British Petroleum - Analysis And Recommendations
Introduction
The oil and gas industry is comprised of many distinct areas of operations generally categorized into "upstream" and "downstream" segments. Upstream is defined as the exploration, development and extraction of the resource. Downstream refers to the refining, transport, storing and selling of the resource. This paper will focus on the upstream aspect of the industry, and exploration and production in particular. Our client firm is BP.
The exploration and production segment is, has always been, and will always be, driven primarily by macroeconomic and geopolitical issues. As the price of crude oil rockets towards $40 per barrel today, understanding the forces driving the increase in price will also reveal the beginnings of a fundamental shift in who holds the power in the industry.
Crude oil and natural gas are commodities. Like all market-traded commodities, their price is driven to a large extent by supply and demand. Currently, changes in both supply and demand are impacting this industry. On the supply side, the consensus is that the world's oil reserves will expire in the next seventy to one hundred years (barring any major discoveries in Russia).
At the same time, demand for oil is skyrocketing due to strong GDP and population growth in China, India and the USA (Exhibits 1 and 2). China, who in years past had been a net exporter of oil, has recently shifted to becoming a net importer due to their strengthening economy and inefficient heavy industry. The oil requirements of the developing nations of Asia, of which we include China and India, are projected to far outstrip that required by the US and Europe combined in the first quarter of the 21st century and most likely beyond. Given this increasing demand, price will rise to achieve a new equilibrium.
Aside from supply/demand issues, OPEC's pricing power and the emergence of Russia (and other Former Soviet Union countries) as a supplier of oil, and...
View Full Essay