1.investment decisions
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Investment Decision Making in theUpstream Oil Industry: An Analysis
Surbhi AroraAssistant Professor,College of Management & Economic Studies,University of Petroleum & Energy Studies
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Investment Decision Making in the Upstream OilIndustry: An Analysis
IntroductionCurrent Capabilities in Upstream Oil & Gas
Industry:Current Practice Techniques in Upstream Oil &
Gas Industry:Conclusion
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Investment Decision Making in the Upstream OilIndustry: An Analysis
The allocation of funds and capital to the various
projects is the most important aspect of theinvestment decision of a firm. Criteria forinvestment:
type of the projects
requirements of the projectsreturn that is promised by the project
life time of a project
duration of the return value of the project etc.
Introduction
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investment decisions by individual companies
political decisions of countries with regard to licensing
degree of foreign investment
market psychology
OPEC Policy
unexpected events
resource availability, etc.
Investment Decision Making in the Upstream OilIndustry: An Analysis
World oil supply depends upon:
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The opportunities available for investment woulddepend:
investment regime, and
the risk involved.
The incentiveswould be in the form of:oil prices, andthe rate of return
Investment Decision Making in the Upstream OilIndustry: An Analysis
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The costsof this industry remain huge, regardlessof whether earnings are high or low as was thecase throughout most of the 1990s
Refiners need to continually invest, and do soeven when earnings are lower
Current Capabilities in Upstream Oil & GasIndustry:
Investment Decision Making in the Upstream OilIndustry: An Analysis
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Current Practice Techniques in Upstream Oil& Gas Industry:
Despite its importance to economic growth and
market structure, the investment behavior of firms,
industries, and countries remains poorly understood.
Economic models have had limited success inexplaining and predicting changes in investment
spendingPindyck, 1991
Investment Decision Making in the Upstream OilIndustry: An Analysis
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The International Energy Agency estimates thatthrough 2030 investments in oil and gas
exploration and production, refining,transportation, and infrastructure, will require$9.6 trillion, averaging over $380 billion annually.
Investment Decision Making in the Upstream OilIndustry: An Analysis
Current Practice Techniques in Upstream Oil& Gas Industry:
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As existing and future supply facilities becomeobsolete or resources are depleted, newexploration and development will need to replace
existing oil reserves, plus add significant new oilreserves.
Investment Decision Making in the Upstream OilIndustry: An Analysis
Current Practice Techniques in Upstream Oil& Gas Industry:
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A firm should seek to maximize profits, but financialforces and shareholders (banks, fund managers,etc.) may require a firm to pursue growth
(reserves volume) or diversify its operations.
Investment Decision Making in the Upstream OilIndustry: An Analysis
Current Practice Techniques in Upstream Oil& Gas Industry:
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Typically, a planning horizon for oil prices isassumed and projects are evaluated on acommon and consistent basis, where judgments
on the risks and rewards of the projects under avariety of price scenarios and geologic, technicalproduction, government, tax, and legal factors areconsidered (Seba, 2000).
Investment Decision Making in the Upstream OilIndustry: An Analysis
Current Practice Techniques in Upstream Oil& Gas Industry:
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If the capital employed in a company does notgenerate an adequate return, the company willhave limited access to new capital because
investors and lenders seek more profitableopportunities elsewhere.
Investment Decision Making in the Upstream OilIndustry: An Analysis
Current Practice Techniques in Upstream Oil& Gas Industry:
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Capital requirements in E&P compete with othersegments in the petroleum industry as well as thecapital needs of other industries.
Uncertainty about the future price of oil and gas andglobal conditions impacts allocation decisions andexternal evaluations by bond raters and capital markets(Pirog, 2005b).
Investment Decision Making in the Upstream OilIndustry: An Analysis
Current Practice Techniques in Upstream Oil& Gas Industry:
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Governments might defer investment to preservehydrocarbon resources and revenues for futuregenerations (Reynolds, 2005).
If governments increase taxes and royalties onproduction, or otherwise change the terms andconditions of the fiscal regime, lower profitability ofupstream projects might deter investment.
Investment Decision Making in the Upstream OilIndustry: An Analysis
Current Practice Techniques in Upstream Oil& Gas Industry:
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Investment Decision Making in the Upstream OilIndustry: An Analysis
Some of the current techniques used byupstream oil and gas industry are:
Decision Tree Analysis and Expected Monetary Value
Payback Period
Sensitivity Analysis
Discounted Cash flows
Preference Theory
Simulation
Portfolio Theory
Option Theory
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Investment Decision Making in the Upstream OilIndustry: An Analysis
ConclusionThe factors which are vital for investment decision making for
specifically the oil and gas industry may be summarized asbelow:
The Price expectationsof the firm from the industry
The amount of annual cash flows expected to be
received on the investment.
The borrowing capacitywhich the annual cash flows can
support.
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Investment Decision Making in the Upstream OilIndustry: An Analysis
Portfolio of opportunities
The acceptable risk associated with the investment
decisions.
Other factors - supply factors, market demand,
availabilityand access to resources etc.
Conclusion
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