Petroleum Geoscience Course No.

PGSC

Fundamentals of Petroleum Economics

and Risk Analysis
by
Allan Russell

Faculty of Engineering,

Department of Chemical Engineering

January 2012
 Fundamentals of Petroleum Economics
and Risk Analysis

1.0 Objectives
The principal aims of this course is to provide a general background to the geo-politics of the
international petroleum industry, an understanding of the essentials of Cashflows, profitability
measures, risk measurement and decision making as it relates to the petroleum industry. The
intention is to expose the participant to techniques of bid amounts for exploration blocks and to
review contract types from a commercial bias. Petroleum taxation as it relates to the profitability
of individual exploration, development and enhanced oil recovery projects will be explained. The
student must be able to perform manual Cashflow analyses for exploration and production
(Royalty/Tax Systems) and Production Sharing Contracts. These once fully understood can be
easily performed in spreadsheets.

Commodity prices for crude oil or natural gas with respect to the Spot market and long term
contracts are reviewed especially in relation to pricing from the Caribbean. Capital expenditures
and operating expenses and the elements that make them up will be explained.

Finally, risk analysis will be explained to understand the nature of exploration risk and its
treatment in decision-making of such ventures. The participants must complete a project
involving an exploration and/or development scenario(s) with relevant costs and expenses,
Cashflow analyses, profitability and risk analyses. The final conclusions and recommendations
for the project must also be presented.

Each student must present their work in a report format complete with the relevant analyses.

“Knowledge is of two kinds – either you know it or you know where to find it”.

“Knowledge is power” but only to those who knows what it means.

Career planning as a geoscientist means the developmental phases of independent thinking,
analysis and evaluation of G&G concepts. The stages of development is further refined as one
passes from being supervised, to working independently and then to supervising others. In order
to achieve your goals, you must diligently pursue your career objectives without fail or let-up.
2.0 THE INTERNATIONAL PETROLEUM INDUSTRY

The oil industry has always been of an international scale from its initial beginnings to the
present. It has been in existence for the past one hundred years and conceivably will last another
hundred or two depending upon future discoveries and efficiencies of extraction. Oil and gas
fields are wasting or depleting assets that essentially exhaust themselves with continued
extraction and which cannot be replenished or recycled. Once extracted and used it is gone
forever. Therefore careful determination of the resources in place, its extraction or recovery and
the maximisation of its use are paramount to the industry.

It is believed by some authors that oil production will follow the normal curve or bell-shaped
curve with a peak possibly occurring by 2015 to 2030 with a plateau or continuous decline
thereafter. In terms of management of the world’s petroleum resources therefore, the end of the
light oil era is almost in sight but it does mark the beginning of increased importance for heavy
oils and oil sands/Tarsands. Enhanced oil recovery using injected chemicals will become
increasingly important also.

In order to fully appreciate what drives the decisions of certain countries, its relationship with
others and their dependence on energy, we must start at the beginning of the “Petroleum Age”.
Our world as we know it today literally runs on oil and gas; it is the stuff that lubricates the entire
modern age of technology. Hence a historical review will illuminate the nature of the current
political events taking place and provide a useful background to world issues that seem un-
related to the oil business.

The Lamp Oil Era

The Lamp Oil Period runs from 1784 to 1900 during which kerosene lamps were used as a
source of lighting fuelled by whale oil, turpentine and rapeseed oil. Mineral oil became a quiet
competitor during 1849 in Canada and Scotland. Comparative prices at that time were
Whale oil $0.35 to 0.90 per litre
Turpentine $0.12 per litre (dangerously explosive)
Rapeseed oil $0.30 per litre
Mineral oil $0.20 per litre

In 1857, the first working distillation unit was developed and provided small quantities of lamp
oil. The Lamp Oil era ended around 1900 when about 57.6% of the petroleum products sold in
the US were for the lamp oil market.

Early Exploration
Due to the positive economic benefits of selling mineral oil to consumers, a need arose to find
suitable quantities of mineral oil to manufacture lamp oil and sell to a ready market. In 1858,
Colonel Drake was hired by Seneca Oil Company to drill for oil using the method of the salt
industry at the time. So a salt drilling rig was bought and drilled to 69.5 feet and on 30 August
1859 oil began filling the wellbore at an estimated rate of 25 bopd.
Although Drake was not the first to drill for oil he was the first to achieve some measure of
commercial success. In Trinidad Colonel Walter Darwent drilled a well at Aripero and found
small quantities of oil. In Canada some others had already drilled wells without success. The
impact of this source caused mineral oil prices to drop from $0.20/litre to $0.06/litre and then to
a cent per litre. The end of the whale oil industry had arrived and was replaced by cheaper
mineral oil.

Standard Oil
After Drake’s well was successful, crude oil production increased dramatically due to the
entrance of other exploration companies and as a consequence prices for oil fell due to the
oversupply created. The US distillation capacity was about three times the production capacity.

By age 26 John Davidson Rockefeller in 1864 bought control of a refinery business in Cleveland
Ohio in the USA. The Atlantic and Great Western Railroads were the main carriers of oil into
continental US and caused a rapid expansion of the oil industry to a commercial scale since the
products could be distributed to a very large market. Rockefeller through many secret deals
bought out the refining competition in Cleveland and undersold his way into the railway markets.
Rockefeller perceived that the only way to overcome the stranglehold of the railways was to
become an integrated company, i.e. being in control of the exploration, production,
transportation, refining, marketing and distribution aspects of the industry.

Standard Oil became a monopoly from well to sales pump. It was untouchable by neither the
State government nor the Federal government in Washington. By bribes and bargains it
established friends in the legislature and teams of lawyers to defend its position. The US Senate
passed an anti-trust act and a massive lawsuit was filed against Standard Oil for their illegal
practices of trusts and combinations in restraint of trade. The U S Supreme Court eventually
broke up the virtual monopoly of Standard Oil on 15th May 1911 after 30 years of monopoly.

Lessons learnt from the Standard oil era were

- enormous wealth was transferred by oil monopoly to establish a system of
philanthropy
- established a kind of secondary government
- influenced the direction of research and education, and
- it was immune from taxation (paid no taxes).

Income taxes were only legislated in 1913.

The Standard Oil Company Sisters

From the break-up of Standard Oil emerged seven(7) major privately owned, American
integrated oil companies, as shown below.

Standard Oil Company of New Jersey (Exxon) also called Esso

Standard Oil Company of New York (Mobil)
Standard Oil Company of California (Socal), which later became Chevron
Standard Oil Company of Indiana (Amoco)
Standard Oil Company of Ohio (Sohio)
Continental Oil Company (Conoco) a marketing company, and
Atlantic Refining Company, which later became Atlantic Richfield or ARCO.

Royal Dutch/Shell
On the other side of the world in Europe, the oil industry developed around Baku in the
Caucusus. Heavy fuel oil was produced and was competing against coal and lampoil. By 1906
two Nobel brothers were involved in the steam ship transport of fuel oil to Europe. It was Marcus
Samuel who realised the potential and developed this trade. In 1896 he obtained a concession in
Borneo to explore for and produce oil and in 1897 created Shell Transport and Trading
Company. Henry Deterding had also developed a trading business called Royal Dutch. He
competed fiercely with Shell and during the Standard Oil price war of 1903 Shell’s tankers were
unable to be economic. In 1907 the two companies were merged as Royal Dutch/Shell at 60/40
percentage shareholdings.

In 1911, Sir Winston Churchill, was appointed First Lord of the Admirality of the British Navy.
At this period in time, the British Empire was in full bloom with many territories under its rule.
In his speech to the British Parliament he declared that Shell and Standard Oil shared the world
between them and denounced the power of monopolies.

Main points to note are – two major companies emerged, Standard Oil and Royal Dutch/Shell
and the US and USSR began and mainly controlled the international petroleum industry. Salient
points are

Standard Oil of US controlled international oil trade

Royal Dutch/Shell (Anglo-Dutch) controlled the rest of the international trade
US States were selling oil to Standard Oil for overseas markets, paid no taxes and were
autonomous
Invention of internal combustion engine and steam ship tankers
Concessions were the normal type of petroleum contacts

The Fuel Oil and Automobile Era

The British Empire at this time included its holdings in the West Indies, Central and South
America, India, Pakistan, Africa, Australia and Canada. There was a strong movement for the
British Navy to switch from coal to oil as its fuel thereby opening up a large market for the
European companies. The other empire in place at that time was the Ottoman Empire, which was
centered in Turkey and was of Moslem origin. Its states included Eastern Europe, Iran, Iraq,
Saudi Arabia and further east to Pakistan.

British Petroleum, BP
The original company was founded by William Knox D’Arcy a retired gold rush adventurer who
had made substantial profits in Australia and was back in London. A French geologist was
alleged to have reported that Persia (now Iran and Iraq) held great potential oilfields. D’Arcy
sent two men to obtain a concession from the Grand Vizier in Teheran that was under Turkish
rule as part of the Ottoman Empire. They obtained a concession covering 480,000 square miles
in exchange for 20,000 pounds in cash, 20,000 one-pound shares and 16% net profits. Burmah
Oil, a Scottish owned company was invited to farm-in and on 26 May 1908 oil was discovered.
The new company was called the Anglo-Persian Oil Company.

In 1914 the British government under Churchill’s advice bought 24.5% shares in the Anglo-
Persian Oil Company (APOC) for strategic reasons. In 1915, Britain and Russia signed an
agreement to divide Persia into two colonies, the northern half for Russia and the southern half
for Britain. The APOC signed a 40-year supply contract with the British Navy to supply fuel oil
at low prices. Due to the Russian Revolution the British took advantage of their absence and
tried to re-negotiate the D’Arcy agreement in Persia through an “Interpretive Agreement” which
was unsuccessful. In 1920 a bloodless revolution took place in Persia that deposed of Ahmed
Shah and installed Reza Shah.

World War 1
Germany left out of the concessions and colonies outside of Europe. Ottoman empire sided with
the Germans who lost the war due to the involvement of the Americans on the side of the Allies.
One of the objectives of Germany was to build up a German oil industry in Iraq. Instead after the
defeat of Germany, France was invited to take an interest in the oil fields through a company
called Compagnie Francaise des Petroles.

There was devised an agreement to divide up the Turkish Empire in to the companies of the
Allies which were of British, French and American origins. The “Red Line Agreement” was
conclude in order to avoid un-necessary competition between the companies and possibly to
have a united front in dealing with the locals. A new company called Iraq Petroleum Company
(IPC) with interests as follows BP 27.5%, CFP 23.75%, Exxon 11.875%, Mobil 11.875% and
Shell 23.75%. The remaining 5% was given to Mr. Calouste Gulbenkian who put the deal
together.

Saudi Arabia
After WW 1 Saudi Arabia was officially recognized as a nation. In 1927 King Ibn Saud a desert
warrior from the interior had defeated all of his rivals and he named the whole territory after his
own clan, Saudi Arabia, the only country to be named after its ruling family.

In 1933 Chevron was granted a concession in Saudi Arabia for 60 years and oil was discovered
in 1938 in Damman. In 1939 a supplementary agreement was made adding 6 years to the term
and an extra 80,000 square miles.

Mexico and Venezuela

Fuel for Allied navies and armies were obtained from the prolific oilfields of Mexico and
Venezuela that were under European or American control. The concessions in Venezuela were a
real giveaway with low royalties, low lease rentals no drilling obligations or any taxes.

Mexico was exporting about 30% of world supplies. Sohio bought into the Mexican oil industry
and is reported as having a reedy appetite for profit and sometimes they went against the
Supreme Court resolutions. The Mexican Revolutionary Period was 1910 to 1920. In 1938,
President Lazar Cardenas decided to expropriate all the interests of the foreign companies due to
the non-payment of a $2 million settlement to oil workers.

This was to be concluded in 1947 with the formation of Pemex. In 1948 Venezuela successfully
imposed a 50/50 Profit-Sharing split that could be offset for US income tax purposes.

By 1930 the automobile industry had taken off and created a great need for gasolene, lubricants
and a number of spin-off products in the USA. East Texas oil field was discovered, a 6 billion
bbl field, which caused prices to be depressed because of over-supply. The Texas Railroad
Commission was designated the responsibility to maintain production in line with demand.

World War 2
Net importers of crude oil in 1938 were countries such as Germany, Italy, Bulgaria, Finland,
Austria, Rumania and Japan at an annual total of 12 million metric tons. Germany lost the war
after its oil supplies from the Caucusus were cut off by the Russians and the battle of El Alamein
in the Middle East lost all hopes for an oil supply. The Middle East now remained under Allied
control.

Japan invaded Manchuria to obtain access to the oil shale plant s located there.

The Allies were supplied largely from the prolific fields in Venezuela and the Aruba oil
refineries.

The Jet Age

Advances in air travel caused a great demand for aviation fuel (jet kero). Automobile
proliferation over the last 50 years also caused a rise in motor-gasolene and clean diesel fuels.
Tanker traffic utilises heavy fuel oil or bunkers.

In the northern climate energy is used for residential, commercial and industrial purposes. Coal,
Heavy Fuel Oil and coal are natural substitutes for petroleum-derived fuels. Synthetic polymers
and plastics are an integral part of the petroleum industry.

State Oil Companies

Countries who want to control the development and exploitation of their petroleum resources
often form a national oil corporation or a state owned oil corporation, commonly abbreviated as
NOC or SOC. From the earliest accounts of domination of other countries petroleum resources
by international oil companies, IOCs, there has been a quiet movement towards gaining control
of a nation’s resources. Take for example, the rapid depletion of a country’s petroleum to enable
good returns to IOC shareholders that do not take into account the countries own needs and
requirements. The resources may fetch a better price outside of the host country than that inside
of the nation. These issues become paramount without resolve but fall onto signed contractual
arrangements and steamy negotiations concerning the further disposal of petroleum.
During the early development of Mexico’s oil industry, Pemex was formed as early as 1930s.
However, it was not until the 1960s that the wave of nationalism swept across the globe with the
formation of many NOCs. These takeovers were either hostile or passive negotiated buy-outs.

Important NOCs are:

Saudi Aramco of Saudi Arabia, NIOC of Iran, NNPC of Nigeria, Sonatrach of Algeria, Petronas
of Malaysia, Pertamina of Indonesia, ONGC of India, Pemex of Mexico, PDVSA of Venezuela,
Petrobras of Brazil, Ecopetrol of Columbia and Statoil of Norway.
It is important to note that NOCs and SOCs control over half of the world’s oil and gas
production.

There are two ends of the control spectrum – fully nationally owned and controlled such as
Pemex or having absolutely no ownership or interest as in countries such as the USA where
investments are carried out by private oil companies. Many other countries however have a
mixture of SOCs and IOCs.

Certain countries have NOCs that are the licensors of mineral rights while in others the State
retains this control but allows a SOC to maintain a presence in joint venture with the IOCs.

Israel
This state was created based on the Balfour Declaration after WW-1 as a promise to the Jews.
This was eventually carried out in 1948 after WW-2 when the state of Israel was created in
Palestine including the holy city of Jerusalem. The Arab world that surrounded Israel was in
turmoil.

The former French Prime Minister in 2004 and current member of the European Parliament,
Michel Rocard, blasted Israel as an "abnormal case in the world", describing its creation by the
1917-Balfour Declaration as a "historic mistake".

Rocard, who is also a well-known member of the French Socialist Party, was delivering a lecture
at the Bibliotheca Alexandrina on June 16, in which he said that the Balfour promise England
gave to the Jews to create a national homeland for them in Palestine was a "mistake".

OPEC
The decline in Posted Prices for crude oil in 1959 and 1960 caused a financial crisis for the
producer countries. Exxon lowered the price of crude oil and affected all other buyers in the
market. On 14 September 1960 the Organization of Oil Exporting Countries, OPEC, was formed
by Venezuela, Kuwait, Saudi Arabia, Iran and Iraq. At that time OPEC countries supplied over
85% of the world oil market.

Immediate effect was the stabilisation of posted prices. In 1962 Libya and Indonesia joined
OPEC. They fought the major oil companies for royalty to be expensed and not treated as a pre-
tax payment.
The Arab Oil Embargo
The Suez Canal has been the site of three wars: the 1956 Suez Crisis, the 1967 Six-Day War, and
the 1973 Yom Kippur War. It is 120 miles long, and it is the longest canal in the world without
locks and can hold ships with a draft of 58 feet. This is the main gateway for oil to Western
Europe. French engineers built it in 1867 for a grant of a 99 year lease to operate it as the Suez
Canal Company Limited. However, due to the French financial difficulty, Britain’s prime
Minister bought the shares from the French and controlled the canal for over 84 years.

In June 1956, President Gamal A. Nasser asked for and was denied money from the United
States and Great Britain to build his Aswan High Dam. This and the fact that Egypt's own canal
did not belong to them led to President Nasser nationalizing the Suez. Britain, France and Israel
plotted to overthrow Nasser and to get back the canal.

These reactions are what caused the Suez Crisis. The tripartite collusion attacked Egypt with
Israeli troops leading the way. Egypt responded by sinking the 40 ships that were in the Canal at
the time. The U.S. and the Soviet Union both disagreed with the collusion's actions because their
interference would help their influence in the Middle East. The Cold War was still going strong
so the interference could have determined who had control of the Middle East: the US or the
Soviet Union. The United Nations, United States, and Soviet Union all intervened and stopped
the Crisis. The collusion was forced to pay reparations to Egypt for the damage, and the Canal
was reopened under Egyptian control after the sunken ships were cleared out. However this did
not solve the problem, because the Six-Day War in 1967 was partly due to the fight in 1956.

The Arab Nations were still mad about the fumbled attack on Egypt in 1956 and sought revenge.
They started many anti-Israeli campaigns. Finally on May 31, 1967, Egypt moved 100,000
troops, 1,000 tanks, and 500 heavy guns into the Sinai. By June 4th, Israel was outnumbered
three to one. Israel saw the inevitable, attacked Egypt's airforce, and crushed it before it left the
ground. The rest of the fighting continued in much the same manner. By June 7th, Israel's troops
had secured the eastern bank of the Suez Canal. Finally on June 8th, Nasser accepted a cease-
fire. If he had not, Israel would have headed for Cairo. The Canal was badly damaged and repairs
went on for years following the war. The Canal was closed by Egypt until after they won the
Yom Kippur War of 1973 and halted the bloodshed in the Sinai. The Canal was reopened in
1975. The Canal has remained in Egyptian hands ever since.

Due to the closure of the Suez Canal, crude oil tankers had to take the long route to Europe
around the Cape of Good Hope in South Africa. This led to the construction of the VLCCs the
very large cargo carriers in order to maintain tanker freight charges at about the same price.

2.1 Petroleum industry Status 2005, BP Statistical Review

Bp Statistical provides a comprehensive view of the world energy trade.

2.2 The T&T Context

Production and oil/gas reserves. Ultimate Reserves.
2.3 Basic Concepts of the Oil Industry and Economics
Integrated Oil Companies
In order to obtain the advantage of monopoly, companies may arrange itself into a special
combination to sell the final product to the consumer. The parts of the value chain begin from
exploration and production, through transportation, refining, marketing and retail sales to the
eventual consumer. By having such a firm grip on the essential components of the industry the
oil company stands to benefit from profits all along the value chain. Transfer pricing is used as a
mechanism to calculate revenues and net income, taxes for each part of the chain. Skilful
accountants can ultimately maximise profits by moving around costs, revenues and expenses. In
such companies, there is less risk in security of supply or access to retail markets.

Horizontal Integration is where all the companies are at the same stage of production for
example, exploration and production only or exploration only or transportation or pipeline or
refining or service stations etc. This form of integration occurs due to the competitive advantage
of a particular company in the marketplace. For instance, all competitive electric logging
companies have been bought out so that there are only three majors in this field – Schlumberger,
Halliburton and Baker Hughes Inc.

Vertical Integration is where the companies are arranged at different stages of the process to
sell a final product for example exploration, production, transportation, refining, marketing and
distribution. These companies eventually have a monopoly on the proliferation or scarcity of a
product and can manipulate prices to suit the changing conditions to their advantage.
Competitive behaviour from a number of companies is usually the better system of development.

Voluntary associations of companies at a horizontal level may form pricing rings, pools or
cartels. On the other hand, trusts are the vertical equivalent of this horizontal structure.

A Monopoly exists only in economics theory and is used to describe forms of very imperfect
competition. Oligopoly is when there are a few producers of a homogenous commodity.
Monopolies are in some countries illegal by Anti-Trust laws, which affect persons in the restraint
of trade.

Cartels are more complex organisations used to regulate or restrict output of a commodity. All
of the individual members retain their individual identity and independence but agree as long as
they belong to the cartel to abide by the methods for developing quotas. These quotas are
forecasted in respect of future demand and are designed to maintain price stability. OPEC is an
oil cartel; others are IATA the International Air Travel Association, Marketing Boards, etc.

Pricing
Demand is the quantity demanded at a particular price for the commodity. Demand curves show
the variation of demand versus price. Supply is the quantity of a commodity demanded by a
market over a certain period of time at a particular price. The equilibrium price is the price at
which the supply and demand curves cross. The determination of price is the interaction of the
forces of supply and demand through the working of the price mechanism. The short-term
equilibrium price is the market price. Long-term prices, for about 1 year, are called the contract
price.

Elasticity of supply or demand is meant the degree of responsiveness of demand or supply

respectively to changes in price. Inelastic demand occurs when the quantity of supply remains
fixed no matter the price value. The most important point about elasticity of demand is whether
there are other substitutes for the commodity. For example if natural gas prices rise sharply then
heavy fuel oil can be substituted instead which in fact will reduce demand and cause a drop in
prices.

Oil and Gas Value Chains

Since the activities in a vertically integrated oil company may take place in more than one
country, the companies use a transfer pricing mechanism to value the sale of the commodities
sold to its other operating divisions. Transfer Prices therefore may not reflect true market
conditions and therefore the exact value derived for the payment of royalties and taxes. In
Trinidad the Government set up a Petroleum Prices Commission to set prices that would
otherwise be considered an arms length sale, which is a sale of a commodity from a willing
seller to a willing buyer.

Crude Oil Markets and Pricing

Crude oil is the most actively traded commodity in the world and is sold/traded on the large
stock markets of the major countries such as NYMEX – New York Mercantile Exchange, IPE
International Petroleum Exchange, and in Singapore. However, crude oil cargoes have a specific
gravity, quality, sulphur content, metals content and chemical basis. So that each cargo of crude
oil is sold by sophisticated pricing mechanisms to account for these variations.

Because of the disparate varieties of crude oil, buyers and sellers have agreed to reference a
certain crude oil as a marker or benchmark crude for pricing purposes. Brent is generally
accepted as the most commonly used benchmark and is used to price about two-thirds of the
world’s crudes. However, in the USA and other parts of the western hemisphere the marker
crude is WTI or West Texas Intermediate.

Brent is the marker for Saudi Arabian crudes for Europe, Dubai crude for the Middle East, WTI
in the USA and Venezuela Tia Juana light markers for Latin America, Nigera Bonny Light for
Africa. There is also an OPEC basket that is made up of crudes from certain OPEC members.

Crude oil is usually sold on long term contracts that has a term of about one year. Short term
contracts run for approximately one month. Excess crude that is not required under contract is
sold on the Spot Market eg NYMEX on a daily basis. Futures contracts are transactions in which
the buyer agrees to take delivery in the following month at a pre-arranged price and at a specific
location. If supplies become extremely tight this may cause large swings in price over each day
in the market.
Crude oil cargoes are sold F.O.B, Free On Board at a loading port or C.I.F., Cost Insurance and
Freight at the destination offloading port. Crude oil prices are governed by quality and transport
differentials. If a crude oil has a lower gravity than the marker crude then the price is discounted
or vice versa if the gravity is higher than the marker. Increasing percentages of sulphur allow for
greater discounts for these sour crudes. The transport differential allows for the freight and
associated charges to be included in the price from a particular point of sale or point of supply.

Oil and Politics

The recent changes in the world’s landscape for petroleum has been the creation of mega-sized
corporations such as ExxonMobil, Chevron(Texaco), BP(Arco,Amoco,Veba) and Royal Dutch
Shell. All of the other privately owned companies are much smaller in this food chain.

The second major change has been the increasing importance of natural gas as pipeline gas or as
LNG moving towards a commodity status in time to come. Thirdly is the rapid increase in price
form 25 to 30 per barrel to 50 to 60 per barrel, almost a doubling of prices. This is a net effect of
major increased demand for petroleum and its products from emerging economies of China and
India who together are the world’s most populous countries.

The most recent writings suggest a peaking of oil production according to M. King Hubbert who
predicted a maximum and decline in accordance with a normal statistical distribution. It is
believed that this event will occur during the 2015 to 2030 period. Therefore control of the
world’s remaining supplies of petroleum is of major economic and strategic importance for the
survival of the consuming nations such as USA, Japan, Europe and the Far East countries.

2.4 Overview of Exploration In Trinidad and Tobago

Trinidad and Tobago’s petroleum history goes back as far as 1857 when the Merrimac Company
drilled for oil in the vicinity of the Pitch Lake at La Brea, South Trinidad. This attempt however
was unsuccessful. Other attempts to find oil occurred again in 1865 when Walter Darwent drilled
his first discovery well at Aripero. The well produced at 2 and 1 half bbls/hour or 60 bopd. Other
wells were drilled at San Fernando without success.

Commercial crude oil production began in 1908. During this time several small companies were
formed to explore for petroleum in such areas as Guayaguayare, Tabaquite, Point Fortin and
Barrackpore. These attempts were more or less driven by the numerous surface seepages of oil,
gas and mud to be found within these areas.

By 1913, crude oil production had increased to 2 million barrels per year or an average of 5478
bopd. New land fields were discovered in the southern half of the island by the many new oil
companies seeking their fortunes in the forests of Trinidad.

The first offshore discovery occurred in the Gulf of Paria with the drilling of Soldado No.1 in
1954 under the Trinidad Northern Areas Exploration and Production Licence. The Soldado fields
were rapidly developed together with other land discoveries such as Trinity-Inniss and Moruga
fields.

The 1960s
During the early 1960’s the Navette Field at Guayaguayare was discovered and rapidly
exploited. The Barrackpore field was also discovered and also put onto production. Production
declines took place and the three majors of the 1960’s were considering exiting Trinidad and
Tobago. The first to leave was BP in 1969 after a three-year retrenchment programme that had
its associated hardships. With the exit of BP, the Government of Trinidad and Tobago entered
into negotiations with BP in order to purchase the assets of the company and thereby secure jobs
in the oilfield. This was completed at a price of US$ million. GORTT and Tesoro Corporation
of Dallas, Texas, USA entered into a joint venture association with the government holding
50.1% of the shareholding. The new company was re-named Trinidad Tesoro Petroleum
Company Limited and was located with Head offices at Santa Flora, South Trinidad.

On the east coast of Trinidad there were discoveries of major oil and gas fields discovered by the
Pan American Oil Company that was subsequently named American Oil Company Limited
Amoco.

The 1970’s
Shell Trinidad Limited was the second major to pull out and in 1974 GORTT purchased the
entire assets of STL at a price of US$ 75 million. These assets included the refinery at Point
Fortin, land fields and its interests in the prolific Soldado oilfields. Again this purchase seemed
inevitable since the need to maintain a stable social environment at that time and to continue to
employ individuals who were also retrenched from STL. The new company named Trinidad and
Tobago Oil Company Limited, Trintoc was 100 percent owned by GORTT and was set up as a
limited liability company under the Companies Act of Trinidad and Tobago. Trintoc was run and
operated on the basis of a limited liability company and was governed by a Board of Directors
who were appointed by the GORTT.

Amoco had begun producing oil and gas at prolific rates from its Samaan, Teak and Poui fields.
Natural gas produced from the Teak field and associated low-pressure gas being flared at that
time was collected, compressed and transported by the National gas Company of Trinidad and
Tobago limited to users such as Trinidad and Tobago Electricity Commission Limited for power
generation as well as for the use as feedstock into petrochemical plants such as ammonia and
methanol.

The 1980’s
During the 1980’s saw the increased actions of labour unrest at the refinery at Pointe-a-Pierre
and the final exit of Texaco Trinidad Inc., from all of its assets in Trinidad and Tobago except
for its shareholding in Trinmar and the Trinidad Northern Areas licence and the East Coast
acreage of Blocks 5 and 6 which included the Dolphin gas discovery. In 1985 the sale of these
assets had been completed at a sale price of US$270 million. Trintoc and the ex-Textrin assets
were merged into a larger state-owned oil company called Trintoc.
During that same year, Trinidad Tesoro Limited, offered to sell its 49.9% shareholding in the
company to GORTT. The sale was closed at a price of US$ million. Both companies operated
as two independent entities until 1993 when both were merged to create Petroleum Company of
Trinidad and Tobago, Petrotrin. During 1997 GORTT purchased the remaining 33-1/3%
shareholding in the TNA licence and related assets from Textrin.

The only Texaco assets remaining in T&T at this time are the East coast acreages. In order to
overcome the stranglehold of the country on Amoco’s gas the GORTT decided to develop the
Pelican and Kiskadee gas condensate fields via a new State owned company called Trinidad and
Tobago Marine Petroleum Company Limited, Trintomar. The assets were the licence pertaining
to the South East Coast Consortium SECC. Nevertheless, the Pelican platform never achieved
the realisation of 150 mmscf/d due to insufficiency of reserves.

The 1990s saw the continuation of exploration and development work mainly offshore. With the
demise of Trintomar, Enron Trinidad and Tobago limited was issued a licence to develop the
Kiskadee field to meet local gas demand. Also, British Gas BG who had purchased the assets of
Tenneco became a player in Trinidad and Tobago with the development of the Dolphin field.
The Southern Basin Consortium, SBC was an un-incorporated joint venture comprising Exxon,
Total and Chevron holding 49.9% and the State companies Trintoc and TTPCL holding the
remaining 50.1%. No commercial discoveries were made.

The 2000’s
The east coast acreages again proved to be the fertile hunting ground for new discoveries as
Amoco conducted a number of consecutive discoveries making the country’s proved gas reserves
over 20 tcf. At the same time BHP Billiton, an Australian mining company made a new
discovery in the northern half of the east coast in the Angostura field. The latest exploration
effort has been the drilling of wells on structures in the Deep-Water acreage and the acquisition
of seismic data over the Ultra Deep water acreage.

The thrust was now into the monetisation of these large volumes of natural gas discovered but
without a long term market. Indeed the domestic market in Trinidad and Tobago could only grow
at 40 to 60 mmscfd for each new ammonia or methanol plant installed. A new way to rapidly
monetize the reserves was needed.

Amoco Trinidad Limited was instructive in this regard making investment proposals for the
installation of a LNG plant and export of liquefied natural gas. This method of export would
mean a new way of gas pricing and risks for the government of Trinidad and Tobago.

Atlantic LNG was formed by the companies BPTT, BG, Repsol, Cabot and NGC and was
designed to handle all liquefaction matters. The market for Train 1 was Spain and USA.
Subsequent developments entailed with the Train 2/3 and 4 plants. Gas exports from T&T had
now reached 2.2 bcf/d which represented approximately 60% of all gas production.

During the early 2000 period prices for gas in the USA market was buoyant with prices reaching
up to $8 to $10/mmbtu in certain months. By 2008 the natural price in the USA was hit by
abundant supplies from shale gas across the continental USA. Gas prices fell to $2.20 to
$3.00/mmbtu with a resulting loss in revenues from the gas selling companies.
New markets have been sought with the emergence of South American and Far East markets
where pricing are much better than the USA.

The current gas production is about 4 bcf/d and oil production of 90 k b/d. The oil decline over
the period was based on a steady decline without replenishment. Petrotrin Land and Trinmar
fields were worked on without enough exploratory or Enhanced Oil Recovery (EOR) projects
due to low re-investments.

Remaining Areas for Exploration

It is believed that there is still major petroleum to be discovered in the territorial areas of
Trinidad and Tobago. Some areas include
• Further exploration on Land to Cretaceous age rocks
• Deep exploration in the west coast acreages of Soldado
• Continental shelf opportunities
• North Coast gas opportunities
• Deepwater exploration
• Ultra-Deep water exploration