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Oil and Gas Industry

Oil and Gas Industry. Darren Prins Dylan Watson Jorge Cruz Ian Harcus Lisa Banxachai. Outline . Introduction Industry overview Risk analysis Suncor Corporate Profile Risk Management Canadian Oil Sands Corporate Profile Risk Management. Oil and Gas Industry Structure.

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Oil and Gas Industry

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  1. Oil and Gas Industry Darren Prins Dylan Watson Jorge Cruz Ian Harcus Lisa Banxachai

  2. Outline • Introduction • Industry overview • Risk analysis • Suncor • Corporate Profile • Risk Management • Canadian Oil Sands • Corporate Profile • Risk Management

  3. Oil and Gas Industry Structure • The oil and gas industry is a branch of the Energy Industry • Oil and Gas Industry components: • Upstream operations (Exploration) • Midstream operations (Refining) • Downstream operations (Distribution and sales) • The industry is pro-cyclical (it is positively correlated with the business cycle) • Pro-cyclical demand • There have been negative supply shocks (1970’s OPEC and current OPEC quotas) • Barriers to entry due to high capital requirements

  4. Oil Industry Structure • Global Industry: • Top 10 Oil Producers and Consumers

  5. Oil Industry Structure • Global Industry: • Largest Oil Companies by production (Oil and Gas Journal, 1999) • State-owned companies are marked with a star * Oil & Gas Journal, 1999 http://www.gravmag.com/oil2.html

  6. Oil Industry Structure • Global Industry: • Technically Recoverable Reserves: the amount of oil that experts are certain of being able to extract without regard to cost from Earth • Only a small fraction of the World’s Technically Recoverable Reserves can be extracted at current prices. • Of the known oil reserves that can be profitably extracted at current prices, more than half are in the Middle East; only a small fraction are in North America.

  7. Oil Industry Structure • Global Industry: • World Oil Demand is projected to grow by over 2 percent in 2004 and 2005. • On the supply side, oil inventories have been low for the last year and are expected to remain the same for 2004 and 2005

  8. Oil Industry Structure (North America) • US: General aspects • The United States is the world's largest energy producer, consumer, and net importer. It also ranks twelfth worldwide in reserves of oil • During 2002, the United States produced around 8.1 million barrels per day Energy Information Administration: http://www.eia.doe.gov

  9. Oil Industry Structure (North America) • US: Imports • US oil demand has been increasing by 3% on average • Imports from: • Persian Gulf • Mexico • Canada • Venezuela Energy Information Administration: http://www.eia.doe.gov

  10. Oil Industry Structure (North America) • US: Sector Organization • Merger activity in the oil business accelerated sharply during 2000 and 2001 (before slowing considerably in 2002 and early 2003). • The largest merger/acquisition announcements came from BP and Amoco, Exxon and Mobil, BP Amoco and ARCO, and, most recently, Chevron and Texaco

  11. Oil Industry Structure (North America) • US: Production • Top producing areas as of 2002: • Gulf of Mexico (1.6 million bbl/d) • Texas onshore (1.1 million bbl/d) • Alaska's North Slope (954,000 bbl/d) • California (707,000 bbl/d) • Louisiana onshore (274,000 bbl/d) • Oklahoma (181,000 bbl/d) • Wyoming (150,000 bbl/d).

  12. Oil Industry Structure (North America) • Canada: General aspects: • Canada was the fifth-largest energy producer in the world in 2001: • 39% natural gas • 25% oil • 20% hydropower • 11% coal • 5% nuclear power • 3rd largest producer of natural gas • 9th largest producer of crude oil • Oil sands account for approximately 30% of Canada’s total oil production • According to Oil & Gas Journal, Canada's total crude oil reserves stood at 180 billion barrels as of January 2003 • Annual Production Average: 2.9MM bbl/d • Annual Consumption Average 2.0MM bbl/d • Exports 2002:1.5MM bbl/d crude (to US)

  13. Oil Industry Structure (North America) • Canada: General aspects: Energy Information Administration: http://www.eia.doe.gov

  14. Oil Industry Structure (North America) • Canada: Exports • Canada is a major source of U.S. oil imports. In 2002, the United States imported 1.97 million bbl/d of oil from Canada. • This makes Canada the top petroleum supplier to the United States and the third-largest supplier of crude oil imports (behind Saudi Arabia and Mexico, and ahead of Venezuela). • Canada has been the top supplier to the United States of refined petroleum products, including gasoline, jet fuel, distillate, etc., since 1996. Energy Information Administration: http://www.eia.doe.gov

  15. Oil Industry Structure (North America) • Canada: Exports CAPP: www.capp.ca

  16. Oil Industry Structure (North America) • Canada: Sector Organization • Significant mergers and acquisitions in recent years. • In 2001, U.S. firms purchased over $35 billion in Canadian oil and gas assets including the purchase of Gulf Canada. • EnCana Corp. was the result of the merger between the 2 largest Canadian oil companies. It is now the world's largest independent oil and natural gas producer (by market value).

  17. Oil Industry Structure (North America) • Canada: Sector Organization CAPP: www.capp.ca

  18. Oil Industry Structure (North America) • Canada: Exploration and Production • The industry is based primarily in Alberta • The Athabasca Oil Sands deposit, in northern Alberta, is one of the two largest oil sands deposits in the world (Oil Sands) • Atlantic Coast: Mainly in Newfoundland • Pacific Coast: The British Columbia government is pushing to lift a 30-year-old ban on exploration in the Pacific Ocean in order to begin production by 2010.

  19. Oil Industry Structure (North America) • Canada: Main Producers • EnCana • Syncrude (a joint venture of eight companies with Canadian Oil Sands Investments Inc. having the largest stake) is Canada's largest producer of crude from oil sands. • Suncor, the first company to begin processing Alberta oil sands in 1967, completed in 2001 its Project Millennium, which increased production capacity to 225,000 bbl/d • Shell Canada Limited • Chevron Canada Limited (a wholly owned subsidiary of ChevronTexaco Corp.) • Western Oil Sands Inc • Canadian Oil Sands

  20. Oil and Gas Industry Structure (North America) • Canada: Natural Gas • Canada is the third largest natural gas producer (after the United States and Russia) • Second largest natural gas exporter (after Russia). Energy Information Administration: http://www.eia.doe.gov

  21. Products • Products Being Produced: • Oil: • Gasoline • Kerosene • Jet Fuel • Lubricants • Natural Gas • Major Substitutes • Nuclear Power • Hydrogen • Hydropower • Coal • Methane • Solar energy

  22. Regulations • Global: • The United States maintains energy sanctions against several countries, including Iran and Libya • OPEC regulate its members oil production

  23. Regulations • Canada: • Government: • Efficiency and market regulations (National Energy Board and Office of Energy Efficiency of Natural Resources Canada) • Environmental Regulations (Environment Canada) • Property Regulations (Provincial Government and Federal Government) • Self-regulation: • Canadian Association of Petroleum Producers (CAPP)

  24. Major Risks • General Business risk (production and sales uncertainty) • Financial and commodity market risk: (interest rate risk, FX risk and in the form of volatile oil and natural gas prices) • Excessive Cash Flow fluctuations • Credit risk and liquidity risk: (Counterparty failures (airlines, etc.)) • Operational Risk: (Pricing) • Legal risk: (contract enforcement, i.e. OPEC) • Environmental Regulations: Kyoto Protocol and growing environmental concerns (Canada ratified the Protocol in December 2002) • Other: • Accidents:Plant, equipment and frontline employees • Lack of diversification (assets and current and future investments) • Exploration and Development

  25. Risk Measurement • Sensitivity analysis: • On cash flows sensitive to: • Oil and gas prices • Interest rates • FX changes • Further developed with: • Probability calculations for movements in prices, interest rates and FX.

  26. Available products and techniques for risk management • Derivatives are at the center of the risk management for these companies: • Major Products for risk management: • Energy Futures traded in COMEX • FX Futures traded in CME • OTC Forward contracts (oil, gas, etc) • Interest rate and FX SWAPS • Options: Costless Collar • Other products used for corporate purposes: • Managerial Stock options • Warrants • Puts (used in stock repurchase programs)

  27. Available products and techniques for risk management • Costless Collar:

  28. Available products and techniques for risk management • Costless Collar: • A collar (or fence) is a spread comprising a long (short) call and a short (long) put, both out-of-the-money and for the same expiration. The strikes can be chosen so that the purchase (sale) price of the call exactly offsets the sale (purchase) price of the put so the spread is a costless collar.

  29. Hazards from risk management activities • Decreased earnings • Liquidity pressure • Potential loses from hedging

  30. Corporate Profile • Integrated energy company (Canada/US) • Core business is Oil Sands • Fort McMurray, Alberta • Market capitalization: US$11.790 Billion • 3400 employees • Oil Sands, Natural Gas, EM&R

  31. Growth Strategy • Developing and Expanding Oil Sands • facilities to increase the production of crude oil • Controlling costs • Reducing natural gas price risk • producing volumes exceeding internal demand • Developing new marketing • further integrate Suncor’s upstream and downstream business • Managing environmental and social performance

  32. Financial Statement Analysis • Income Statement • Balance Sheet • Statement of Cash Flow

  33. Financial Highlights

  34. Project Millennium

  35. Financial Highlights

  36. Cost Structure

  37. Pipeline Network – Oil Sands Production

  38. Sensitivity Analysis

  39. Risk Exposure • Fluctuations in prices of: • crude oil • natural gas • Currencies exchange rates • Canadian $ earnings to US $ • Interest rates • cross-currency • Counterparty Credit Risk • High credit rating counter-parties • Environment legislation • KYOTO

  40. Risk Management Philosophy • Suncor cannot predict or control prices • Reduce exposure to market volatility and support the company’s ability to finance growth (artificial spot price range) • To manage interest or currency-sensitive assets and liabilities (ex. Bonds) • Has Audit committee that works with BOD • Assess hedging thresholds in light of price forecast and cash

  41. Hedging Instruments Used • Swaps • Crude Oil – Hedging Program • Interest Rate • Swapping floating rate and fixed rate interest payments • Foreign Currency • Options • Costless Collar

  42. Crude Oil Hedges

  43. Crude Oil Hedges

  44. Crude Oil Hedges • Hedged 3-4 years out; convenience yield

  45. Interest Rate/Foreign Exchange Swaps Hedged 9 years out; term structure of prices of currency constant

  46. Adverse Hedging Effects • Decreased earnings by: • $160 million (2002) • $148 million (2001) • Reduce potential benefits of favorable changes in commodity prices and exchange rates • Artificial spot price range created by the hedging program

  47. Executive Compensation • Executive Stock Plan • Granted 1.8 million options to executives • 10 year life, exercisable immediately • Exercise price=market value at expiration • Old Plan (1997-2002) • Cash payments of $34 million to employees

  48. Executive Compensation • New Stock Option plan (SunShare) • Granted 9 million options to all eligible staff • 10 year life, 10 year vesting period • Accelerated vesting by meeting performance targets • Issued at-the-money (zero expense) • Possible adverse affects due to lack contingency

  49. Executive Compensation

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