It is impossible to imagine the modern world without energy. People got used to live in warm houses, the greatest plants work on the basis of the products oil and gas industry supplies them with. This high demand on energy in different forms makes it impossible for the modern economy function without it. Oil and gas industry is considered to be the most impacting in the whole world as well as in the USA.
The Purpose of the Research
The main purpose of the research is to consider how oil and gas industry affects the economy of the country. It is important to understand that the financial value of the industry is not the only an issue which is considered to be influential at the financial market, labor market is also affected at great extend.
The Effect of Oil and Natural Gas Industry on the Economy
The General Impact of the Industry on the Economy of the USA
The general impact of the oil and gas industry may be divided into three main measures, direct impact, indirect impact, and induced impact. Direct impact is understood as the jobs and added value which are considered within the industry. Indirect impact is followed within the industries which deal with the products offered by the oil and gas industry. Induced impact is considered as the use of the income resulted from the oil and gas industry. Almost each country in the world deals with this industry and it is possible to say that the impact of this industry is great (“The Economic Impacts” 9). It is crucial to consider the financial importance and the significance of the industry as the employee in detail.
The Impact of Oil and Natural Gas Industry on Business and Finances
Dwelling upon the impact of the oil and gas industry on the economy of the country, business sector cannot be omitted. The great impact of the industry on business may be explained as follows, the industry spends money which is further spent by local businesses and recipient employees; then businessmen purchase different goods and hire employees who get salaries and spend them on state economy. This is an indirect impact of the oil and gas industry on the USA economy (“The Economic Impacts” 14).
The demand on the products manufactured in the industry has been increasing from year to year. With the rise of the prices on the oil and gas, capital investments increased as well. This influenced the level of revenue in the industry and the rate of taxes the industry pays to the national treasury.
The production of the crude oil in 2005 was valued at $45.2 billion. The increase of the natural gas production is measured by the increase on 312% from 1997. The export of gas and oil brought the country value at $45.2 billion in 2006. The contribution to the gross domestic product in 2005 was about $5.1 billion (Williams 9).
The Effect Oil and Natural Gas Industry Provides on Labor Market
The impact of the considering industry on the labor market in the whole world and in the USA is crucial. More than 7.8 million employees were involved in the oil and gas industry in the USA, according to the information collected in 2007. If to pay attention to the total employment contribution to the national economy, including the related jobs, the industry managed to provide 9.2 million employees in 2007. This is 5.7% of the whole employment in the USA (Pennsylvania Economy League of Southwestern Pennsylvania 3).
Apart from the creation of the job places within the industry, the “oil and gas industry creates jobs in related industries” (Pennsylvania Economy League of Southwestern Pennsylvania 14).
Moreover, the same report states that due to the direct impact of the industry 10,538 employees have the jobs in the industry, 5,260 employees work in the related spheres and 10,761 employers are related to the industry by means of the induced impact (Pennsylvania Economy League of Southwestern Pennsylvania 16). These results are considered only for Pennsylvania and it is may be easy to predict he results for the whole country.
Conclusion
The Summary of the Information
Thus, it may be concluded that the impact of the oil and gas industry on the country and world economy is crucial, especially if to take into account the rapid growth of the industry. Moreover, there is a tendency that more and more companies and even the whole countries become dependent on oil. It becomes not only the product, but the method for payment. The country which exports more oil and gas industry’s products is the most powerful one and can influence the price formation in the industry.
Oil and Natural Gas Industry Effect on Financial and Labor Markets
The labor and financial markets are influenced by the industry in both direct and indirect ways. Many companies have created business on the basis of the products and services produced within this industry. Many people work in the sphere, even if there is no oil and gas manufacture in the country. Many indirect job places are created on the basis of this industry.
Works Cited
“The Economic Impacts of the Oil and Natural Gas Industry on the U.S. Economy: Employment, Labor Income and Value Added.” Price Waterhouse Coopers 8 September, 2009. Print.
Pennsylvania Economy League of Southwestern Pennsylvania. “The Economic Impact of the Oil and Gas Industry in Pennsylvania.” Pennsylvania Economy League November, 2008. Print.
Williams, Cara. “Fuelling the economy.” Perspectives on labor and income 8(5): 2007, p. 9. Print.
Exxon Mobil Corporation is a multinational corporation that deals with oil and gas production. Having its headquarters located in Irving, Texas, Exxon Mobil Corporation has its shares enlisted in the New York Stock Exchange. The company as well trades its shares in Dow Jones and S&P 500 Component. The company reserves an average of 70 billion oil barrels every year.
Exxon Mobil Corporation has about 40 oil refineries brances in about 20 countries in the world. Having been formed in 1870, the company has emerged as one of the largest refiner in the world. Averagely, Exxon Mobil produces about 3.9 million barrels of oil. Exxon Mobil Corporation majorly markets its products through the brands of Mobil, Esso and Exxon (Casper & Matraves 2003, p. 112).
Global operating divisions
The company has a range of divisions, which helps the firm to carry out its activities effectively. The first category is upstream, which majorly deals with oil exploration, wholesale operations, shipping of diverse oil products as well as extraction. The upstream division is located in Houston, Texas.
The downstream division is located in Fairfax, Virginia and chiefly deals with retail operations, refining and marketing. The chemical division is as well located in Houston, Texas and mainly deals with a range of chemicals produced by the company for different purposes (Peteraf 1993, p. 7).
African National Oil Corporation
African National Oil Corporation is amongst the largest oil companies, which dominates the large part of Sub-Saharan desert. The company is based in Tripoli, Libya and merely deals with upstream and downstream products.
Founded in 1970, the company has grown to own several subsidiaries in the continent such as Zawia Refining, RASCO, Brega, North African Geophysical Exploration Company and National Oil Fields among others. Although the company is state-owned, its chairperson Nuri Berruien and Abdulrahman Ben Yezza have enabled the company emerge as one of the very competitive oil companies in the world.
African National Oil Corporation output accounts for over 70% in Libya (Wittner 2003, p. 12). Indeed, Libya is said to have the largest oil reserve in Africa. Other countries that have almost equal reserves include Nigeria and Algeria. As is the case with other countries in Africa, Libya is a member of OPEC (organization of petroleum exporting countries).
The Sirte Basin province was ranked 13th amongst other provinces in the world as having high-level of petroleum. The province is chiefly known to have reserves of 37.8 trillion cubic feet of gas and 0.1 Gbbl of natural gas in liquid form.
Libya has managed to bring its economy into control through manipulation of the oil resources policies. It has been estimated that oil products generates about 95% of the total export earnings and contributes about 50% of the GDP computed to stand at about $50.2 billion in the year 2006.
Onshore gas field
After exploring and carrying out an appraisal program in a potential oil field, which is about 200km south of the Mediterranean Sea, it was confirmed that the field needs about 150 wells, although the field will also need pipelines. The pipeline facilities would include condensation recovery facilities, as well as dehydration plants.
A pipeline of 220 kilometers would be laid somewhere in the land from the coast. In addition, a new liquefied natural gas terminal would be built. The appraisal program also confirmed that specialized LNG vessels would be built, as it would help to ship gas to a given terminal along the U.S. coast (Amable 2003, p. 46).
Exxon Mobil Power Production Sharing Contract Proposal
As scholars define it, Production Sharing Contract is a kind of contract that is signed between companies that desire to extract resources, especially oil firms and governments that own natural resources and wishing to attract contractors. Mostly, governments usually give a contractor some powers to conduct exploration related activities as well as production.
In this situation, a company always bears all risks associated with exploration and developing the field to become significant in production of a given natural resource. After a company is through with development, it may start producing a natural resource such as oil. In many circumstances, a company is always allowed to use profit from the resource in recovering its capital in addition to operating expenditures.
The amount associated with recovering the costs is widely recognized as cost oil while the profit left after allocating revenues to all oil costs is referred to as profit oil. The oil profit is normally shared between the government and the contractor. Previously, most companies have been earning 20% of the profit while government goes with a whopping 80% of the oil profit.
Production sharing contract has become effective for countries that lack expertise in oil production as well as capital required for oil exploration and development (Hollingsworth 2000, p. 45).
Most countries in Africa often attract foreign companies in production of oil related products with a view that it would be able to own production facilities after a given period. It is also apparent that most African countries lack expertise in oil production and sometimes they end up producing substandard products. Therefore, it is advisable for foreign companies to be given a chance as far as oil exploration is concerned.
Signature Bonus
Because it is mostly used in oil producing countries, the signature bonus system tends to make an upfront payment to the country owning resources. The upfront payment enables a foreign company to begin its operations within a designated locality of in the host country. Frequently, this system has been accepted because a given company has the right to exploit natural resources in an approved region.
Exxon Mobil will embrace the signature bonus initially by paying $0.1 billion before beginning its operations. The 0.1 billion is assumed that it would strongly attract ANOC in considering Exxon Mobil as the best foreign company in exploring and producing gas that will be shipped to the East coast of the U.S.
However, this figure is much high as compared to what other companies would have proposed (Kanniainen & Keuschnigg 2005, p. 145). Nevertheless, the company is hopeful that 0.1 million will be recovered within a short period. In fact, it would be more reasonable to sign for such huge bonuses given the fact that Sirte Basin province was ranked 13th amongst other provinces in the world.
Therefore, the reserves of 37.8 trillion cubic feet of gas and 0.1 Gbbl of natural gas in liquid form assures that Exxon Mobil will certainly stand a chance of compensating all expenditure expended in oil production in all fields.
The signature bonus amount is expected to put off other companies from getting the contract of producing liquefied natural gas in a field of length 220 kilometers south of Mediterranean Sea. The company expects date of operation to begin from February 15 2012 and probably stop its operation on February 15 2037.
This duration is anticipated to remain unchanged unless unpredictable events that are binding for the termination of operation occur within the duration of operation.
Exxon Mobil will comply with all requirements signed under the signature including exploiting only designated area, bringing its technology of production in the area, proving enough it has more than minimum capital requirement of 8 billion US dollars. Exxon Mobil has a good reputation of not breaking terms and conditions provided on the contract.
Royalties
Royalty is very important in power sharing contract since at this point title of ownership passes on to contractor. For the ownership to pass on to a contractor, a licensee must pay a certain amount of money commonly known as royalty fee. After a licensee have paid the royalty fee he/she is given go ahead of using natural resources provided by licensor.
In this regard, Exxon Mobil will acquire ownership for 25 years by offering an upfront payment of $.1 billion. The payment will be made before the commencement of operations. The upfront payment of $.1 billion is anticipated to give Exxon Mobil a competitive advantage over other petroleum and gas producing companies such as Galana Oil Company.
However, the company will later pay stream of a given ratio of the revenue received from operations. Nevertheless, Exxon Mobil will begin distributing annual 15% of total revenue at the end of 5th year. Exxon Mobil anticipates that it will be able to generate total revenue of 3,202,580,645 pounds at an annual basis.
Exxon Mobil believes that the remaining 85% of revenue will be able to pay for other costs associated with investment such as exploration costs, development cost and production costs, which are specifically incurred before commencement of selling of liquefied natural gas. Exxon Mobility will however, embrace sliding royalty scale, which is as shown below in order to reap optimally from the gas production.
Production per day Royalty percentage
8,000 bbl per day and below 10%
8001 bbl-15,000bbl per day 15%
15,000 bbl per day and above 20%
The above sliding scale denotes that when the production level is low royalty payment will be low. This will defend Exxon Mobil from high level of losses incurred during low level of productions (Michael & McGahan 2007, p. 231).
Cost recovery
Cost recovery is a very important aspect in power sharing contract especially with production of liquefied gas at the field, which is estimated at 200 kilometers south of the Mediterranean Sea. The cost recovery part of Exxon Mobil and ANOC contract will enable both parties to understand clearly, which costs are recoverable and which will be recovered within a designated period.
In particular, Exxon Mobil will face partly exploration costs, development costs as well as the production costs. However, production costs are only counted up to the period when a product will be able to sell in the market. Exxon Mobil will be able to determine the period within which it would be able to recoup all investment costs aimed towards producing liquefied natural gas.
Exxon Mobil will comply with 100% payment policy of all costs incurred in the operation. Exxon Mobil will be free to allow ANOC to participate in production of liquefied natural gas up to the percentage of 45%. Exxon Mobil will be ready to recover all expenditures if production of liquefied natural gas will be sufficient.
This means that the gas produced should be able to meet a target of average revenue of 3,202,580,645 pounds every year. In addition, Exxon Mobil will agree with ANOC that it facilitate recovery of annual costs with maximum of 60% of the revenue generated during the period.
Allocation of profit gas between ExxonMobil and the African National Oil Company
From the Exxon Mobil perception, it is wise to pay royalties first, although it is a law for the companies to pay royalties first. From the royalties, Exxon Mobil will as well be required by law to pay all taxes including both local and state taxes. The final payment will be charged for all costs associated with the explorations, development and production activities.
The remaining amount after the subsequent charges is normally referred as profit gas, which will be available for both ANOC and Exxon Mobil. The amount is expected to be distributed at the ratio of 6:4. To calculate the amount, which will directly go to the government, it would be necessary to get all costs.
In the case of Exxon Mobil, it is anticipated to pay annual production tax of 4%, 15% of royalty in addition to maximum (cost gas cap) of 60% of annual revenue. In this circumstance, a profit gas of 21% [100 %-( 60%+15%+4%)] will be distributed between the government of Libya and Exxon Mobil at the ratio of 6:4. This means that Exxon Mobil will only make away with 4%of the 21% average annual revenue.
However, the government of Libya will share the remaining 6% of the 21% revenue with the state-owned company at the ratio of 7:3. The percentage allocated to the state-owned company is meant to improve facilities owned by ANOC in different regions of Libya and abroad.
The government is expected to depend on the revenue for various government expenditures such as ensuring high level of education. This can be judged in such a manner given the fact that Libya oil industry makes 90% of exports (Ghemawat 1999, p. 10).
Profit taxes
Exxon Mobil will pay taxes in accordance with the law taxes provided in Libya. Libya requires that all domestic companies pay corporate tax of 30% while foreign companies will be charged at the rate of 40%. In addition, the charges are imposed at both the local level and state level. All-inclusive, it is expected that every foreign company will have to pay the entire 40% of its before-tax revenue.
The tax before revenue will be perceived as all revenues collected less all costs associated with investment and production, as well as royalty fee and the upfront bonus signature fees. In addition, the liquefied natural gas, which will consequently be transported to the East coast of the U.S.A., will as well be charged export taxes at the rate of 9%.
Accounting standards and foreign exchange
Exxon Mobil has dedicated itself towards using the full cost method in analyzing its expenses and revenues. For this reason, the company will frequently allocate its entire expenses to the balance sheet regardless of whether the firm would successfully locate the natural gas reserves or not.
The exploration costs are always indicated in the balance sheet as long-term costs although the GAAP requires all costs to be charged against the generated revenue for the specified financial period since the assets are used on a daily basis. The company is expected to convert the US dollar into sterling pounds at the rate of US $1.5 for every one sterling pound.
Export rights
Exxon Mobil will enter into contract with ANOC to allow it to export most of its unrefined liquefied natural gas to the East coast of the U.S. for further processing. Exxon Mobil will however pay the export tax of 9% of the total cost of entire liquefied natural gas shipped to the U.S.
Duration of contract phases and relinquishment
The contract is expected to last within the duration of 25 years. The 25 years include the 4 years, which ultimately do not generate any revenue. The four years will also include the payment of the yearly investment cost of US$2 billion, which will total to US$8 billion for the 8 years. In the remaining 21 years, the company expects to generate3, 202,580,645 pounds on an annual basis.
Nevertheless, termination of the contract may occur before the expiry date of the contract given that Exxon Mobil will fail to comply with the rules outlined on the contract such as failure to pay royalty fees or other costs negotiated between the government and Exxon Mobil’s directors.
Meeting predetermined objectives of ANOC
Technology Transfer
Exxon Mobil is expected to transfer sophisticated methods of productions to Libya. This will include bringing experts in gas exploitation in Libya as well as advanced facilities that would help in production of liquefied natural gas.
Exxon Mobil is focused towards training the local residents in a bid to empower them with sufficient knowledge concerning gas production as well as oil products exploitation (Besanko & Dranove 1996, p. 67).
Development Local content
Exxon Mobil will as well plan to improve the society of Libya by offering several incentives.
Infrastructure development
Exxon Mobil is focused towards helping Libya in improving its infrastructure. Exxon Mobil will particularly improve electricity in the north part on Libya. Exxon Mobil is as well planning to improve road network throughout the country with a grand of US$20 million.
Apart from roads and electricity, Exxon Mobil is dedicated towards improving the level of education by pumping in US$30 million (Gompers & Lerner 2004, p. 58).
Laying 225 kilometer pipeline
Exxon Mobil is planning to lay a pipeline approximately 225 kilometers south of Mediterranean coast. The pipeline is budgeted at US$1million for every kilometer. It is also expected that Exxon Mobil will spend 2% of the planned operational expenditure. Exxon Mobil will contract a more competitive firm.
In this respect, it would be wise for Exxon Mobil to choose PIPECO for the development as well as laying of 225-kilometer pipeline south of Mediterranean sea. The PIPECO has more competitive services as well as cost effective services that would help the entire work carried out during the production of gas effectively. The PIPECO covers the following scope.
Engineering Design
PIPECCO mostly imports its pipeline products from Germany, which are perceived to be stainless. PIPECO will help Exxon Mobil to lay pipes across the field in a manner that will run through areas, which are highly expected to have high level of gas. The company is also expecting to install about 30 natural liquefied gas terminals. The pipelines are expected to serve the area within the duration of 30 years before replacement.
Procurement
The pipeline, which will be laid on the ground, will be imported from Germany. The stainless steel pipe will be purchased at the cost of US$100 for every meter. The terminals will also be equipped with special terminals that will be purchased from France. All terminal equipments are expected to be purchased at a cost of US$1 million.
Pipeline construction
The pipeline construction will involve a number of issues including trenching, welding as well as reconstituting the route. The company will dig about 0.5 meters to 3 meters below the ground in order to lay the pipes, which will transport natural liquefied gas towards the coast to be shipped to the U.S. Welding will be done in order to allow the joining of laid down pieces of pipes across the 225 kilometer route.
The construction will begin from the inland and finalize with terminals that would be situated at the coast. The construction of pipelines is estimated to cost US$1 million for very kilometer. PIPECO is expecting that Exxon Mobil would consider this affordable as compared to what other companies might be offering (Hall & Soskice 2001, p. 89).
5 years operation
PIPECO is expecting to run and maintain the laid down pipes for about 5 years from the time of construction. PIPECO realized that it would take Exxon Mobil 4 years to execute all activities pertaining to investment during this period and therefore, it will hardly earn anything from the investment.
Exxon Mobil is expected to start generating revenue on the 5th year. Due to this, PIPECO will remain on the ground to ensure the pipes remain effective for gas production within the designated period of 5 years.
Before the installment of the pipes, PIPECO will dedicate its time in advising Exxon Mobil on the best pipes to lay on the ground, which perhaps will remain effective for over 30 years without the need for replacement. In addition, PIPECO will advice Exxon Mobil in areas that would prove efficient for pipes to be laid, which would include avoiding hilly areas that might require a lot of pressure to pump the liquefied natural gas.
Most importantly, Exxon Mobil should avoid populated areas and rather lay the pipes across regions with less population to avoid leakage of pipes through road construction and other underground activities that might interfere with the pipelines. Populated areas are also risky areas as they are more exposed to criminal cases such as banditry.
However, PIPECO is determined towards negotiating the price of laying down the pipes, although PIPECO will not accept any amount below US$800,000 due to risks associated with losses or facing increased cost of labor as well as procurement of the pipes. Exxon Mobil will mostly pay attention to services of PIPECO considering that laying of pipelines for various companies, which transport liquids, is its core business.
Payment associated with performance and equity investment
PIPECO will propose for a contract that will be based on performance. PIPECO would like to be rewarded in terms of its performance as well as equity investment. Payment based on performance would most likely attract Exxon Mobil since PIPECO would be paid less if its services are considered ineffective.
This means that PIPECO will endure to produce the best services followed by best engineering products. However, equity investment might not be attractive considering that Exxon Mobil might fail to perform in the market. Therefore, its shares would depreciate in value leading to losses (Oster 1994, p. 36).
List of references
Amable, B 2003, The Diversity of Modern Capitalism, Oxford University Press, Oxford.
Besanko, D & Dranove, D 1996, Economics of Strategy, John Willey & Sons, Nueva York.
Casper, S & Matraves, C 2003, “Institutional Frameworks and Innovation in the German and UK Pharmaceutical Industry”, Research Policy, Vol. 32, no. 1, pp 1865–1879.
Ghemawat, P 1999, Games Businesses Play: Cases and Models, MIT Press, Cambridge.
Gompers, P & Lerner, J 2004, The Venture Capital Cycle, MIT Press, Cambridge.
Hall, PA & Soskice, W 2001, Varieties of Capitalism: The Institutional Foundations of Comparative Advantage, Oxford University Press, Oxford.
Hollingsworth, RJ 2000, “Doing Institutional Analysis: Implications for the Study of Innovations”, Review of International Political Economy, Vol. 7, no. 1, pp 595–644.
Kanniainen, V & Keuschnigg, C 2005, Venture Capital, Entrepreneurship, and Public Policy, MIT Press, Cambridge.
Michael, P & McGahan, MA 2007, “An Interview with Michael Porter”, The Academy of Management Executive, Issue 16, no. 1, pp 2-44.
Oster, SM 1994, Modern Competitive Analysis, Oxford University Press, Nueva
Peteraf, MA 1993, “The Cornerstone of Competitive Advantage: A Resource-Based View”, Strategic Management Journal, Issue.14, no.1, pp 179-191.
Wittner, P 2003, The European Generics Outlook: A Country-by-Country Analysis of Developing Market Opportunities and Revenue Defense Strategies, Datamonitor, London.
The article American LNG Exporters Turn to Europe as Asian Demand Sputters deals with the changes in the LNG export market in the US. According to the article, the market is about to experience the boost in export demand, mainly from European countries. The limited supply of domestic LNG, drawbacks in production, and the decline of import from Russia are the main reasons for this.
The latest progress in the shale gas extraction, dubbed the shale revolution, also contributes to the predictions, possibly putting America among the world’s most formidable suppliers of gas, Qatar and Russia (Loh et al. 2015). Authors further reinforce their predictions by the example of Lithuania, who has recently signed a contract with the US LNG supplier, Cheniere Energy Inc. (LITGAS and Cheniere Marketing sign master trade agreement 2015).
In short, we can describe it in the following way: Europe’s domestic production of gas is gradually declining, and the required amount is not dropping (gas is characterized by low elasticity), thus the demand for imported LNG is expected to grow, doubling by 2020 (North America LNG: Project timelines 2015). This will result in the shift of the demand curve, raising the price Europe will be willing to pay for the gas. At the same time, America’s LNG supply is going to grow due to technological advancements (five liquefaction projects currently in construction) with as much as a sevenfold increase in production by 2019 (World Energy Outlook factsheets 2015).
This will create the shift in a supply curve, leading to the creation of the new equilibrium for Europe and the USA. The third player, Asia, is not growing as expected, so its demand curve does not shift. As of today, the prices of American LNG are not acceptable for Europe. For example, in 2014, the prices of the imported LNG in the European Union was 11,50 USD per MMBtu in January to 9,83 USD in December and decreasing steadily (European Union natural gas import price 2016).
At the same time, the price of exported gas in the US in the same period fluctuated between 12,58 and 16,01 (Price of liquefied U.S. natural gas exports 2016). Thus, the equilibrium could not be reached. However, with the predicted massive shift in supply and the growing demand on the European side, the equilibrium will become more acceptable for both sides. If we take, for example, the amount of gas currently supplied to EU countries (World Energy Outlook factsheets 2015) and compare it to the perceived amount, we can see that none of these match the supply based on the current total export of the US (Price of liquefied U.S. natural gas exports 2016). However, both figures form an equilibrium with the US predicted supply, with suggesting the price of roughly 11 USD and just above 12 USD respectively.
As this analysis is based on estimated predictions rather than hard data, it is limited to the multitude of factors. It is based on the initial assumption that the growth will continue as predicted (as we have seen, this did not happen to the Asian market) and that the shale revolution phenomenon proceeds according to plan. Besides, it does not account for factors like domestic and industrial use of LNG, which change the picture considerably.
Hunter (2007) and the panel of experts have compiled the report to quantify the main grievance of the people of Alberta, Canada, that the people in this province do not receive a fair share of the oil revenue. Studies by the panel were supported by interviews with Albertans and posts left on the panel’s website and over 66% felt that Albertans are not getting a fair share. The region is rich in natural crude oil deposits and the people feel that as the lands belong to them, the region should be seen more like an investment decision than as an area where crude oil is extracted and exported. Detailed data on the reserves have been provided and it is estimated the reserves are next in quantity to Saudi Arabia. The report has substantiated the claim with extensive data about the different types of oil reserves such as oil sands, conventional oil, and natural gas and recommends that the current share of Alberta from the three reserves, which is beneficial towards the developers, should be changed so that Albertans get an increased share of 20% in 2006, 26% in 2010 and 37% by 2016. The report claims that if the recommendations were implemented, the government would have about 2 billion dollars extra as funds. In the report, Hunter has agreed that developers must be duly compensated for their efforts and financial investments, especially in the oil sands oil recovery areas, where a significant financial outlay is required for the project to get started. However, the authors suggest that the income must be fairly distributed between the producers and the people of Alberta. The report has dealt separately with all the three types of natural oil resources and has adopted a differential model that takes into account the current market price, justified returns to the developers, and the fair share that must be given to the Albertans.
While comparing the total government takes in Alberta with other jurisdictions, the report has used computer simulation project analysis models that are used to estimate the total government takes from the oil and gas activities. Data from different oil and gas producing regions have been mapped for each type of reserve and a total of three charts have been created. Reference areas used for comparison mapping are New Mexico, Texas, Wyoming, Colorado, California, and three areas of Alberta. In each case, the take of the respective governments in the region and the developers have been computed. The report has argued that treating royalties as costs, has resulted in the METR for conventional oil and natural gas in Alberta are lower than other industries and such a practice leads to sharp erosion of royalties.
The report has made several recommendations in areas such as rentals, base royalty, net revenue royalty, corporate income tax, and accelerated capital cost difference, oil sands severance tax, grandfathering, bitumen pricing, upgrade royalty credit, etc. While the issues for conventional oil sources and natural gas are more transparent since they can be benchmarked against other areas, the oil sand reserves are the cause for much dissatisfaction. For the oil sands, the panel has suggested that the royalties be increased from the current 16.8% to 31.8 %. For rentals, the panel has suggested that the current system of a 20 year grace period for developing oil sands be reduced to 6 years as this will bring pressure on the developers and more revenue for the government. The current base royalty of 1% for the pre-payout should be retained while for the post-payout period; it should become a deduction in the calculation of the net revenue royalty. The current post payout royalty of 25% should be increased to 33%. The panel has recommended the elimination of the preferential treatment for provincial ACCA should be removed. The Oil sands severance tax should be zero for WTI prices that are less than 40$ per barrel; 1% at 40$/ barrel and increasing by 0.1% for each $1/ barrel price rise and a maximum of 9% at 120$/ barrel. Taking a severe view of the loophole that the upgrader act, the panel recommends that under section 41 of the Canadian Income Tax Act, qualifying costs should only be allowed for costs that are shared between or incurred for the actual process of upgrading bitumen.
The report has also suggested that the government should be held accountable for collecting the economic rent and the monies that are generated should be used to increase the quality of life of Albertans, provide them tax cuts, create jobs, improve the infrastructure, and so on. The report also urges transparency in governmental operations and suggests that information about the data collected should be made public.
From the analysis and recommendation presented in the report, the implications for the foreign developers are deep. The major developers are vast oil companies with major oil wells in different regions and they would have to ensure that there is parity in the way wealth is distributed in the Albertan community and the manner it is done worldwide. The increase in royalties of up to 33% would mean that their profits would go down. The recommendations for income tax would deduction would mean that expenses declared for oil sand upgrade would have to be used for this purpose only and this would require the developers to invest in new technology. Since recommendations for rentals have suggested a reduction of the 20 year grace period for developing oil sands be reduced to 6 years, developers need to take up work in the oil sand regions and this would mean that more investment has to be made in the low revenue yield areas of oil sands. To make profits, the rate of oil must be 60 USD per barrel and since the oil prices fluctuate, the financial risk and exposure of the developers are increased.
References
Hunter William H. (2007). Report of the Alberta Royalty Review panel. Web.
Qatar is considered to be one of the key exporters of liquefied natural gas (LNG) in the world. In 2016, it produced 181.2 billion cubic meters of gas, of which domestic consumption was only 41.7 billion cubic meters, while export reached 104.4 billion cubic meters (“Natural Gas Production”). According to the report of the Qatar National Bank (QNB), the country accounts for 30.1 percent of the global share of LNG, and most of the demand came from African and Asian countries (Japan). This paper will provide a literature review based on the recent information in the given field.
Natural Gas Resources (Fields)
Due to a variety of factors, Qatar retains its status as the world’s largest LNG producer. One of them is huge reserves, the volume of which reaches 900 trillion cubic meters, which is approximately 20 percent of the world’s resources. The second is the ease of gas production as well as the broad industrial base and experience accumulated by the Qatari gas companies over the past twenty years.
There are several large fields in Qatar that provide NLG, including Al Shaheen (300,000 barrels daily), Dukhan (225,000 barrels daily), and Idd alShargi (100,000 barrels daily) (Japan). The primary operators of the mentioned fields are Maersk, Qatar Petroleum, and Occidental, respectively. All of the mentioned largest fields present great potential to grow, and, therefore, operators invest in their development. The literature review also reveals some minor companies working in gas production, the capacity of which ranges between 7,000 and 45,000 barrels per day (Japan).
Production
Despite the embargo of Qatar set by the Quartet countries (Saudi Arabia, the United Arab Emirates, Egypt, and Bahrain), it is safe to suggest that the Qatari economy stood up in the face of such acts of its Arab neighbors (Gloystein). In these conditions, LNG became the core tool that gives Qatar an incentive to develop. Gloystein claims that the policy pursued by Qatar allowed neutralizing the negative consequences for the economy, especially in the gas sector, where the country has achieved great success in recent years. Many manufacturers have entered the market, between which there is competition for access to resources and distribution of quotas for gas supplies (Naji). At the same time, LNG is recognized as the cheapest and safest gas that provides Qatar with a competitive advantage.
Qatar is considered one of the smartest gas producers in the world, which maintains the balance in the market without forgetting its own interests. It is obvious that the increased productivity will strengthen Qatar’s position in the long term. In his latest statements, Dr. Mohammed Bin Saleh Al-Sada, the Minister of Energy and Industry, declared that the measures taken against Qatar proved that the country has a stable and diversified economy (“Ministry of Energy & Industry”).
According to the minister, LNG supplies to Japan, India, South Korea, and China account for approximately 75 percent of the country’s exports, and sanctions did not affect these figures. It should also be stressed that Qatar fulfills obligations under all agreements with partners and intends to preserve the current state of affairs in the gas sector, despite the unlawful and unfair actions of its neighbors (Naji). Thus, the production of NLG in Qatar is growing, and the processes involved in it seem to be apparent and effective.
Exports
It is noted that the increasing volumes of gas production in Qatar, along with the need of a number of countries for its supplies, indicate the confidence of the world in Qatar. Although the propaganda is carried out by the opposing countries, Qatar’s solution to raising the level of production of LNG was made in a timely manner and corresponded to the current situation. Recently, the Qatari RasGas Company made the first delivery of LNG to the floating terminal Toscana near Italy for storage and subsequent regasification (“RasGas Delivers First LNG”). It seems essential to pinpoint the fact that the mentioned event marked a new shift in the expansion of Qatar to European gas markets, where Italy may stand along with the United Kingdom and Spain as an importer of Qatari natural gas.
Following the results of 2017, Qatar Petroleum increased foreign LNG supplies to 77 million tons. Now, Qatar is to find buyers for new volumes of liquefied gas as the country plans to increase its export by 30 percent in the next five to seven years – by 100 million tons per year (“WrapUp 1 – Qatar Raises”). It is worth mentioning that Indian Petronet LNG and France’s Total SA have already expressed interest in additional purchases of LNG (Mukherjee and Verma). A number of companies from China, Russia, the United States, and Europe also intend to take part in the creation of the necessary liquefaction capacities.
Future Trends in Qatar’s Gas Exploration
Due to the isolation, LNG supply routes from Qatar have to be changed, and in the future, India will have to sell more gas in the spot market, which is usually less profitable. Simultaneously, Egypt and the UAE, in particular, the Dubai emirate, which supported Saudi Arabia in the actions against Qatar, will have to look for new gas suppliers, and those cargoes that they refused could be sent to Western Europe. For instance, the UK, the largest gas storage facility of which will be closed, seems to welcome new sources of Qatari LNG.
Following the new development program, it is planned to increase the global share of Qatar to six million barrels in oil equivalent daily. In an effort to increase gas production by 30 percent over the next five to seven years, Qatar warns competitors in the energy market and the Persian Gulf countries involved in the isolation (“WrapUp 1 – Qatar Raises”). This measure prevented the attempts of embargo countries to influence the world companies that have rushed to the Qatari market after the statement of production. The specified decision also gave confidence to world markets since Qatar remains faithful to its investment projects, and the intended programs are implemented in a planned mode. It should also be stated that due to the equipment of the ports, Qatar was able to continue the export of LNG.
Conclusion
To conclude, Qatar was able to prove that it is capable of increasing its export of LNG even in the conditions of the embargo imposed against the country on the initiative of Saudi Arabia. The new program announced by Qatar implies an increase in the total LNG production by 30 percent, namely, to 100 million tons per year. In general, the production of NLG by Qatar is likely to grow significantly in the future caused by its great resources, well-developed infrastructure, and the interest of several countries to act as suppliers.
