus, increasing the sustainability of the investment during period of low oil price.

Energizing Comparative Environmental Politics and Comparative Political Economy

Energizing Comparative Environmental Politics and Comparative Political Economy

Predicting the Oil Investment Decision through Data Mining

Petroleum investment decision remains subject to economic and financial research for decades. Due to capital intensive and higher risk on oil exploration, the investment decision has become more important than ever before. This study aims to shed some light on this issue by conducting four machine learning algorithms to predict the decision applying the dataset from 2007-2019. This study includes the Decision Tree, Random Forest, Naïve Bayes, and Support Vector Machine. A comparative performance analysis is the illustrated using confusion matrix, Cohen’s Kappa value, and the accuracy of each model and Area under the ROC Curve. In this study, a machine learning approach was carried out on the oil exploration data. The findings demonstrate that Naïve Bayes has the most accurate performance for the classification (94.5%), followed by Decision Tree (92.9%), Random Forest (90.9%), and Support Vector Machine (89.6%). In practice, the selected Naïve Bayes model was applied to assess the decision using a new data test. The findings can diminish the subjective blindness and confirmation bias in the investment decision and bring about a reasonable and orderly exploration and development of petroleum reserves.

Causal effect between balance of payment and foreign direct investment in oil and gas sector in Nigeria

The study examined the effect of balance of payment on foreign direct investment on the oil and gas sector in Nigeria. The study used ex-post facto research design and the population is made up of 5 oil and gas foreign investors in Nigeria. The sample size is the 5 oil and gas foreign investors. The study relied on reports from Central Bank of Nigeria for secondary data. The study employed various procedures in analysing the data such as correlation matrix, unit root test, co-integration and vector error correction model. The study found that causality ran from balance of payment to multinational corporations in Oil and Gas sector in Nigeria in terms of foreign direct investment which implied that balance trade openness caused increase in the inflow of FDI in Oil and Gas sector of Nigeria. This implied that balance of payment attracted more inflow of FDI in Oil and Gas sector in Nigeria. The study recommended that balance of payment policy in Oil and Gas should be formulated to encourage inflow of foreign direct investment in the sector in Nigeria. Government of Nigeria should seek for the assistant of Organization of the Petroleum Exporting Countries (OPEC) to direct investors in Oil and Gas to refine the oil and gas in Nigeria without exporting the raw material to their home country.

On Building a Model for the Efficient Development of the Oil and Gas Industry

Aim. The presented study aims to build a model for the efficient development of the oil and gas industry in the long term. Tasks. The authors investigate the peculiarities of the development of the oil and gas industry in the Russian Federation at the present stage when the COVID-19 coronavirus pandemic has had a significant impact on the reduction of oil production and global demand for oil and petroleum products; identify strategic directions for the development of the oil and gas industry in Russia and substantiate the need for government measures to support the oil and gas industry, including the possibility of forming innovative investment resources and reducing the tax burden in combination with a global shift away from fossil fuels, which will ensure more efficient use of oil and gas reserves. Methods. This study uses the theory and methodology of strategizing developed by academician V.L. Kvint as a basis for determining strategic directions and priorities for the development of the oil and gas industry. An economic and mathematical regression model for predicting the volume of oil production in the Russian Federation over the next five years is developed with allowance for the priorities of the methodology under consideration. Results. Substantiation of the projected values of oil production increases the preparedness of Russian oil companies and the government, allowing them to respond to various scenarios in the future and thus making it possible to develop an efficient strategy based on preventive measures to reduce the impact of oil price volatility on the Russian economy. Calculations show that Russia will most likely not be able to fully realize its production potential. In the long term, oil production will naturally decline due to the depletion of the resource base. One of the prerequisites for the successful operation of oil and gas enterprises is their orientation towards an innovative strategy in the context of sustainable development. Conclusions. The era of cheap oil and unexpected profits from hydrocarbons is gradually coming to an end. Therefore, strategically important directions for the oil and gas industry include the modernization of technologies and equipment by attracting investments in oil and gas enterprises and the development of the industry’s infrastructure, diversification of the refining industry, reduction of crude oil exports, and increased exports of finished petroleum products.

Risk transmission between old and new energy markets from a multi-scale perspective: the role of the EU emissions trading system

ABSTRACT The trading market of carbon emission permits is not only an effective tool for tackling climate change, but it also reinforces the connection between carbon and energy markets by risk transmission. This paper investigates the volatility spillover effects and dynamic correlation between fossil energy, clean energy and the European Union carbon markets by applying the asymmetric BEKK- and DCC-GARCH models in a time-frequency framework and designs the portfolio strategies. Empirical results display that fossil energy market has a significantly positive impact on the clean energy market at most scales, but the feedback transmission is relatively weak. Two indirect volatility spillover effects exist between the three markets, which are ‘fossil energy→carbon→clean energy’ and ‘clean energy→carbon→fossil energy’, suggesting that the carbon market plays a vital role in bridging the clean and fossil energy markets. Significant time-varying asymmetric effects are identified between the three markets, and the carbon market is confirmed to offer the least expensive hedge to an investment in oil. Our findings can provide meaningful implications for policymakers to design market mechanism and investors to adjust hedging strategies and diversify their portfolios.

The Multiple Impacts of the COVID-19 Pandemic on China’s Oil Security and the Rising Green Opportunities

The COVID-19 pandemic has seriously challenged the global oil market, and coronavirus-induced oil prices crash, oil demand decline and global economic recession affect China’s oil supply as well. China has high oil vulnerability due to its rising oil import dependency which aggravates Beijing’s concerns about oil security, despite at a time of the pandemic-induced oil oversupply. This study uses the SWOT analytical model to identify the strengths, weaknesses, opportunities and threats in China’s oil sector, and the changes in opportunities and threats caused by the COVID-19 pandemic. The pandemic has brought multiple impacts to China’s oil security. Results from the analysis show that the existing opportunities such as oil investments in the Belt and Road Initiative (BRI) and domestic upstream opening-up have been weakened; new threats that the uncertainty over global oil demand-supply and decrease in global upstream investments have emerged; opportunities that an increase in domestic strategic petroleum reserve (SPR) and low-carbon development are rising amid the pandemic. Notably, the COVID-19 pandemic has demonstrated the vulnerability of the global oil market to systemic risks and accelerated the transition to renewable energy.

The Multiple Impacts of the COVID-19 Pandemic on China’s Oil Security and the Rising Green Opportunities

The COVID-19 pandemic has seriously challenged the global oil market, and coronavirus-induced oil prices crash, oil demand decline and global economic recession affect China’s oil supply as well. China has high oil vulnerability due to its rising oil import dependency which aggravates Beijing’s concerns about oil security, despite at a time of the pandemic-induced oil oversupply. This study uses the SWOT analytical model to identify the strengths, weaknesses, opportunities and threats in China’s oil sector, and the changes in opportunities and threats caused by the COVID-19 pandemic. The pandemic has brought multiple impacts to China’s oil security. Results from the analysis show that the existing opportunities such as oil investments in the Belt and Road Initiative (BRI) and domestic upstream opening-up have been weakened; new threats that the uncertainty over global oil demand-supply and decrease in global upstream investments have emerged; opportunities that an increase in domestic strategic petroleum reserve (SPR) and low-carbon development are rising amid the pandemic. Notably, the COVID-19 pandemic has demonstrated the vulnerability of the global oil market to systemic risks and accelerated the transition to renewable energy.

Econometric Model for Indonesian Fiscal and Monetary Policies in Oil & Gas Sector

Indonesia has been an oil exporting country since 1965. Indonesia is currently in a period of declining in production but an increase in consumption has caused a trade deficit that continues to increase over time. Continuous production decline reflects limited discovery as a result of declining investment. The focus of the study is to evaluate variables affecting lifting, reserves and investment in oil and gas sector. Several VAR or VECM panel models are built to provide empirical evidence. The results of the empirical study give a recommendation for both fiscal and monetary policies. The impact of interest rate on investment is less significant, but the exchange rate and inflation are higher on investment. Therefore, monetary policy should be directed toward controlling inflation and moderate intervention from Central Bank to retard depreciation of Rupiah. The success rate of exploration activities to increase reserves is proven empirically relatively low. The Application of more advanced technology supported by R&D is an important component of fiscal policy so incentives need to be added to these two things to increase the success rate of exploration activities. Misinterpretation that cost recovery does not increase lifting can be corrected because the response of lifting due to cost recovery is positive. Government should reconsider the policy of eliminating the PSC Cost Recovery system by considering empirical evidence from the results of this study which proves misconceptions about cost recovery. The PSC Cost Recovery system is recommended to be reinstated in the future with improvements.

Green bonds in Sweden and Norway: What are the success factors?

Transition to a low-carbon economy to achieve the Paris Agreement goal requires substantial investments. The green bond market shows good potential to help mobilize financial sources towards sustainable investments. In this paper, we compare the uptake of green bonds in Norway and Sweden from 2013 till 2019, with the aim to understand what drives the green bond market. Our study is one of the first comparative analyses specifically designed to explain differences in green bond uptake between two similar financial markets. The analysis can help us to identify factors that are transferable to other countries and that therefore can be important for facilitating the growth of green bonds in different markets. Data shows that there has been a faster growth in issuances in Sweden than Norway, and especially for the corporate sector and municipalities. When interviewing experienced green bond market participants in Norway and Sweden, we find that likely explanations are a business culture and financial institutions more focused on sustainability in Sweden, as well as a larger and more diversified corporate sector. In Norway, green bonds uptake may have been hampered by competition with high yield investments in oil & gas and shipping, a ‘green’ energy sector that considers green bonds to be superfluous, and many municipalities that are too small for green bond issuance. The experience from Sweden indicates that other countries wanting to facilitate uptake of green bonds should emphasize leadership on sustainability, collaboration between green bond issuers and investors, and active communication, high visibility, and thorough disclosure of sustainable finance activities.

Forecasting the volatility of crude oil futures: The role of oil investor attention and its regime switching characteristics under a high-frequency framework

The purpose of this article is to investigate whether oil investor attention (OA), measured by Google search volume, contains incremental information content to predict crude oil futures volatility under high-frequency heterogeneous autoregressive (HAR) model specifications. Moreover, to account for possible structural breaks and nonlinearity in the relation between OA and crude oil volatility, this article extends HAR-type models with regime switching considerations. The results of parameter estimation and out-of-sample prediction show that the in-sample and out-of-sample performance of HAR-type and Markov switching (MS)-HAR-type models with OA is significantly better than that of their corresponding HAR-type and MS-HAR-type models without OA. Furthermore, our findings suggest that (i) HAR-type-OA models tend to produce better forecasts for the volatility of the crude oil market at short horizons (1-day) compared to HAR-type, MS-HAR-type and MS-HAR-type-OA models. (ii) MS-HAR-type-OA models have the best forecasting performance at relatively long prediction horizons (1-week and 1-month). Therefore, the result suggests that the OA and regime switching specifications have a significant positive impact on volatility predictions and can be useful for improving the performance of HAR-type models.

How valuable is the option to defer Uganda's crude oil production?

Our study contributes to the limited literature on real options valuation of Africa's oil investments. We establish binomial lattices to assess the value of the option to defer crude oil production in Uganda. We assume that oil prices follow a Geometric Brownian Motion (GBM) stochastic process. In our base case, we find that deferring production by another year adds value of $0.9 billion to the oil project. The value of the option to defer production particularly increases at lower crude oil prices amidst higher crude oil price volatility. When the rate of net convenience yield is high and the oil price is high, the value of the option is lower. At low oil prices, increases in cost inflation result in rejection of the project. We conclude that the Uganda oil project is generally profitable, and that deferring oil production is justified except in the cases where the net convenience yield or cost inflation is high.

Is bioeconomic potential shared? An assessment of policy expectations at the regional level in Colombia

ABSTRACT As other technological promises, bioeconomy has raised expectations as a burgeoning field for the economy. Policy work in Colombia claims that such current focus on ‘bio’ should be profited by the country given its regional mega-diverse potential. Yet, the question remains to what extent such arrangements are shared regionally, in a country exhibiting variegated multi-cultural drivers and differentiated bio-potential. This paper tackles this question, assessing national policy documents and regional oil and mining royalties investment in the period 2012–2019. Conceptually, we build on the notions of integration and convergence to read regional funding and niche development as evidence of multi-level expectations. We combine content analysis, descriptive analysis and social network analysis to assess expectations at the macro, meso and micro levels. Results show that there is not a consistent regional translation of the discourse on bioeconomy, showing dispersed views about how to render bioeconomy real. Higher education institutions and regional governments play a central role in keeping the network together; however, the lead has been taken by regional governments.

Mature offshore oil field development: Solving a real options problem using stochastic dual dynamic integer programming

Oil and gas companies are facing low output prices and are forced to focus on the development of mature fields. Relevant investment decisions for operators include lifetime-enhancing activities, such as drilling new wells or permanent shutdown. We study the problem of optimal timing of investments in mature oil and gas fields in the presence of price uncertainty, which is an example of a complex real options problem consisting of a portfolio of interdependent options. We formulate a multistage stochastic integer programming model that incorporates a detailed representation of the uncertain oil price, and demonstrate how such a complex real options problem can be efficiently solved using the Stochastic Dual Dynamic Integer Programming algorithm. The paper presents a numerical example based on realistic data and discusses our computational results. We find that only a small number of Markov states are required to represent the uncertain price process, while obtaining convergence of the lower and upper bounds of the objective function. The value of stochastic solution of 11% is considerable in this example. It is concluded that the shutdown decision tends to be postponed as a result of high decommissioning costs, high discount rates, high price uncertainty and low operational expenditures, while it generally is accelerated if the decommissioning costs increase over time.

The challenges of oil investing: Contango and the financialization of commodities

The ability of oil investment vehicles to perfectly track spot oil has always been challenging; however, recently many vehicles have underperformed spot oil. We study the behavior of oil futures and exchange-traded products that invest in oil futures to document and understand the source of this tracking error. The primary reason why oil investment vehicles have underperformed spot oil is an increase in contango in oil futures markets that we find might be related to investment crowding and the financialization of commodity markets. We show that from 2006 to 2017, oil futures investing underperformed spot oil and the market was in contango most of the time. Proxies for crowding, such as the concentration of major oil investors and changes in assets under management and fund flows of major oil exchange-traded products, are associated with contango in the futures markets and the divergence between futures and spot returns. We also provide evidence of an impact of the financialization on oil futures prices.

Permanent Sovereignty over Natural Resources and Contract Stability in Transnational Petroleum Investment Contracts

This paper makes a critical analysis of the principle of permanent sovereignty over natural resources and contract stability as applicable to transnational petroleum investment contracts. It considers the extent to which these concepts affect foreign direct investment in the petroleum industry. This work further demystifies the theory of contract stability as a panacea to the tense environment contrived by the principle of permanent sovereignty over natural resources. The doctrine of pacta sunt servanda as applicable to stabilization clauses is considered towards explicating how it procures stability in oil investment contracts. In this wise, other like devices like renegotiation, clausula rebus sic stantibus, etc are not left out, particularly as they introduce some element of flexibility and attenuate the hardships that might arise due to strict insistence on the application of principle of pacta sunt servanda to the dynamics of the petroleum industry. This work adopts the synthesis and analysis as well as the comparative methodology in reviewing the relevant materials consulted in the course of this work. It argues that parties to transnational petroleum contracts should pursue stability in such agreements through the employment of such devices that ensure flexibility within the context of a dynamic petroleum industry. Keywords: Permanent Sovereignty, Contract Stability, Petroleum Investment Contract, Stabilization Clauses DOI: 10.7176/JLPG/111-09 Publication date: July 31 st 2021

How does geopolitical uncertainty affect Chinese overseas investment in the energy sector? Evidence from the South China Sea Dispute

Based on Chinese outward foreign direct investment data, this study examines the impact of the South China Sea Dispute on China's overseas investments in oil & gas-related sectors. The South China Sea Dispute alarms a potential threat to China's energy supply. By applying a difference-in-difference estimation, we find that the South China Sea Dispute brings about an increase in the frequency of China's oil & gas-related investments to low-risk countries. The findings are robust under several specification tests. It indicates that under geopolitical uncertainty environment, energy-importers will reallocate energy investment in order to avoid the potential disruption of energy supply.