Energy Exploration & Exploitation

A critical analysis is presented of the factors influencing foreign investment in Russian oil and gas exploration and production. Greater stability in the Russian economy would help and unfortunately some elements of the Russian bureaucracy hinder quick decision making. Western investors could improve their position by concentrating on developments which are unlikely to be developed by Russian companies in the next decade.

The Baltic Sea is turning to be an inland sea of the European Union. Interlinking the energy systems of the Baltic Sea countries and the relevant EU networks should concur with the process of unification of the states. The primary strategic goal is to create a common free energy market based on regional energy systems around the Baltic Sea – the Baltic Ring. This common energy system must cover both electricity transmission lines and natural gas pipelines. The Baltic Ring project is of major importance for the economic interaction and growth, sustainable development and security of the energy supply of Baltic Sea states.

Supply of LPG is forecast to grow over the next decade from the present level of 180 million t/y to about 185–190 million t/y, depending on demand in Asia which is rising rapidly and on new LPG export projects. Most of the increase in supply will come from new gas and crude oil production, from new LNG ventures, and from refineries reducing the n-butane content of motor gasoline.

Pricing will remain volatile as a result of crude oil price volatility, variations in the winter weather in the Northern Hemisphere, and as a result of competition between ethane, PPG, naphtha and condensate as ethylene cracker feedstocks.

Saudi Aramco is the world's biggest exporter of LPG/NGL, with a capacity rising from 17.5 million to more than 20 million t/y over the next decade. It plays a key role in the pricing of LPG, and since Oct. 1, 1994, has introduced a new “contract price” (CP) formula which in winter months has raised its revenue by up to $30/tonne. Its move has upset most of its clients and some of them have cancelled their contracts.

Demand for LPG in OECD countries will continue to show steady growth. The increase in demand will be more rapid in the relatively less developed OECD countries, as the trend in Spain has shown in recent years.

Provided that the LPG price is competitive, demand in China, South-East Asia and the Indian sub-continent could grow beyond current projections. Consumption in these countries will depend on the installation of distribution facilities and the rate at which LPG can substitute for traditional fuels and kerosine as well as compete for limited disposable incomes.

Working interest, W, and risk adjusted value, RA V, are evaluated using both Cozzolino's formula for exponential dependence of risk aversion and also for a hyperbolic tangent dependence. In addition, the general method is given of constructing an RA V formula for any functional choice of risk aversion dependence. Two examples are given to illustrate how the model dependencies influence choices of working interest and risk adjusted value depending on whether the expected value of the project is positive or negative.

In general the Cozzolino formula provides a more conservative position for risk than does the hyperbolic tangent formula, reflecting the difference in corporate attitudes to risk aversion.

The commonly used Cozzolino formula is shown to have simple exact arithmetic expressions for maximum working interest and maximum RAV; the hyperbolic tangent formula has approximate analytic expressions. Both formulae also yield approximate analytical expressions for the working interest yielding a risk neutral RAV of zero. These arithmetic results are useful for making quick estimates of working interest ranges and risk adjusted values.

For a given hydrocarbon exploration opportunity, the influences of value, cost, success probability and corporate risk tolerance provide an optimal working interest that should be taken in the opportunity in order to maximize the risk adjusted value. When several opportunities are available, but when the total budget is insufficient to take optimal working interest in each, an analytic procedure is given for optimizing the risk adjusted value of the total portfolio; the relevant working interests are also derived based on a cost exposure constraint. Several numerical illustrations are provided to exhibit the use of the method under different budget conditions, and with different numbers of available opportunities.

When value, cost, success probability, and risk tolerance are uncertain for each and every opportunity, the procedure is generalized to allow determination of probable optimal risk adjusted value for the total portfolio and, at the same time, the range of probable working interest that should be taken in each opportunity is also provided. The result is that the computations of portfolio balancing can be done quickly in either deterministic or probabilistic manners on a small calculator, thereby providing rapid assessments of opportunities and their worth to a corporation.