Energy

Key Industry Trends

• Clean renewable energy sources like wind, solar, and biomass are increasingly utilized, with significant projected growth by 2050.
• Technological advancements, particularly in ‘fracking’ and ‘horizontal drilling,’ have increased US oil output while reducing costs and risks.
• New shale discoveries in the US have boosted domestic oil production, reducing reliance on foreign oil imports.
• Natural gas is a primary energy source in the US due to its abundance and cost-effectiveness, displacing crude oil and coal.
• Petroleum products include gasoline, jet fuel, natural gas, fertilizer, plastics, detergents, propane, diesel, and lubricants.

Important Terminology

• Upstream (E&P): Exploration and Production – Activities involved in finding, drilling, and producing crude oil and natural gas (LNG).
• Midstream: Focuses on the processing, storage, and transportation of oil and natural gas, often involving pipeline companies.
• Downstream: Includes oil refineries, petrochemical plants, petroleum product distributors, retail outlets, and natural gas distribution companies.
• OPEC (Organization of Petroleum Exporting Countries): A cartel of 14 nations that coordinates petroleum policies, influencing global output and prices.

Important Calculations

• Return on Investment (ROI): (Profits - Cost of Investment) / Cost of Investment
• Breakeven Point: (Fixed Costs) / Contribution Margin (CM)

Important Considerations (Cost Drivers)

• Transportation / Distribution costs
• Storage Costs
• Production Costs (Labor + Materials)
• Plant Development Costs
• Depreciation & Taxes
• Overhead

Overview

• Oil & Gas is a stage-based industry, with market share largely tied to upstream operations.
• Upstream: Drilling and extracting raw oil (usually contracted out).
• Midstream: Transporting the raw oil.
• Downstream: Refining and selling the finished petroleum products.

Revenue Drivers

• Upstream: Crude oil price.
• Midstream: Transportation fees.
• Downstream: Sale of gasoline, oils, fuel, and other petroleum products.

Cost Drivers

• Upstream: Exploration costs (e.g., land leases).
• Rig rates (daily usage) and rig utilization.
• Drilling and extraction equipment & labor.
• Midstream: Crude oil purchase.
• Storage costs.
• Transportation costs.
• Pipeline construction.
• Downstream: Crude oil purchase.
• Refinery equipment & labor.

Important Considerations / Trends

• Organization of Petroleum Exporting Countries (OPEC) accounts for ~44% of global oil production and ~73% of the world’s proven oil resources; OPEC effectively controls the price of oil.
• Technology advancements (e.g., fracking) increase output and push costs down.
• Liability for spills (environmental and safety risks).

Overview

• Oil & Gas is a stage-based industry, with market share heavily linked to upstream operations.
• Upstream operations involve drilling and extracting raw oil.
• Midstream operations focus on transporting raw oil.
• Downstream operations include refining and selling finished petroleum products.

Revenue Drivers

• Upstream: Crude oil price.
• Midstream: Transportation fees.
• Downstream: Sale of gasoline, oils, fuel, and other petroleum products.

Cost Drivers

• Upstream costs include exploration (e.g., land leases), rig rates and utilization, and drilling/extraction equipment and labor.
• Midstream costs cover crude oil purchases, storage, transportation, and pipeline construction.
• Downstream costs include crude oil purchases and refinery equipment and labor.

Important Considerations / Trends

• OPEC (Organization of the Petroleum Exporting Countries) controls approximately 44% of global oil production and 73% of proven oil resources, effectively influencing oil prices.
• Technological advancements like fracking have increased output and reduced costs.
• Significant liability risks associated with spills.
• Requires extensive regulatory approval for operations.

Introduction

• This industry deals with hydrocarbon extraction (upstream), transportation (midstream), and refinement (downstream).
• It provides the most common precursors for fuel, plastics, and energy production.

Revenue Drivers

• Upstream: Crude oil prices.
• Midstream: Sales and purchase agreement contracts.
• Downstream: Sales of refined products (e.g., gas, fuel, oils, plastic, lubricant).

Cost Drivers

• Upstream: Exploration and extraction costs.
• Midstream: Crude oil purchase, storage, and transport costs.
• Downstream: Crude oil purchase and property, plant, and equipment (PP&E) costs.

Key Industry Trends

• Industry shifts towards sustainability and climate change awareness are exerting pressure.
• The introduction of renewable energy can serve as a substitute for certain traditional oil and gas uses, but it faces technical challenges related to energy density (for jet fuel), chemical composition (for plastics), and other specific applications.
• Significant price impacts on oil futures are observed due to post-pandemic recovery and geopolitical situations.

Suppliers

• Land Surveyors
• Government (for exploration permits)
• Rig/equipment manufacturers

Customers

• Finished goods manufacturers
• Energy and fuel distributors
• Power generators for transmission
• Logistics and vehicle operators

Other Industry Metrics

• Production (barrels): Quantity of oil or gas extracted.
• Attainable reserve (barrels): Estimated amount of oil or gas that can be economically extracted.
• Depletion rate: The rate at which natural resources are used up.
• Carbon footprint: The total greenhouse gas emissions caused by an organization, event, product, or individual.

Major Regional Players in Asia

• Sinopec
• Saudi Aramco
• China National Petroleum Corp.
• China National Offshore Oil Corp.
• ENEOS Corporation

Key Industry Ideas

• The industry is segmented into upstream (exploration and production), midstream (transportation), and downstream (refining and marketing) operations.
• Cost per gallon is a key metric.
• Renewable energy sources are growing in importance.
• Fracking (hydraulic fracturing) is a significant extraction method.

Important Terminology

• PV-10: Present Value of estimated future net revenues from proved oil and gas reserves, discounted at 10% per year.
• OPEC (Organization of the Petroleum Exporting Countries): An intergovernmental organization of 13 oil-exporting developing nations that coordinates petroleum policies of its members.

Revenue Streams

• Sales of crude oil.
• Sales of gasoline.
• Sales of natural gas.
• Revenue from refined products such as lubricants.
• Income from gas stations, including fuel sales, convenience store items, and car washes.

Cost Drivers

• Costs associated with exploration, including seismic studies, drilling rigs, and labor.
• Expenses related to production, particularly refining.
• Costs for pipelines used in transportation.
• Operational costs for gas stations, including oil procurement, labor, insurance, and licenses.

Risks

• Access to new oil and gas reserves.
• Impact of energy policies and regulations.
• Decisions made by OPEC regarding production levels.
• Geopolitical pressures and instability.
• Competition from substitute energy sources and growth of renewable energy.

Key Economic Drivers

• Government regulation.
• International oil production levels and global demand.

Customer Segments

• Petroleum refiners.
• Electricity generators.
• Domestic and commercial consumers.
• Other industrial sectors.

Channels

• Retail sales.
• Wholesale distribution.
• Commercial sales.

Key Companies

• Exxon Mobil
• Baker Hughes
• Saudi Aramco
• Gazprom
• Pemex
• Phillips 66

Key Ideas

• A highly cyclical industry driven by global supply-demand dynamics.
• Capital-intensive exploration, production, and refining processes.
• Prices are heavily influenced by OPEC decisions.
• Requires significant upfront investment.
• Subject to significant environmental, safety, and regulatory requirements.
• Features an integrated value chain from upstream to downstream.
• Large exposure to commodity price volatility.

Revenue

• Crude oil production and sales.
• Natural gas production and LNG exports.
• Refined product sales (gasoline, diesel, jet fuel).
• Petrochemicals and specialty chemical products.
• Pipeline transport fees (midstream).
• Trading and commodity hedging income.
• Retail fuel station operations.

Costs

• Fixed Costs: Exploration and drilling equipment, plant maintenance, pipelines and storage infrastructure, Corporate SG&A, and long-term regulatory obligations.
• Variable Costs: Extraction costs, transportation and pipeline tariffs, labor for field operations, energy usage and water for drilling/refining, and repair costs.

Trends

• Global shift toward decarbonization driving investment in renewables and lower-carbon fuels.
• Increased LNG demand as countries transition away from coal.
• Digital transformation is improving predictive maintenance and production efficiency.
• Consolidation among operators as smaller players struggle with cost pressures.
• Rising interest in carbon capture, utilization, and storage (CCUS) technologies.

Risks

• Oil price volatility can cause large swings in profitability and capital spending.
• Environmental and safety incidents can lead to severe financial and reputational damage.
• Regulatory pressure around emissions, methane leaks, and ESG compliance is increasing.
• Geopolitical instability in producing regions disrupts supply chains and pricing.
• High capital intensity exposes companies to long payback periods and financing risk.

Key Industry Ideas

• Increasing energy consumption.
• Characterized by high investment costs and significant regulatory oversight.
• Industry structure is evolving, with traditional utilities disintegrating into smaller supplier segments.
• Operations are affected by seasonality.
• Government incentives support sustainable initiatives.
• Bundling of services with renewable energy options is becoming common.

Revenue Streams

• Revenue from transmitted electricity, categorized into base load and intermittent sources.
• Base load accounts for 95% of industry revenue, from sources like coal, natural gas, nuclear, and other traditional fuels.
• Intermittent revenue generated from renewable energy sources.

Cost Drivers

• Purchased power accounts, representing nearly half of total costs.
• Infrastructure development and maintenance.
• Wages and salaries.
• Marketing expenses.
• Maintenance contracts for equipment and systems.

Risks

• The growth of clean energy poses a threat to traditional power generation methods.
• Seasonal demand fluctuations lead to uncertain revenue and cost estimations.
• Increased energy efficiency in appliances can decrease overall consumption.

Key Economic Drivers

• Economies of scale.
• Industrial production index.
• Climate and seasonality impacts on demand.

Customer Segments

• Commercial and industrial customers.
• Residential customers.

Channels

• Transmission lines and pipelines for distribution.
• Upstream electricity generators.

Key Companies

• PG&E
• AES
• Duke Energy
• Exelon
• National Grid
• Nextera Energy