project details

Topic: project details
TABLE OF CONTENTS:
Abstract ———————————————————————————————–         4
Chapter 1 -Introduction ———————————————————————————    5
Problem Statement ——————————————————————————8
Research Statement—————————————————————————- 8
Research Hypothesis —————————————————————————-9
Assumption, Scopes & Limitations ——————————————————— 10
Background of Study 10
Summary 11
Chapter 2- Literature Review ————————————————————————–13
Summary —————————————————————————————-16
Chapter 3 – Methodology ——————————————————————————18
Research Objective/Study Scope ———————————————————-18
CHAPTER 4 – Data Collection and In depth Simulation Analysis ———————————20
Research Method ——————————————————————————–20
Pre-interviews ————————————————————————————20
Survey ———————————————————————————————21
Sample ———————————————————————————————21
What the survey asks —————————————————————————–22
Reliability and Validity of Research Instrument ———————————————-22
Simulation Analysis —————————————————————————– 23
Chapter 5 – Analysis and Results ————————————————————————26
Estimation and Empirical Results ————————————————————- 26
Summary ——————————————————————————————-31
The Causes —————————————————————————————-32
The Expected Quantity of New Oil ————————————————————33
Public Policies in the 1980s ———————————————————————34
Summary ——————————————————————————————-35
Chapter 6 — Conclusion ——————————————————————————–36
Chapter 7 — APPENDIX ———————————————————————————-38
Simulation Analysis ——————————————————————————38
Descriptive Statistics —————————————————————————–39
Explore ———————————————————————————————40

Case Processing Summary ——————————————————————————-40
Descriptive ———————————————————————————————— 41
Chapter 8 – References ————————————————————————————45

Abstract
The global market of crude oil is one of the biggest markets in the world which offers a great competition for the producers

and they are very much interested in knowing the costs of crude oil so that they would be able to decide their position in

the market.  For producers, the profits can go high in case of low crude cost. In this project, we will try to analyze the

economic activities involved in the efforts of finding the crude in two major area of Canada which are Saskatchewan and

Alberta. Due to higher competition in the industry, it becomes important for the producer to have an analysis of the costs to

be incurred in exploration activities in both oil producing areas. The cost also highly affects the public policies given by

the government sector in order to inspire more exploration efforts.
Coming to the results, we see a significant difference among the costs in the regions of Alberta and Saskatchewan that the

unit exploration cost in Saskatchewan is quite less than in Alberta. The estimation of these costs is not simple procedure

rather specific methods are required and in this work, the method used is the one proposed by Uhler (1979) and is commonly

used for non-renewable resources. The results derived after conducting the research show that the costs would tend to

increase in future in both the areas and in the near future they may become equal.

Chapter 1
Introduction
The oil industry in the world is a renowned one offering high level of completion and there are lots of producers who are

involved in providing the best possible product at a reasonable price to the customers so that their demands would be met.

Producers think that they can earn bigger revenues if their operating cost decrease. So it is a crucial matter for the

producers to analyze their operating cost so that they would be able to know about where they stand and what are the

prospects regarding their annual income.
Canada produces small amounts of oil still it is a part of oil industry in the world. Considering the statistics of 1999 for

daily production, we see that the amount is not that much significant as compared to the total production in the world and is

only 3% of the world i.e. 305,000 cubic meters daily while the total oil production in the world is 10,468,000 cubic meters.
For the same year, the recognized reserves in Canada were less substantial as compared to the total i.e. only 769 billion

cubic meters and for the world they were 165,830 billion cubic meters. Percentage wise this constitutes only 0.5% of the

total. In Canada, there are only two regions which can be counted as oil producers with Saskatchewan contributing 28% and

Alberta producing 58% in the Canadian oil production. The two regions lie in the North American oil production market. These

areas have been connected with the global market by using different ways such as pipeline system, railways or marine shipping

i.e. freighters.

It is not an easy job to supply oil. It takes plenty of time as well as larger costs are associated with it. Considering the

supply process, we see several steps involved in it:
1.    The first one is the efforts made to explore the oil reserves
2.    Then development is needed for the oil explored
3.    The oil is to be processed which is called production
4.    The finished product is to be transported to the desired locations
The above mentioned steps are not free of cost rather Expenses are associated with them. Firstly the cost associated with

finding new reserve, which is the most significant cost and highly affects the venture judgments. The other costs are

developmental cost, cost of production and the cost of carriage.

Source: Modified from University of Regina map

The most costly activities are that of the exploration and development. The focus of this study is only exploration. The

producers of oil industry come across one major problem that is limited resources of oil available and it is so obvious that

the exploration of any new field will be more difficult in future. There are chances that the producers do not find any oil

reserve for a longer period of time which is definitely expensive on their end as they will not be able to earn any profits

still paying for the exploration efforts. The other problem is with the digging as there are chances that the reserve may be

deep requiring heavy drilling which again is expensive, increasing the operating cost for the producer.
The two oil producing areas of Alberta and Saskatchewan are different from one another in terms of geophysical and geological

specifications. Saskatchewan has possibly lesser crude quantities in tectonic elements which mean small oil reserves. In the

two oil producing regions of Canada, most resources can be found in “Western Sediment Basin”. Larger are of Alberta lies in

this Basin as compared to that of Saskatchewan which is also an evidence of larger oil resrves in Alberta.
In terms of land area, the two regions are equal and have been segregated into zones for the purpose of finding new oil

reserves. As indicated above that larger are of Alberta lies in Western Sediment, so this is obvious that there is

probability of finding new reserves in Alberta and in Saskatchewan there are few reserves but the chances of success are

high. According to Porter and Hendricks, success rate of exploring for new reserves in the neighboring areas of previously

explored area are high.
Also it is mentioned in literature that the producers are of the view that they have high chances of discovering new reserves

in Alberta than Saskatchewan. Costs of oil exploration activities are highly dependent on the public policies in the

respective region and in this work, the affect public policies have on the operating cost will also be studies in order to

fully understand the economic analysis. The producers will definitely tend to put all their efforts in the region of Alberta

for discovering new resources of oil if public policies would become same in both the areas so in order to have balance,

public policies are set accordingly.
Problem Statement
No one in the world can ever think of living without energy resources and oil is considered to be the most important energy

resource used all around the globe. Crude oil is the source of producing all the energy resources such as LPG, petrol,

gasoline and diesel etc. the finished oil products ready to use are actually the processed form of crude oil which is

discovered and obtained from the ground and this whole process of oil production is a very difficult and complex job with

lots of expenses involved in it.
All the organizations get motivation for discovering and exploring new oil reserves from the decision regarding the funds

they have or the funds they want to invest in the exploration activities. The exploration activities become faster if the

companies see that the oil prices are going up in the market as this provides them more profits and covering all their costs

so they become more inclined towards investing in this industry.  In case the prices tend to increase at a very high rate and

the slope of cost becomes steep then the buyers do not tend to buy the products due to their limited buying power.

So, for the producers to increase profits without the price of oil being high in the market, one way to think about how to

minimize the operating costs for the production and development processes. This research works aim to have an analysis of the

costs associated with the discovery and processing of new oil products, factors which are associated with oil finding efforts

and what steps could be taken to minimize the cost of oil production so as to be one of the high profit making organizations

in the industry.
Research Statement
In this section of the report, some important research questions have been listed:
•    For new oil production processes, what kinds of costs are to be considered?
•    What steps could be taken to reduce the operating costs?
•    Have some research for obtaining the data in order to reduce the operating costs in order to answer the above

mentioned two questions.
•    Analysis of data obtained
•    Suggesting a clear answer to the above mentioned questions with the help of data analysis
For the testing of data, following hypotheses have been made:
1.    In both major oil producing areas of Canada, the cost of discovering per unit of oil will become high due to limited

resources of reserves available.
2.    As both the areas have distinct geology, public policies and hopes for finding any new resource so the increase in

cost will not be same rather rate will differ.
3.    The cost of discovering per unit  oil in the area of Saskatchewan is supposed to be high due to less reserves

available than in the other region i.e. Alberta.
4.    The producers are of the view that in future the costs in both the oil producing regions are supposed to become equal

due to profit maximization intentions.
Assumption, Scopes & Limitations
In this section, the scope of the project for the future researchers and producers, the assumptions which would be made to

carry out this research and limitation of the projects will be given:
The research is going to be made on a larger scale so it is necessary to use the data from existing resources associated with

the oil industry as it would be so costly and time consuming to gather new data or to verify the available data. The

different oil producing areas in the world are different from each other on the basis of their geography, land

characteristics and other factors so the costs of discovering and processing the crude oil cannot be same all around the

world. Due to this fact this study cannot be generalized for the whole world as it is specifically conducted keeping in mind

the conditions in the two areas Alberta and Saskatchewan in Canada.
Background of Study
Considering the oil production in Canada, we see that there are two main regions which are major oil producers in the country

and they produce up to 90% of the total production of the country. These two areas are Alberta and Saskatchewan. The research

is based on the data obtained for only these two regions and cannot present the overall situation in the world.
Canada is currently producing only 3% of oil out of the total production on the globe which is a very small percentage. The

aim of this work is to find and present some ways useful for the minimization of operating cost which will definitely help

the producers in intensify the discovery process as by minimizing the costs they can earn high profits. More discoveries

means more profits so this work may prove to be a motivation for the oil producers in Canada.
In order to conduct this research, the existing data for oil exploration will be used as there is no company or government

providing any assistance in the project. This data will be statistically analyzed in order to see the feasibility and

practicality of minimizing the operating cost for processing the oil.
One important fact regarding the costs associated is that the major cost is the discovery cost but this is not the only cost

rather labor, capital and transportation are also associated with it which increase the overall cost too much.
The methods to be used for analyzing the available data have not yet been decided as the methods will be examined with the

progression of the research. The most suitable methods will be employed. All the data which has been used and analyzed has

been made a part of this research report for having a record and convenience.
SUMMARY:
The oil industry in Canada is not a newer one rather it has been decades that the oil industry has been operating in

Saskatchewan and a century in Alberta. It is very important to consider all the costs associated in oil discovery process,

processing of crude oil into finished products and transporting it to the desired places. Analysis of oil production is

incomplete without the consideration of these costs. The first and the foremost thing for a producer for entering the oil

sector is to focus on the exploration costs which include the cost of drilling down for getting a reserve, purchasing a land

and the geophysical analysis. These three constitute the total cost of exploration for any new oil reserve.
Discovering new oil reserves is the output of the exploration efforts out by a producer. The data considered in this work is

taken from the primary addition records to the initial recoverable reserves (enhanced oil recovery, or EOR, is not included)

per discovery year. According to the data, we see that the number of new oil reserves is decreasing in Saskatchewan as

compared to that of Alberta which means Saskatchewan has fewer reserves than Alberta.
The oil prices in the Canadian market are not very much different from that of the world prices which shows a great

competition in the global oil marketplace. The Canadian Oil market is basically a part of North American oil Market. The

pattern of oil prices are categorized into three distinct periods: constant price, escalating price, and unstable price. This

shows the overall significance of analyzing the costs in the oil market.
Furthermore, the market connections for crude exist at somecosts, namely the transportation costs. There are severalways of

transporting crude to the market. For the oilindustry in Western Canada, the cheapest long-run alternative of transporting

crude is pipelines. To remain competitive,to build the pipelines is required. However, the costs ofbuilding these pipelines

are high. This is when the supportfrom the governments through their policies is important.
Two governments rule Canada which are the Federal Government and Crowns. The government is responsible for controlling the

price of oil from being too high, controlling the access to reserves and imposing taxes on the oil producers. The dominant

role of government has always influenced the discovery efforts made by the produces and their hopes for the profits.
Royalties and taxes are collected for the oil producers which constitute the main revenues for the government. Government

decides the rate of royalty and taxes to be paid by the oil producing organizations. Sometimes, the provincial and federal

government faces some clashes with each other in terms of specifying the tax rates which has an influence on the discovery

process of oil in the region.
For the oil sector in Canada, the policies and regulation enforced by the government are very important as they control the

efforts put by the producers in oil exploration. This is also important fact that the drilling costs, labor cost and capital

do not make any difference for the two regions of Alberta and Saskatchewan.
When the producers will have to pay higher taxes for their production of oil, this will definitely decrease their profits so

the profits are highly influenced by the tax payments and royalty payments. The efforts for discovering new reserves can also

get suffered from the tax and royalties as the producers will expect less revenue generation and less exploration efforts may

be the results. The existing data regarding the taxes in the Canadian oil producing regions show the higher tax and royalty

rate in Saskatchewan which will make the producer to focus towards Alberta where these rates are low.

Chapter 2
Literature Review
The Review
Whenever one wants to have market analysis for any specific product, it is important to consider average and marginal costs.

The cost incurred as a result of exploration efforts for discovering the new resources is among the total costs and it

affects the average and marginal cost. In order to have the economic analysis of oil industry in Canada, finding cost is an

important concept to be considered. Adelman (1972) wrote a book named “The World Petroleum Market” in which he presented the

analysis of oil industry and the focus was the overall oil market in the world. He also presented the significance of

exploration efforts. Details were also provided about how crude oil is explored, processed and converted to finished

products. Then the costs associated with these activities were also assessed. The process of exploration is quite important

as costs are highly affected by them and the following statement is the representation of this importance.
“The consideration of exploration cost in any study for the economic analysis is as important as a helmet for the one who

drives a bike”.
A model was also presented in “Oil and Gas finding cost” by Uhler (1979) but this focused only on the cost estimation in one

area i.e. Alberta. Uhler was of the view that the chances of finding any new oil reserves is highly affected by the number of

discoveries in a certain are in past. The increased rate of discovering new oil reserves also decreases the chance of finding

any reserves in future.  So increased discovery rate will reduce the number of resources which have not yet been discovered.

This reality also highlights the probability that the finding cost in future will tend to increase and Uhler, like the

previous researchers is of the view that this increased cost will demotivate the producer to carry out any activities for

discovering the new resources in future. Uhler proposed a production function in order to determine the finding cost which he

defined to be the cost required for finding one unit of oil. He also specified that for the exploration cost, three types of

costs are required which are: cost of land for having oil field, Cost of drilling for discovering new reserves and geological

activities. The output of the discovery process is new oil resources found in the form of reserves.
Huller considered the influence of chances of finding any new reserves and then the effects on the price estimation and then

the profit as the market offers too much competition. There are no significant differences in the discovery efforts for

exploration of oil and gas and the data for both is also same. There may arise certain problem with the data if one want to

analyses one products out of oil and gas so in order to overcome these issues, the method used was the one presented by

Ellington (1975).
For data generation, the data for oil and gas was separated. Then the data was aggregated into oil wells intent group. At the

end calculation was made for the success rate for the exploration efforts.
After estimating the stages, regression data was retrieved in order to provide the data for the area of Alberta. When Uhler

was done with the approximation of parameters, all the information available at this stage was analyzed so that the

substitution could be made for the three inputs required in the oil discovery process. Uhler proposed that requirement of

land is the complement while drilling cost and geophysical efforts are the alternatives. He also needed to provide the

evidence for his statements so he provided experimental results of elasticity of alternatives. These results were in

accordance with the hypothesis he made.
Another researcher named Livernois (1988) presented the approaches which might be useful in the estimation of discovery cost

or exploration cost of oil and gas both. He presented these approaches in “Estimates of Marginal Costs for Oil and Gas”. He

proposed an equation for finding the total cost and the supposition made for this purpose was that manifold productions

technology exists to bypass the mutual products difficulty. He also described that it is possible to calculate the marginal

exploration cost for oil but it cannot be broken down that is why a technique is required to be used for this purpose.
In case when oil and gas are supposed to be on the right hand side of the function, Livernois suggested that it is better to

use the econometric approach containing least squares so that the chances of getting unreliable parameters could be

minimized. The parameters remain constant but Livernois knows the fact that there are chances of malfunctioning of parameters

so he preferred to have some dummy variable so that the possibility of auto-correlation could be reduced. The equation he

gave was segregated according to the variables so that marginal cost could be predicted. The cost calculated out of this

function was then compared with the shadow price reserve and conclusion given on the basis of this calculation was that the

marginal cost is not the true predictor of reserve cost due to its very small value. This is just because we know that

finding cost is not the only cost associated with the oil exploration rather this is just a part of the total cost incurred.
Estimating the Volume of New Discoveries
All the researchers agree with each other that the concept of finding cost is an important one and the estimation of finding

cost is necessary for economic analysis for the oil industry. They also agree with the fact that calculation of finding cost

is a problematic task. It is possible for the producers of oil industry to calculate the total cost simply by calculation all

the amount they spent in exploring a new reserve till production but it is quite difficult to forecast the chances of

discovering new reserves. This affects the calculation of finding cost per unit of oil.
It is important to know that for finding the cost to be spent on the exploration activities, one must have an idea of how

many reserves would be found.
Certain methods can be adopted to forecast the amount of new reserves which could be discovered. The first method is

geological (Mossep, 1997) according to which the estimation can be made on the basis of crude present in the sedimentary

rocks. Another method is the mathematical economics and engineering (Hotelling, 1931, Pyndick, 1978 &Hubbert 1962) which use

specific formulae and logics to estimate the reserves. In statistics (Kaufman, 1963, Eckbo, Jacoby, & Smith, 1978, Smith

1980) and econometrics (Fisher, 1964, Khazzoom, 1971, Erickson and Spann, 1971, MacAvoy and Pindyck, 1973, Epple, 1975,

Huller, 1979, Livernois, 1987, Cuddington and Moss, 1998) data is collected which is used to determine the dependency of

variables on one another. all the methods mentioned above have their own importance with regards to the estimation of costs

and they had been widely used in past to provide meaningful information. In this research work, the data used is the existing

data which has been provided by the governmental sources so the reliability of such data is quite high.
Summary
The oil market provides a lot of competition for the producers so producers tend to maximize their profits by be considerate

towards more promising opportunities. Market factors determine the price of oil. It is obvious that the prices would tend to

increase in future as the number of reserves will decrease with more and more discoveries. The producers have an attitude to

focus on the area where operating costs would be less. Now the producers are interested in calculating their costs for both

areas under consideration so that they could move to one with lower costs.
The discovery process and the efforts made for it offer certain risks for the producers as they decide the achievement or

disaster of the producers. For every producer, the exploration activities offer some costs which are termed as exploration

expenditures. Finding a large reserve can make these expenses fruitful for the producers as they gain high profits and their

cost per unit if oil production decreases significantly in this way.
An important fact of difficulty of forecasting the new discoveries, it is also not possible to estimate the actual unit costs

of production. So the calculations made are not trustworthy and they prove to be wrong in future. But the researchers still

focus on providing estimates on the unit cost of production.
In the next chapter of the report, a model has been presented for exploration cost. This is a very simple model but quite

beneficial as it provides the true estimates for the existing data which is being used in this research work.

Chapter 3
Methodology
Research Objective/Study Scope
The Canadian oil market has been involved in larger number of mega projects and these projects are facing serious risks in

terms of cost attacks which may affect the activities going on in the projects. The literature shows that there has no

extensive research been done in the area of finding cost for per unit of oil production specifically for Canada. Moreover,

the research work is not available with respect to the behaviors of the producers, project managers and directors for the oil

production in the two oil producing regions of Canada (Alberta & Saskatchewan).
This project suggests that the producers and contractors will get motivated for oil production in the areas of Alberta and

Saskatchewan specifically for the front end loading and construction management. In this way, the estimation of costs

associated can be forecasted with reliable end products.
Following are the purposes of the project report:
•    Study the readiness of the companies working in the two oil producing regions of Canada for employing new strategies

for the purpose of making contract
•    Determine the obstacles which are being faced by the companies due to which they are not able to make contracts for

new oil production in the two regions of Alberta and Saskatchewan.
•    Study the imitations for influencing new oil production and the projects outputs in both Alberta and Saskatchewan
The objectives of the research mentioned above will be examined in light of the following characteristics:
•    The strategies being used in the industry for contacting
•    The nature of business of company in terms of its being local or global
•    Principles being used in contracting
•    Principles of change management and project management
•    Ability and willingness to take risk
•    Complications involved in the project
•    Attention towards location
It has been necessary to have a survey for operating companies and EPC contractors in oil industry in the two oil producing

regions of Canada i.e. Alberta and Saskatchewan so that the behavior of producers could be examined for discovering new oil

reserves. This is to be done in order to have industry opinion so that a solution could be proposed for the estimation of per

unit production cost of oil.

CHAPTER 4
Data Collection
Research Method
In this research work, two approaches were used for collecting data and theses were conducting semi structured interview

followed by unspecified surveys. Specific industry and region was selected for the purpose of research and this research

cannot be generalized for other industries and areas of the world. The sample used for this research work belonged to the oil

industry of two major oil producing areas of Canada named Alberta and Saskatchewan. Most of the respondents were from Calgary

and Alberta due to the presence of head offices in these regions.
Pre-interviews
The first step for data collection was the interviews for which the sample chosen was consisted of 10 respondents who were

higher level managers from construction companies and engineering firms from the oil and gas industry. All the people who

were interviewed were experts in their fields and they were chosen so as to have maximum information which would prove to be

useful for the purpose of research. Most of the respondents were CEOs or VPs with an average experience of 30 years in oil

and gas industry. The aim behind the selection of these professionals for the purpose of interview was to get most reliable

information. The interviews were taken though email messaging and telephone lines.  The purpose behind conducting the

interviews was to understand the attitudes and behaviors of the professionals in the oil and gas industry so that it would

help further data gathering and analysis. In additions these people also provided useful information about the barriers they

face during the exploration and development processes in the areas of Alberta and Saskatchewan.
The information was taken with respect to the prospects of new oil production both in Alberta and Saskatchewan for Canadian

and International contracts and the obstacles that were supposed to be faced in Western Ca

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