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In the USA and elsewhere, sulphur has also been reduced, to the point where advanced emissions reduction equipment will produce only about three per cent of the emissions of a vehicle manufactured in the 1960s. The technologies that have made these improvements possible include:

•Additives that allow petrol to more fully combust, thus improving vehicle efficiency while reducing emissions.

•Improved catalysts and refining processes which have helped reduce the volatility and sulphur content of petrol and diesel fuels, leading to lower emissions.

Community

For many petroleum companies, consultation with local communities is carried out well before a project even reaches the design stage. In some cases community participation is also sought in project audits so that people understand the type of development envisaged, while the company benefits from local knowledge and opinion. The aim is to develop a trust that will continue through construction and commissioning to the ongoing production stage for the life of the project.

In addition, a number of companies become involved with the local communities, particularly in remote areas, by helping to provide services and supporting existing community organisations and initiatives. These can range from support for medical and educational facilities and programs (including traineeships, work experience, career guidance and scholarships) through to aid for local economies, conservation and heritage programs. BHP Billiton, for instance, allocates one per cent of its pre-tax profit to community projects throughout its areas of operation.

In other instances, companies and petroleum industry associations fund research projects relevant to their operations such as whale migration and breeding patterns, coral reef habitats, studies of wetland biodiversity and health watch programs to study the long-term health of petroleum industry employees.

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Community Development Case Study — Pakistan

BHP Billiton operates the Zamzama gas plant in Sindh Province, Pakistan. As part of the company’s commitment to sharing success it is working closely with its partners, customers and local communities to make a real contribution to sustainable development in Pakistan. One of BHP Billiton’s operating values is that the communities with which it works value its citizenship. Since its inception the company’s Community Development Program in Pakistan has made a significant difference in the areas of health, education, basic infrastructure and sustainable livelihoods.

The health aspect of the program has been specifically designed to cater to the needs of local women and children in an attempt to reduce maternal and infant mortality rates. BHP Billiton is supporting five community health centres run by partner NGOs which serve a population of over 13,000, with the help of 38 trained medical staff. Thirty three community health workers have been trained in primary healthcare, with a view to establishing health houses and small local clinics at the village level. Future plans include upgrading a local hospital in collaboration with the government.

The educational component focuses on providing quality education for children, especially girls. In collaboration with local NGOs, the local community and local government, BHP Billiton has established 11 community schools in the area in which over 800 students are enrolled. The schools are run by communitybased School Management committees. A Learning and Information Centre has also been established in association with a local partner NGO. The Centre helps students develop basic computer skills and teaches them English.

Lack of clean drinking water in the villages is a common problem around the Zamzama gas facility. To overcome this, the company installed a reverse osmosis unit in one village, providing access to clean water for 1100 people daily, and has also facilitated the installation of hand pumps in 30 villages in the area.

A vocational centre has also been established in nearby Johi town to enable women to take part in entrepreneurial activities. The objective of the Entrepreneurship and Marketing Development element of the program is to contribute to a sustainable community development process through improved livelihoods for local women, by providing them with opportunities for income generation and training in production and marketing.

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Chapter 9. ECONOMICS

Crude Oil

Price history

Crude oil prices behave the same way as any other commodity — there are wide price swings in times of shortage or oversupply. The crude oil price cycle can extend over several years in response to changes in demand as well as to OPEC (Organisation of Petroleum Exporting Countries, formed in 1960) and non-OPEC supply.

The history of oil prices post World War II shows that when adjusted for inflation and expressed in 2004 USA dollars, the world price has averaged US$22.86 per barrel to 2004. In fact, until 2000 oil prices only exceeded US$23 a barrel in response to war or conflict in the Middle East.

From 1948 to 1957 the price of oil rose from US$2.50 to about US$3 keeping pace with inflation. From 1958 to 1972 prices were stable at about US$3 a barrel(actuallydeclininginrealterms),butby1974thepricehadquadrupled

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to US$12. This came about because of the 1973 Yom Kippur War when Egypt and Syria invaded Israel and many western nations (headed by the USA) supported Israel. As a result several Arab oil exporting nations imposed an embargo on Israel’s supporters and curtailed production by 5 million barrels a day (bbl/d). One million barrels a day was made up by increased production in other countries, but the net loss of 4 million bbl/d represented seven per cent of non-communist world production.

From 1974 to 1978 world crude oil prices remained stable ranging from US$12.21 –13.55 a barrel (actually a moderate decline when adjusted for inflation). Then between November 1978 and June 1979 the Iranian revolution cut 2.5 million bbl/d from world production. This loss was compounded in 1980 when Iraq invaded Iran and the combined production from both countries fell to 1 million bbl/d, some 6.5 million bbl/d less than the previous year. In world terms crude oil production in 1980 was 10 per cent lower than in 1979. The events in Iran and Iraq sent prices from US$14 a barrel in 1978 to US$35 a barrel in 1981.

Some countries, such as the USA, imposed price controls on domestically produced crude oil during this period in an attempt to lessen the impact, and in the short term this did ease the recession induced by the 1973–1974 oil price rises. On the other hand it took away incentives for USA domestic exploration and production and did nothing to curb domestic oil consumption or promote efficiency in energy use. Consequently the USA was more dependent on crude oil imports and less prepared for the price increases of 1979–1981 than it might have been without the earlier price controls.

Australia was also somewhat insulated from the rapid world oil price spikes because it already had in place a complicated system of governmentimposed levies that prevented the bulk of indigenous production being sold at world prices. The government did not allow free-market prices for Australian crude until 1988.

Interestingly during 1979–1980, Saudi Arabia, the world’s largest oil producer, warned other OPEC countries that continued spiralling prices would lead to a reduction in demand. This is exactly what happened as

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consumer nations finally began to introduce energy efficiencies, such as better insulation in buildings, more efficient industrial processes and vehicles that used less fuel per kilometre. In addition, the higher oil prices encouraged increased exploration and production in non-OPEC countries. OPEC was faced with lower oil demand and greater competition as non-OPEC production increased 10 million bbl/d between 1980 and 1986. World oil prices began to fall.

During this period OPEC tried to set its production quotas at levels low enough to stabilise prices, but individual members repeatedly broke ranks and produced at higher rates. In 1985 Saudi Arabia, which had been acting as a ‘swing producer’ and cutting its production to stop the price free fall, suddenly tired of this practice. Saudi linked its price to the crude oil spot market and increased its own production from 2 million to 5 million barrels a day. In response to this induced oversupply world prices fell below US$10 a barrel in mid-1986.

Prices remained weak for the remainder of the 1980s and into the early 1990s, with the exception of a short spike in 1990 linked to the uncertainty surrounding the Iraqi invasion of Kuwait. However by the mid-1990s prices had begun to rise again on the back of a strong US economy and high demand in Southeast Asian countries. World oil consumption increased more than 6 million barrels a day during the 1990–1997 period — 95 per cent of this rise absorbed in Asia.

In another piece of poor OPEC management and timing, the OPEC quota was increased by 10 per cent to 27.5 million bbl/d in 1997 just at the time of the Asian economic crash which saw a rapid decline in consumption. Oil prices fell rapidly in 1998 until belated OPEC remedial moves to reduce quotas again moved prices back above US$25 a barrel.

Prices see-sawed for the next three years including a rise in 2000 after Y2K computer network problems did not eventuate and a fall in 2001 after the World Trade Centre terrorist attack in New York. Prices moved into the US$25 a barrel range again by early 2002.

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In 2003, production cutbacks in Venezuela (due to unrest within the national oil company) and Iraq (because of the USA-led military action) coincided with improvements in USA and Asian demand. This loss of production combined with growing demand quickly eroded the excess of world production capacity that had been built up in the previous few years. In mid-2002 the excess stood at 6 million bbl/d. In mid-2003 excess production capacity had fallen to 2 million bbl/d. In 2004/2005 it has fallen below 1 million bbl/d.

Exacerbated by continuing political instability in a number of producing countries and the burgeoning demand in Asia, particularly China, there are concerns that this latest figure is insufficient to cover any future interruption of supply. Mirroring those concerns, the world oil price topped the US$60 a barrel mark during 2005.

Price impacts

There are a number of factors within the petroleum industry linked to the prevailing price of crude oil.

Rig count — the number of exploration drilling rigs, both on and offshore, is often seen as a barometer of the industry’s activity. The number of rigs around the world rose steadily following the price rises of the 1970s as explorers took to the field buoyed by the potential higher rewards from new discoveries. The number declined again after the price collapse of the mid-1980s, albeit with a year’s lag between the start of price decline and the fall in the rig count. In recent years the number of rigs is rising again although the response time of rig count to significant price changes is now down to a few months.

Well completions — not all wells that discover oil (or gas) are completed for production. The general rule is that if the well can produce sufficient oil or gas to cover the cost of completion and subsequent ongoing production costs it will be developed. Hence, a high oil price will improve the viability of small discoveries that may be marginal at low prices, and increase the number of economic well completions.

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Workovers — a workover is an operation to repair or perform maintenance on an existing production well, such as replacing tubing and pumps. If oil prices are low, workover activity may be deferred until the cost can be justified by the price received for rejuvenated production. If prices stay low, workovers may be foregone altogether and a well kept in production only as long as it produces a positive cash flow.

Enhanced recovery — the average primary recovery of oil from a field’s total volume in place is around 40 per cent. High oil prices can make secondary and tertiary recovery programs viable so that overall yields from a field are above 75 per cent of the total.

New technology — low oil prices can be a catalyst for improved technology and efficiency in exploration, development and production techniques. In recent times many oil companies have cut their costs to the extent that they can still make a profit from new projects down to an oil price of US$15 a barrel. Equally, refineries have been improved to accept inferior low quality heavy and sour (high sulphur content) crudes to take advantage of their low price in relation to light crudes and still manufacture a wide range of products.

Conversely, when crude prices are high, exploration of deep water and other difficult prospects becomes more attractive, and this in turn can lead to advances in technology so they can be reached affordably.

Alternative fuels — the other factor to impact on the petroleum industry in times of continuing high oil prices is the potential for energy users to switch to alternative fuels and to give developers of alternatives the incentive to make the technologies viable at more moderate oil prices.

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Natural gas

Unlike oil, which is easily transported across the world through pipelines and tankers and hence considered as one global market, natural gas prices follow local markets. Although gas can be transported long distances (from North Africa to and across Europe, across the USA and some long distances in Asia/Australasia) as well as via an expanding LNG fleet, the availability on a global scale is more limited than oil.

Like other commodities, natural gas is governed by supply and demand but, because of long lead times, response can be measured in months or even years, not hours and days as for oil. Similar to oil, low gas prices inhibit exploration expenditure and subsequent production. At the same time low prices increase demand. Overall though, supply is relatively inelastic in response to changes in price.

There is often an incentive to continue producing even in the face of lower prices. This is because:

If production is halted, it may not be possible to restore production because of reservoir and well characteristics.

Net present value of recapturing production in the future may be negative, i.e. it is better to produce today rather than wait as there are no guarantees the future prices will be higher.

Some gas is associated with oil production and hence to stop gas flow will mean stopping oil as well.

A producer may be contract-bound to produce specific volumes of gas.

There is no world price for natural gas, although it is often linked, at least in part, to the price of oil. Gas price also depends on factors such as its proximity to market and its status in relation to other fuels. In some instances customers may be able to switch fuels (for example from gas to coal) to take advantage of price changes.

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Historically demand for natural gas has been seasonal. As recently as the 1970s, gas discoveries were considered as second prize after oil. Markets were limited and often it was left in the ground, especially when discoveries were made in remote areas. It was also capital intensive, with large up-front costs and long-term contractual arrangements.

Recently, however, the demand for natural gas has increased markedly. It is the fastest growing source of energy for generating electricity, and overall it now makes up about 22 per cent of the world’s energy mix. In today’s environmentally-conscious world natural gas is recognised as an abundant, clean-burning fuel. In the USA, for instance, natural gas used for power generation grew from 15.5 per cent in 1992 to 26.6 per cent in 2002. The use for power generation has also begun to smooth out the seasonal nature of demand.

Liquefied natural gas is also growing in stature. Where a large domestic gas network is already in place but domestic reserves are dwindling (such as in the USA), the development of LNG import reception terminals is being seen as a way to revitalise the economy and capitalise on the existing infrastructure of pipelines, processing and storage facilities.

The USA is the world’s largest importer of natural gas, followed by Germany, Japan and Italy. Russia is by far the largest exporter followed by Canada, Norway and Algeria.

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Chapter 10.

DOWNSTREAM PROCESSES

Crude oil

Crude oil is delivered from the wellhead generally by pipeline to a stabilising plant which removes water and associated natural gas, although for offshore gas this treatment may now occur on a floating unit. It is then piped or shipped to a refinery to be made into petroleum products.

The basic process in refining crude oil involves distillation. Just as boiling water turns into steam, so oil — a complex mixture of different hydrocarbon molecules plus olefins, aromatics and impurities like sulphur

— can be separated into its different parts by heating. Distillation takes place in a heated refinery tower about 45 metres high where crude oil is fed in continuously at the bottom. The heat causes the various parts (called fractions) to boil off.

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