Investing in Energy: A Primer on the Economics of the Energy Industry

Preface xiii

Acknowledgments xv

Part I: Introduction and Financial Considerations

Chapter 1 Historical Perspectives 3

Oil and Gas Producers 4

Production Perspectives 5

Importance of Reserves 6

Regulatory Environment 7

Alternative Energy Forms 8

Alternative Energy Growth 8

Energy Investment Cost Considerations 12

Concluding Thoughts 12

Chapter 2 Investment Opportunities in Energy 15

Asia Comes of Age 15

Australia’s Natural Gas Boom 16

Brazil Beckons with Deepwater 17

Iraq’s Road to Recovery 20

North American Unconventional Natural Gas Plays 23

Solar Power Generation 24

Concluding Thoughts 24

Chapter 3 Cash Flow and Liquidity at Various Crude Prices 27

Independent Oil Companies 27

National Oil Companies 28

Capital Expenditure Planning 29

Liquidity—Cash Is Still King 31

Liquidity Metrics 32

Cash-Flow Considerations 32

Cash-Flow Metrics 33

Leverage 33

Concluding Thoughts 34

Chapter 4 Capital Structure and Capital Markets 37

Capital Structure 37

Investors 39

Alternative Energy Subsidies 42

Concluding Thoughts 43

Chapter 5 The Quarterly Earnings Disconnect 45

Short Term versus Long Term 45

Business Risks 49

Concluding Thoughts 50

Part II: Crude Oil and Natural Gas

Chapter 6 Analyzing Reserves 53

Authorities on Reserves 53

Proven Reserves 54

Industry Nomenclature 54

Proven Reserve Criterion 55

Unproven Reserves 57

Certification Process 58

More on Reserve Authorities 59

Measuring Reserves 61

Concluding Thoughts 63

Chapter 7 Crude Oil Markets and Production 65

The Crude Oil Markets 65

Benchmark Crudes 65

Inventory Levels 67

Crude Oil Quality 67

Crude Oil Markets 68

Concluding Thoughts 74

Chapter 8 Natural Gas Markets and Production 75

De-Coupling of Natural Gas from Crude Oil 75

Conventional Natural Gas Production 76

North American Unconventional Natural Gas Shale Plays 77

Canadian Natural Gas Markets 78

Natural Gas Markets 79

LNG—Fuel for the Future 81

Natural Gas Storage 81

Natural Gas as a Utility 82

Natural Gas—The Cleaner Fuel 82

Concluding Thoughts 83

Chapter 9 Understanding Refining Economics 85

The Business Model 85

Challenge for Independent Refiners 86

Physical Crude Oil Trading 86

Refining Capacity, Complexity, and Utilization 87

Benchmark Crude Oils 90

Crack Spreads 90

The Challenge 93

Concluding Thoughts 94

Chapter 10 Integrated Majors and the Evolution of the Competitive Landscape 95

Role of National Oil Companies 95

The Road Ahead for Integrated Majors 97

U.S. Safety and Regulation 97

UK Environmental Program 98

Technological Challenges Abound 99

Reserve Changes 101

Concluding Thoughts 102

Chapter 11 The Oilfield Service Sector and Oil Juniors 103

The World Is Their Platform 103

Oil Juniors: Is Smaller Better? 106

Concluding Thoughts 110

Chapter 12 OPEC 111

OPEC Organization 111

OPEC Crude Basket 112

OPEC Crude Production 112

OPEC’s Role during the Financial Crisis 2008 to 2009 113

Saudi Arabia’s Role in OPEC 115

OPEC versus Non-OPEC Reserves 116

Geopolitics of Crude 117

Nationalization of Assets 117

Concluding Thoughts 118

Chapter 13 Bidding and Production Rights 119

Brazil 119

Mexico 121

Norway 123

The United Kingdom 124

Venezuela 125

Concluding Thoughts 126

Chapter 14 Analyzing State-Owned Oil Companies 127

Hydrocarbons, a Source of Revenue 127

Regulatory Frameworks 128

Concessions and Bid Rounds 129

Taxes and Royalties 129

Pensions and Legacy Support 129

Transparency 130

Social Programs 130

Capital Markets 131

Mexico’s PEMEX 131

Ownership Structure 132

Hybrid-Capital Companies 132

Concluding Thoughts 136

Chapter 15 Crude Oil Pricing and Industry Investment 137

Higher Crude Prices Impact Demand 137

Global Oil Imbalance 138

Unprecedented Financial Crises 139

Great Commodity Collapse of 2009 140

Leverage Creep 141

Improved Market Fundamentals 142

Investment Outlook 142

Concluding Thoughts 143

Part III: The Power Sector

Chapter 16 Hydroelectric Power 147

Advantages 148

Disadvantages 149

China 150

Brazil and Paraguay 151

Concluding Thoughts 152

Chapter 17 Nuclear Quagmire 153

The Issue: Nuclear Waste 153

The Benefits 154

Nuclear Power in the United States 154

The Future of Nuclear Energy 156

Nuclear Energy in France 157

Concluding Thoughts 159

Chapter 18 Geothermal and Wind Energy 161

United States 162

Philippines 162

Wind Generation Energy 163

Denmark 164

United Kingdom 165

Concluding Thoughts 165

Chapter 19 Solar Energy 167

Types of Solar Energy 167

Spain 168

Germany 170

Concluding Thoughts 171

Part IV: Green Energy Chapter 20

Biofuels and Ethanol 175

Biofuels Development 175

Ethanol Development 177

Concluding Thoughts 182

Chapter 21 Cleaner Coal 183

Coal as a Fuel Source 183

Cleaner Coal 186

Concluding Thoughts 189

Part V: Summary and Conclusion

Chapter 22 Opportunities and Challenges in Green and Traditional Energies 193

Renewable Energy 193

Cap and Trade 195

Natural Gas Opportunities 196

Offshore Drilling Challenges 197

Concluding Thoughts: Energy Independence—A Strategic Imperative 197

Appendix: Energy Equivalent Conversions 199

Glossary 201

About the Author 205

Index 207