'I
All rights reserved INFORMATION TO ALL USERS
The qu ality of this repro d u ctio n is d e p e n d e n t upon the q u ality of the copy subm itted.
In the unlikely e v e n t that the a u th o r did not send a c o m p le te m anuscript and there are missing pages, these will be note d . Also, if m aterial had to be rem oved,
a n o te will in d ica te the deletion.
uest
ProQuest 10673018
Published by ProQuest LLC(2017). C op yrig ht of the Dissertation is held by the Author.
All rights reserved.
This work is protected against unauthorized copying under Title 17, United States C o d e M icroform Edition © ProQuest LLC.
ProQuest LLC.
789 East Eisenhower Parkway P.O. Box 1346
Ann Arbor, Ml 4 8 1 0 6 - 1346
"VENEZUELA'S POSITION IN THE INTERNATIONAL OIL INDUSTRY
1940 - 1965n
BY
J A M E S F E R N A N D E Z
S u b m itte d f o r t h e M .P h i l.
D e g ree i n Economics t o th e
UNIVERSITY OF LONDON
J u n e , 1967
A b s t r a c t
The p o s i t i o n t h a t th e p e tr o le u m i n d u s t r y o c c u p ie s to d a y i n t h e Economy of th e v a r i o u s p r o d u c in g and consuming c o u n t r i e s , and th e i n t e r r e l a t i o n s o f t h e s e c o u n t r i e s b a s e d o r d e r i v e d from t h e o i l b u s i n e s s has g iv e n t h i s i n d u s t r y an i n t e r n a t i o n a l c h a r a c t e r . The p e tr o l e u m i n d u s t r y , however, was s u b j e c t e d t o c e r t a i n changes b y t h e t r a n s f e r e n c e o f i t s c e n t r e of g r a v i t y fro m th e W e ste rn Hem isphere t o t h e E a s t e r n , w i t h t h e emergence o f t h e l a t t e r a s t h e m ajor s o u r c e o f o i l e x p o r t s . The U n i t e d S t - . t e s by
i t s e l f had e x e r t e d a p o w e r f u l i n f l u e n c e o v e r t h e i n t e r n a t i o n a l o i l
i n d u s t r y , p a r t i c u l a r l y o v e r p r i c e s and o v er th e p r i c i n g sy ste m u s e d w h ile i t was a n e t e x p o r t e r o f o i l , t h t i s , up t o 1948. The i n f l u e n c e on p r i c e s managed t o p e r s i s t , h o w ever, up t o t h e m i d - f i f t i e s due t o t h e v a r i o u s
i n t e r n a t i o n a l e v e n t s t h a t fo llo w e d : th e K o rean war ( 1 9 5 0 ) , t h e n a t i o n a l i z a t i o n o f th e I r a n i a n o i l i n d u s t r y (1953.), --*id t h e Suez c r i s i s (1 9 5 6 -1 9 5 7 ).
I t i s o n ly a f t e r t h e U n i t e d S t a t e s e s t a b l i s h e d v o l u n t a r y c o n t r o l s i n 1957 and l a t e r i n 1959 m an d ato ry q u o t a s , when m ark e t f o r c e s b e g a n t o p l a y a dom inant p a r t i n th e i n t e r n a t i o n a l i n d u s t r y .
T h e re i s l o g i c a l l y a p a r a l l e l l i n e o f th o u g h t w i t h r e s p e c t t o th e V e n e z u e la n o i l i n d u s t r y . I t had a l s o b e e n u n d e r th e i n f l u e n c e of t h e American i n d u s t r y u n t i l 1959 > and s i n c e th e n V e n e z u e la h a s a l s o b e en r e c e i v i n g th e im p a c t o f m a rk e t f o r c e s . However, t h i s c o u n t r y h a s b een s u s c e p t i b l e t o t h e s t r o n g e s t im p a c t h a v in g th e h i g h e s t p r o d u c t i o n c o s t
amongst th e m a jo r e x p o r t i n g c o u n t r i e s , ..nd t h u s , un d er th e p r e v a i l i n g c o m p e ti t iv e s i t u a t i o n , h a s b e e n lo sin g n o s i t i o n i n w o rld ;,v r k e t s 7 /ith r e s p e c t t o M iddle E a s t e r n and f r i c a n s o u r c e s . However, 'l e n e z u e l a b e l i e v e s t h t vh t h t h e c r e a t i o n of 0 ,1 0C , c o m p e t i t i o n among s o u r c e s can be p r e v e n t e d , and t h a t v d t h a c o o r d i n ■ie d p o l i c y among O .P .E .C .
members, t h e y c a n become i n s u l a t e d from t h e e f f e c t s of c o m p e t i t i o n among o i l co m p an ies. I b e l i e v e t h a t th e weakness o f t h i s t h e o r y l i e s i n t h e f i r s t a s s u m p tio n .
. ; i t h t h e p r e s e n t work I hope t o c l a r i f y i n some d e g re e t h e s i t u a t i o n of th e p e tr o le u m i n d u s t r y i n V e n e z u e la , and i t s p o s i t i o n w i t h i n t h e
i n t e r n a t i o n a l s c e n e . N e e d le s s t o s a y , t h i s w i l l i n v o l v e many p o l i t i c a l and s o c i a l c o n s i d e r a t i o n s , b u t b e c a u s e t h e y a r e so e n t a g l e d w i t h t h e
econom ics o f th e p e tr o lo u m i n d u s t r y , th e y v / i l l be u n a v o i d a b l e .
WITH RECOGNITION AM) GRATITUDE
.loknowledf e '.no n t s
I r n s h t o acknowledge mr u tm o st g r a t i t u t d e t o trio C e n t r a l Bank of V e n e z e u la f o r h a v in g g i v e n me th e o p p o r t u n i t y end f i n a n c i a l a s s i s t a n c e t o mako t h i s s tu d y . To D r, Crrmon C„ L a s i , head of t h e P e t r o le u m and Mining D i v i s i o n of t h i s i n s t i t u t e , I am a l s o g r e a t l y i n d e b t e d , f o r h e r m oral s u p p o r t and f o r h a v in g " p e r s u a d e d ” me t o j o i n t h e P e tr o le u m S e c t i o n th r o u g h w hich I was i n i t i a t e d i n t h i s f i e l d . From th e M i n i s t r y o f Mines and H y d ro carb o n s of V enezuela., I w ish t o th a n k D r. A l i r i o P a r r a f o r h i s a d v ic e and a s s i s t a n c e on many o c c a s i o n s , and Miss E t h e l B r a n d t who k i n d l y p r o v i d e d me w i t h s t a t i s t i c s and d a t a . There a r e no words t o
e x p r e s s my g r a t i t u d e t o P r o f e s s o r E d i t h P e n ro so t o whom I s h a l l alw ays be i n d e b t e d f o r th e t r a i n i n g she has g iv e n me and f o r h e r p a t i e n c e a s
she s u p e r v i s e d my work. To D r. B iplabkukum ar Das G-upta I am a l s o v e ry g r a t e f u l f o r h i s encouragem ent a t e l l t i m e s , end f o r h i s a d v ic e and h e lp d u r i n g d i f f i c u l t moments. And l a s t b u t by no means l e a s t , I w ish t o acknowledge t o " S h e l l O i l Company" i n London, my g r a t i t u d e f o r
p e r m i t t i n g me t o u se t h e i r e x c e l l e n t l i b r a r y , -nd t o i t s v e r y e f f i c i e n t s t a f f who were always r-.-ady t o le n d a h e l p i n g nund.
M erely as a p r e c a u t i o n I want t o emphasize- t h a t th e view s e x p r e s s e d i n t h i s work a r e e n t i r e l y my own, and t h e r e f o r e do n o t r e p r e s e n t t h o s e of any o f th e i n s t i t u t i o n s m en tio n ed above.
T ab 1 e of _C_on t e n t s
P a r t One: B a s i c F e a t u r e s and H i s t o r i c a l Backgr o u n d _o f ^ t h e I n t e r n a t i o n a l O i l I n d u s t r y
PAGg CHAPTER ONE ... . ... . ... 9 C h ie f Focnomic C h a r a c t e r i s t i c s o f th e I n t e r n a t i o n a l O i l
I n d u s t r y . S t a g e s o f th e P e t r o le u m I n d u s t r y . The Changing P a t t e r n o f Demand and S u p p ly .
CHAPTER TWO ... 37
B r i e f A ccount o f th e E v a l u t i - m o f t h e P r i c i n g System u s e d b y t h e I n t e r n a t i o n a l O i l Companies*. A) The G u l f o f Mexico B a s in g P o i n t ; B) The V e n e z u e la n B a sin g P o i n t ; C) The P e r s i a n G u lf B a s in g P o i n t . The R e l a t i v e F a l l o f Middle E a s t e r n E .O .B . P r i c e s .
CHAPTER THREE ... 57
S i g n i f i c a n c e o f P o s t e d P r i c e s , R e a l i s e d P r i c e s , and Tax R e f e r e n c e P r i c e s . T a x a t i o n on t h e O i l I n d u s t r y i n U*P,B.G, C o u n t r i e s ,
PAGE P a r t Two: V e n e z u e l a i n th e Frame-.ork j j f the-_ I n t e r n e t i o r a l
O i l I n d u s t r y
CHAPTER FOUR . . . ... ... . . . . ... 83 The B e g in n in g s of th e O i l I n d u s t r y i n V e n e z u e la . C h a r a c t e r i s
t i c s o f t h e V e n e z u e la n O i l I n d u s t r y and i t s P o s i t i o n i n th e I n t e r n a t i o n a l I n d u s t r y . The S i g n i f i c a n c e o f t h e O i l I n d u s t r y i n th e V e n e z u e la n Economy. V e n e z u e l a 's P e tr o le u m P o l i c y .
The " C o r p o r a c io n V e n ez o lan a de P e t r o l e o 11. The P e t r o - c h e m ic a l I n d u s t r y i n V e n e z u e la .
C IE P T Ij^ jO T o . . o „ , b „ , , . . o . q , , o . d . c » o 0 , 0 o o . . . . . . * b . o , . 6 . 14.6 V e n e z u e l a 's I n t e r n a t i o n a l M a rk e ts . The D e t e r i o r a t i o n of
V e n e z u e l a 's P o s i t i o n as th e " i o r l d ' s Major E x p o r t e r of P e tro le u m : A) D om estic R e a so n s; B) E x t e r n a l R e a s o n s. The P a t t e r n of
V e n e z u e l a 's P e tr o le u m E x p o r t s ; S p e c i a l R e f e r e n c e t o F u e l O i l .
CHAPTER S I X ... ... . ... 193 The F o rm a tio n of th e O r g a n i z " t i o n of P e tr o le u m H x r o r t i n a Coun
t r i e s ( O . P .E .C .) 0 0P , E . C of s Of f o r t s t o I n c r e a s e Members1 Sh-:-re o f O i l Incom e. V en ez u ela as a Member o f G .F .E .C .
CHAPTER SEVEN . . ... . . ... 217 C o n c l u s i o n s .
BIBLIOGRAPHY ... ?S2
B a s ic F e a t u r e s and
H i s t o r i c a l Background of t h e
I n t e r n a t i o n a l O il I n d u s t r y
CHAPTER ONE
C h ie f Economic C h a r a c t e r i s t i c s o f th e I n t e r n a t i o n a l O i l I n d u s t r y :
V e r t i c a l I n t e g r a t i o n , O l i g o p o ly , High C a p i t a l I n v e s t m e n t s , Economics of S c a l e , Large I n i t i a l I n v e s t m e n t s , S ta g e s of th e P e tr o le u m I n d u s t r y . The Changing P a t t e r n of Demand and S u p p ly .
I Ch i e f Economic Ch a r a c t e r i s t i c s_ of th e t y n t e rn a . t i o n a l 0 i l ^I n d u s t r y , Ver t ic e J -_ In t e g r a t i o n
The o i l i n d u s t r y i s composed of f i v e d i f f e r e n t s t a g e s : e x p l o r a t i o n , p r o d u c t i o n , t r a n s p o r t , r e f i n i n g and m a r k e ti n g . However, t h e m ajo r o i l
companies seem, t o have f a v o u r e d v e r t i c a l I n t e g r a t i o n a s a viay o f c o o r d i n a t i n g t h e s e and of making th e p r o c e s s of " p ro d u c tio n * 1, u s i n g t h e term i n th e w i d e s t s e m e , i . e . from w e l l t o consum er, q u i t e e f f i c i e n t . T /ith o u t im p ly in g t h a t t h e s e s t a g e s c o u ld n o t ha,ve b e e n , o r c o u ld n o t be d e v e lo p e d by s e p a r a t e comp
a n i e s o r c o n c e r n s , u s i n g " l o n g - te r m c o n t r a c t s '' ( l ) t o a s s u r e th e a v a i l a b i l i t y of th e n e c e s s a r y i n p u t s of e a c h s t a g e and t h e o u t l e t s f o r t h e i n t e r m e d i a t e and f i n a l p r o d u c t , t h e p r e s e n t s i t u a t i o n i s t h a t c h a r a c t e r i z e d by v e r t i c a l i n t e g r a t :
lo v I t was th r o u g h v e r t i c a l i n t e g r a t i o n t h a t some com panies managed t o e x e r t t h e i r suprem acy i n th e o i l b u s i n e s s by r e s t r a i n i n g c o m p e t i t i o n from th e
s m a l l e r companies t h a t had no a c c e s s e i t h e r t o cru d e o i l o r t o m ark ets. (2 ) But we must r e c o g n i s e , how ever, t h a t i t was a l s o a n a y o f s e c u r i n g an o u t l e t f o r th e v a s t r e s o u r c e s of c ru d e o i l f o r t h o s e i n th e p r o d u c in g sta g e , and
of s e c u r i n g an even f lo w of i n p u t i n th e r e f i n e r i e s and o f s u p p ly in g a m ark e t w ith f i n i s h e d p r o d u c t s r a t h e r e f f i c i e n t l y f o r t h o s e i n t h e r e f i n i n g s t a g e . V e r t i c a l i n t e g r a t i o n seems t o be d e fe n d ed by t h e oml i n d u s t r y on t h e g ro u n d s
( 1 ) Pe n r o s e , E , ; "monopoly a n d Compe t i t i on i n t h e I n t e r n a t i o n a l .. P e t r ol yum I n d u s t r y " , The Y ear Book o f V o rld A f f a i r s , 1 9 6 4 , - page* 157.
( 2 ) H a r t s h o r n , J a c k ; " O il t y t y t y t y 5 an & Lover m e n t s " , 1 9 6 2 , page 109.
t h a t e f f i c i e n t o p e r a t io n s s r e q u ir e a c o n tin u o u s and s e c u r e flo w o f s u p p l i e s , and b i g f i r m s w i t h l a r g e and f a r - f l u n g m ark e ts and h eavy in v e s tm e n t s can n o t a f f o r d t o be e n t i r e l y dep en d en t on o t h e r s . One m a jo r o i l company a l l e g e s t h a t s i n c e t h e c a p i t a l in v e s tm e n t r e q u i r e d a t e ac h s t a g e of th e o i l i n d u s t r y i s l a r g e " i t i s i n e v i t a b l e . . . . t h a t o p e r a t o r s s h o u ld s e e k , . . . an a rra n g e m e n t whereby t h e i r i n v e s tm e n t i n each s t a g e o f th e i n d u s t r y can be p r o p e r l y
c o - o r a i n a t e d w ith t h a t a t o t h e r s t a g e s so as t o e n s u r e optimum employment of c a p i t a . l o v e r a l l , t h e r e b y k e e p in g c o s t s a s low a s p o s s i b l e . The p u r s u i t of t h e s e v e ry n a t u r a l aims i n a c a p i t a l - i n t e n s i v e i n d u s t r y h a s l e d t o a. l a r g e m easure of v e r t i c a l i n t e g r a t i o n " . ( 3 ) A c co rd in g t o t h i s same s o u r c e , a p p r o x i m a t l e y 7 0 / o f t h e i n d u s t r y i s c o m p le te ly i n t e g r a t e d v e r t i c a l l y , and
" t h e r e i s a c o n t i n u i n g te n d e n c y f o r more r e c e n t l y e s t a b l i s h e d companies t o seek p a r t i a l or co m p lete i n t e g r a t i o n " * ( 4 )
On th e w h o le , t h e a c t i v i t i e s o f th e i n t e r n a t i o n a l o i l i n d u s t r y have b een l a r g e l y i n th e h an d s o f e i g h t f u l l y i n t e g r a t e d com panies g e n e r a l l y r e f e r r e d t o as "M ajors" t h a t managed t o a c q u i r e a h ig h d e g re e o f c o n t r o l of th e i n d u s t r y These companies f i v e American and t h r e e E u ro p ean , a r e a s f o l l o w s :
1) S ta n d a r d O i l .of New J e r s e y .
2) M obil O il Company
3) S ta n d a r d O i l Company o f C a l i f o r n i a
4) The Texas O il Company
5) G-ulf O i l Company 6) R oyal D u tc h ./S h e ll
( 3 ) S h e l l I n t e r n a t i o n a l P e tro le u m Company, London; " C u r r e n t I n t e r n a t i o n a l O i l P r i c i n g P r o b le m s " , A u g u s t, 1963> page 3«
( 4 ) I b i d 3 page 3 .
7) B r i t i s h P e tro le u m
8) Compagnie E r a n c a i s dcs P e t r o l e s .
j o i n t o p e r a t i o n s a r e common b etw een t h e s e com panies and t h e i r a f f i l i a t e s i n m ost p a r t s o f th e world* Only among th e f i r s t seven th e y h o ld ( b )
a p p r o x i m a t e ly 73?- o f th e w o rld p r o d u c t i o n ( 6 ) , 633 o f r e f i n i n g ( 7)> and m ark e t some 64% of t h e o i l s o l d t o co n su m ers. (8 ) f u r t h e r m o r e , t h e y a r e a l s o " o f t e n c l o s e l y a s s o c i a t e d t h r o u g h j o i n t o w n ersh ip o f s u b s i d i a r i e s and th r o u g h lo n g term s u p p ly o r m ak etin g a g re e m e n ts ” . (9 ) The a s s o c i a t i o n
th r o u g h j o i n t o w n ersh ip a l s o seems t o be- a way by w h ich t h e o i l companies have ch o sen t o u n d e r t a k e c e r t a i n i n v e s t m e n t s . There have b e e n a g re e m e n ts b etw een com panies w hereby a s u r p l u s of cany k i n d h e l d by one c o n c e r n i n a p a r t i c u l a r a r e a c o u ld be ns o l d t o th e c o m p e t i t o r i n exchange f o r s u p p l i e s of an e q u i v a l e n t v a l u e ” i n a n o t h e r a r e a where th e fo rm e r m ig h t be s h o r t ? t h a t r e s u l t i n s a v in g of c a p i t a l e x p e n d i t u r e " t o t h e a d v an tag e o f b o th com panies c o n c e rn e d " . (10)
A lth o u g h th e o l i g o p o l i s t i c n a t u r e s t i l l h o ld s f o r th e o i l i n d u s t r y we must?
however? make th e o b s e r v a t i o n t h a t i t h as l o s t i t s c h a r a c t e r i s t i c o f b e in g a t i g h t o l i g o p o l y w ith th e e n t r y o f t h e i n d e p e n d e n t s , and t o d a y i t i s b e t t e r t o r e f e r bo i t a s an " o l i g o p o l y w i t h a f r i n g e " , ( l l )
C. High C a p i t a l I n v e s tm e n ts
As a n o t h e r c h a r a c t e r i s t i c o f t h e o i l i n d u s t r y wo have t h a t i t i s one of h ig h c a p i t a l i n v e s t m e n t s . At th e end of 1964 t h e r e had b e e n $ 1 3 5s625 m i l l i o n
( g r o s s f i g u r e ) i n v e s t e d i n f i x e d a s s e t s o u t s i d e o f th e S i n o - S o v i e t b lo c
( b ) O u tsid e o f H o tth Am erica and th e S o v i e t B loc (196b)*
(6 ) P e tr o le u m P r e s s S e r v i c e , November 1966, page 415*
(7 ) I b i d .
(8) MI-
(9 ) P e n r o s e , 35, "f i d d l e _East_ Oi l : The I n t e r n a t i o n a l D i s t r i b u t i o n of P r o f i t s and I n come, T a x e s" , Economic a, A ugust I 9 6 0 , page 204.
(10) O d e l l , P ; "An _Bc Gnomic G-eography of O i l " London 1963 > page 113*
(11)Term u s e d by David Owens. See " Crude O i l P r i c e s : The k%xt Eive_?Yba r s i n C o m p e titiv e A s p e c ts o f O i l O p e r a t i o n s " , I n s t i t u t e o f P e t r o le u m , London 195S page l o b .
( s e e t a b l e I - l ) . Of t h i s am ount, a p p r o x im a tle y 50% had b een a l l o c a t e d i n t h e U n i t e d S t a t e s , and 701' were i n t h e V e s t o r n H em isphere a l o n e , V en ezu ela p a r t i c i p a t e d i n t h e g l o b a l f i g u r e w i t h 5?- and t h e M iddle E a s t w i t h 4%. I t would a l s o seem i n t e r e s t i n g t o p o i n t o u t v /e s te rn Europe’ s p a r t i c i p a t i o n of l i f e i.i t h i s f i g u r e s i n c e i t r e f l e c t s t h e im p o rta n c e and th e developm ent o f th e r e f i n i n g and m a r k e tin g s t a g e s i n th e a r e a ,
V i t h r e s p e c t t o t h e d i f f e r e n t s t a g e s o f t h e o i l i n d u s t r y , we f i n d t h a t n e a r l y 50% o f t h e s e g r o s s i n v e s tm e n t s a r e a l l o c a t e d i n th e p r o d u c t i o n s t a g e , f o l lo w e d by 17% i n r e f i n i n g , l 6 f."- i n T r a n s p o r t and 15% i n m a r k e ti n g . T h is i s a breakdown of th e t o t a l f i g u r e which a l s o r e f l e c t s r a t h e r a c c u r a t e l y th e
s i t u a t i o n o f t h e d i f f e r e n t p r o d u c in g a r e a s . F o r t h i s r e a s o n , and a s we can see i n t a b l e I - 1 , t h i s i s n o t th e c ase o f W e ste rn Europe and t h e Ea,r E a s t ( h i g h l y i n f l u e n c e d by J a p a n ) s i n c e t h e s e two r e g i o n s a r e n o t c h a r a c t e r i z e d as p r o d u c e r s b u t r a t h e r a s heavy consumers and c o n s e q u e n t l y have t h e i r p e tr o le u m
i n d u s t r y b a s e d on r e f i n i n g and m ark etin g *
T7ith r e s p e c t t o th e p a r t i c i p a t i o n o f Am erican i n v e s tm e n t i n t h e p e tro le u m i n d u s t r y o u t s i d e o f th e U n ite d S t a t e s , we f i n d t h a t a t th e end of 1964 i t had r e a c h e d a f i g u r e o f $>3>325 m i l l i o n which was e q u i v a l e n t t o 36% of t h e
i n t e r n a t i o n a l o i l i n d u s t r y o u t s i d e o f th e A m erican b o r d e r . Canada v/as t h e c o u n tr y t h a t had had m ajo r a t t r a c t i o n f o r Am erican C a p i t a l 4>250 m i l l i o n ) a l t h o u g h V e n e z u e la , t h a t came c l o s e b e h in d 4>100 m i l l i o n ) , had th e i n d u s t r y w ith t h e h i g h e s t p a r t i c i p a t i o n o f Am erican i n t e r e s t s (64%)* ( s e e t a b l e 1 - 2 )
A n o th e r f a c e t o f th e o i l in d u s tr y * s in v e s tm e n t p a t t e r n i s g i v e n by th e a l l o c u t i o n o f n e t i n v e s t m e n t s . A n a ly s in g th e s i t u a t i o n from t h i s p o i n t o f view , we c o n ti n u e g i v i n g th e V e s t e r n Hemisphere p re p o n d e r a n c e o v er th e
E a s t e r n , b u t we f i n d t h a t V e n ez u ela f a l l s below th e M iddle E a s t and A f r i c a w ith r e s p e c t t o the amount o f i n v e s t m e n t , ( s e e t a b l e 1 - 3 ) The g l o b a l
00o
hiP oa
otr
0P CD
P
&
Pch chP
•□o'£»
a
OP kdH*
chP H
I—I ES <i 0p
c f
&
OP c+P O cf*b"
o o m* P
►0 c+-Q 4O 1—i CD
H
bJ M o I—1
pP
OQb
COH*
b0
GO1 o
tdb Oo
— cp ijtsi
t •v:* 1 o <J o cri
o ' ts !{P p b H) CD* o" c-h s p p
p p M P* P ?p b
i p H*
b I—J
i! CD Pi H* cf* , d o S3 cf-
P b b O O l o to Pi CD
i-3 oo b p 0 P b CD ^ p pi
p p
fci P
O p
j w ct* b o b to
cf* cf* (0 t?d p p p.,* cf-
P CD 2 p P 0 cf- P
b pj ib
8H- c f 4
o B
b b o
0 ^ cf*
Jco *0 | p CD
s y P
i_t
o
bso
o
is*p bSo
0 b , Cn
b j
Y (j Ob j1 H M H 3 N# Va va
1—i
V* ;
va i i
Cn
b -b H CmvD o Ob I v* V» c* Va
ro Ob [ Cn -"J bM ro b n I Vji Co c n - b o 1 o b n |i b n b n O b n cn ;
I
-g Cn b n b nOb IV) toCo
CO
bbn
bMb b1 - 1
o
roro M b
O bo o
bro
V*
gb n
O to bnro bn
bDO o
CO COOb o
ro co bn bn
b b i ' b H
bn bn bn o
bM -b- H -b-
o o o o
ro Ob
on oo -b* o O b n b J - ^ l O bn O bn
v»Ob Obto o
Vb* bb Cn
Hro
00o o
bnro bn
bnro
v*b
00 Cn
O
V■F“* bn Ob co
H ro m O bn O
b
: o
ro c>j co o 'O o
b co V* Va b H b f—* bM CO bn Cn O
b n jij V-*I—1 I b bM , • bM
j ^ \*
0 0 J CO Cn b n CO |I 1—1 b r~
o -P- K i ro H f - 0b j co CD - b cn [ o b n J b n O o O o |I Cn O o b n
b1—j o0
0 bP
<!
0 to cf*
PO Pcf*
H* P
O | H *
p j Ob bP 4 -b i
’ o
'hd p*
11—1 o
•IP P p H*
Jcf- O Jp p b
bj H-X Po pb- pCD c+
P
JoW o J CD
jcn
*4J
|b nb
Sh3p P"
r
HH j iM
H
&
p p cf*
3
I—1
CO CDro
bn o
co
b n Oo
ro b bn DO b n O Ob o co Ob bn
O O O O
l—i o
O b fO bn
ub cn£
b -'•J
\* Va b ro —0
—-J b n --0 Cn O Cn
i ^Jco Ob
b b I ro p
CO Va 1 Vi
Ob o J -F2- 1—1 bM b b co
-P: bM bn bn Ob b bM b V0 co ro b
V* o CD bn 5 O o O bn cn o o o cn
(—1 A
p bM b bM
!
m CD b0^ bn ro b \ Ob bn bn ro b Ob Ob b
0 Va V. S M v» v» ^ V* Va
Ob -P- b 3 o \ o b ro b b Cm P H -g"• bnro bnro OO J Cn bn bn Cnj ro b ro b oo I obn Cn bn Ob b O
2 s S .e .. 0
A'aer i e an IiiY^ t m e.nt _ i ii t h e Pa t r o l e uni In d u s try_ Out s i d e t h e Unitocl , S t a t e s ^ l )
(DGcenber 3 1 , i % 4 )
M i l l i o n P e r c e n t a g e o f D o l l a r s Dom estic I n d u s t r
Canada 4 ,2 5 0 6 1 .8
VEKHSZUELA 4 ,1 0 0 a - 3
O th e r W este rn Hem isphere 2,125 2 7 .4
W e ste rn Europe 3 ,9 5 0 2 5 .9
A f r i c a 1 ,0 7 5 2 6 .1
Middle E a s t 2 ,4 7 5 4(3.8
F a r E a s t 2 ,0 7 5 3 1 -3
F o r e i g n F la g T an k ers 3,275 2 6 . 4
T o t a l
ca:jcr=ii2TC5rcs=3 2 3,325 3 6 . 1
( 1 ) C ro ss I n v e s tm e n t i n F ix e d A s s e t s ,
S o u rc e : Chase M a n h a tta n B ank; " C a p i t a l I n v e s tm e n ts o f t h e World P e tr o le u m I n d u s t r y " , 1964* Pa Se 6 ,
Source:Chase ManhattanBank; "Capital Investmentsof the VoridPetroleumIndustry> 1964%page 5*
tdM aP piH H*4 0*3
CQH-
40
CO1
o<1 H*CD
ch triH OO
Vh o
ccro On
a ib=j
4 P
P to
{—i cb
H CD
O 4
o 4
pc+ l-wl-M CD CD
Pi ri
H-to C4JD 4CD
bd J- ~J f- i> - 0
p H* CD'
4 P i 4 CO b d P i H - c b
H O CD
p CD P 4
CO
b d 4
cf-
P bd
to P
cb 4
o CD
|CD
1“f CD
N fK
jCDIB
y toH*
I'd|Df*
Q4
CD
c+O tr*CD
4 tt-Ui o o0 to
H-ct~
CO CD
'P 4£*4
CD
4o
<q O
bd £3
•—H h*>
bd p bq Pj cd p
0 4a H*c+
^*VCDl cbCO
H~p OCO
O
Vh ro , ro
1 M H cm j1 1—1 m ro o
v» X V* \f s* 1j v> V* v* v*
VD 3 Vn -F“ Vh Vn 00 Co 00 p- -g Vh i Vn -d vn vn vo ro on oo ro O S Vn Vn O o Vn o Vn Vn vn
Vf VOcm
Vn
\»-J
Vh oo
f=(J -from
Vn
-"•J Vn
l_i v_m 4> ,{>•
am -V -V vn U lU iV jl o
ro ro ro
O Ui Ul VJI
VVH4
On
Vnvo
O
Vn
t—•
o
VlH
ro ro -F- -u Oh Vh —v
O o On
H H v n Vn O Vn o
,P1-3
Jo1
| CD
H
3Vn
j—Hj
P"
Vn
o o
VnV||
ODO
Vji
H Vn Vn
vn oh ro om Vn Oh ---J Vji O O vn O
cmro Vn Vnto
Oh ro Vn om W cm cm-v O Vn Vn
Vn V*
- jVn
Vn o
Vno o
ro ro
-u r—*h o vn vn o o
ro vnro Vn
i H
I Vn
!—1
H VO Vh vn o o o
•?4j fTo ch O
CO p
v*ro Vroh
O O
Vnv»
a\o o
H Vh
oh ro am-p- ro Vh -f“ O Vn O Vti o
cm Vcmh o
-V00
Vn
M CD CD ro H ro O O vn
Vro* oCT\
o o
amo o
H VH Vm Vn Cmvn vn O vn O
H
amo VnH
Vn
1—1 Q '\ VO ’OD vn o o
-U H i - r VH
Vh
1 00 ro to vo -j •P~ ro 4^ vn
\A 5 ^ V* V« <JI V* \*
VjvJ VD , VD cm oo cm ro -P“ vn vn cm
- J ° -V ro o ro ro o Vn ro vn
Vn O vn 1 Vn o vn vn O vn O Vn o
f i g u r e o f n e t i m e s tm e n ts f o r th e end of 1964 i s o f $ ^ 7 3 ,4 7 5 m i l l i o n o f which 6 l $ wxs a l l o c a t e d i n t h e W e ste rn Hemisphere* and 26/1 i n t h e E a s t e r n . (12) V e n e z u e la p a r t i c i p a t e d i n t h i s f i g u r e w ith 3%*
D. E ononis,s of f c a l e
Economies o f s c a l e a r e a l s o p r e s e n t i n t h e p e tr o l e u m i n d u s t r y s i n c e th e d e c r e a s e i n u n i t c o s t s which r e s u l t s as t h e s c a l e o f o p e r a t i o n s i n c r e a s e s , c o n s t i t u t e s a s t n iding i n c e n t i v e t o employ b i g u n i t s , (1 3 )
I n c ru d e o i l p r o d u c t i o n , l a r g e - s c a l e o p e r a t i o n s makes i t p o s s i b l e f o r a company t o "assume r i s k s , t h a t would be beyond t h e c a p a c i t y and r e s o u r c e s o f a s m a ll f i r m " , and t o a p p ly more advanced t e c h n o l o g i c a l m ethods and r e s e a r c h t o e x p l o r a t i o n and d e v e lo p m e n t, ( 14) I n t h i s s e n s e we c a n u n d e r s t a n d t h a t th e l a r g e r t h e a r e a i s u n d e r e x p l o r a t i o n i n a f i e l d t h a t h o l d s o i l d e p o s i t s , th e h i g h e r w i l l be th e p r o b a b i l i t y o f suoaess, and t h i s s u c c e s s , i f achieved., i s what f i n a l l y p a y s o f f th e ex p en se u n d e r ta k e n u n t i l t h a t moment. I n p r o d u c t i o n g r e a t econom ies a r e a l s o g a i n e d , b u t we must c l a i r f y , t h a t what c b - ° r a c t e r i x e s th e p r o d u c t i o n s t a g e i s an "economy o f h i g h - l e v e l o u t p u t " , (lf>) Once th e o i l b- g i n s t o f l o w , th e h i g h e r t h e o u tp u t t h e lo w e r t o t a l a v e r a g e c o s t p e r u n i t :.t w i l l be u n t i l m a rg in a l c o s t comes t o c o i n c i d e w ith a v e r a g e c o s t ;
( s e e d iagram I No, l ) , I n o t h e r w o rd s, econom ies can be r e a c h e d i n th e o n ly
p ro d u c in g s t a g e o f th e i n d u s t r y , b u t / u p t o t h e l i m i t g i v e n by th e m a r g in a l c o s t i u n c t i o n s i n c e t h e s i s o o f any r e s e r v o i r ^ no n a t t e r hove l a r g e I t may b e , h as b e e n " l i m i t e d b3>* natuDre" and beyond t h i s l i m i t i t can n o t v'j f u r t h e r
f l 2 ) The r e m a in in g p e r c e n t a g e i s u n a l l o c a t e d ,
( l 3 ) Thompson and. P e t e r s ; "The St r u c t u r e o f th e O i l I n d u s t r y " , page 57, I n s t , of P e tr o le u m , London 1953.
( i k ) C0 I s s a w i and M* Yeganeh, "The Economics o f Mi d d l e E a st e r n O i l ” ; New Y o rk , P 0A0 P r a e g e r , 1962, page 8 4 .
( 1 5 ) • wlelmnn, M .; :tI 4 p J :rQrI f ,,QI1_. Ou t lo o k " i n M arion Clawson ( e d i t o r )
••.N a t u r a l ^ R e s ou r c e s a nd I n t e r n a t i o n a l J D ^yelopme^nt" , B a l t i m o r e , The dohns Hopkins P r e s s , 1964, page 4 4 .
U N IT C O S T
“ S i m p l i f i e d Diagram of the
Cost Structure of an Oil D e p o s i t ”
v i
M ARG INAL COST
TOTAL AVERAGE
COST AVERAGE
F I X E D GOST
ii
O U T P U T
I n r e f i n i n g , i n v e s tm e n t p e r u n i t o f c a p a c i t y " f a l l s sh a rp ly * 1’ w i t h i n c r e a s e i n s c a l e up t o a c o n s i d e r a b l e l e v e l , ( l 6 ) I s s a w i and Yeganeh fo u n d t h a t i n t h e U n ite d S t a t e s i t had b e e n e s t i m a t e d t h a t in v e s tm e n t p e r b a r r e l o f c a p a c i t y f e l l from $ 1 ,3 0 0 f o r a r e f i n e r y w i t h 1 0 ,0 0 0 B/D c a p a c i t y , t o $833 f o r one of 33*000 B./D c a p a c i t y , $ 6 l 0 f o r one o f 1 0 0 ,0 0 0 B/D, and $?4-5 f o r one o f 200,000 B/D due t o t h e d rop i n u n i t f i x e d c o s t s and o f l a b o u r r e q u i r e m e n t s . ( 17) I n f a c t , an o i l r e f i n e r y seems t o have th e minimum c a p a c i t y r e q u i r e m e n t o f 13*000
b a r r e l s d a i l y of t h r o u g h p u t below which i t would be " h a r d l y economic*' t o b u i l d . (1 8 )
T an k ers and p i p e l i n e s a l s o a ll o w l a r g e econom ies o f s c a l e . W ith r e s p e c t t o t a n k e r s i t h a s b e e n e s t i m a t e d t h a t compared w i t h a 1 6 ,6 0 0 t o n t a n k e r ( a v e r a g s i z e d u r in g t h e w a r ) , t h e s a v i n g i n t r a n s p o r t c o s t p e r t o n i s a b o u t kOr f o r a 43*000 t o n n e r , 50y- f o r an 8 5 ,0 0 0 t o n n e r , and 60/: f o r one of o v e r 1 0 0 ,0 0 0 to n s d.w* (19) T h i s i s so b e c a u s e b u i l d i n g c o s t s p e r t o n d e c r e a s e w i t h s i z e , and power r e q u i r e m e n t s and f u e l consum ption i n c r e a s e l e s s t h a n p r o p o r t i o n a t e l y w ith s i z e . (2 0 ) A c co rd in g t o t h e s p e c i a l i z e d p r e s s , b u i l d i n g c o s t s i n 1964 were £50 t o £55 p e r t o n f o r a 1 9 , 5^0 t o n n e r , £ 4-0 f o r a 4-0 ,0 0 0 t o n n e r and £32 f o r t h e l a r g e s t s i z e v e s s e l s . (2 1 ) P i p e l i n e s a l s o a r e c a p a b le of economics of s c a l e w i t h an i n c r e a s e i n t h e i r d i a m e t e r s i n c e su c h an i n c r e a s e r e s u l t s i n a much l a r g e r p r o p o r t i o n a t e i n c r e a s e i n volume and t h u s g i v e s f o r t h a c o n s e q u e n t f a l l i n u n i t c o s t s . I n t h i s r e s p e c t i t h as b e e n c a l c u l a t e d t h a t a 24- i n c h
(15A) Adelman, M; "The Supply and P r i c e of N a tu r a l _Uasi?, O xford: B l a c k w e ll , 1 9 6 2 , page 1 5 ,
( 1 6 ) C. I s s a w i and M. Yeganeh, Op G i t , page 8 4 * (1 7 ) I b i d ,
(1 8 ) H a r t s h o r n , J ; Op C i t , page 6 8 ,
( 19) Pe t r o l e u m P r e s s S e r v i c e , November i 9 6 0 , page 405
(2 0 ) Newton, W.L. ; The Long Term Development of th e T an k e r P r e i g h t h a r k e t y J o u r n a l o f t h e I n s t i t u t e o f P e tr o le u m , S ep tem b er 1964* page 2l)4.
(2 1 ) P e t ro le u m P r e s s S e r v i c e , May 196 4 * page 172.________ __________ _____________ _
p i p e l i n e can c a r r y t h i r t y tim e s as much o i l a s a 6 in c h l i n e . (22) jjh Lar g e I n i t i a l In y e s tm e n t s
The o i l i n d u s t r y i s a l s o c h a r a c t e r i s e d by b e in g one t h a t r e q u i r e s l a r g e i n v e s tm e n t s b e f o r e o u t p u t can b e g i n i n commercial q u a n t i t i e s . I t i s a common b e l i e f t h a t i n g e n e r a l t h e c o s t of e n t r y f o r a newcomer i s v e ry h i g h k23)>
a l t h o u g h i t seems t h a t i t i s n o t a l t o g e t h e r i n a c c e s i b l e e i t h e r . I n t h i s sen se P r o f e s s o r Adelman seems t o im ply t h a t t h i s e n t r y f e e i s n o t a s l a r g e as i t i s made t o b e l i e v e and c i t e s th e c a s e o f th e J a p a n e s e A r a b ia n O il Company t h a t e n t e r e d t h e b u s i n e s s i n 1958 by r a i s i n g th e " r a t h e r s m a ll s u n 1’ of $610 m i l l i o n . (2 4 ) T h is in d e e d was a f o r t u n a t e c a s e b u t b e c a u se i t was c h a r a c t e r i s e d b ' such good f o r t u n e and b e in g " t h e r e l a t i o n b etw een i n v e s tm e n t and b a s i c new c a p a c i t y u n p r e d i c t a b l e " ( 25) , I d o u b t t h a t i t c o u ld be t a k e n as th e g e n e r a l y a r d s t i c k .
To s e c u r e c o n c e s s i o n s i n many o f th e c o u n t r i e s w i t h o i l p o s s i b i l i t i e s or t o e s t a b l i s h a m a r k e tin g c o n c e rn i n any of th e o i l consuming r e g i o n s of th e w o rld " v e r y l a r g e i n i t i a l i n v e s tm e n t s a r e g e n e r a l l y r e q u i r e d " . (26) F i t b r e s p e c t t o t h e c o n c e s s i o n s t h a t vrere g r a n t e d i n V en ez u ela d u r in g 1956-1957
( t h e p e r i o d when new comers were a l l a n x io u s t o g e t I n t o th e b u s i n e s s ) ,
The s p e c i a l i z e d c r e s s s p e c i f i c a l l y s t a t e s t h a t payments i n b o n u ses were made t o t a l l i n g 682 m i l l i o n d o l l a r s f o r 56 c o n c e s s i o n s o f which " o n ly 3 c o n c e s s i o n s can be l a b e l e d s t a n d o u t s u c c e s s e s , and 3 more b a r e l y s u c c e s s f u l " . ( 2 7 )
B e s id e s t h e s e h i g h e x p e n d i t u r e s which have t o be u n d e r t a k e n b e f o r e o u t p u t
(2 2 ) T h p ^ S t a t i s t , A p r i l 2 2 , 1950 ( O i l s u p p le m e n t) . ( 23) H a r t s h o r n , J ; Op C i t , page 103«
( 24) Adelman, M. ;" T h e F o r I d O il O u tlo o k " , page 91*
( 25) Adelman, M. ; "Th_e_ F o r I d Oi l Ou tlo o jc '1, page 59.
(2 6 ) H a r t s h o r n , J . ; Op^jkt* page i 0 3 .
( 2 7 ) Pet_rol e um P r e s s S e r v i c e , O cto b er k> 1965* page 5.
can be o b t a i n e d t h e r e a r e a l s o heavy s o c i a l o v e rh e ad c o s t s which a r e n e c e s s a r y i n o r d e r t o d e v e lo p i n f r a s t r u c t u r e and com unit3;r f a c i l i t i e s i n u n d e rd e v e lo p e d c o u n t r i e s . many r o a d s have t o be a d e , h o u sin g programmes d e v e lo p e d ,
s a n i t a r y and h e a l t h p r e r e q u i s i t e s se en t o , and t h e e s t a b l i s h m e n t o f h o s p i t a l , s c h o o l , and a m e n i t i e s b e f o r e a p e tr o le u m s e t t l e m e n t can b e g i n t o f u n c t i o n . I became aware of th e g r e a t in v e s tm e n t t a k e n u n d e r t h i s h e a d in g d u r in g a v i s i t t o Cardon i n W e ste rn V e n e z u e la , b u t 11 :e I n C ardon, t h i s i s common t o t h e r e s t of t h e p r o d u c i n g s i t e s i n L a t i n America and a l s o o f A f r i c a and t h e f i d d l e E a s t .
Not o n ly t h e f i r s t s t a g e s o f t h e o i l i n d u s t r y r e q u i r e a l a r g e e n t r a n c e f e e , b u t a l s o t r a n s p o r t a t i o n , r e f i n i n g and m a r k e tin g r e q u i r e s l a r g e sums t o
i n i t i a t e o p e r a t i o n s . (2 8 ) f u r t h e r m o r e , i n r e f i n i n g i t h a s b een a l l e g e d t h a t t h e c o s t h as even i n c r e a s e d due t o t h e i n t r o d u c t i o n of more complex methods o f p r o c e s s i n g . (2 9) We must c o n c lu d e t h e n , t h a t i n s p i t e of th e d i f f e r e n c e of
o p i n i o n s w i t h r e s p e c t t o th e o i l i n d u s t r y ’ s e n t r a n c e f e e , we can a c c e p t w i t h o u t much h e s i t a t i o n t h a t I t i s h i g h .
,"5_8tages of the) P e tt o1 eum_ I n d u s t r y iy,_JExp^or^tion
E x p lo r a t i o n i s t h e i n i t i a l s t a g e i n t h e p e tr o l e u m i n d u s t r y and i t c o n s i s t s i n th e s e a r c h i n g f o r o i l i n an a r e a which g e o l o g i c a l l y seems f a v o u r a b l e t o th e f o r m a t i o n and a c c u m u la tio n of h y d r o c a r b o n s . T h is s t a g e i s c a r r i e d o u t th ro u g h a s e r i e s o f methods r a n g i n g from t h e s i m p l e s t and most e c o n o m ic a l, l i k e th e f i r s t g e n e r a l a p p r a i s a l made by th e g e o l o g i s t , t o t h e m ost c o m p lic a te d and e x p e n s iv e t e c h n i q u e s . The r e s u l t s o b t a i n e d by t h e f o r m e r methods w i l l in d u c e o r r e s t r a i n , w h a te v e r th e c a se n ay b e , t h e u se o f t h e l a t t e r . G e n e r a l l y s p e a k i n g , t h e m ethods u se d i n t h i s s t a g e of t h e I n d u s t r y tire d iv id e d i n t o g e o l o g i c a l , g o e p h y s i c a l and g e o c h e m ic a l, (3 0 ) The p r e l i m i n a r y r e c o n n a i s s a n c e b ' t h e g e o l o g i s t u s u a l l y t a k e s a f u l l y e a r and o n ly t h e n i t i s f o l lo w e d by
s u r f a c e g e o l o g i c a l mapping and a i r p h o to g r a p h y . G e o p h y s ic a l t e c h n iq u e s
m easure f r a c t i o n a l d i f f e r e n c e s i n th e e a r t h ' s g r a v i t a t i o n a l o r m a g n e tic f i e l d s and t h e u se o f s e i s m ic m ethods c a p a b le o f e ch o so u n d in g a r e a l s o o f norm al u s e . The g e o c h e m ic a l p r o c e d u r e r e s o r t s t o t h e c h e m ic a l a n a l y s i s of s u r f a c e sam ples from t h e more f a v o u r a b l e s i t e s i n o r d e r t o v e r i f y t h e i r c o m p o s itio n and t h e n d e te rm in e i f t h e r e i s any p r e s e n c e o f h y d r o c a r b o n s . d l l t h e s e methods how ever, can o n ly a s s e s s t h e p r o b i b i l i t y t h a t o i l may be found i n a c e r t a i n a r e a , so once a p r o b a b l e a r e a h as b een d e te r m i n e d , th e o n ly way t o v e r i f y t h e p r e s e n c e o f o i l i s t o d r i l l .
However, f a v o u r a b l e g e o l o g i c a l c o n d i t i o n s a r e n o t s u f f i c i e n t t o in d u ce a s i g n i f i c a n t e x p l o r a t o r y programme. P o l i t i c a l c o n s i d e r a t i o n s must be t a k e n i n t o a c c o u n t as w e l l as th e s u p p ly and demand p a t t e r n of the. i n d u s t r y .
(3 0 ) F o t h e r g i l l , C u b ; " O il E x p l o r a t i on jfc t h e d s '' i n "Handbook of th e P e tro le u m I n d u s t r y " ; E d .: G. S e l l and H.A, f i o s s e t t ; London, page 21,
E x p l o r a t i o n h as b e e n a way by which th e p e tr o le u m i n d u s t r y has a t t e n e t e d t o e n s u r e i t s e l f of a d e q u a te s u p p l i e s f o r f u t m o d e v elo p m en t ( 3 l ) ? t o f i n d b e t t e r l o c a t e d r e s e r v e s w i t . r e s p e c t t o t h e consuming c o u n t r i e s , t o f i n d lo w e r c o s t o i l t h a t tvould be c o r e eco n o m ical t o produce even w i t h th e a d d i t i o n a l
expense o f e x p l o r a t i o n and d e v o lo p e in n t, and t o o b t a i n a g r e a t e r d e g re e of d i v e r s i f i c a t i o n in order t o o b t a i n a s t r o n g e r b a r g a i n i n g p o s i t i o n w i t h r e s p e c t t o t h e p r o d u c in g c o u n t r i e s and t o s e c u r e th e a v a i l a b i l i t y of th e o i l i n case of t h e c l o s u r e o f any p a r t i c u l a r s o u r c e .
R e s e rv e s
R e s e r v e s can be c o n s i d e r e d as th e i n d u s t r y ’ s s t o c k room and th e i n v e n t o r y may v a r y w i t h -'t h e r e s u l t s o f e x p l o r a t i o n and by the m ethods u s e d t o e s t i m a t e t h e o i l i n s i t u . I n t h i s way we f i n d t h a t r e s e r v e s c o u ld i n c r e a s e a s a r e s u l t of e x p l o r a t i o n , p a r t i c u l a r l y when new t e c h n i q u e s a r e a p p l i e d , and a l s o a s a r e s u l t o f a d i f f e r e n t method o f e s t i m a t i n g t h e amount o f r* s o u r c e s i n a p a r t i c u l a r r e s e r v o i r . However, a new or b e t t e r m ethod o f e s t i m a t i n g r e s e r v e s ,
o r a r e v i s i o n o f p a s t e s t i m a t e s , could a l s o l e a d t o a r e d u c t i o n . B r o a d ly s p e a k i n g , t h e r e a r e two t y p e s of r e s e r v e s : l ) p ro v e d r e s e r v e s , and 2) p r o b a b l e r e s e r v e s . (3 2 )
P ro v ed .r e s e r v e s a r e th e amount o f o i l fo u n d a s a r e s u l t of d r i l l i n g which can be p ro d u c e d e c o n o m ic a lly u n d e r-‘P r e s e n t t e c h n o l o g y . P r o b a b le r e s e r v e s , on t h e otl e r hand i s a much w id e r c o n c e p t s i n c e i t i s an g s t i m u l i of th e t o t a l
p e tr o le u m r e c o v e r a b l e , b o t h from c u r r e n t p ro v e d r e s e r v e s and from r e s e r v e s t h a t w i l l be e c o n o m ic a lly e x p l o i t a b l e i n th e f u t u r e c o n s i d e r i n g p r o b a b le t e c h n o l o g i o a
*
(3 1 ) The d e g r e e o f t h i s m o t i v a t i o n w i l l o f c o u rs e v a r y f o r t h e d i f f e r e n t p a r t i c i p a n t s i n th e i n d u s t r y a c c o r d i n g t o t h e i r r e s p e c t i v e s t o c k s . (32) Adelman, M .; ‘’The, /[p y lc ^ O iJ^ ^ u tljo o k ” , page 66,
R e s e r v e s a r e q u a n t i f i e d by an amount o f b a r r e l s o r t o n s i n sjl.tu a t a c e r t a i n p e r i o d , b u t one o f th e most i m p o r t a n t y a r d s t i c k s u s e d by th e i n d u s t r y i s th e r e s e r v e - p r o d u c t i o n r a t i o which e n a b le s us t o c a l c u l a t e th e t h e o r e t i c a l d u r a t i o n of th e r e s e r v e s e x p r e s s e d i n y e a r s a t th e c u r r e n t r a t e of p r o d u c t i o n . T h is r a t i o v a r i e s s u b s t a n t i a l l y w ith r e s p e c t t o th e v a r i o u s p ro d u c in g c o u n t r i e s b u t we s h a l l see t h i s l a t e r .
B . P ro d u c t i o n
A lth o u g h th e term. " P r o d u c tio n " i s som etim es usod i n a. more g e n e r a l way i n c l u d i n g a c t i v i t i e s p r i o r t o th e a c t u a l p r o c e s s o f e x t r a c t i n g t h e c i l from th e gro u n d ( i . o . e x p l o r a t i o n and d e v e lo p m e n t) , we w i l l u se i t h e ro t o r e f e r t o t e
s t a g e o f e x t r a c t i o n o n ly .
C o n s id e r in g t h e l i f e c y c le of an o i l w e l l , we can d i v i d e th e p r o c e s s of o i l p r o d u c t i o n i n t o two d i s t i n c t p h a s e s : t) p r i m a r y r e c o v e r y , and B) se c o n d a r y r e c o v e r y . (3 3 ) The f i r s t c o r r e s p o n d s t o th e i n i t i a l p e r i o d o f e x t i n c t i o n and i s c h a r a c t e r i z e d by th e n a t u r a l d r i v e of th e o i l flo w in g t o th e s u r f a c e
b a s i c a l l y on i t s own a c c o r d . T h is i s due t o th e p r e s s u r e o f th e r c s c r v i o r formed, by t h e p r e s e n c e o f n a t u r a l gas which u s u a l l y acco m p an ies th e o i l .
t h e o i l
Thus when th e p r e s s u r e i n th e o i l r e s e r v i o r i s h i g h / " w i l l gush t o t h e s u r f a c e a t a v e r y h i g h r a t e " . (3 4 ) The second p h ase o r se c o n d a r y r e c o v e r y , c h a r a c t e r i z e s t h e p r o d u c t i o n s t a g e when t h e w e l l ’ s n a t u r a l d r i v e o r p r e s s u r e lias been e x h a u s t e d , and t h e r e f o r e "com plex te c h n iq u e s " such as f l u i d i n j e c t i o n w i t h gas o r w a t e r a r e u se d i n o r d e r t o b r i n g th e o i l up t o t h e s u r f a c e . (33) The u se o f t h e s e t e c h n i q u e s i s r e f e r r e d t o a s " a r t i f i c i a l l i f t " , how ever, when t h e y a r c a p p l i e d e a r l y i n a w e l l ’ s p r o d u c in g l i f e , i t i s r e g a r d e d as " p r e s s u r e
m ain tc nano c " . (36)
The f i r s t p h a s e , i . e . when th e o i l flo w s on n a t u r a l d r i v e , i s o b v i o u s l y t h e p e r i o d o f a low er c o s t o f p r o d u c t i o n . T h is c o s t , hovc-vor, w i l l r i s e a s more e l a b o r a t e fo rm s of s e c o n d a r y r e c o v e r y a r c u s e d . T h e r e f o r e , as p r e s s u r e i s g r a d u a l l y l o s t , t h e r a t e o f o i l p r o d u c t i o n w i l l a l s o te n d t o f a l l . But t h i s i s t r u e n o t o n l3r o f th e f i r s t p h a s e , b u t a l s o o f th e s. cond, Every tim e p r e s s u r e - t e c h n i q u o s a r e a p p l i e d , th o rr-to o f o u t p u t w i l l r i s e h u t o n ly t o g r a d u a l l y f a l l a g a i n . T h is i n t r o d u c e s us t o one o:f th o b a s i c c h a r a c t e r i s t i c s o f o i l p r o d u c t i o n which i s th e p r o d u c t i o n d e c l i n e c u r v e . (37)
D uring th o f i r s t p h ase o f p r o d u c t i o n when th o o i l i s o b t a i n e d by th e n a t u r a l d r i v e o f t h e w e l l , t h e r e i s an " u l t r a s h o r t " p e r i o d d u r in g w hich
" t h e more b a r r e l s p r o d u c e d , th e lo w e r t h e c o s t p e r u n i t " i t w i l l r e n d e r . (36) ( i n diagnam I - No 1 , page 1 7 , t h i s u l t r a - s h o r t p e r i o d would be O R on X a x i s ) . However, i n t h e r e g a i n i n g l i f e o f t h e f i e l d when th e p r o d u c t i o n d e c l i n e
c u rv e i s c h a r a c t e r i s i n g t h e s i t u a t i o n ( f r o n MBH onwards) f;. < arg in al c o s t i s a r i s i n g f u n c t i o n o f o u t p u t " • I n o t h e r w o rd s, " t h e g r e a t e r i s th o o u t p u t th e h i g h e r i s th e c o s t of a d d i t i o n a l o u t p u t " . ( 3 ° )
T h is l i n e o f t h o u g h t a s p r e s e n t e d by P r o f e s s o r u d c l u a n , sowas to q u a l i f y th e o i l i n d u s t r y a s one o f i n c r e a s i n g c o s t s i n o p p o s i t i o n t o th o n o t so
u n u s u a l b e l i e f of th e c o n t r a r y , (40)
(36) I b id *
(3 7 ) hdelr-ian, 2a. $ The "ro r l d O il O u tlo o k , page 41 .
(38) I b i d , page — ...— ■
(39) Sid.
(4 0 ) D r. P a u l P ra n k ed i n h i s ’: E ssen t l a jus y f Pet_rol_eunin (Chapman and Pi a l l , London 1946, page 17) had c h a r a c t e r i z e d t h e o i l i n d u s t r y as b e in g a
n a t u r a l monopoly. B eing a c a p i t a l i n t e n s i v e i n d u s t r y " i t i s i m p e r a t i v e "
he s a i d , " t h a t t h e o p e r a t o r e x t r a c t s th e maximum from a p ro d u c in g w e l l b e c a u s e h i s c o s t p e r b a r r e l d e c r e a s e s r a p i d l y as o u t p u t i n c r e a s e s " . T h e r e f o r e , n o t b e in g a s e l f - a d j u s t i n g i n d u s t r y , and b e c a u s e o f t h e p o o r .■rice e l a s t i c i t y of c r u d e , ag re em e n ts b etw een p r o d u c e r s have, alw ays b e en t h o u g h t t o be n e c e s s a r y " i n o r d e r t o a v o i d a s i t u a t i o n of " g l u t " .
