Deutsche Bank's overview of the global oil & gas industry. Structured in three
parts, this layperson's guide includes details on the workings of the oil & gas
industry, key oil producing countries and a summary of the assets and portfolios of
the leading European and US oil & gas companies.

As the dominant source of our energy needs for the better part of the last sixty
years, crude oil has held influence over the politics and economic strategies of
nations more than any other commodity, frequently proving the source of
instability, dispute and war. From the birth of Standard Oil through the
expropriation of Yukos, the oil industry has similarly found itself the subject of
frequent controversy, with the companies involved often achieving profits and
wielding power greater than the nations in which they are based. For an industry
that, at its most basic involves little more than drilling a hole in the ground in the
hope of finding the ‘black stuff’, the modern day oil industry is a remarkable
amalgam of politics, economics, science and technology. Huge and diverse, it is
also one that can at times prove bewildering, and not just for the uninitiated.
The industry, the countries and the companies – all in one
With this in mind, the global oils team at Deutsche Bank has sought to create a
product that might prove of use for beginners and old hands alike. Oil & Gas for
Beginners is not intended to be read from cover to cover but is meant to be kept
on your shelf as an easy to use reference guide. Structured in three parts it
contains contributions from Deutsche Bank’s global team of oil & gas analysts,
many with backgrounds in the industry as well as drawing on Deutsche Bank’s
longstanding relationship with Wood Mackenzie, one of the industry’s leading
research houses. In the initial Industry section we look at what shaped today’s
industry, the geology of oil, and its applications together with how it’s found, how
it’s extracted & refined and how it’s taxed. In the second Countries Section we
review the oil & gas production outlook and histories for the leading OPEC and
non-OPEC producers including details of the major fields, their tax systems,
energy infrastructure and, of course, the status of their reserves. Finally, in the
Companies section we review the portfolios of thirteen of the leading international
oil companies that comprise the bulk of the oil & gas sector’s stock market
capitalisation, providing asset value breakdowns and an overview of their major
business activities and growth projects.
For the uninitiated and more learned reader alike
Although Oil & Gas for Beginners is intended as a beginners guide we hope that
it will also find favour with the more experienced reader. Overall, we trust that our
audience will find it a useful document and entrust it with a permanent slot on an
already overcrowded desk. So for those of you who want to know more about the
life cycle of a basin, the Earth’s geologic clock or any number of industry relevant
themes read on. We hope that what you find will prove both interesting and
informative.

Table of Contents
A Brief History of Oil ......................................................................... 7
From biblical times……....................................................................7
Setting the scene.................................................................................8
IOCs and NOCs.................................................................................12
The IOC Sisters – 100 years in the making ......................................13
The International Oil Companies .........................................................14
The IOCs Compared ........................................................................ 17
The major NOCs .............................................................................20
OPEC................................................................................................. 23
A brief history.....................................................................................23
How does OPEC work? ...................................................................24
Why is OPEC able to influence prices?..........................................25
What price does OPEC want?.........................................................26
The OPEC basket .............................................................................27
What is the western IOCs’ exposure to OPEC?..............................27
In the beginning ….. ........................................................................ 28
A brief summary .......................................................................28
Geologic time and rock record.................................................29
Basic geology...................................................................................30
Hunting for sand…......................................................................32
Working hydrocarbon system....................................................34
Source rocks ..................................................................................36
Migration.........................................................................................38
Reservoir quality ..................................................................39
The trap and seal.........................................................................41
Reservoir volumetrics .................................................................43
Getting it out.................................................................................... 44
The Life Cycle of a Basin....................................................44
Field Operations..............................................................................49
Land Seismic.........................................................................49
Offshore seismic.......................................................................51
Assessing risk and reward ..............................................................53
Field Operations - Drilling................................................................54
Directional wells..................................................................................58
Land and offshore rigs ............................................................58
Drilling day rates .............................................................60
Field Operations - Evaluation ..................................................62
Field Operations - Development .................................................66
Onshore – oil is usually straight-forward… .......................................66
Offshore – as usual, deeper is tougher ..............................................67
Extending the field life .........................................................69
Recovery factors .........................................................................70
Primary recovery ......................................................................70
Depositional controls on recovery factor .....................................71
Secondary recovery… waterflood....................................72
Tertiary recovery techniques...................................................72
Oil Services – What are they and where do they fit? ....................73
Oil & Gas reserves ........................................................................... 76
A cautionary tale ........................................................................76
A company’s lifeblood ........................................................76
SEC Reserves – Proven developed and proven undevelope   77
SPE definitions - Proven, probable and possible...................80

Reserve revisions...............................................................82
Reserves: What do they actually tell us? ......................................83
Reserves Accounting– FAS 69 ........................................................ 85
Disclosure of proved oil and gas reserves ....................................85
Disclosure of capitalised cost relating to oil and gas producing activities .......85
Disclosure of costs incurred in oil and gas property acquisition ...............85
Disclosure of operational results................................................86
Disclosure of discounted future net cash flows..................86
Disclosure of current cost information..................................86
So how do analysts use FAS 69 information?.............................87
Reserves - Where and what? .......................................................... 90
So how much oil has been extracted? ..................................90
What is Peak Oil? ...................................................................92
A critical weakness - simple economics ignored .....................93
So when will a peak occur and does it matter? ..............................94
Oil & Gas Taxation........................................................................... 95
Concessions & contracts – An overview..............................95
Tax & Royalty Concessions.....................................................97
Production Sharing Contracts (PSCs) ...........................98
Working through an IRR based PSC ........................................104
Buy Backs ...........................................................................107
Oil & Gas Taxation – Some Key Terms................................109
World Oil Markets ......................................................................... 110
The oil price.....................................................................110
Oil Demand........................................................................111
Oil Supply..........................................................................115
Inventories .......................................................................116
The forward curve..............................................................116
World Gas Markets........................................................................ 117
Gas Pricing...........................................................117
Gas demand......................................................................118
Gas Supply......................................................................120
Oil & Gas Products ........................................................................ 124
What is crude oil? ............................................................124
Definitions............................................................................124
Trends in crude oil.......................................................................126
Key Global Blends ...........................................................127
Refining Overview ......................................................................... 128
The Black Sheep of the family..............................................................128
The curse of the investment cycle ..............................131
What is Refining?........................................................................... 132
What do refineries make? ...................................................132
The stream of oil products .......................................................133
How does a refinery work?............................................................134
Key variables impacting refinery performance .....................138
Configuration and complexity ............................................................138
Choice of Crude – Heavy, sour, sweet and light .................141
Location ...............................................................................143
Other factors..........................................................................143
Regional balances and market structure ......................................145
Measuring Refining Profitability ....................................................147

US margins ($/bbl)......................................................................148
NWE margins ($/bbl) ......................................................148
Asian margins ($/bbl)......................................................................148
Gasoline/fuel oil crack spreads US/Europe..................................149
What drives refining margins? ........................................................149
Refining Industry Structure ........................................................151
Petroleum Administration for Defence Districts (PADDS) ............151
Marketing ....................................................................................... 153
Stability in a cyclical world .........................................................153
The wholesale/retail chain...........................................................155
Removing capital, containing costs................................................156
What’s in a litre of fuel? European Retail Data....................................157
What’s in a litre of fuel? US Retail Data ...................................157
Biofuels........................................................................................... 158
What are biofuels? ................................................................158
Why use biofuels? .................................................................158
Where are biofuels produced and used? ...........................159
The regulatory framework....................................................160
Key legislative measures................................................................162
Biodiesel .........................................................................................164
Criticisms of biofuels ............................................................165
Long-term developments in biofuel ...................................166
Petrochemicals .............................................................................. 167
Part of the integrated chain............................................................168
Petrochemical Industry profitability....................................................170
Olefin and Aromatic Building Blocks and their Chains ................................172
Ethylene – C2 Olefin..................................................172
Propylene – C3 Olefin ..................................................172
Butadiene – C4 Olefin .....................................................173
Benzene – C6 Aromatic......................................................173
Paraxylene – C8 Aromatic ..................................................174
The Major Plastics or Polymers ...........................................175
Polyethylene (PE) ........................................................177
Polypropylene ....................................................................177
Purified Terephthalic Acid (PTA)...........................................177
Conventionals & Unconventionals............................................... 179
Conventionals ....................................................................179
Unconventionals ...................................................................179
Liquefied Natural Gas (LNG) ........................................................ 180
Overview...........................................................................180
LNG - The process and the chain .........................................182
LNG – returns across the chain..............................................183
Pricing of LNG.....................................................................185
Costs of LNG Production .............................................187
Shipping of LNG...............................................................188
Re-gasification of LNG ..................................................................189
Existing LNG facilities and facilities planned 2006-12................ 191
LNG - The IOCs Portfolios and ................................193
The IOC majors compared ................................................195

Deepwater...................................................................................... 196
Peering into deepwater....................................................................196
NGLs and condensates ................................................................. 198
A valuable by-product .............................................................................198
Canada’s Oil Sands........................................................................ 199
A huge unconventional resource................................................199
Methods of Extraction – Mining............................................................201
Methods of Extraction – In-situ .............................................201
Upgrading ......................................................................................203
Costs – The highest marginal cost barrel on the globe .............................204
Gas to Liquids (GTL)...................................................................... 206
An expensive alternative to LNG...........................................206
Background...................................................................................206
Commercial GTL plants are limited ...............................................207
There are positives.....................................................................209
An uncertain future at this time..................................................209
Coal Bed Methane ......................................................................... 210
Exactly what it says on the label ..............................................210
Tight Gas ........................................................................................ 211
Huge potential resource...............................................................211
Economic at current prices ..................................................212
Section II: The Countries............................................................... 213
Major non-OPEC producers .......................................................... 214
Norway........................................................................................... 215
United Kingdom............................................................................. 221
US Deepwater Gulf of Mexico...................................................... 227
US Alaska ....................................................................................... 233
Canada – Oil Sands........................................................................ 239
Azerbaijan ...................................................................................... 245
Kazakhstan..................................................................................... 251
Russia ............................................................................................. 259
Argentina........................................................................................ 267
Brazil ............................................................................................... 273
Major OPEC Producers.................................................................. 279
Angola............................................................................................. 281
Iran.................................................................................................. 287
Iraq.................................................................................................. 295
Kuwait ............................................................................................ 303

Libya ............................................................................................... 311
Nigeria ............................................................................................ 319
Saudi Arabia................................................................................... 327
United Arab Emirates.................................................................... 335
Venezuela....................................................................................... 341
Section III: The Companies ........................................................... 349
BP ...........................................................................................351
Royal Dutch Shell plc ................................................................355
Total SA.........................................................................................359
ENI ...................................................................................363
Repsol.............................................................................................367
StatoilHydro ....................................................................................371
BG Group ........................................................................................375
ExxonMobil .........................................................................379
Chevron...........................................................................................383
ConocoPhillips ......................................................................387
Occidental Petroleum ..................................................................391
Marathon Oil .................................................................................395
Hess Corporation .....................................................................399
Glossary.......................................................................................... 403
Industry Investment thesis ........................................................... 413