Petroleum Marketing and Supply Chain

The Petroleum Industry

The petroleum industry, also known as the oil industry includes the global processes of exploration,
extraction, refining, transporting (often by oil tankers and pipelines), and marketing of petroleum products. The
largest volume products of the industry are fuel oil and gasoline (petrol). Petroleum (oil) is also the raw material
for many chemical products, including pharmaceuticals, solvents, fertilizers, pesticides, synthetic fragrances,
and plastics. The industry is usually divided into three major components: upstream, midstream and
downstream. Midstream operations are often included in the downstream category.

Petroleum is vital to many industries, and is of importance to the maintenance of industrial civilization in its
current configuration, and thus is a critical concern for many nations. Oil accounts for a large percentage of the
world’s energy consumption, ranging from a low of 32% for Europe and Asia, to a high of 53% for the Middle
East.

Other geographic regions' consumption patterns are as follows: South and Central America (44%), Africa
(41%), and North America (40%). The world consumes 30 billion barrels (4.8 km³) of oil per year, with
developed nations being the largest consumers. The United States consumed 25% of the oil produced in 2007.[1]
The production, distribution, refining, and retailing of petroleum taken as a whole represents the world's largest
industry in terms of dollar value.

Governments such as the United States government provide a heavy public subsidy to petroleum companies,
with major tax breaks at virtually every stage of oil exploration and extraction, including the costs of oil field
leases and drilling equipment

Natural history

Petroleum is a naturally occurring liquid found in rock formations. It consists of a complex mixture of
hydrocarbons of various molecular weights, plus other organic compounds. It is generally accepted that oil is
formed mostly from the carbon rich remains of ancient plankton after exposure to heat and pressure in Earth's
crust over hundreds of millions of years. Over time, the decayed residue was covered by layers of mud and silt,
sinking further down into Earth’s crust and preserved there between hot and pressured layers, gradually
transforming into oil reservoirs.

Petroleum in an unrefined state has been utilized by humans for over 5000 years. Oil in general has been used
since early human history to keep fires ablaze and in warfare.

Its importance to the world economy however, evolved slowly, with whale oil being used for lighting in the
19th century and wood and coal used for heating and cooking well into the 20th century. Even though the
Industrial Revolution generated an increasing need for energy, this was initially met mainly by coal, and from
other sources including whale oil. However, when it was discovered that kerosene could be extracted from
crude oil and used as a lighting and heating fuel, the demand for petroleum increased greatly, and by the early
twentieth century had become the most valuable commodity traded on world markets.[3]

Modern history
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Imperial Russia produced 3,500 tons of oil in 1825 and doubled its output by mid-century. After oil drilling
began in what is now Azerbaijan in 1846 in Baku, two large pipelines were built in the Russian Empire: the
833 km long pipeline to transport oil from the Caspian to the Black Sea port of Batum (Baku-Batum pipeline),
completed in 1906, and the 162 km long pipeline to carry oil from Chechnya to the Caspian. Batum is renamed
to Batumi in 1936.

At the turn of the 20th century, Imperial Russia's output of oil, almost entirely from the Apsheron Peninsula,
accounted for half of the world's production and dominated international markets. Nearly 200 small refineries
operated in the suburbs of Baku by 1884. As a side effect of these early developments, the Apsheron Peninsula
emerged as the world's "oldest legacy of oil pollution and environmental negligence." In 1846, Baku the first
ever well drilled with percussion tools to a depth of 21 meters for oil exploration. In 1878, Ludvig Nobel and
his Branobel company "revolutionized oil transport" by commissioning the first oil tanker and launching it on
the Caspian Sea.

Samuel Kier established America's first oil refinery in Pittsburgh on Seventh avenue near Grant Street, in 1853.
One of the first modern oil refineries were built by Ignacy Łukasiewicz near Jasło (then in the dependent
Kingdom of Galicia and Lodomeria in Central European Galicia), Poland in 1854–56. These were initially
small, as demand for refined fuel was limited. The refined products were used in artificial asphalt, machine oil
and lubricants, in addition to Łukasiewicz's kerosene lamp. As kerosene lamps gained popularity, the refining
industry grew in the area.

The first commercial oil well in Canada became operational in 1858 at Oil Springs, Ontario (then Canada
West). Businessman James Miller Williams dug several wells between 1855 and 1858 before discovering a rich
reserve of oil four metres below ground.[10][11] Williams extracted 1.5 million litres of crude oil by 1860,
refining much of it into kerosene lamp oil.[9] Some historians challenge Canada’s claim to North America’s first
oil field, arguing that Pennsylvania’s famous Drake Well was the continent’s first. But there is evidence to
support Williams, not least of which is that the Drake well did not come into production until August 28, 1859.
The controversial point might be that Williams found oil above bedrock while Edwin Drake’s well located oil
within a bedrock reservoir. The discovery at Oil Springs touched off an oil boom which brought hundreds of
speculators and workers to the area. Canada's first gusher (flowing well) erupted on January 16, 1862, when
local oil man John Shaw struck oil at 158 feet (48 m). For a week the oil gushed unchecked at levels reported as
high as 3,000 barrels per day.

The first modern oil drilling in the United States began in West Virginia and Pennsylvania in the 1850s. Edwin
Drake's 1859 well near Titusville, Pennsylvania, is typically considered the first true modern oil well, and
touched off a major boom. In the first quarter of the 20th century, the United States overtook Russia as the
world's largest oil producer. By the 1920s, oil fields had been established in many countries including Canada,
Poland, Sweden, Ukraine, the United States, Peru and Venezuela.

The first successful oil tanker, the Zoroaster, was built in 1878 in Sweden, designed by Ludvig Nobel. It
operated from Baku to Astrakhan. A number of new tanker designs were developed in the 1880s.

In the early 1930s the Texas Company developed the first mobile steel barges for drilling in the brackish coastal
areas of the Gulf of Mexico. In 1937 Pure Oil Company (now part of Chevron Corporation) and its partner
Superior Oil Company (now part of ExxonMobil Corporation) used a fixed platform to develop a field in 14
feet (4.3 m) of water, one mile (1.6 km) offshore of Calcasieu Parish, Louisiana. In early 1947 Superior Oil

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erected a drilling/production oil platform in 20 ft (6.1 m) of water some 18 miles off Vermilion Parish,
Louisiana. It was Kerr-McGee Oil Industries (now Anadarko Petroleum Corporation), as operator for partners
Phillips Petroleum (ConocoPhillips) and Stanolind Oil & Gas (BP), that completed its historic Ship Shoal Block
32 well in November 1947, months before Superior actually drilled a discovery from their Vermilion platform
farther offshore. In any case, that made Kerr-McGee's Gulf of Mexico well, Kermac No. 16, the first oil
discovery drilled out of sight of land. Forty-four Gulf of Mexico exploratory wells discovered 11 oil and natural
gas fields by the end of 1949. During World War II (1939-1945) - control of oil supply from Baku and Middle
East played a huge role in the events of the war and the ultimate victory of the allies. Cutting off the oil supply
considerably weakened Japan in the latter part of the war. After World War II ended, the countries of the
Middle East took the lead in oil production from the United States. Important developments since World War II
include deep-water drilling, the introduction of the Drillship, and the growth of a global shipping network for
petroleum relying upon oil tankers and pipelines. In 1949, first offshore oil drilling at Oil Rocks (Neft Dashlari)
in the Caspian Sea off Azerbaijan eventually resulted in a city built on pylons. In the 1960s and 1970s, multi-
governmental organizations of oil–producing nations OPEC and OAPEC played a major role in setting
petroleum prices and policy. Oil spills and their cleanup have become an issue of increasing political,
environmental, and economic importance.

World Oil Reserves Distribution

Oil reserves denote the amount of crude oil that can be technically recovered at a cost that is financially
feasible at the present price of oil.[1] Hence reserves will change with the price, unlike oil resources, which
include all oil that can be technically recovered at any price. Reserves may be for a well, for a reservoir, for a
field, for a nation, or for the world. Different classifications of reserves are related to their degree of certainty.

The total estimated amount of oil in an oil reservoir, including both producible and non-producible oil, is called
oil in place. However, because of reservoir characteristics and limitations in petroleum extraction technologies,
only a fraction of this oil can be brought to the surface, and it is only this producible fraction that is considered
to be reserves. The ratio of reserves to the total amount of oil in a particular reservoir is called the recovery
factor. Determining a recovery factor for a given field depends on several features of the operation, including
method of oil recovery used and technological developments.

Based on data from OPEC at the beginning of 2013 the highest proved oil reserves including non-conventional
oil deposits are in Venezuela (20% of global reserves), Saudi Arabia (18% of global reserves), Canada (13% of
global reserves), and Iran (9%).

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Sectors in the Petroleum Industry

The American Petroleum Institute divides the petroleum industry into five sectors:[19]

 upstream (exploration, development and production of crude oil or natural gas)

 downstream (oil tankers, refiners, retailers and consumers)
 pipeline
 marine
 service and supply

Upstream

Oil companies used to be classified by sales as "supermajors" (BP, Chevron, ExxonMobil, ConocoPhillips,
Shell, Eni and Total S.A.), "majors", and "independents" or "jobbers". In recent years however, National Oil
Companies (NOC, as opposed to IOC, International Oil Companies) have come to control the rights over the

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largest oil reserves; by this measure the top ten companies all are NOC. The following table shows the ten
largest national oil companies ranked by reserves and by production in 2012.

Top 10 largest world oil companies by reserves and production

Total
Worldwide Worldwide Reserves in
Output
Company Liquids Natural Gas Oil Company
Rank (Millions
(Reserves) Reserves Reserves Equivalent (Production)
bbl/day)[1]
(109 bbl) (1012 ft3) Barrels (109
bbl)

Saudi Saudi
1 260 254 303 12.5
Aramco Aramco

2 NIOC 138 948 300 NIOC 6.4

Qatar
3 15 905 170 5.3
Petroleum ExxonMobil

4 INOC 116 120 134 4.4

PetroChina

5 PDVSA 99 171 129 BP 4.1

Royal
6 ADNOC 92 199 126 3.9
Dutch Shell

7 Pemex 102 56 111 Pemex 3.6

8 NNPC 36 184 68 Chevron 3.5

Kuwait
9 NOC 41 50 50 Petroleum 3.2
Corporation

10 12 159 39 ADNOC 2.9

Sonatrach

Total energy output, including natural gas (converted to bbl of oil) for companies
producing both.

Most upstream work in the oil field or on an oil well is contracted out to drilling contractors and oil field service
companies.

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Aside from the NOCs which dominate the upstream sector, there are many international companies that have a
market share. For example:

 BG Group
 BHP Billiton
 Royal Dutch Shell
 ConocoPhillips
 Chevron
 Eni
 ExxonMobil
 OMV
 Hess Ltd
 Marathon Oil
 Total
 Tullow Oil
 First Texas Energy Corp

Midstream

Midstream operations are sometimes classified within the downstream sector, but these operations compose a
separate and discrete sector of the petroleum industry. Midstream operations and processes include the
following:

 Gathering:

Natural gas and crude oil gathering systems are defined as both the flow line networks as well as the
process facilities. Together they transport and control the flow of the natural gas or oil from its origin
point at the wellsite to a main storage facility, a processing plant, or a shipping point.The gathering
process employs narrow, low-pressure pipelines to connect oil- and gas-producing wells to larger, long-

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 haul pipelines or processing facilities.

Processing/refining: Processing and refining operations turn crude oil and gas into marketable products. In the
case of crude oil, these products include heating oil, gasoline for use in vehicles, jet fuel, and diesel oil. Oil
refining processes include distillation, vacuum distillation, catalytic reforming, catalytic cracking, alkylation,
isomerization and hydrotreating. Natural gas processing includes compression; glycol dehydration; amine
treating; separating the product into pipeline-quality natural gas and a stream of mixed natural gas liquids; and
fractionation, which separates the stream of mixed natural gas liquids into its components. The fractionation
process yields ethane, propane, butane, isobutane, and natural gasoline.

 Transportation: Oil and gas are transported to processing facilities, and from there to end users, by
pipeline, tanker/barge, truck, and rail. Pipelines are the most economical transportation method and are
most suited to movement across longer distances, for example, across continents. Tankers and barges are
also employed for long-distance, often international transport. Rail and truck can also be used for longer
distances but are most cost-effective for shorter routes.
 Storage: Midstream service providers provide storage facilities at terminals throughout the oil and gas
distribution systems. These facilities are most often located near refining and processing facilities and
are connected to pipeline systems to facilitate shipment when product demand must be met. While
petroleum products are held in storage tanks, natural gas tends to be stored in underground facilities,
such as salt dome caverns and depleted reservoirs.
 Technological applications: Midstream service providers apply technological solutions to improve
efficiency during midstream processes. Technology can be used during compression of fuels to ease
flow through pipelines; to better detect leaks in pipelines; and to automate communications for better
pipeline and equipment monitoring.

While some upstream companies carry out certain midstream operations, the midstream sector is dominated by
a number of companies that specialize in these services. Midstream companies include:

 Aux Sable

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  Bridger Group
 DCP Midstream Partners
 Enbridge Energy Partners
 Enterprise Products Partners
 Genesis Energy
 Gibson Energy
 Inergy Midstream
 Kinder Morgan Energy Partners
 Oneok Partners
 Plains All American
 Sunoco Logistics
 Targa Midstream Services
 TransCanada
 Williams Companies

The Downstream Industry

The downstream industry includes oil refineries, petrochemical plants, petroleum products distributors, retail
outlets and natural gas distribution companies. The downstream industry touches every territory wherever
consumers are located and provides thousands of products such as gasoline, diesel, jet fuel, heating oil, asphalt,
lubricants, synthetic rubber. plastic, fertilizers, antifreeze, pesticides, pharmaceuticals, natural gas

 asphalt, lubricants, synthetic rubber. plastic, fertilizers, antifreeze, pesticides, pharmaceuticals, natural
gas and propane.

 Oil Refinery

Oil refinery or petroleum refinery is an industrial process plant where crude oil is transformed and
refined into more useful products such as petroleum naphtha, gasoline, diesel fuel, asphalt base, heating
oil, kerosene, liquefied petroleum gas, jet fuel and fuel oils.[1][2][3] Petrochemicals feed stock like
ethylene and propylene can also be produced directly by cracking crude oil without the need of using
refined products of crude oil such as naphtha.[4][5]
Oil refineries are typically large, sprawling industrial complexes with extensive piping running
throughout, carrying streams of fluids between large chemical processing units, such as distillation
columns. In many ways, oil refineries use much of the technology of, and can be thought of, as types of
chemical plants.
The crude oil feedstock has typically been processed by an oil production plant. There is usually an oil
depot at or near an oil refinery for the storage of incoming crude oil feedstock as well as bulk liquid
products.
Petroleum refineries are very large industrial complexes that involve many different processing units
and auxiliary facilities such as utility units and storage tanks. Each refinery has its own unique
arrangement and combination of refining processes largely determined by the refinery location, desired
products and economic considerations.
An oil refinery is considered an essential part of the downstream side of the petroleum industry.
Some modern petroleum refineries process as much as 800,000 to 900,000 barrels (127,000 to 143,000
cubic meters) per day of crude oil.

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  Integrated operations

In the Petroleum industry, Integrated operations (IO) refers to new work processes and ways of
performing oil and gas exploration and production, which has been facilitated by new information and
communication technology. Multi-discipline collaboration in plant operation is one example. IO has in a
sense also taken the form of a movement for renewal of the oil and gas industry. In short IO is
collaboration with production in focus.

Instrumentation in petrochemical industries

Instrumentation in petrochemical industries basically consists of flow meters, pressure transmitters, level
sensors, temperature sensors, and analysis instruments.

Temperature indicators

The measurement of temperature is a vital part of instrumentation in petrochemical industries. Platinum

Resistance Temperature Detectors (RTD's) are often used for their excellent temperature response.
Thermocouples are used in locations that need a more durable sensor. Thermocouples come in many types.

Pressure measurement

A pressure to current converter (P/I converter) in petrochemical industries is used to measure the pressure
developed by liquified petroleum gas (LPG), crude oil, petrol, and various other petroleum byproducts. In the
P/I converter, the indicated pressure can be a digital or an analog form. The main advantage is that it can be
directly shown on the control panel in the control room. This is true for temperature measurement also.

Flow meters

Because refined oil is volatile, it is important to know the quantity of oil being transported at numerous points
along the pipeline. This requirement also holds for natural gas. Flowmeters are generally of vortex, positive
displacement (PD), differential pressure (DP), coriolis, and ultrasonic varieties.

Level sensors

Petroleum and natural gas industries need very accurate level measurement. Besides traditional technologies
like differential pressure level meters, radar, magnetostrictive, and magnetic float are also used extensively.

One of the problems with a significant number of technologies is that they are installed through a nozzle and are
exposed to products. This can create several problems, especially when retrofitting new equipment to vessels
that have already been stress relieved, as it may not be possible to fit the instrument at the location required.
Also, as the measuring element is exposed to the contents within the vessel, it may either attack or coat the
instrument causing it to fail in service. One of the most reliable methods for measuring level is using a Nuclear
gauge, as it is installed outside the vessel and doesn't normally require a nozzle for bulk level measurement. The
measuring element is installed outside the process and can be maintained in normal operation without taking a
shutdown. Shutdown is only required for an accurate calibration.

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Analysis instruments

Industrial chromatographs are generally used in olefin processing in the petrochemical industry. Continuous gas
analyzers are also widely used.

Benchmarks Standardization of Oil Sales in oil industry

The three most quoted oil products in North America's West Texas Intermediate crude (WTI), North Sea Brent
Crude, and the UAE Dubai Crude, and their pricing is used as a barometer for the entire petroleum industry,
although, in total, there are 46 key oil exporting countries. Brent Crude is typically priced at about $2 over the
WTI Spot price, which is typically priced $5 to $6 above the EIA's Imported Refiner Acquisition Cost (IRAC)
and OPEC Basket prices. WTI and Brent are quoted F.O.B specific locations, not F.O.B. the oilfields. For WTI,
the delivery point is Cushing, OK; for Brent, it is Sullom Voe, an island north of Scotland.

Although crude oil assays evaluate various chemical properties of the oil, the two most important properties
determining a crude's value are its density (measured as API specific gravity) and its sulphur content (measured
per mass). Crude oil is considered "heavy" if it has long hydrocarbon chains, or "light" if it has short
hydrocarbon chains: an API gravity of 34 or higher is "light", between 31-33 is "medium", and 30 or below is
"heavy". Crude is considered "sweet" if it is low in sulphur content (< 0.5%/weight), or "sour" if high (>
1.0%/weight). Generally, the higher the API gravity (the "lighter" it is), the more valuable the crude.

Crude Oil Marketing

Crude oil stability is a function of price stability. Since 1980, there has been unstable prices. Furthermore,
market stability depends on contract stability. Before OPEC, market was relatively stable. After 1973, OPEC
seized control of price and production. Before 1960, oil marlet was controlled by the 7-Sisters (Exxon, Mobil,
Sohio, Standard Oil of Indiana, British Petroleum, Shell and Texaco). They also controlled oil reserves, tankers,
refineries, etc, i.e. from wellhead to the pump. 80% of the oil moves within these 7-Sisters. They were also
responsible for third party sales to independent refiners. They had a series of overlapping joint ventures within
them.

If demand decreased, they shut down, hence, they were able to stabilize the price. The prices were set on a Cost
Insurance Freight (CIF) on the US Gulf Coast, Cost and Freight (C&F) and Free On Board (FOB), Free
Alongside Strip (FAS), where responsibility ends at the port.

FOB involves loading, export fee. It is used to indicate whether the seller or the buyer is liable for goods that
are damaged or destroyed during shipping. FOB shipping point or FOB origin means the buyer is at risk once
the seller ships the goods.

Cost and freight is a legal term in international trade. In a contract specifying that a sale is made CFR, the
seller is required to arrange for the carriage of goods by sea to a port of destination and provide the buyer with
the documents necessary to obtain the goods from the carrier.

CIF – COST INSURANCE AND FREIGHT (named port of destination): Seller must pay the costs and freight
includes insurance to bring the goods to the port of destination. However, risk is transferred to the buyer once
the goods are loaded on the ship

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In 1970, multinatonals lost control of the oil market.

In 1973, FOB at port of sale commened and the price was administered by OPEC based on market crude, i.e.,
Saudi Arabian light (340 API). The official selling price (OSP) by other OPEC countries was dependent on
market crude. Non-OPEC countries are US, Norway, North Sea, Russia.

Problems with Administered Pricing

- Saudi became a swing producer, determining oil prices

- Auction prices occurred
- Oil producers started tying their sales to political objectives
- Oil producers were primarily concerned with maximizing current value of oil exported
whereas oil importers wanted a secured long term supply at minimum cost.

Price of oil is affected by

- Sulphur content
- Yield
- API value
- Seller’s preferences
- Buyer’s preferences and needs
- Availability of alternatives
- Bargaining power of seller and buyer
- Level of political harmony
- Government regulation
- OPEC regulation
- Supply
- Demand
- Distance from market
- Activity on stock market
- etc

Crude Oil Pricing Options

1. Administered Pricing. This is set by OPEC based on a Saudi light average. They are Official Selling
Prices (OSP).
2. Auction and Spot Related Sales. Gives a good idea of what the trend is. In glut, there is difficulty in
process. There is tendency for low bid. It is done periodically and not a standard policy.
3. Crude Prices Linkages. Prices are linked with well traded crude. For example, Ecuador crude linked
with Alaskan crude. There is however a problem, if the linked crude is not quoted on stock exchange
(world market).
4. Market Basket Pricing. This method of administered prices is tied to bundles of crudes. Mexico tie
their crude to Isthmus, and price of Isthmus is further tied to price of NorthSea Brent. Market basket
pricing provides investors with a benchmark against which to compare their investment returns.
5. Netback Pricing. The netback per barrel is determined by removing the costs of production from the
average realized price resulting in a net profit per barrel amount. These costs include importing,

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 transportation, marketing, production and refining costs, and royalty fees. Was used before OPEC was
formed.

Sources of Oil Market Information

- Platt’s Oilgram
- OPEC Bulletin
- Oil Buyer’s Guide
- World Oil Journal
- Journal of Petroleum Technology (JPT)

Market Forces Impacting Oil Prices

Then there’s the problem of cartels. Probably the single biggest influencer of oil prices is OPEC, made up of 13
countries (Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the
United Arab Emirates and Venezuela); collectively, OPEC controls 40% of the world's supply of oil.

What is a Cartel?

A cartel is an organization created from a formal agreement between a group of producers of a good or service
to regulate supply in an effort to regulate or manipulate prices. In other words, a cartel is a collection of
otherwise independent businesses or countries that act together as if they were a single producer and thus are
able to fix prices for the goods they produce and the services they render without competition.

A cartel has less command over an industry than a monopoly — a situation where a single group or company
owns all or nearly all of a given product or service's market. Some cartels are formed to influence the price of
legally traded goods and services, while others exist in illegal industries, such as drugs. In the United States,
virtually all cartels, regardless of their line of business, are illegal by virtue of American anti-trust laws.

Cartels have a negative effect for consumers because their existence results in higher prices and restricted
supply. The Organization for Economic Cooperation and Development (OECD) has made the detection and
prosecution of cartels one of its priority policy objectives. In so doing, it has identified four major categories
that define how cartels conduct themselves: price fixing, output restrictions, market allocation and bid rigging
(the submission of collusive tenders).

The World's Biggest Cartel

The Organization of Petroleum Exporting Countries (OPEC) is the world's largest cartel. It is a grouping of 14
oil-producing countries whose mission is to coordinate and unify the petroleum policies of its member countries
and ensure the stabilization of oil markets. OPEC's activities are legal because it is protected by U.S. foreign
trade laws.

Amid controversy in the mid-2000s, concerns over retaliation and potential negative effects on U.S. businesses
led to the blocking of the U.S. Congress attempt to penalize OPEC as an illegal cartel. Despite the fact that

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OPEC is considered by most to be a cartel, members of OPEC have maintained it is not a cartel at all but rather
an international organization with a legal, permanent and necessary mission.

Price Fixing

Price fixing is setting the price of a product or service, rather than allowing it to be determined naturally through
free-market forces. Although, antitrust legislation makes it illegal for businesses to fix their prices under
specific circumstances, there is no legal protection against government price fixing. In an ill-fated attempt to
end the Great Depression, for example, Franklin Roosevelt forced businesses to fix prices in the 1930s.
However, this action may have actually prolonged the downturn.

Legality

Price fixing runs afoul of federal and state competition laws as it stifles fair competition in the free market.
When prices are fixed at a premium, the conspirators earn higher profits than businesses not involved in the
scheme. Similarly, when price fixing is at a discount, businesses not in on the collusion efforts lose market
share and sales. Because businesses are prevented from fairly competing against each other, price fixing is a
criminal violation under the Sherman Antitrust Act federal law, a civil violation under the Federal Trade
Commission (FTC), and a violation under state antitrust laws. In Canada, entities found guilty of price fixing
are subject to imprisonment to a maximum term of five years, to a maximum of $10 million dollar in fines, or
both.

Some economists believe antitrust laws are unnecessary because the free market already contains several built-
in guards against price fixing. Consumers who believe that an item is priced unfairly high can do any of the
following:

• Purchase a substitute good or service that is lower-priced

• Decrease their consumption for the good, making it unprofitable for businesses to keep prices fixed

• Buy the product from another country

Distrust among companies in a price fixing arrangement also acts as a barrier to continued manipulation. And, if
all those fail, price fixing usually breaks down because of the power of large buyers to negotiate the price they
are willing to pay.

Price fixing is a manipulation scheme that is difficult to detect and prove since multiple companies having
identical prices is not enough to prove that they colluded to fix prices. For example, the price of commodities,
such as wheat, is almost always identical across various markets in the same region. This is because the
products are virtually identical, and the demand and supply factors that affect one farm, most likely affect all
other farms growing the same commodity within the same geographical region. For this reason, it is easiest for
companies in a monopoly to fix prices, since they have no competitors that can counter their sales prices with
lower ones.

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Monopoly

In business terms, a monopoly refers to a sector or industry dominated by one corporation, firm or entity.
Monopolies can be considered an extreme result of free-market capitalism; absent any restriction or restraints, a
single company or group becomes large enough to own all or nearly all of the market (goods, supplies,
commodities, infrastructure, and assets) for a particular type of product or service. Antitrust laws and
regulations are put in place to discourage monopolistic operations – protecting consumers, prohibiting practices
that restrain trade and ensuring a marketplace remains open and competitive. "Monopoly" can also be used to
mean the entity that has total or near-total control of a market.

A monopoly is a kind of structure that exists when one company or supplier produces and sells a product. If
there is a monopoly in a single market with no other substitutes, it becomes a “pure monopoly.” When there are
multiple sellers in an industry and there are many similar substitutes for the goods being produced, and
companies keep some power in the market, then it is called monopolistic competition.

Characteristics of a Monopoly
Profit Maximizer
 High or no barriers to entry: Other competitors are not able to enter the market
 Single seller: There is only one seller in the market. In this instance, the company becomes the same as
the industry it serves.
 Price maker: The company that operates the monopoly decides the price of the product that it will sell.
 Price discrimination: The firm can change the price or quantity of the product at any time.

Why Are Monopolies Illegal?

A monopoly is characterized by the absence of competition, which can lead to high costs for consumers,
inferior products and services, and corrupt behavior. A company that dominates a business sector or industry
can use that dominance to its advantage, and at the expense of others. It can create artificial scarcities, fix
prices, and otherwise circumvent natural laws of supply and demand. It can impede new entrants into the field,
discriminate, and inhibit experimentation or new product development, while the public — robbed of the
recourse of using a competitor — is at its mercy. A monopolized market often becomes an unequal, and even
inefficient, one.

Mergers and acquisitions among companies in the same business are highly regulated and researched for this
reason. Firms are typically forced to divest assets if federal authorities think a proposed merger or takeover will
violate anti-monopoly laws.

Natural Monopolies

Not all monopolies are illegal. There are such things as natural monopolies, which occur for several reasons.
Sometimes, a specialized industry may have certain barriers to entry that only one company or individual can
meet. Or, a company may have patents on its products that limit its competition in a specific field; the
monopoly is considered just compensation for the high start-up and research and development (R&D) costs the
company has incurred.

14
There are also public monopolies set up by governments to provide essential services and goods, such as the
U.S. Postal Service (though of course, the USPS has less of a monopoly on mail delivery since the advent of
private carriers like United Parcel Service and FedEx).

The utilities industry is an excellent example of a sector where natural monopolies flourish. Usually, there is
only one major (private) company supplying energy or water in a region or municipality. It's allowed because
these suppliers incur large costs in producing power or water and providing these essentials to each local
household and business, and it's considered more efficient for there to be a sole provider of these services.

Market

A market is a medium that allows buyers and sellers of a specific good or service to interact in order to facilitate
an exchange. This type of market may either be a physical marketplace where people come together to
exchange goods and services in person, as in a bazaar or shopping center, or a virtual market wherein buyers
and sellers do not interact, as in an online market. Market can also refer to the general market where securities
are traded. This form of the term may also refer to specific securities markets and may take place in person or
online. The term "market" can also refer to people with the desire and ability to buy a specific product or
service.

Markets may come in the form of physical locations where transactions are made, which may exist as anything
from thrift or boutique stores selling individual items to wholesale markets selling goods to other distributors.
Yet, markets do not necessarily need to be a physical meeting place. Internet-based stores and auction sites, for
example, are all markets in which transactions can take place entirely online and where the two parties do not
ever need to physically meet. Technically speaking, a market is any medium through which two or more parties
can engage in an economic transaction, even those that do not necessarily need to involve money. A market
transaction may involve goods, services, information, currency or any combination of these things passing from
one party to another in exchange for one of these or another combination.

How Markets Work

Markets establish the going rates for goods and other services, which sellers determine by creating supply and
which buyers determine by creating demand. A market is a focal center for the distribution of goods and
resources within a society, though they are not always deliberately created. Markets may emerge organically or
as a means of enabling ownership rights over goods, services and information. When on a national or other
more specific regional level, markets may often be categorized as “developed” markets or “developing”
markets, depending on many factors including income levels and the nation or region’s openness to foreign
trade.

Markets vary widely for a number of reasons, including the kinds of products sold, location, duration, size and
constituency of the customer base, size, legality and many other factors. For example, the term black
market refers to an illegal market. Yet, like markets in general, a black market can be a physical market where
illegal goods are traded in person or a virtual market where illegal goods are traded with relative anonymity. A
variation on this is a grey market, which is an unauthorized or unofficial locus of trade through channels that are
otherwise legal.

15
Because a market may often be bound to a geographic region, nation or state, even when the market in question
is not physical, it is subject to rules and regulations set by a regional or other governing body that determines
the market’s nature. This may be the case when the regulation is as wide-reaching and as widely recognized as
an international trade agreement (such as the North American Free Trade Agreement or the European Union) or
as local and temporary as a pop-up street market where vendors self-regulate through market forces.

The theoretical optimally functioning market is one experiencing perfect competition, a condition in which no
individual party or other entity within the market is powerful enough to determine the price of a particular good
or service. In addition, though only two parties are needed to make a trade, at minimum a third party is needed
in order to introduce an element of competition and bring balance to the market. As such, a market in a state of
perfect competition, among other things, is necessarily characterized by a high number of active buyers and
sellers.

Securities Markets

The most common types of securities markets are stock markets, bond markets, currency markets (called
foreign exchange markets or forex), money markets and futures markets. Many of these markets manifest
themselves in the form of exchanges. In the case of the stock market, there are a variety of exchanges around
the world, the most popular of which are the New York Stock Exchange, NASDAQ, the United
Kingdom's London Stock Exchange, Japan’s Tokyo Stock Exchange, China’s Shanghai Stock Exchange, the
Hong Kong Stock Exchange, Euronext, China’s Shenzen Stock Exchange, Canada’s TMX Group and
Germany’s Deutsche Börse.

Generally speaking, the existence and prevalence of these various forms of securities markets are characteristics
of a free market economy.

Manipulation

Manipulation is the act of artificially inflating or deflating the price of a security or otherwise influencing the
behavior of the market for personal gain. Manipulation is illegal in most cases, but it can be difficult for
regulators and other authorities to detect. Manipulation is also difficult for the manipulator as the size and
number of participants in a market increases. It is much easier to manipulate the share price of smaller
companies, such as penny stocks, because they are not as closely watched by analysts and other market
participants as the medium and large cap firms. Manipulation is variously called price manipulation, stock
manipulation and market manipulation.

Manipulation takes many forms in the markets. One way people can deflate the price of a security is by placing
hundreds of small orders at a significantly lower price than the one at which it has been trading. This gives
investors the impression that there is something wrong with the company, so they sell, pushing the prices even
lower. Another example of manipulation would be to place simultaneous buy and sell orders through different
brokers that cancel each other out but give the perception, because of the higher volume, that there is increased
interest in the security.

16
Two Types of Stock Manipulation

These false order techniques are often combined with the spreading of false information through online
channels and message boards that other investors may frequent. The outside barrage of bad information
combines with seemingly legitimate market signals to encourage traders to pile on or off a trade. The pump and
dump is the most frequently used manipulation to artificially inflate a micro cap stock and then sell out leaving
later followers to hold the bag. The opposite of the pump and dump is the less common poop and scoop. The
poop and scoop seems to be used less because it is harder to make a legitimately good company look bad than it
is to make an unknown company look amazing.

One Type of Legal Manipulation

Currency manipulation is a slightly different class of market manipulation, as only central banks and national
governments can engage in it and they are legal authorities in and of themselves. Being the owner of a currency
legitimizes many of the actions these governments take to suppress or inflate their currency's value compared to
its peers. Even though currency manipulation is not illegal, a country that is manipulating its currency may be
challenged by other nations or punished through sanctions passed by its trading partners. Moreover,
international bodies like the the World Trade Organization (WTO) have been encouraged to play a stronger role
in addressing accusations of currency manipulation.

OPEC Basket

The OPEC Basket is a weighted average of oil prices collected from various oil producing countries. This
average is determined according to the production and exports of each country and is used as a reference point
by OPEC to monitor worldwide oil market conditions.

West Texas Intermediate - WTI

West Texas Intermediate (WTI) crude oil is the underlying commodity of the New York Mercantile Exchange's
oil futures contracts. Light, sweet crude oil is commonly referred to as "oil" in the Western world. WTI is
considered a "sweet" crude because it is about 0.24% sulfur, which is a lower concentration than North Sea
Brent crude. WTI is high quality oil that is easily refined.

WTI crude oil is produced, refined and consumed in North America. It is lighter and sweeter than the other
major oil benchmarks: Brent crude and Dubai crude.

Oil Benchmarks

WTI crude oil is important because it is an oil benchmark. The significance of a benchmark in the oil market is
that benchmarks serve as a reference price for buyers and sellers of crude oil. Oil benchmarks are frequently
quoted in the media as the price of oil. Although there are many different varieties of crude oil, there are three
primary benchmarks: WTI, North Sea Brent crude, often referred to simply as Brent crude, and Dubai crude.
Brent crude and WTI crude are the most popular benchmarks, and their prices are often contrasted. The
difference in price between Brent and WTI is called the Brent-WTI spread. Theoretically, WTI crude should
trade at a premium to Brent crude, but this is not always the case. While the two crude oil varieties can trade at

17
similar price points, each one has its own unique supply and demand market, and therefore its price reflects its
individual market fundamentals.

WTI Market

WTI crude oil is produced in America. It is actually a blend of several U.S. domestic streams of light sweet
crude oils. WTI is produced in different areas of the United States and refined mostly in the Midwest and Gulf
Coast regions. The major trading hub for WTI is Cushing, Oklahoma. Cushing is the delivery point for crude
contracts, and it is the price settlement point for WTI. WTI crude oil flows into Cushing from all points of the
United States, and then flows outbound through pipelines.

Even though WTI is the highest-quality light sweet crude available, it is not the most used oil. That title goes to
Brent crude. WTI's market is primarily the United States. This is partially due to an export ban on U.S. crude
oil, which was reversed in late 2015. Even though exports of WTI can now occur, transporting WTI overseas to
Brent crude's market could come at a cost that would make WTI unable to compete with Brent crude in terms of
pricing.

How OPEC (and Non-OPEC) Production Affects Oil Prices

Crude oil holds the most prominent position in the global commodities market as oil price changes impact the
way the world economy operates. Among others, the crude oil prices are largely dependent on two factors:
geopolitical developments and economic events. These two factors lead to changes in oil supply levels from the
major oil producers which result in oil price fluctuations.

For instance, the 1973 Arab oil embargo, the 1980 Iran-Iraq war and the 1990 gulf war are some of the
historical geopolitical developments which have impacted oil prices significantly. Similarly, the Asian financial
crisis of 1997, the global financial crisis of 2008 – 09, and the current continuing state of continued oil
oversupply from OPEC are major economic events which have impacted oil prices significantly.

The two prominent groups which own the majority of global oil production are the Organization of Petroleum
Exporting Countries (OPEC), and the non-OPEC group of nations. Amid the highly dynamic economic and
geopolitical developments, these groups make changes to their oil production capacities, which impact the oil
supply levels and results in volatility in oil prices. For instance, the recent decision to continue with the oil
oversupply by the OPEC group primarily driven by its largest member, Saudi Arabia, has resulted in rock
bottom oil prices of the last 12 years.

Let’s look at how, and to what extent, the production levels of oil from these two groups impact the oil prices.

How Does OPEC Production Impact Oil Prices?

The market share of OPEC-produced oil in the global oil market keeps hovering around 40%. For instance,
the International Energy Agency (IEA) provides the following representation of OPEC oil share in the global
market between 2013 and 2015:

OPEC-exported oil accounts for around 60% of the global oil trade, which indicates its dominant position in the
global oil market. IEA also reports that 81% of the world’s proven crude oil reserves lie within the boundaries

18
of the OPEC nations. Of that, around two-thirds lie within the Middle Eastern region. Additionally, all OPEC
member nations have been continuously improving on technology and enhancing explorations leading to further
enhancements to their oil production capacities at reduced operational costs.

OPEC remains influential due to three primary factors: an absence of alternative sources equivalent to its
dominant position, a lack of economically feasible alternatives to crude oil in the energy sector, and the
comparatively low-cost price advantage against the relatively high-cost non-OPEC production.

OPEC has the economic capability to disrupt or enhance the supply of oil to substantial levels at any time,
severely affecting the oil prices. The 1973 Arab oil embargo saw prices quadrupling from $3 to $12 per barrel,
while the recent ongoing oversupply has brought down prices from $100 a year before to present-day $28 per
barrel.

Within the OPEC group, Saudi Arabia is the largest crude oil producer in the world, and remains the most
dominant member of OPEC.

A representation from EIA indicates that each instance of a cut in oil production by Saudi Arabia has resulted in
a sharp rise in oil prices, and vice versa.

Prior to 2000, all historical instances since the 1973 Arab oil embargo indicate that Saudi Arabia has managed
to maintain its upper hand in the oil market. It calls the shots in determining crude oil prices by controlling the
supply. All major oil price fluctuations can be clearly attributed to production levels from Saudi Arabia, along
with other OPEC nations.

Does Non-OPEC Production Impact Oil Prices?

Non-OPEC oil producers include other crude oil producing nations outside of the OPEC group, and those
producing shale oil.

Interestingly, five out of the top 10 oil-producing countries include non-OPEC nations like Russia, the U.S.,
China, Canada and Mexico. Since their own consumption levels are high, they have no or limited capacity to
export. Instead, many of these nations are net oil importers despite high production. This makes them
ineffective participants in oil price determination process. Riding high on the shale oil and shale gas discovery,
the non-OPEC oil producers enjoyed increased production and larger market share in recent times. However,
shale oil technology needs high upfront investments which soon marred the shale oil producers.

The following IEA graph indicates the high production levels achieved by non-OPEC nations in recent times
while riding high on the shale oil boom. However, none of that seems to have translated to create a visible price
impact (like in the case of Saudi Arabia represented above). High production levels during 2002 – 2004 and in
2010 did not result in price declines, and were instead accompanied by raised prices. The recent high production
during 2014 – 2015 is accompanied by price declines, but it overlaps with and can be equally attributed to the
increased supply from OPEC.

This indicates that non-OPEC oil producers have a limited role to play in the oil price determination
process, and it is OPEC (primarily Saudi Arabia) which calls the shots.

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Pipeline Network Locations in Africa

Chad–Cameroon Petroleum Development and Pipeline

The Chad–Cameroon Petroleum Development and Pipeline Project is a controversial project to develop the
production capacity of oilfields near Doba in southern Chad, and to create a 1,070-kilometre (660 mi) pipeline
to transport the oil to a floating storage and offloading vessel (FSO), anchored off the coast of Cameroon, near
the city of Kribi. It is operated by ExxonMobil (40%) and also sponsored by partners forming the consortium,
Petronas (35%) and Chevron (25%). The governments of Chad and Cameroon also have a combined 3% stake
in the project.[1] The project was launched on October 18, 2000, and completed in June 2003 (the official
inauguration took place in October of the same year).

It was largely funded by multilateral and bilateral credit financing provided by Western governments. The
International Finance Corporation, the private-sector arm of the World Bank, provided $100 million of debt-
based financing, and France's export credit agency COFACE and the U.S. Export-Import Bank each provided
$200 million; private lenders coordinated by the IFC provided an additional $100 million,

South Sudan – Ethiopia Pipeline

South Sudan officially known as the Republic of South Sudan is a landlocked country in East-Central Africa.
This pipeline is under construction,

Transnet Pipelines

Transnet Pipelines, a subsidiary of Transnet, is the principal operator of South Africa's fuel pipeline system. It
is responsible for over 3,000 kilometres (1,900 miles) of pipelines. It is responsible for petroleum storage and
pipeline maintenance. Transnet Pipelines works with petrols, diesel fuel, jet fuel, crude oil and natural gas
(methane rich gas). Total throughput is over 16 billion litres (3.5 billion imperial gallons; 4.2 billion US
gallons) per year.

Transnet Pipelines uses a telecontrol system to monitor its pipeline. The telecontrol system is by Siemens
Systems and "allows for automatic leak detection and batch tracking". The system operates with a 4-second
delay between an event in the pipeline and on-screen display in Durban.

The company's projects include a new multiproduct pipeline corridor between Gauteng and Durban. It is
working on a partnership with Pande Gas in Mozambique.

Sumed pipeline

The Sumed pipeline (also known as Suez-Mediterranean pipeline) is an oil pipeline in Egypt, running from the
Ain Sukhna terminal on the Gulf of Suez to offshore Sidi Kerir, Alexandria on the Mediterranean Sea. It
provides an alternative to the Suez Canal for transporting oil from the Persian Gulf region to the Mediterranean.

20
The project for an oil pipeline from the Red Sea to the Mediterranean commenced after the extended closure of
the Suez Canal in June 1967. Establishment of the pipeline company was agreed in 1973 between five Arab
governments. The Sumed pipeline was opened in 1977.

The Sumed pipeline is 320 kilometres (200 mi) long. It consists of two parallel lines of 42 inches (1,070 mm)
diameter. Its capacity is 2.5 million barrels per day (400×103 m3/d).[5] In 2009 it carried 1.1 million barrels per
day (170×103 m3/d).

The Tazama Pipeline

The Tazama Pipeline (Tanzania Zambia Mafuta Pipeline, mafuta meaning 'oil' in Kiwwahili) is a 1,710-
kilometre (1,060 mi) long crude oil pipeline from the Single Point Mooring terminal at the outer anchorage of in
Dar-es-Salaam, Tanzania, to the TIPER refinery in Dar-es-Salaam and the Indeni refinery in Ndola, Zambia.[1]
It was commissioned in 1968. The pipeline was designed for a throughput of 1.1 million tonnes per year.
Currently, it is handling approximately 600,000 tonnes annually. The diameter of pipeline varies between 8 and
12 inches (200 and 300 mm). The pipeline is owned by Tazama Pipeline Limited, a joint company of the
governments of Zambia (66.7%) and Tanzania (33.3%). The pipeline is currently under privatization.

Nembe Creek Trunk Line

Nembe Creek Trunk Line (NCTL) is a 97 kilometre, 150,000 barrels of oil per day pipeline constructed by
Royal Dutch Shell plc and situated in the Niger Delta region of Nigeria. "The Trunk Line is one of Nigeria's
major oil transportation arteries that evacuate crude from the Niger Delta to the Atlantic coast for export."[4] It is
owned by Aiteo Group, which recently purchased it as part of the related facilities of the prolific oil bloc
OML29 from Shell Petroleum Development Company, SPDC. By March 2015, the Shell Petroleum
Development Company of Nigeria Limited (SPDC), a subsidiary of Royal Dutch Shell plc (Shell), completed
the assignment of its interest in OML29 and the Nembe Creek Trunk Line to Aiteo Eastern E&P Company
Limited, a subsidiary of Aiteo Group. The other joint venture partners, Total E&P Nigeria Limited and Nigerian
Agip Oil Company Limited also assigned their interests of 10% and 5% respectively in the lease, ultimately
giving Aiteo Eastern E&P Company Limited a 45% interest in OML29 and the Nembe Creek Trunk Line,

Uganda–Kenya Crude Oil Pipeline

The Uganda–Kenya Crude Oil Pipeline (UKCOP) was a proposed pipeline to transport crude oil from
Uganda's oil fields in the Northern and Western Regions to the Kenyan port of Lamu on the Indian Ocean.
Along the way, the pipeline would have picked up more crude oil from the South Lokichar Basin and other oil
fields in northwestern Kenya and delivered it to Lamu for export. South Sudan had also planned to construct a
pipeline from its Unity State, linking to the UKCOP as an alternative to its only current oil export route through
Port Sudan in its northern neighbor Sudan. It is 930iles (1,500km) long. Partners are Tullow Oil, Total SA and
CNOOC.

It is expected to be commissioned in 2020,

21
List of Natural Gas Pipelines in Africa

Trans-Saharan gas pipeline

The Trans-Saharan gas pipeline (also known as NIGAL pipeline and Trans-African gas pipeline) is a
planned natural gas pipeline from Nigeria to Algeria. It is seen as an opportunity to diversify the European
Union's gas supplies. It is 4,128km (2,565miles) and will deliver 30 billion cubic meters of gas per year.

West African Gas Pipeline

The West African Gas Pipeline (WAGP) is a natural gas pipeline to supply gas from Nigeria's Escravos
region of Niger Delta area to Benin, Togo and Ghana. It is the first regional natural gas transmission system in
sub-Saharan Africa. It is 678km (421miles) long, pipe diameter of 20in (508mm) and delivers gas at 5 billion
cubic meter per year.

Escravos–Lagos Pipeline System

The Escravos–Lagos Pipeline System (ELPS) is a natural gas pipeline built in 1989 to supply gas from
Escravos region of Niger Delta area to Egbin power station near Lagos in Nigeria. Subsequent spur lines from
the ELP supply Delta power plant at Ughelli, Warri Refining and Petrochemical Company at Warri, the West
African Portland Cement (WAPCO) Plants at Shagamu and Ewekoro, industries at Ikorodu, City Gate in lkeja
Lagos. Since the NIPP power plants emerged ELPS is the major gas supply artery to the power plants in
Nigeria. It is 439km (273miles) long, capacity is 800MMcf/d.

Kenya Pipeline Company

Kenya Pipeline Company (KPC) is a state corporation that has the responsibility of transporting, storing
and delivering petroleum products to the consumers of Kenya by its pipeline system and oil depot
network.

Type

Government-owned corporation

Founded 1977

Headquarters Nairobi, Kenya

The Kenya Pipeline Company was incorporated on 6 September 1973 and started commercial operations
in 1978. The company is a state corporation under the Ministry of Energy with 100% government
shareholding.

Kenya Pipeline Company operates a pipeline system for transportation of refined petroleum products
from Mombasa to Nairobi and western Kenya towns of Nakuru, Kisumu and Eldoret. Working closely

22
with the National Oil Corporation of Kenya, KPC operates 5 storage and distribution depots for
conventional petroleum products, located in Eldoret, Kisumu, Mombasa, Nairobi and Nakuru. Depots
are fed by domestic-manufactured product from the Kenya Petroleum Refinery near Nairobi and
imported, refined petroleum product from the Kipevu Oil Storage Facility near Mombasa. The company
operates two aviation fuel depots at Jomo Kenyatta Airport, Nairobi, and Moi International Airport,
Mombasa

In collaboration with the Government, KPC facilitates the implementation of Government policies:

Acts as a Government agent in specific projects as directed through the Ministry of Energy. To this end,
the company works with the government in the implementation of key projects such as the extension of
the Oil Pipeline to Uganda and the LPG import handling and storage facilities.

Assists in the fight against fuel adulteration and dumping.

Ensures efficient operation of petroleum sub-sector.

Unlike some state corporations, KPC does not depend on government subsidies, but is a source of
revenue to the government in terms of dividends and taxes. It is supported by major petroleum
companies which are signatories to the network, including Dalbit Petroleum.

In 2011, the government of newly independent South Sudan expressed interest to building a pipeline
connecting the oil fields in that country to the existing South-Eldoret-Mombasa pipeline in Kenya.

In 2016, it was announced that KPC has secured $350 million to install a new 865-kilometers long
pipeline from Mombasa to Nairobi. KPC is the largest consumer of electricity in Kenya.

Call for bids

A call for bids, call for tenders, or invitation to tender (often called tender for short) is a special
procedure for generating competing offers from different bidders looking to obtain an award of business
activity in works, supply, or service contracts. They are usually preceded by a pre-qualification
questionnaire (PQQ).

Types

Open tenders, open calls for tenders, or advertised tenders are open to all vendors or contractors who can
guarantee performance.

Restricted tenders, restricted calls for tenders, or invited tenders are only open to selected prequalified
vendors or contractors. This may form part of a two-stage process, the first stage of which (as in the
expression-of-interest (EOI) tender call) produces a shortlist of suitable vendors.

The reasons for restricted tenders differ in scope and purpose. Restricted tenders can come about
because:

23
  essentially only one suitable supplier of the services or product exists
 of confidentiality issues (such as in military contracts)
 of the need for expedience (as in emergency situations)
 of a need to weed out tenderers who do not have the financial or technical capabilities to fulfill
the requirements

Double envelope system

In an open bid or tender system, a double envelope system may be used. The double envelope system
separates the technical proposal (based on and intended to meet the statement of work) from the
financing or cost proposal in the form of two separate and sealed envelopes.

During the tender evaluation, the technical proposal would be opened and evaluated first followed by the
financing proposal.

The objective of this system is to ensure a fair evaluation of the proposal. The technical proposal would
be evaluated purely on its technical merits and its ability to meet the requirements set forth in the
Invitation without being unduly skewed by the financial proposal.

Tender box

A tender box is a mailbox that is used to receive the physical tender or bid documents. When a tender or
bid is being called, a tender or bid number is usually issued as a reference number for the tender box.
The tender box would be open for interested parties to submit their proposals for the duration of the bid
or tender.

Once the duration is over, the tender box is closed and sealed and can only be opened by either the
tender or bid evaluation committee or a member of the procurement department with two witnesses.

Security deposit

Registered contractors are usually required to furnish a bond for a stipulated sum as security or earnest
money deposit to be adjusted against work done, normally in the form of bank guarantee or surety.

Locating tenders

Public sector organizations in many countries are legally obliged to release tenders for works and
services. In the majority of cases, these are listed on their websites and traditional print media.
Electronic procurement and tendering systems or e-procurement are also increasingly prevalent.

A number of companies provide subscription alert services which send notifications of relevant tender
documents to the subscriber.

An array of private organizations also assist businesses in finding out about these tenders. Cost may vary
from a few pounds a week to a few hundred.

24
Because of the specialized language and sometimes difficult-to-grasp procedures, some organizations
also offer companies tender writing training, or do the writing for them.

Typical template contents (in project management)

A typical invitation to tender template in any project has the following sections:

 Introduction
 Project background
 Legal issues
 Maintaining issues
 Supplier response required
 Timetable for choosing a supplier
 Requirements

Oil and Gas Supply

Oil and Gas Supply is the total amount of a oil and gas supply that is available to consumers. It is the
amount available at a specific price or the amount available across a range of prices. Supply provided
by producers will rise if the price rises to maximize profits.

Demand is an economic principle referring to a consumer's desire and willingness to pay a price for a
specific good or service. Holding all other factors constant, an increase in the price of a good or service
will decrease demand, and vice versa. Think of demand as your willingness to go out and buy a certain
product. For example, market demand is the total of what everybody in the market wants.

The Determinants of Oil Prices

With oil's stature as a high-demand global commodity comes the possibility that major fluctuations in
price can have a significant economic impact. The two primary factors that impact the price of oil are:

 supply and demand

 market sentiment

In general, as demand increases (or supply decreases) the price should go up. As demand decreases (or
supply increases) the price should go down.

The price of oil as we know it is actually set in the oil futures market. An oil futures contract is a binding
agreement that gives one the right to purchase oil by the barrel at a predefined price on a predefined date
in the future. Under a futures contract, both the buyer and the seller are obligated to fulfill their side of
the transaction on the specified date.

The following are two types of futures traders:

 hedgers

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  speculators

Who is a Speculator?

A speculator is a person who trades derivatives, commodities, bonds, equities or currencies with a higher
than average risk in return for a higher-than-average profit potential. Speculators take large risks,
especially with respect to anticipating future price movements, in the hope of making quick, large gains.

Market Sentiment

Market sentiment is the overall attitude of investors toward a particular security or financial market.
Market sentiment is the feeling or tone of a market, or its crowd psychology, as revealed through the
activity and price movement of the securities traded in that market. For example, rising prices would
indicate a bullish market sentiment, while falling prices would indicate a bearish market sentiment.

Marine Transportation

Maritime transport is the transport of people (passengers) or goods (cargo) by water. Freight transport
has been achieved widely by sea throughout recorded history. Although the importance of sea travel for
passengers has decreased due to aviation, it is effective for short trips and pleasure cruises. Transport by
water is cheaper than transport by air, despite fluctuating exchange rates and a fee placed on top of
freighting charges for carrier companies known as the Currency Adjustment Factor (CAF).

Maritime transport can be realized over any distance by boat, ship, sailboat or barge, over oceans and
lakes, through canals or along rivers. Shipping may be for commerce, recreation, or for military
purposes. While extensive inland shipping is less critical today, the major waterways of the world
including many canals are still very important and are integral parts of worldwide economies. Virtually
any material can be moved by water; however, water transport becomes impractical when material
delivery is time-critical such as various types of perishable produce. However, water transport is highly
cost effective with regular schedulable cargoes, such as trans-oceanic shipping of consumer products –
and especially for heavy loads or bulk cargos, such as coal, coke, ores or grains. Arguably, the industrial
revolution took place best where cheap water transport by canal, navigations, or shipping by all types of
watercraft on natural waterways supported cost effective bulk transport.

Merchant shipping

A nation's shipping fleet (merchant navy, merchant marine, merchant fleet) consists of the ships
operated by civilian crews to transport passengers or cargo from one place to another. Merchant
shipping also includes water transport over the river and canal systems connecting inland destinations,
large and small.

According to the 2005 CIA World Factbook, the total number of merchant ships of at least 1,000 gross
register tons in the world was 30,936. In 2010, it was 38,988, an increase of 26%. Statistics for
individual countries are available at the list of merchant navy capacity by country.

26
A ship's complement can be divided into four categories: the deck department, the engineering
department, the steward's department, and other.

Deck department

Officer positions in the deck department include but not limited to: Master and his Chief, Second, and
Third officers. The official classifications for unlicensed members of the deck department are Able
Seaman and Ordinary Seaman.

A common deck crew for a ship includes:

(1) Chief Officer/Chief Mate

(1) Second Officer /Second Mate

(1) Third Officer / Third Mate

(1) Boatswain - the officer in charge of sails, rigging, anchors, cables, etc

(2-6) Able Seamen

(0-2) Ordinary Seamen

A deck cadet is a person who is carrying out mandatory sea time to achieve their officer of the watch
certificate. Their time on board is spent learning the operations and tasks of everyday life on a merchant
vessel.

Engineering department

A ship's engineering department consists of the members of a ship's crew that operate and maintain the
propulsion and other systems on board the vessel. Marine Engineering staff also deal with the "Hotel"
facilities on board, notably the sewage, lighting, air conditioning and water systems. They deal with bulk
fuel transfers, and require training in firefighting and first aid, as well as in dealing with the ship's boats
and other nautical tasks- especially with cargo loading/discharging gear and safety systems, though the
specific cargo discharge function remains the responsibility of deck officers and deck workers. On LPG
and LNG tankers however, a cargo engineer works with the deck department during cargo operations, as
well as being a watchkeeping engineer.

A common Engineering crew for a ship includes:

(1) Chief Engineer

(1) Second Engineer / First Assistant Engineer

(1) Third Engineer / Second Assistant Engineer

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(1-2) Fourth Engineer / Third Assistant Engineer

(0-2) Fifth Engineer / Junior Engineer

(1-3) Oiler (unlicensed qualified rating)

(0-3) Greaser/s (unlicensed qualified rating)

(1-5) Entry-level rating (such as Wiper (occupation), Utilityman, etc.)

Many American ships also carry a Qualified Member of the Engine Department. Other possible
positions include Motorman, Machinist, Electrician, Refrigeration Engineer, and Tankerman. Engine
Cadets are engineer trainees who are completing sea time necessary before they can obtain a
watchkeeping license.

Steward's department

A typical Steward's department for a cargo ship would be composed of a Chief Steward, a Chief Cook,
and a Steward's Assistant. All three positions are typically filled by unlicensed personnel. The chief
steward directs, instructs, and assigns personnel performing such functions as preparing and serving
meals; cleaning and maintaining officers' quarters and steward department areas; and receiving, issuing,
and inventorying stores. On large passenger vessels, the Catering Department is headed by the Chief
Purser and managed by Assistant Pursers. Although they enjoy the benefits of having officer rank, they
generally progress through the ranks to become pursers. Under the Pursers are the department heads –
such as chief cook, head waiter, head barman etc. They are responsible for the administration of their
own areas.

The chief steward also plans menus; compiles supply, overtime, and cost control records. They may
requisition or purchase stores and equipment. They may bake bread, rolls, cakes, pies, and pastries. A
chief steward's duties may overlap with those of the Steward's Assistant, the Chief Cook, and other
Steward's Department crewmembers.

In the United States Merchant Marine, a chief steward must have a Merchant Mariner's Document issued
by the United States Coast Guard. Because of international law, conventions, and agreements, all chief
cooks who sail internationally are similarly documented by their respective countries.

Other departments

Staff officer positions on a ship, including Junior Assistant Purser (handles money on board), Senior
Assistant Purser, Purser, Chief Purser, Medical Doctor, Professional Nurse, Marine Physician Assistant,
and Hospital Corpsman, are considered administrative positions and are therefore regulated by
Certificates of Registry issued by the United States Coast Guard. Pilots are also merchant marine
officers and are licensed by the Coast Guard. Formerly, there was also a radio department, headed by a
chief radio officer and supported by a number of radio officers. Since the introduction of GMDSS
(Satellite communications) and the subsequent exemptions from carrying radio officers if the vessel is so
equipped, this department has fallen away, although many ships do still carry specialist radio officers,

28
particularly passenger vessels. Many radio officers became 'electro-technical officers', and transferred
into the engineering department.

Life at Sea

Mariners spend much of their life beyond the reach of land. They sometimes face dangerous conditions
at sea or on Lakes – the fishing port of Gloucester, Massachusetts has a seaside memorial listing over
10,000 fishermen that lost their lives to the sea, and the Great Lakes have seen over 10,000 lost vessels
since the 1800s, yet men and women still go to sea. For some, the attraction is a life unencumbered with
the restraints of life ashore. Seagoing adventure and a chance to see the world also appeal to many
seafarers. Whatever the calling, those who live and work at sea invariably confront social isolation.

Ships and watercraft

Ships and other watercraft are used for maritime transport. Types can be distinguished by propulsion,
size or cargo type. Recreational or educational craft still use wind power, while some smaller craft use
internal combustion engines to drive one or more propellers, or in the case of jet boats, an inboard water
jet. In shallow draft areas, such as the Everglades, some craft, such as the hovercraft, are propelled by
large pusher-prop fans.

Most modern merchant ships can be placed in one of a few categories, such as:

Bulk carriers, such as the Sabrina I, are cargo ships used to transport bulk cargo items such as ore or
food staples (rice, grain, etc.) and similar cargo. They can be recognized by the large box-like hatches on
their deck, designed to slide outboard for loading. A bulk carrier could be either dry or wet. Most lakes
are too small to accommodate bulk ships, but a large fleet of lake freighters has been plying the Great
Lakes and St. Lawrence Seaway of North America for over a century.

Container ships are cargo ships that carry their entire load in truck-size containers, in a technique called
containerization. They form a common means of commercial intermodal freight transport. Informally
known as "box boats," they carry the majority of the world's dry cargo. Most container ships are
propelled by diesel engines, and have crews of between 10 and 30 people. They generally have a large
accommodation block at the stern, directly above the engine room.

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Tankers are cargo ships for the transport of fluids, such as crude oil, petroleum products, liquefied
petroleum gas (LPG), liquefied natural gas (LNG) and chemicals, also vegetable oils, wine and other
food - the tanker sector comprises one third of the world tonnage.

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Refrigerated ships (usually called Reefers) are cargo ships typically used to transport perishable
commodities which require temperature-controlled transportation, mostly fruits, meat, fish, vegetables,
dairy products and other foodstuffs.

Roll-on/roll-off ships, such as the Chi-Cheemaun, are cargo ships designed to carry wheeled cargo such
as automobiles, trailers or railway carriages. RORO (or ro/ro) vessels have built-in ramps which allow
the cargo to be efficiently "rolled on" and "rolled off" the vessel when in port. While smaller ferries that
operate across rivers and other short distances still often have built-in ramps, the term RORO is
generally reserved for larger ocean-going vessels, including pure car/truck carrier (PCTC) ships.

Coastal trading vessels, also known as coasters, ships used for trade between locations on the same
island or continent. They are often small and of shallow draft, and sometimes set up as self-dischargers.

Ferries are a form of transport, usually a boat or ship, but also other forms, carrying (or ferrying)
passengers and sometimes their vehicles. Ferries are also used to transport freight (in lorries and
sometimes unpowered freight containers) and even railroad cars. Most ferries operate on regular,
frequent, return services. A foot-passenger ferry with many stops, such as in Venice, is sometimes called
a waterbus or water taxi. Ferries form a part of the public transport systems of many waterside cities and
islands, allowing direct transit between points at a capital cost much lower than bridges or tunnels. Many
of the ferries operating in Northern European waters are ro/ro ships.

Cruise ships are passenger ships used for pleasure voyages, where the voyage itself and the ship's
amenities are considered an essential part of the experience. Cruising has become a major part of the
tourism industry, with millions of passengers each year as of 2006. The industry's rapid growth has seen
nine or more newly built ships catering to a North American clientele added every year since 2001, as
well as others servicing European clientele. Smaller markets such as the Asia-Pacific region are
generally serviced by older tonnage displaced by new ships introduced into the high growth areas. On
the Baltic Sea this market is served by cruiseferries.

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Ocean liner is a passenger ship designed to transport people from one seaport to another along regular
long-distance maritime routes according to a schedule. Ocean liners may also carry cargo or mail, and
may sometimes be used for other purposes.

Ocean liners are usually strongly built with a high freeboard to withstand rough seas and adverse
conditions encountered in the open ocean, having large capacities for fuel, food and other consumables
on long voyages. These were the main stay of most passenger transport companies, however, due to the
growth of air travel, the passenger ships saw a steady decline. Cruise ships later filled the void and are
primarily used by people who still have a love of the sea and offer more amenities compared to the older
passenger ships.

Cable layer is a deep-sea vessel designed and used to lay underwater cables for telecommunications,
electricity, and such. A large superstructure, and one or more spools that feed off the transom distinguish
it.

A tugboat is a boat used to manoeuvre, primarily by towing or pushing other vessels (see shipping) in
harbours, over the open sea or through rivers and canals. They are also used to tow barges, disabled
ships, or other equipment like towboats.

A dredger (sometimes also called a dredge) is a ship used to excavate in shallow seas or fresh water
areas with the purpose of gathering up bottom sediments and disposing of them at a different location.

A barge is a flat-bottomed boat, built mainly for river and canal transport of heavy goods. Most barges
are not self-propelled and need to be moved by tugboats towing or towboats pushing them. Barges on
canals (towed by draft animals on an adjacent towpath) established the conditions supporting the early
industrial revolution in both Europe and the American Northeast but later after they made possible steam
locomotive prime movers riding iron rails – after both could grow (and mature) to become
commonplace and capable – contended with the railways and were outcompeted in the carriage of
people, light freight, and high value items due to the higher speed, falling costs, and route flexibility of
rail transport. Carriage of bulk goods also gradually lost ground to freight railways as train capacity and
speeds continued to climb. Even underpowered early rail networks could usually reach places only an
outrageously expensive canal might be built, and once Iron T-rails and higher powered locomotives
became possible, the far cheaper to build railways were unfettered and independent upon water sources,
whilst mostly unplagued by the seasonal problems (restricted by icing) of temperate latitude canals
which suffered ice and freshet flooding damages with dreary regularity. When floods did affect railways,
restoration of services was usually comparatively rapid.

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A Multi-purpose ship (sometimes called a general cargo ship) is used to transport a variety of goods
from bulk commodities to break bulk and heavy cargoes. To provide maximum trading flexibility they
are usually geared and modern examples are fitted for the carriage of containers and grains. Generally
they will have large open holds and tweendecks to facilitate the carriage of different cargoes on the same
voyage. The crew will be highly competent in the securing of break bulk cargoes and the ship will be
equipped with various lashings and other equipment for sea fastening.

Historical Development of Oil Transportation

1850’s: Refinery of kerosene. Refinery built on the field and transportation was by wooden bamboo
barrels. Major product of te refinery was kerosene. Slug obtained was flushed away. In 1859 Drake
drilled the first well in Titusville, Pennsylvania.

1861: First export of petroleum product, kerosene, from Philadelphia to London.

1879: Tank built inside a sailing vessel.

1886: Tankers were built to carry oil product only. First tanker had 2300DWT. German’s GLUKAUF
was the name of the tanker. Rockeffeler’s Standard Trust was broken into 34 components:

Mobil Standard Oil of New Jersey

Exxon Standard Oil of New York

Chevron Standard Oil of California

Sohio Standard Oil of Ohio

Amoco Standard Oil of Indiana

Around World War 1, refineries were built in consuming nations.

1886: Baku, Russia, Nobel brothers produced oil.

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After WW1, oil companies decided to treat transportation as a cost.

During WW2, there was demand for kerosene and gasoline. Allied government built many tankers. T –
2 tankers, with steam propulsion and 50 crew men.

After WW2, government sold surplus T – 2 tankers to industries.

Suez canal crisis.

Oil Jetty

An oil jetty is a structure that projects from the land out into water, where oil tankers are berthed. Often,
"jetty" refers to a walkway accessing the centre of an enclosed waterbody.

Kenya Oil Jetty

The Kenya Pipeline Company has completed the construction of an oil jetty in Kisumu. The station will
be able to serve countries in east and central Africa conveniently without having to get to the coastal city
of Mombasa.

Transportation of oil may have taken a significant step following the subsequent completion of an oil
jetty meant to serve Kenya and the neighboring countries of Uganda, Tanzania, Burundi and the eastern
side of the democratic republic of Congo. Kenya Pipeline directors have stated that the presence of this
jetty will position the town as a major oil hub in the region.

The economy will greatly improve as activities around the lake and this station will significantly boost
the great lakes region as industries may begin to troop into the area. They indicated on the need to have
proper structures in place to ensure equitable sharing of resources.

The station has a capacity of supplying close to 1 billion litres a year and is set to increase to 3 billion
litres by the year 2028 to meet demand in the region.

The oil supply company is set to complete the laying of pipes of more than 122 kilometers a process that
was initiated in July last year.

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36
Joint Venture Agreement

A joint venture agreement is an arrangement where two companies develop a new entity to their mutual
benefit. It normally involves a sharing of resources, which could include capital, personnel, physical
equipment, facilities or intellectual property such as patents.

Advantages

A joint venture agreement provides a company with expertise it may not have or may not be willing to
invest in acquiring itself. For example, if one company has a combustible material research lab that the
venture requires, the company without the lab gains the benefit of an already established lag. There is an
element of risk in most joint ventures. Both joint-venture parties share in the risk, such as a financial
investment. Should the venture not become profitable, both parties can walk away from the deal losing
less than if one company independently invests in the venture. A joint venture also provides a company
with a way to exit from a secondary business or to enter a new business with less of a financial
commitment if it were to do this on its own.

Disadvantages

Forming a successful joint venture effort requires time. Both parties will often come to the potential
venture with different goals. The culture of each company may be different and the integration of both
cultures may be difficult or take a long time. Another problem could be that one or both parties don’t
commit enough resources to achieve a successful venture.

Agreement Points

 Duration of the Agreement

 Parties to the Agreement
 Parties participating Interests
 Scope of Work
 Exclusive Operations
 Designated Operator
 The Joint Operating Committee
 Cost Control and Contracting
 Hydrocarbon Allocation
 Hydrocarbon Lifting and Disposal

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  Transfer of Interests
 Withdrawal from JOA
 Liabilities
 Decommissioning
 Default
 Dispute resolution
 Accounting procedure

Tips

In preparing a joint venture agreement both, parties should be flexible and listen to the other party’s
point of view. In addition, before the agreement is completed, those parties concerned should make sure
they agree on specific objectives for the venture to achieve.

The Energy Act, 2006

The 2006 Energy Act sets up the Energy Regulatory Commission (ERC), an independent regulator
meant to formulate licensing procedures, issue permits, make recommendations for further energy
regulations, set and adjust tariffs, approve power purchase agreements (PPAs) and prepare national
energy plans. The Energy Act entrusts the Ministry of Energy to elaborate sustainable renewable energy
production, distribution and commercialisation frameworks. These Ministerial frameworks shall place
emphasis on the expansion of local manufacturing sectors and provide specific incentives to existing
renewable markets such as bio-digesters, solar systems and hydro-turbines (articles 103-106).

Renewable energy frameworks will also encourage biomass co-generation -heat and power- and
alternative fuel production from sugar mills.

The Ministry of Energy shall also improve levels of international co-operation in the field of technology
transfer and financial support. Renewable energy support tools included in the Energy Act are:

- An authorisation for 4 MW capacity (or a minimum of 30% of the co-generation plant total capacity)
renewable energy systems to produce energy without a license.

- Income tax holidays for relevant generation and transmission projects

- Full custom and import duties exemption for exclusive renewable energy equipment .

With regard to biofuel deployment, the Energy Acts entitles the Kenya Bureau of Standards (KEBS)
with the determination of fuel quality and blending standards and the conduct of Environmental Impact
Assessments (EIA).

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The National Biofuel Committee, under the authority of the Ministry of Energy, is also to prepare and
implement biofuel deployment regulations and national targets. Alongside this renewable energy support
framework, the 2006 Energy Act creates the Rural Electrification Program (REP) that promotes locally
available, sustainable and efficient renewable electricity generation for household, farming and non-
agricultural income-generating activities.

The Energy Act, 2006 (Cap. 314).

ENACTED by the Parliament of Kenya, as follows–

Caption

An Act of Parliament to amend and consolidate the law relating to energy, to provide for the
establishment, powers and functions of the Energy Regulatory Commission and the Rural Electrification
Authority, and for connected purposes.

This Act concerns the control and licensing of electricity distribution, natural gas and petroleum
businesses and renewable energy. It establishes the Energy Regulatory Commission, the Rural
Electrification Authority, the Rural Electrification Programme Fund and the Energy Tribunal.The
Commission shall be a body corporate and shall regulate and control: (a) the importation, exportation,
generation, transmission, distribution, supply and use of electrical energy; (b) the importation,
exportation, transportation, refining, storage and sale of petroleum and petroleum products; and (c) the
production, distribution, supply and use of renewable and other forms of energy. It shall also, among
other things, prepare an indicative national energy plan. Under this Act, where a licensee requires the
compulsory acquisition of land for any of the purposes of a licence, s(he) may apply to the Minister to
acquire the land on his or her behalf. The Authority shall, among other things: (a) manage the Rural
Electrification Programme Fund; (b) develop and update the rural electrification master plan; and (c)
promote use of renewable energy sources.

This Act grants powers to the Minister to issue Rules relative to the importation, landing, loading,
shipping, transport and storage of petroleum and for purposes of introducing the requirement of a licence
for such activities. Petroleum shall not be imported, unloaded, landed, loaded, transhipped, transported
or kept save in accordance with rules made under this Act. The occupier of any premises in which
petroleum is kept in contravention of any Rules made under this Act shall be guilty of an offence.

Part IV Petroleum and Natural Gas

Licensing

80—Licence for petroleum business. 81—Licensing Agents. 82—Granting of licences. 83—

Amendment of licences. 84—Display of licences or permits. 85—Revocation of licence. 86—
Replacement of a licence.

87 Transfer of a licence.

88—Register of licences and permits.

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89—Appeal against action of the Commission or a licensing agent. 90—Construction permits.

91—Conditions for granting permits.

92—Exemption from the requirement for a permit. 93—Suspension or revocation of a construction

permit. 94—Validity of permits.

95—Standards for petroleum products, equipment, facilities and installations. 96—Maintenance of

minimum operational stocks.

97—Power of the Minister to provide strategic petroleum stocks. 98—Compliance with environmental,
health and safety standards. 99—Designated parking places reserved exclusively for petroleum tankers.

Offences

100—Contravening provisions relating to petroleum undertakings. 101—Contraventions by petroleum

carrying ships. 102—Regulations for petroleum.

The joint development agreement (JDA) which provides a legal framework on the pipeline development
will be followed by studies on the pipeline’s technical requirements as well as its financing and
ownership structure. It will allow important studies to commence such as Front End Engineering Design
(FEED), Environmental and Social Impact Assessments (ESIA), as well as studies on pipeline financing
and ownership. FEED, the engineering process that comes after the conceptual design or feasibility
study, focuses on the technical requirements and approximate investment costs for a project.

The actual construction will depend on completion of FEED and ESIA which is likely to take less than a
year.The pipeline – to run 820 km between Lokichar and Lamu on Kenya’s coast – would cost $2.1
billion and should be completed in the first quarter of 2021. “The signing of this document provides a
co-ordination between the Investors and the Government to make sure that the crude in Turkana find its
way into the market by working very collaboratively with the Government and representatives of the
community. It is the start of something important for the country in terms of moving forward in the Oil
and Gas industry” said Martin Mbogo- Country Manager Tullow Oil. He further stated that the
Government has put in great resources to make sure the document is reflective of all parties.

Tullow’s count of the Turkana oil reserves stands at 750 million barrels.

Petroleum Marketing Practices Act

Title I of the Petroleum Marketing Practices Act (PMPA) sets certain requirements for the contracts
between gasoline refiners or distributors and their retailers. It prohibits franchisors from terminating a
franchise, or failing to renew one, except in accordance with its provisions. It is intended to protect
distributors and retailers. A supplier may terminate a franchise only for certain reasons such as the
franchisee's failure to make a good faith effort to carry out the terms of the franchise or if the supplier
loses the right to grant use of the trademark under which the gasoline is sold. A supplier may choose not
to renew a franchise for all of the reasons it may terminate a franchise and for certain other additional

40
reasons. These include the franchisee's failure to agree to certain additional franchise terms or if the
franchisee has a record of numerous customer complaints.

The PMPA preempts state laws concerning gasoline franchise termination and non-renewal.

Title II of the act requires sellers to disclose octane rating and Title III required the federal energy
secretary to study fuel marketing subsidization and report to Congress in 1980.

Franchises

Title 1 of the PMPA (15 USCA §§ 2801 to 2806) defines “franchise” as the contract between (1) a
refiner and distributor, (2) refiner and retailer, (3) a distributor and another distributor, or (4) a
distributor and a retailer under which a refiner or distributor allows a retailer or distributor to use a
trademark owned or controlled by the refiner or distributor in connection with the sale, distribution, or
consignment of gasoline or another motor fuel. Under the act's definition, a refiner, distributor, jobber,
or subjobber may be the “franchisor” and a jobber, subjobber, or retailer may be the “franchisee.”
Franchisors are commonly characterized as suppliers.

In general, the act applies to franchises with terms of three years or longer. It does not apply to trial
franchises.

Rules for Ending a Franchise Relationship

The PMPA establishes substantive and procedural rules for ending a franchise relationship, including
compensating the franchisee. The rules for terminating a franchise are narrower than those for not
renewing one.

Termination

The act allows a supplier to terminate a covered franchise (1) for noncompliance with a franchise
agreement concerning a reasonable and important requirement, (2) for the franchisee's lack of a good
faith effort to carry out the franchise's terms, (3) by mutual agreement, (4) if the supplier withdraws
from the market area, or (5) for certain other reasons.

These other reasons include the franchisee's:

1. fraud or criminal action;

2. declaration of bankruptcy;

3. severe physical or mental disability lasting at least three months that renders the franchisee incapable
of properly operating the premises;

4. failure to pay the supplier on time;

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5. failure to operate the premises for seven consecutive days or for a shorter period if the failure is
unreasonable;

6. intentional adulteration, misbranding, or mislabeling of the fuel;

7. failure to comply with relevant law; or

8. conviction of a felony involving moral turpitude.

They also include:

1. expiration of the supplier's underlying property lease,

2. the property is taken through eminent domain,

3. loss of the supplier's right to grant the use of the trademark, and

4. destruction of the premises other than by the supplier.

Non-Renewal

Under the PMPA, a supplier may choose not to renew a franchise for the same reasons that it may
terminate one. It may also choose not to renew (1) if the franchisee fails to agree to changes or additions
to the franchise; (2) if there is a record of numerous customer complaints relating to the condition of the
premises or the conduct of employees; (3) for unsafe or unhealthful operations, or (4) the supplier has
decided, in the normal course of business, (a) to change the use of the property on which the premises
operates, (b) to materially alter or add to the premises, (c) to sell the premises, or (d) that continuing the
franchise is uneconomical. In the case of a leased marketing premises, the PMPA requires the supplier,
during the 90-day notice period, to make a bona fide offer to sell, transfer, or assign the premises to the
franchisee or, if applicable, to give the franchisee a right of first refusal of at least 45 days of an offer,
made by another, to purchase the franchisor's interest in the premises.

Compensation

The PMPA sets certain rules for compensating a franchisee when a franchise is terminated or not
renewed. Generally, if termination or non-renewal happens after (1) the underlying property was taken
through eminent domain or other governmental action or (2) the supplier lost the right to grant use of the
trademark, the PMPA requires the supplier to fairly share with the franchisee any compensation received
for loss of business opportunity or good will. If termination or non-renewal occurs because the premises
was destroyed, the PMPA requires the supplier to give the franchisee the right of first refusal if the
premises is rebuilt or replaced.

Procedural Rules

The PMPA's procedural rules require a supplier to give notice, usually 90 days, before taking any action.
If 90-day notice is not possible, then a supplier must give notice as soon as he can. Notices must state

42
the intention to terminate or not renew and the date the action takes effect. For certain grounds, the
PMPA also requires the supplier to give the franchisee and opportunity to correct the problem. For
example, if a franchise is being terminated or not renewed for failure to carry out the terms of the
franchise, the supplier must inform the franchisee of the intention and give a reasonable opportunity to
make good faith efforts to comply. The act also prescribes the method and form of giving notice.

ENFORCEMENT

The PMPA authorizes franchisees to sue in federal court to enforce the rights it establishes. Courts may
grant equitable relief and must grant a preliminary injunction if the franchisee shows (1) that his
franchise has been terminated or not renewed and that there are “sufficiently serious questions going to
the merits” and (2) the court determines that, on balance, that the hardship imposed on the supplier by
granting temporary relief is less than that imposed on the franchisee if relief were not granted.

THE PMPA PREEMPTS STATE LAWS ON TERMINATION OR NON-RENEWAL

The PMPA prohibits states and their political subdivisions from adopting or enforcing any law
concerning the termination or non-renewal of a franchise unless its provisions are the same as the
provision in the PMPA. Further, states may not adopt laws that require a goodwill payment on the
termination or non-renewal of a franchise by a supplier.

The act states that it does not (1) authorize or prohibit a transfer or assignment of a franchise allowed by
the franchise or by state law or (2) prohibit states from specifying terms and conditions under which a
franchise may be transferred to a designated successor upon the franchisee's death

The Basics of Crude Oil Classification

Liquid petroleum pumped from oil wells is called “crude” or “crude oil.” Composed predominantly of
carbon, crude oil contains approximately 84 to 87 percent carbon and 11 to 13 percent hydrogen. Crude
oil also contains varying amounts of oxygen, sulfur, nitrogen, and helium.

Crude Oil Classifications

The petroleum industry often names crude based on the oil's geographical source -- for example “West
Texas Intermediate.” Crude oil is also classified based on physical characteristics and chemical
composition, using terms such as “sweet” or “sour,” “light” or “heavy.” Crude oil varies in price,
usefulness, and environmental impact.

What Is “Sweet” Crude Oil?

Crude oil with low sulfur content is classified as “sweet;” crude oil with a higher sulfur content is
classified as “sour.” Sulfur content is considered an undesirable characteristic with respect to both
processing and end-product quality. Therefore, sweet crude is typically more desirable and valuable than
sour crude.

What Makes a Crude Oil “Light?”

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Crude can be classified as “light” or “heavy,” a characteristic which refers to the oil’s relative density
based on the American Petroleum Institute (API) Gravity. This measurement reflects how light or heavy
a crude oil is compared to water. If an oil’s API Gravity is greater than 10, it is lighter than water and
will float on it. If an oil’s API Gravity is less than 10, it is heavier than water and will sink.

Lighter crude is easier and less expensive to produce. It has a higher percentage of light hydrocarbons
that can be recovered with simple distillation at a refinery.

Heavy crude can’t be produced, transported, and refined by conventional methods because it has high
concentrations of sulfur and several metals, particularly nickel and vanadium. Heavy crude has density
approaching or even exceeding that of water. Heavy crude oil is also known as “tar sands” because of its
high bitumen content.

With simple distillation, dense, heavier crude oil produces a greater share of lower-valued products.
Heavy crude requires extra refining to produce more valuable and in-demand products.

What Determines Crude Oil’s Relative Economic Value?

Generally, the less processing or refining a crude oil undergoes, the more valuable it is considered. Price
differentials between crude oils typically reflect the ease of refining.

Crude oil can be refined to create products ranging from asphalt and gasoline to lighter fluids and
natural gas, along with a variety of essential elements such as sulfur and nitrogen. Petroleum products
are also key components in the manufacturing of medicines, chemicals, and plastics.

How Distillation Impacts Price

Simple distillation -- first-level refinement -- of different crude oils produces different results. For
example, the U.S. benchmark crude oil, West Texas Intermediate (WTI), has a relatively high natural
yield of desirable end-products, including gasoline. But the process also yields about one third
“residuum,” a residual by-product that must be reprocessed or sold at a discount. In contrast, simple
distillation of Saudi Arabia's Arabian Light, the historical benchmark crude, yields almost half
"residuum." This difference gives WTI a higher premium.

The lighter the oil, the more of the desirable, in-demand products it produces through distillation at a
range of temperatures. At the lowest distillation temperatures, products produced include liquid
petroleum gases (LPG), naphtha and so-called "straight run" gasoline. In the middle range of distillation
temperatures, the refinery produces jet fuel, home heating oil, and diesel fuel.

At the highest distillation temperatures -- over 1,000 degrees Fahrenheit – the heaviest products are
produced, including residuum or residual fuel oil, which can be used for lubricants. To maximize output
of more desirable products, refineries commonly reprocess the heaviest products into lighter products.

Toxicity of Crude Oils

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“Toxicity” refers to how harmful an oil might be to humans and other living organisms, as well as to
land and water.

Generally, the lighter the oil, the more toxic it is considered. Because of the constant potential of spills,
the Environmental Protection Agency has classified crude oil in four categories that reflect how the oil
would behave in spills and its aftermath:

Class A: Because they are light and highly liquid, these clear and volatile oils can spread quickly on
impervious surfaces and on water. Their odor is strong, and they evaporate quickly, emitting volatiles.
Usually flammable, these oils also penetrate porous surfaces, such as dirt and sand, and may remain in
areas into which they seep. Humans, fish, and other plant and animal life face the danger of toxicity to
Class A oils.

Class B: Considered less toxic than Class A, these oils are generally non-sticky but feel waxy or oily.
The warmer they get, the more likely Class B oils soak into surfaces; they can be hard to remove. When
volatile components of Class B oils evaporate, the result can be a Class C or D residue. Class B includes
medium to heavy oils.

Class C: These heavy, tarry oils, which include residual fuel oils and medium to heavy crudes, are slow
to seep into porous solids and are not highly toxic. However, Class C oils are difficult to flush away and
can sink in water and can smother or drown wildlife.

Class D: Non-fluid, thick oils are comparatively non-toxic and don’t seep into porous surfaces. Mostly
black or dark brown, Class D oils tend to dissolve and cover surfaces when they get hot, which makes
them hard to clean up. Heavy crude oils, such as the bitumen found in tar sands, fall into this class.

Different Types of Crude Oil

There are many different kinds of oil.

In its natural, unrefined state, crude oil ranges in density and consistency, from very thin, light weight
and volatile fluidity to an extremely thick, semi-solid heavy weight oil.

There is also a tremendous gradation in the color that the oil extracted from the ground exhibits, ranging
all the way from a light, golden yellow to the very deepest, darkest black imaginable.

For the purpose of having a set, agreed upon “vocabulary,” the petroleum industry often uses references
to “Geographical Locations” in order to descriptively classify crude oils.

This is due to the fact that oil from different geographical locations will naturally have its own very
unique properties. These oils vary dramatically from one another when it comes to their viscosity,
volatility and toxicity.

The term “viscosity” relates to the oil's resistance to flow. Higher viscosity crude oil is much more
difficult to pump from the ground, transport and refine.

45
The term “volatility” describes how quickly the oil evaporates into the air. Oils that are naturally highly
volatile need additional effort to ensure that temperature regulation and sealing procedures loose as little
oil as possible.

The term “toxicity” refers to how dangerously poisonous the oil & its refining processes are to local life,
from humans, to flora and fauna as well as other environmentally fragile living entities and organisms. If
an oil spill were to occur, each type of oil presents quite unique “clean up” challenges, procedures and
priorities!

The four primary types of oil are:

(1) The Very Light Oils / Light Distillates which include: Jet Fuel, Gasoline, Kerosene, Light Virgin
Naphtha, Heavy Virgin Naphtha, Petroleum Ether, Petroleum Spirit, and Petroleum Naphtha. These oils
tend to be highly volatile and can evaporate within just a couple of days, which quickly diffuses and
decreases toxicity levels.

(2) Light Oils / Middle Distillates which include: Most Grade 1 and Grade 2 Fuel Oils and Diesel Fuel
Oils as well as Most Domestic Fuels and Light Crude Marine Gas Oils.

These oils are moderately volatile, less evaporative and moderately toxic.

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(3) Medium Oils: Most of the crude oil on the market these days falls into this particular category. Low
volatility makes for messier & more complex “clean ups” and when it comes to the increased toxicity
levels, I believe we have all lived long enough to see what “Medium Oil” spills can do to the local ocean
life out on the seas or local wildlife right here on “terra firma!”

(4) Heavy Fuel Oils which include the heavy crude oils, Grade 3,4,5 and 6 Fuel Oils (Bunker B & C) as
well as Intermediate and Heavy Marine Fuels. With these oils there is very slow and little evaporation
and therefore toxicity is highly increased. This not only means potentially severe contamination for fish,
fowl and fur-bearing creatures, but possible “long term” contamination of water and soil as well.

In fact, there are actually over 160 different oils traded on the market theses days, but for simplicity’s
sake, let’s discuss the three primary oils that get most of the serious attention in the news and in the
markets.

West Texas Intermediate (WTI) is an extremely high quality crude oil which is greatly valued for the
fact that it is of such premium quality, more and better gasoline can be refined from a single barrel than
from most other types of oil available on the market.

The WTI “API Gravity” is 39.6 degrees, which makes it a “light” crude oil, with only 0.24 percent
sulfur, which makes it a “sweet” crude oil. The term “API Gravity” refers to

46
the “American Petroleum Institute Gravity, which is a measure that compares how light or heavy a
crude oil is in relation to water. If an oils “API Gravity” is greater than 10 then it is lighter than water
and will float on it. If an oils “API Gravity” is less than 10, it is heavier than water and will sinks.

These combined qualities as well as location make WTI a prime crude oil to be refined in the United
States, which is by far, the largest gasoline consuming country on the planet. The vast majority of WTI
crude oils are refined in the Midwest and Gulf Coast regions. Even with production of WTI crude oil in
decline, WTI is often priced from $5 to $7 higher per barrel than “OPEC Basket” oil and on average, $1
to $2 higher per barrel than “Brent Blend” oils.

Brent Blend is actually a combination of different oils from 15 fields throughout the Scottish Brent and
Ninian systems located in the North Sea. Its “API Gravity” is 38.3 degrees, which makes it a “light”
crude oil, but clearly not quite as “light” as WTI. It also contains about 0.37 percent sulfur, which makes
it a “sweet” crude oil, but then again, not quite as “sweet” than WTI.

Brent Blend is quite excellent for making gasoline and middle distillates, both of which are utilized in
large quantities in Northwest Europe, where Brent blend crude oil is most often refined. Brent Blend
production, much like that of WTI, is also on the decline, but it remains a major benchmark for other
crude oils in Europe or Africa. Brent Blend oil price is often priced at a $4 higher per barrel compared to
the OPEC Basket price.

OPEC Basket oil is a collective seven different crude oils from Algeria, Saudi Arabia, Indonesia,
Nigeria, Dubai', Venezuela and the Mexican Isthmus. The acronym OPEC stands for “Organization of
Petroleum-Exporting Countries” which is an organization that was formed in 1960 in order to create
some common policy for the production and sale of oil within its jurisdiction.

Because OPEC oil has a much higher percentage of sulfur within its natural make-up and therefore is
not nearly as “sweet” as WTI or even Brent Blend and since it is also not naturally as “light” as well, the
prices of OPEC oil are normally consistently lower than either Brent Blend or WTI. However, OPEC’s
willingness or ability to quickly increase production when necessary makes OPEC a consistent “Major
Player” in the oil industry!

Benchmark (crude oil)

A benchmark crude or marker crude is a crude oil that serves as a reference price for buyers and sellers
of crude oil. There are three primary benchmarks, West Texas Intermediate (WTI), Brent Blend, and
Dubai Crude. Other well-known blends include the OPEC Reference Basket used by OPEC, Tapis
Crude which is traded in Singapore, Bonny Light used in Nigeria, Urals oil used in Russia and Mexico's
Isthmus. Energy Intelligence Group publishes a handbook which identified 195 major crude streams or
blends in its 2011 edition.

Benchmarks are used because there are many different varieties and grades of crude oil. Using
benchmarks makes referencing types of oil easier for sellers and buyers.

47
There is always a spread between WTI, Brent and other blends due to the relative volatility (high API
gravity is more valuable), sweetness/sourness (low sulfur is more valuable) and transportation cost. This
is the price that controls world oil market price.

West Texas Intermediate (WTI)

West Texas Intermediate is used primarily in the U.S. It is light (API gravity) and sweet (low-sulfur)
thus making it ideal for producing products like low-sulfur gasoline and low-sulfur diesel. Brent is not
as light or as sweet as WTI but it is still a high-grade crude. The OPEC basket is slightly heavier and
more sour than Brent. As a result of these gravity and sulfur differences, before 2011 WTI typically
traded at a dollar or two premium to Brent and another dollar or two premium to the OPEC basket.[5]

Since 2011, WTI has traded at a significant discount to Brent.

Brent Blend

Brent Crude is a mix of crude oil from 15 different oil fields in the North Sea. It is the benchmark used
primarily in Europe though it is also mixed in with the OPEC reference basket which is used around the
world.[3]

Dubai and Oman

Dubai Crude, also known as Fateh, is a heavy sour crude oil extracted from Dubai. It is produced in the
Emirate of Dubai, part of the United Arab Emirates.[6] Dubai's only refinery, at Jebel Ali, takes
condensates as feedstocks, and therefore all of Dubai's crude production is exported. For many years it
was the only freely traded oil in the Middle East, but gradually a spot market has developed in Omani
crude as well.

For many years, most of the oil producers in the Middle East have taken the monthly spot price average
of Dubai and Oman as the benchmark for sales to the Far East (WTI and Brent futures prices are used
for exports to the Atlantic Basin). In July 2007, a potential new mechanism arose in the form of the
Dubai Mercantile Exchange, which offers futures contracts in Omani crude. Whether the DME will be
successful, and whether Omani futures prices will be adopted by producers and buyers as a benchmark,
remain to be seen.

Canadian Crude

Edmonton Par and Western Canadian Select (WCS) "are benchmarks crude oils for the Canadian
market. Both Edmonton Par and West Texas Intermediate are high-quality low sulfur crude oils with
API gravity levels of around 40°. In contrast, WCS is a heavy crude oil with an API gravity level of
20.5°.

The Canadian Crude Index (CCI) serves as a benchmark for oil produced in Canada.[8] It allows
investors to track the price, risk and volatility of the Canadian commodity.[8]The CCI provides a fixed
price reference for Canadian crude oil and provides an accessible and transparent index to serve as a

48
benchmark to build investable products upon, and could ultimately increase its demand to global
markets.

Contracts

Because of its excellent liquidity and price transparency, the contract is used as a principal international
pricing benchmark.

The first futures contracts on crude oil were traded in 1983, with the Chicago Board of Trade (CBOT)
and the New York Mercantile Exchange (Nymex) both attempting to take advantage of the government's
de-regulation of crude oil. CBOT's initial contracts had delivery problems, so customers abandoned it
for Nymex.[9]

Crude oil became the world's most actively traded commodity, and the NYMEX Division light sweet
crude oil futures contract becoming the world's most liquid form for crude oil trading, as well as the
world's largest-volume futures contract trading on a physical commodity. Additional risk management
and trading opportunities are offered through options on the futures contract; calendar spread options;
crack spread options on the pricing differential of heating oil futures and crude oil futures and gasoline
futures and crude oil futures; and average price options.

The contract trades in units of 1,000 barrels, and the delivery point is Cushing, Oklahoma, which is also
accessible to the international spot markets via pipelines. The contract provides for delivery of several
grades of domestic and internationally traded foreign crudes, and serves the diverse needs of the
physical market.

Energy derivative

An energy derivative is a derivative contract based on (derived from) an underlying energy asset, such
as natural gas, crude oil, or electricity. Energy derivatives are exotic derivatives and include exchange-
traded contracts such as futures and options, and over-the-counter (i.e., privately negotiated) derivatives
such as forwards, swaps and options. Major players in the energy derivative markets include major
trading houses, oil companies, utilities, and financial institutions.

Energy derivatives were criticized after the 2008 financial crisis, with critics pointing out that the market
artificially inflates the price of oil and other energy providers.

The first energy derivatives covered petroleum products and emerged after the 1970s energy crisis and
the fundamental restructuring of the world petroleum market that followed. At roughly the same time,
energy products began trading on derivatives exchange with crude oil, heating oil, and gasoline futures
on NYMEX and gas oil and Brent Crude on the International Petroleum Exchange (IPE).

SWOT Analysis

SWOT analysis (or SWOT matrix) is a strategic planning technique used to help a person or
organization identify the Strengths, Weaknesses, Opportunities, and Threats related to business
competition or project planning. It is intended to specify the objectives of the business venture or

49
project and identify the internal and external factors that are favorable and unfavorable to achieving
those objectives. Users of a SWOT analysis often ask and answer questions to generate meaningful
information for each category to make the tool useful and identify their competitive advantage.

Strengths and Weakness are frequently internally-related, while Opportunities and Threats commonly
focus on environmental placement.

Strengths: characteristics of the business or project that give it an advantage over others.

Weaknesses: characteristics of the business that place the business or project at a disadvantage relative
to others.

Opportunities: elements in the environment that the business or project could exploit to its advantage.

Threats: elements in the environment that could cause trouble for the business or project.

The degree to which the internal environment of the firm matches with the external environment is
expressed by the concept of strategic fit. Identification of SWOTs is important because they can inform
later steps in planning to achieve the objective. First, decision-makers should consider whether the
objective is attainable, given the SWOTs. If the objective is not attainable, they must select a different
objective and repeat the process.

Strengths

Reputation in marketplace

Expertise at partner level in HRM consultancy

Weaknesses

Shortage of consultants at operating level rather than partner level

Unable to deal with multidisciplinary assignments because of size or lack of ability

Opportunities

Well established position with a well-defined market niche

Identified market for consultancy in areas other than HRM

Threats

Other small consultancies looking to invade the marketplace

Large consultancies operating at a minor level

50
A SWOT analysis, with its four elements in a 2×2 matrix.

51
52
one example of a SWOT Analysis used in community organizing

A simple SWOT Analysis used in Community Organizing

Crude Oil Futures Trading Markets

Crude Oil futures are standardized, exchange-traded contracts in which the contract buyer agrees to take
delivery, from the seller, a specific quantity of crude oil (eg. 1000 barrels) at a predetermined price on a
future delivery date. Future markets are

1. NYMEX and TOCOM

Crude Oil futures are traded at New York Mercantile Exchange (NYMEX) and Tokyo
Commodity Exchange (TOCOM).

NYMEX Light Sweet Crude Oil futures prices are quoted in dollars and cents per barrel and are traded
in lot sizes of 1000 barrels (42000 gallons).

NYMEX Brent Crude Oil futures are traded in units of 1000 barrels (42000 gallons) and contract prices
are quoted in dollars and cents per barrel.

53
TOCOM Crude Oil futures prices are quoted in Yen per kiloliter and are traded in lot sizes of 50
kiloliters (13210 gallons).

2. Petroleum Futures. Petroleum futures are used for

- Hedging
- Marketing
- Firming up position (position taking)
- Arbitrage
- Pricing

Hedging

Hedging is analogous to taking out an insurance policy.

A hedge is an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge
consists of taking an offsetting position in a related security, such as a futures contract.

A financial hedge is an investment position intended to offset potential losses or gains that may be
incurred by a companion investment. In simple language, a hedge is a risk management technique used
to reduce any substantial losses or gains suffered by an individual or an organization.

A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded
funds, insurance, forward contracts, swaps, options, gambles, many types of over-the-counter and
derivative products, and futures contracts.

Public futures markets allow transparent, standardized, and efficient hedging of agricultural commodity
prices; they have since expanded to include futures contracts for hedging the values of energy, precious
metals, foreign currency, and interest rate fluctuations.

A perfect hedge is one that eliminates all risk in a position or portfolio. In other words, the hedge is
100% inversely correlated to the vulnerable asset. This is more an ideal than a reality on the ground, and
even the hypothetical perfect hedge is not without cost. Basis risk refers to the risk that an asset and a
hedge will not move in opposite directions as expected; "basis" refers to the discrepancy.

Characteristics of Hedging

- Minimize exposure to price risks

- Reduces potential losses due to risk minimization
- Fixes forward profit margins
- Reduces risks of inventory so that price does not fall and losses incurred.
- Reduces marketing losses
- Increase credit worthiness
- Improve financial planning

54
Types of Hedging

There are long and Short hedge. Long hedge in cash market is where future oil contracts are bought to
protect against rising prices that would generate loss or reduce profits.

A short hedge is where futures contracts are sold to protect interest against the possibility of declining
prices that would reduce inventory value and generate loss in cash business.

Marketing. Actual delivery of oil contract at fixed price at future date.

Arbitrage. Simultaneous purchase and resale of same commodity.

Position taking shifts risk from cash market to future market. It is a form of price speculation.

Pricing Determination of monetary worth of crude oil. It is done on NYMEX anonymously (strict
confidentiality).

The Fundamentals of Oil & Gas Hedging - Futures

In the energy markets there are six primary energy futures contracts, four of which are traded on the
New York Mercantile Exchange (NYMEX): WTI crude oil, Henry Hub natural gas, NY Harbor ultra-
low sulfur diesel (formerly heating oil) and RBOB gasoline and two of which are traded on the
Intercontinental Exchange (ICE): Brent crude oil and gasoil.

A futures contract gives the buyer of the contract, the right and obligation, to buy the underlying
commodity at the price at which he buys the futures contract. On the other hand, a futures contract gives
the seller of the contract, the right and obligation, to sell the underlying commodity at the price at which
he sells the futures contract. However, in practice, very few commodity futures contracts actually result
in delivery, most are utilized for hedging and are sold or bought back prior to expiration.

So how can an oil and gas producer utilize futures contracts to hedge their exposure to volatile oil and
gas prices? As an example, let's assume that you are a crude oil producer who wants to hedge the price
of your future crude oil production. For sake of simplicity, let's assume that you are looking to hedge (by
"fixing" or "locking" in the price) your October crude oil production. To hedge this production with
futures, you could sell (short) a November crude oil futures contract.

You would sell the November, rather than the October futures contract, because the November futures
contract expires during the production month of October. However, the November futures contract will
expire during the middle of the October production month so to properly hedge October production you
would likely utilize a combination of November and December futures contracts. This complexity,
known as “calendar basis risk” in trading jargon, is the reason many oil and gas producers hedge with
swaps rather than futures. We’ll address calendar basis risk in more depth in another post in the not too
distant future.

If you had sold these futures based on the closing price of November WTI crude oil futures yesterday,
you would have hedged your October production at approximately $46.93/BBL.

55
Let's now assume that it is October 20, the expiration date of the November WTI crude oil futures
contract. Because you do not want to make delivery of the futures contract, you buy back the November
futures contract at the prevailing market price to close out your position.

To compare how your strategy will work if the November crude oil futures contract settles at prices both
above and below your price of $46.93, let's examine the following two scenarios.

In the first scenario, let's assume that the prevailing market price, at which you buy back the November
WTI crude oil futures contract, is $60/BBL, which is $13.07/BBL higher than the price at which you
sold the futures contract. In this scenario, you would receive approximately $60/BBL for your October
crude oil production. However, your net revenue would be $46.93, the price at which you originally sold
the futures contract, excluding the basis differential, gathering and transportation fees, etc. This is
because you would incur a loss of $13.07/BBL ($60.00 - $46.93 = $13.07) on the futures contract.

In the second scenario, let's assume that the prevailing market price, at which you buy back the
November WTI crude oil futures contract, is $35/BBL, which is $11.93/BBL lower than the price at
which you sold the futures contract. In this scenario, you would receive approximately $35/BBL for
your October crude oil production. However, similar to your net revenue would be $46.93/BBL, again
excluding the basis differential, gathering and transportation fees. This is because you would incur a
gain of $11.93/BBL ($46.93 - $35.00 = $11.93) on the futures contract.

While there are numerous variable that must be considered before you hedge your crude oil, natural gas
or NGL production with futures, the basic methodology is rather simple: if you are an oil and gas
producer and need or want to hedge your exposure to crude oil, natural gas or NGL prices, you can do so
by selling (short) a futures contract.

Last but not least, while this example addressed how a crude oil producer can hedge with futures, one
can employ similar methodologies to hedge the production of other commodities as well.

The Fundamentals of Oil & Gas Hedging - Swaps

A swap is an agreement whereby a floating (or market) price is exchanged for a fixed price or a fixed
price is exchanged for a floating price, over a specified period(s) of time. The instrument is referred to as
a swap because the transaction involves buyers and sellers “swapping” cash flows with one another.

Swaps are arguably the most popular - because swaps can be customized while futures contracts cannot -
hedging instrument used by oil and gas producers to hedge their exposure to volatile oil and gas prices
as hedging with swaps allows them to lock in or fix the price they receive for their oil and gas
production. In addition to companies seeking to hedge their exposure to energy commodity prices,
swaps are also utilized by companies seeking to hedge their exposure to agriculture commodities,
metals, foreign exchange rates and interest rates, among others.

As an example of how an oil and gas producer can utilize a swap to hedge its crude oil production, let's
assume that you're an oil producer who needs to hedge your November crude oil production to ensure
that your November revenue meets or exceeds your budget estimate of $45.00/BBL. If you had sold a

56
November Brent crude oil swap at the close of business yesterday, the price would have been
approximately $48.78/BBL.

Now let's take a look at how hedging with this Brent crude oil swap would impact your revenue, and in
turn your cash flow, if the prompt month Brent crude oil futures contracts during the month of
November average $10 higher and $10 lower than the $48.78 price at which you sold the swap.

It should be noted that because Brent crude oil futures expire on the last business day of the second
month proceeding the relevant contract month the January futures contract is the prompt futures contract
during the March production month. As a result, a November swap will settle vs. the January futures
contract. If the swap were a WTI swap rather than a Brent swap, the settlement would be calculated
against the December WTI futures contract from November 1 – November 21 (the expiration date of the
December futures contract) and the January futures contract from November 22 – 30.

In the first scenario, let's assume that average settlement price for the prompt Brent crude oil futures, for
each business day in November is 58.78/BBL. In this case, the price you receive at the wellhead for your
November crude oil production would be approximately $58.78/BBL. However, because you hedged
with the $48.78 swap, you would incur a hedging loss of $10/BBL which equates to net revenue of
$48.78/BBL. In this scenario, while you did experience a hedging loss of $10/BBL, the hedge did
perform as anticipated and allowed you to lock in a price which was $3.78/BBL more than your
budgeted price of $45/BBL.

In the second scenario, let's assume that average settlement price for the prompt Brent crude oil futures,
for each business day in November, is $38.78/BBL. As the settlement price is $38.78, you would receive
approximately $38.78/BBL for your November crude oil production. However, due to the fact that you
hedged with the $48.78 swap, you would incur a hedging gain of $10/BBL. Similar to the first case,
your net revenue in this case will be $48.78/BBL as well as the hedging gain offsets the lower, actual
price. Once again, the hedge did perform as expected and allowed you to lock in a price of $48.78/BBL
or $3.78/BBL more than your budgeted price of $45/BBL.

As this example indicates, oil and gas producers can mitigate their exposure to volatile crude oil prices
by hedging with swaps. If the price of crude oil during the respective month averages less than the price
at which the producer hedged with the swap, the gain on the swap offsets the decrease in revenue. On
the contrary, if the price of crude oil during the respective month averages more than the price at which
the producer hedged with the swap, the loss on the swap is offset by the increase in revenue.

While this example addresses how oil and gas producers can utilize swaps to hedge their crude oil price
risk, a similar methodology can be used to hedge natural gas and NGLs as well. In addition, consumers,
marketers and refiners can also utilize swaps to manage their exposure to energy prices as well.

While the theory of hedging crude oil production with swaps may appear simple on the surface, as is
nearly always the case, the devil is in the details. As such, before you decide to hedge your with swaps,
it is imperative that you conduct the proper analysis to determine if hedging with swaps, or any other
hedging strategy, is appropriate for your specific needs, objectives and risk tolerance. If you have
questions or would like to discuss how we can help you to hedge your crude oil price risk, feel free to
contact us.

57
The Fundamentals of Oil & Gas Hedging - Put Options

In the commodity markets, an option is contract which provides the buyer of the contract the right, but
not the obligation, to purchase or sell a specific volume of a specific commodity (such as crude oil or
natural gas), or the financial equivalent of said commodity, on or before a specific date or period of
time.

There are two primary types of options, call options (which are often referred to as a ceilings or caps)
and put options (which are often referred to as floors). A call option provides the buyer of the option
with a hedge against potentially rising prices while a put option provides the buyer of the option with a
hedge against potentially declining prices.

Many oil and gas producers hedge with put options as doing so allows them to mitigate their exposure to
declining crude oil, natural gas and/or NGL prices while retaining the ability to benefit from potentially
higher prices. Similarly, many consumers hedge with call options as call options allow them to minimize
the impact of potentially rising prices while retaining the ability to benefit from potentially lower prices.

As an example of how an oil and gas producer can hedge their commodity price exposure with put
options, let’s assume that you are a crude oil producer and that you need to hedge your exposure to
potentially lower crude oil prices to ensure that you can service your debt, as required by your lender.
More specifically, let’s assume that you need to ensure that you are hedged at no less than $40/BBL. For
the sake of simplicity, let’s also assume for this example that you are focused on hedging your
September production. Clearly in practice you would hedge many months of production, not only a
single month.

In to do accomplish this you could purchase a $45 September Brent crude oil put option. As this is being
written, a $45 September Brent crude oil average price (also known as an APO or Asian) put option is
trading for a premium of $1.91/BBL, which would mean that your of pocket cost for hedging 1,000
BBLs with this strategy would be $1,910 (1,000 BBLs X $1,910/BBL).

Now let's analyze how the September $45.00 Brent crude oil put option will impact your business, and
ensure that you are able to service your debt, if the average of the prompt month Brent crude oil futures
during the production month of September settles both above and below your strike price of
$45.00/BBL. As we noted our last post, crude oil futures expire before the production (delivery) month.
In the case of the September production month, the prompt month Brent futures contract is the
November futures contract.

In the first outcome, let's assume that average settlement price for the prompt Brent crude oil futures, for
each business day in September, is $60.00/BBL. In this case, the actual price that you realize at the
wellhead should be approximately $60.00/BBL, excluding basis, gathering and transportation fees.
However, because you hedged with a $45.00 put option, your hedge would be "out-of-the-money" and
you would incur neither a gain nor loss on the $45.00 put option. Recall that you had to pay $1.91/BBL
for the option, so your actual net, including the option premium, would be $/BBL (this excludes basis,
gathering and transportation fees as well). Clearly, this would be a pleasant surprise as $58.09/BBL
would not only allow you to service your debt but to generate a nice profit as well.

58
In the second outcome, let's assume that average settlement price for the prompt Brent crude oil futures,
for each business day in September, is $35.00/BBL. In this scenario, the actual price that you realize at
the wellhead should be approximately $35.00/BBL. However, because you hedged with a $45.00 put
option, your hedge would be "in-the-money" and you would incur a hedging gain of $10/BBL. In
addition, you had to pay $1.91/BBL for the option, so your actual net, including the option premium,
would be $43.09/BBL (again, this excludes basis, gathering and transportation fees). While not nearly as
ideal as the first scenario, a net of $43.09/BBL would indeed allow you to ensure that you can service
your debt, and hopefully pay your investors a small dividend as well.

The above chart shows the potential outcomes of a crude oil producer hedging with a $45.00 Brent crude
oil put option, as described in the example. As the chart indicates when Brent crude oil prices average
$45/BBL or less, your net price including the option premium of $1.91/BBL, is 43.09/BBL. Conversely,
when Brent crude oil prices average more than $45/BBL, your net price is the Brent monthly average
minus the option premium of $1.91/BBL.

As this example indicates, hedging with put options provides oil and gas producers with the best of both
worlds as put options provide a hedge against potentially declining crude oil (as well as natural gas and
natural gas liquids) prices while allowing the producer to potentially benefit from higher prices as well.

The Fundamentals of Oil & Gas Hedging - Costless Collars

As we noted in the previous post, an option is contract which provides the buyer of the contract the
right, but not the obligation, to purchase or sell a specific volume of a specific commodity, or the
financial equivalent of said commodity, on or before a specific date or period of time. In addition, we
addressed the two primary types of options - call options and put options. A call option provides the
buyer of the option with a hedge against higher while a put option provides the buyer of the option with
a hedge against lower prices.

While futures, swaps and put options are the preferred hedging strategies of many oil and gas producers,
many also utilized a strategy known as a costless collar. While the terminology might sound confusing
at first, it’s actually quite simple. A costless collar is the combination of two options. In the case of a
producer it is generally the combination of buying a put option (floor) and selling a call option, the
combination of which results in both a floor and a ceiling.

As an example, let’s examine how an oil and gas producer can hedge with "producer costless collar" on
Brent crude oil, a strategy which will include buying a Brent crude oil put option and selling a Brent
crude oil call option. In addition, to make the option costless, the options will be structured so that the
premium paid for the put option will be offset by the premium received from selling the call option.

For the sake of this example, let's assume that you are an oil and gas producer looking to hedge your
December crude oil production with a Brent crude oil costless collar. Let’s further assume that you need
to be hedged against December Brent prices trading below $40/BBL. As such, you decided to buy a $40
December Brent crude oil APO (average price) put option for a premium of $1.50/BBL. In addition, in
order to offset the cost of the $1.50 premium associated with the $40 put option, you also sell a $59
December Brent crude oil APO (average price) call option for a premium of $1.50/BBL

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The combination of these two options provides you with a December Brent $40/$59 producer costless
collar, which equates to a $40 floor and a $59 ceiling. As such, if Brent crude oil prices during
December average less than $40/BBL then you will incur a hedging gain. Conversely, if Brent crude oil
prices during December average more than $59/BBL then you will incur a hedging loss. If the price is
between $40 and $59 then you will incur neither a hedging gain nor loss.

How will the $40/$59 costless collar will perform if Brent crude oil prices during the month of
December average less $40/BBL and more than $59/BBL?

Let's first look at a scenario where the average settlement price for the prompt Brent crude oil futures,
during the month of December, is $35.00/BBL. In this case, the price you receive at the wellhead for
your December crude oil production will be approximately $35.00/BBL. However, because you are
hedged with the $40 put option, you would receive a hedging gain of $5/BBL. As such, the net price you
receive for your December production, excluding the basis differential, gathering and transportation
fees) will be $40/BBL.

Now let’s examine a scenario where the average settlement price for the prompt Brent crude oil futures,
during the month of December, is $70.00/BBL. In this case, the price you receive at the wellhead for
your December crude oil production will be approximately $70.00/BBL. However, because you sold the
$59 call option as part of your costless collar, you would have a hedging loss of $11 on the call option.
As such, the net price you receive for your December production, excluding the basis differential,
gathering and transportation fees) will be $59/BBL.

As previously mentioned, if the average settlement price for the prompt Brent crude oil futures, during
the month of December, is between $40 and $59 you will not incur a hedging gain or loss. For example,
if the average settlement price for the month is $50.00, the net price you receive for your December
production will be approximately $50/BBL.

As this example indicates, costless collars can be an effective hedging strategy for oil and gas producers.
However, because one "leg" of the strategy involves selling (shorting) a call option, you need to fully
understand the potential risks of selling a call option before you hedging with a costless collar,
something many market participants have learned the hard way. For example, when prices spiked in
2008 many oil and gas producers who had hedged with costless collars were subjected to margin calls
which were difficult to meet, as their borrowing bases did not yet reflect the higher price environment..

Crude Oil Futures Trading Basics

Consumers and producers of crude oil can manage crude oil price risk by purchasing and selling crude
oil futures. Crude Oil producers can employ a short hedge to lock in a selling price for the crude oil they
produce while businesses that require crude oil can utilize a long hedge to secure a purchase price for the
commodity they need.

Crude Oil futures are also traded by speculators who assume the price risk that hedgers try to avoid in
return for a chance to profit from favorable crude oil price movement. Speculators buy crude oil futures

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when they believe that crude oil prices will go up. Conversely, they will sell crude oil futures when they
think that crude oil prices will fall.

Forwards

A forward contract on a security (or commodity) is a contract agreed upon at date t = 0 to purchase or
sell the security at date T for a price, F, that is specified at t = 0.

Examples of forward contracts include:

• A forward contract for delivery (i.e. purchase) of a non-dividend paying stock with maturity 6 months.

• A forward contract for delivery of a 9-month T-Bill with maturity 3 months. (This means that upon
delivery, the T-Bill has 9 months to maturity.)

• A forward contract for the sale of gold with maturity 1 year.

• A forward contract for delivery of 10m Euro (in exchange for dollars) with maturity 6 months.

Swaps

Another important class of derivative security are swaps, perhaps the most common of which are interest
rate swaps and currency swaps. Other types of swaps include equity and commodity swaps. A plain
vanilla swap usually involves one party swapping a series of fixed level payments for a series of variable
payments.

Swaps were introduced primarily for their use in risk-management. For example, it is often the case that
a party faces a stream of obligations that are floating or stochastic, but that it will have to meet these
obligations with a stream of fixed payments. Because of this mismatch between floating and fixed, there
is no guarantee that the party will be able to meet its obligations. However, if the present value of the
fixed stream is greater than or equal to the present value of the floating stream, then it could purchase an
appropriate swap and thereby ensure than it can meet its obligations.

Examples

1. Plain Vanilla Interest Rate

In a plain vanilla interest rate swap, there is a maturity date, T, a notional principal, P, and a
fixed number of periods, M.

It is important to note that the principal itself, P, is never exchanged. Moreover, it is also important to
specify whether the payments occur at the end or the beginning of each period.

2. Currency Swaps

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A simple type of currency swap would be an agreement between two parties to exchange fixed rate
interest payments and the principal on a loan in one currency for fixed rate interest payments and the
principal on a loan in another currency. Note that for such a swap, the uncertainty in the cash flow is due
to uncertainty in the currency exchange rate.

3. Pricing Swaps

Pricing swaps is quite straightforward. For example, in the currency swap described above, it is easily
seen that the swap cash-flow is equivalent to being long a bond in one currency and short the bond in
another currency. Therefore, all that is needed to price the swap is the term structure of interest rates in
each currency (to price the bonds) and the spot currency exchange rate.

More generally, we will see that the cash-flow stream of a swap can often be considered as a stream of
forward contracts. Since we can price forward contracts, we will be able to price swaps.

Futures

Futures are financial contracts obligating the buyer to purchase an asset or the seller to sell an asset, such
as a physical commodity or a financial instrument, at a predetermined future date and price. Futures
contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate
trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while
others are settled in cash.

The futures markets are characterized by the ability to use very high leverage relative to stock markets.
Futures can be used to hedge or speculate on the price movement of the underlying asset.

Futures Hedging

The purpose of hedging is not to gain from favorable price movements but prevent losses from
potentially unfavorable price changes and in the process, maintain a predetermined financial result as
permitted under the current market price. To hedge, someone is in the business of actually using or
producing the underlying asset in a futures contract. When there is a gain from the futures contract, there
is always a loss from the spot market, or vice versa. With such a gain and loss offsetting each other, the
hedging effectively locks in the acceptable, current market price.

Comparison of Forward and Future Markets

While forwards markets have proved very useful for both hedging and investment purposes, they have a
number of weaknesses. First, forward markets are not organized through an exchange. This means that
in order to take a position in a forward contract, you must first find someone willing to take the opposite
position. This is the double-coincidence-of-wants problem. Second, because forward contracts are not
exchange-traded, there can sometimes be problems with price transparency and liquidity. Finally, in
addition to the financial risk of a forward contract, there is also counter-party risk. This is the risk that
one party to the forward contract will default on its obligations. These problems have been eliminated to
a large extent through the introduction of futures markets. That is not to say that forward markets are

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now redundant; they are not, and they are used, for example, in the many circumstances when suitable
futures markets are not available.

Futures markets are useful for a number of reasons:

• It is easy to take a position using futures markets without having to purchase the underlying asset.
Indeed, it is not even possible to buy the underlying asset in some cases, e.g., interest rates, cricket
matches and presidential elections.

• Futures markets allow you to leverage your position. That is, you can dramatically increase your
exposure to the underlying security by using the futures market instead of the spot market.

• They are well organized and designed to eliminate counter-party risk as well as the “double-
coincidence-of-wants” problem.

• The mechanics of a futures market are generally independent of the underlying ‘security’ so they are
easy to “operate” and easily understood by investors.

Futures markets also have some weaknesses:

• The fact that they are so useful for leveraging a position also makes them dangerous for
unsophisticated and/or rogue investors.

• Futures prices are (more or less) linear in the price of the underlying security. This limits the types of
risks that can be perfectly hedged using futures markets. Nonetheless, non-linear risks can still be
partially hedged using futures.

Uncovering Oil and Gas Futures

Prices for crude oil, crude oil products and natural gas futures constantly change in response to new
information and reflect the adjustments being made to previous and prospective expectations. The
relative size and duration of those adjustments often depend on the nature of the new information and
the way it is received. Unanticipated new information quite often induces extreme price volatility
creating a price shock. For example, the 1973 oil embargo by OPEC members caused oil prices to spike
to historical highs.

New information regularly disseminated to the market also induces price volatility, which can range
from barely noticeable to extreme because even though the information is anticipated, its content may
not be in line with the market's expectations. This is particularly true of the data periodically released on
oil, petroleum products and natural gas inventories. Here we'll cover where the information for this
industry comes from and when to expect it.

Where the Data Comes From

Weekly oil and natural gas supply data is published by the Energy Information Administration (EIA), an
independent agency of the United States Department of Energy. In fulfilling its responsibility as policy

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advisor to the Department of Energy, the EIA's job is to objectively collect, interpret and analyze all
energy-related data.

The EIA schedules the weekly publication of data highlighting U.S. crude oil and petroleum products
inventory levels each Wednesday through two separate reports. The first, called the Weekly Petroleum
Status Report is distributed mid-morning and features raw inventory data along with recent commodity
and product spot and futures prices. The second report, This Week In Petroleum, is available later in the
afternoon. In addition to more extensive data points, this report includes commentary by the EIA about
the most recent data.

The EIA makes its report on U.S. natural gas storage levels available each Thursday. Similar to its oil
reports, it also releases two separate reports; the Weekly Natural Gas Storage Report is released mid-
morning in the form of a much smaller "flash" report. It's similar to its crude oil counterpart in that only
the raw storage data is included. Additional data points and the EIA's detailed analysis of the morning
data is published in the Natural Gas Weekly Update in the afternoon.

These reports are available at no cost and can be received by email automatically each week once you
sign up at the EIA's website.

Like the Energy Information Administration, the International Energy Agency (IEA) serves as the
energy policy advisor to the 26 countries comprising the Organization of Economic and Cooperative
Development (OECD). Also like the EIA, it collects, interprets and analyzes data related to energy.
However, unlike its U.S. counterpart, the IEA's data relates to global crude oil supply and is released
with the publication of the monthly Oil Market Report. Data presented each month is given a detailed
analysis and provides a perspective for the IEA's updated crude oil price outlook, which is also included
in the report. A paid subscription is required to receive the current report when published.

Crude Oil Inventories

Crude oil is the primary refinery input; therefore, any changes in the level of crude oil inventories from
one reporting period to another not only impact the price of their underlying futures contracts, but will
also affect the price of underlying futures contracts of associated refined products like gasoline. The
petroleum inventory data showing the level of U.S. crude oil inventories first highlights the portion of
current inventory produced within the U.S. then it highlights additional data indicating the portion of
total crude oil inventory that was imported.

More specifically, U.S. petroleum product inventory data pertains to the level of refined products, such
as motor gasoline, jet fuel, distillate fuel oil (source of diesel fuel) and residual fuel oil that are readily
available. Like crude oil inventories, petroleum product inventories data also identifies the portion that is
the result of imports. In addition to the impact on refined product futures prices caused by both changes
in crude oil and refined product inventories, volatility in refined product futures prices can also be
attributed to changes in the portion of total inventories that has been imported. Underlying contract price
volatility is likely to increase upon evidence suggesting that the proportion of imported refined product
to total inventories is increasing.

Natural Gas Data

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 Published natural gas inventory, or "storage," refers to the network of more than 400 locations
throughout the contiguous 48 states. It is designed to highlight the volume of natural gas that can be
readily delivered to natural gas consumers, principally in the U.S. This includes power generation plants,
industrial and commercial users, and households. Like crude oil and petroleum product inventories,
natural gas storage data provides a look at absolute levels as of the reporting date as well as changes to
those levels from prior periods. However, unlike crude oil and petroleum product inventories, owing to
characteristics that largely prevent it from being transported over particularly long distances, storage
level data represents natural gas coming only from U.S. production efforts.

The Effect on Oil and Natural Gas Futures Prices

Information concerning crude oil and natural gas supply levels will affect the price of underlying futures
contracts as the market undergoes a process of reconciling and adjusting past expectations, as well as
readying new ones based on the most recently reported data. Moreover, the extent to which some or all
of the actual data departs from expectations is manifested by the degree of resulting price volatility. For
example, energy future prices tend to rise following an inventory report that indicates that gasoline
inventories remained unchanged, whereas analyst prediction may have expected that inventory to rise.

PEST analysis
An analysis of the political, economic, social and technological factors in the external environment of an
organization, which can affect its activities and performance.
[1]

PESTEL model
Involves the collection and portrayal of information about external factors which have, or may have, an impact
on business.

PEST or PESTEL analysis is a simple and effective tool used in situation analysis to identify the key external
(macro environment level) forces that might affect an organization. These forces can create both opportunities
and threats for an organization. Therefore, the aim of doing PEST is to:

 find out the current external factors affecting an organization;

 identify the external factors that may change in the future;
 to exploit the changes (opportunities) or defend against them (threats) better than competitors would do.

The outcome of PEST is an understanding of the overall picture surrounding the company.

PEST analysis is also done to assess the potential of a new market. The general rule is that the more
negative forces are affecting that market the harder it is to do business in it. The difficulties that will
have to be dealt with significantly reduce profit potential and the firm can simply decide not to engage in
any activity in that market.

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PEST variations

PEST analysis is the most general version of all PEST variations created. It is a very dynamic tool as new
components can be easily added to it in order to focus on one or another critical force affecting an organization.
Although following variations are more detailed analysis than simple PEST, the additional components are just
the extensions of the same PEST factors. The analysis probably has more variations than any other strategy tool:

STEP = PEST in more positive approach.

PESTEL = PEST + Environmental + Legal
PESTELI = PESTEL + Industry analysis
STEEP = PEST + Ethical
SLEPT = PEST + Legal
STEEPLE = PEST + Environmental + Legal + Ethical
STEEPLED = STEEPLE + Demographic
PESTLIED = PEST + Legal + International + Environmental + Demographic
LONGPEST = Local + National + Global factors + PEST

The process of carrying out PEST analysis should involve as many managers as possible to get the best results.
It includes the following steps:

 Step 1. Gathering information about political, economic, social and technological changes + any other
factor(s).
 Step 2. Identifying which of the PEST factors represent opportunities or threats.

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 Gathering PEST, PESTEL and STEEPLED information

In order to perform PEST (or any other variation of it) managers have to gather as much relevant information as
possible about the firm’s external environment. Nowadays, most information can be found on the internet
relatively easy, fast and with little cost. When the analysis is done for the first time the process may take a little
longer and as a beginner you may find yourself asking “What changes do I exactly look for in politics,
economic, society and technology?” The following templates might be useful when gathering information for
PEST, PESTEL and STEEPLED analysis.

NOTE: PEST covers all macro environment forces affecting an organization. Therefore, when doing PESTEL
or STEEPLED analysis, legal, environmental, ethical and demographic factors may overlap with PEST factors.

PEST Analysis Template

2. Political factors

 Government stability and likely changes

 Bureaucracy
 Corruption level
 Tax policy (rates and incentives)
 Freedom of press
 Regulation/de-regulation
 Trade control
 Import restrictions (quality and quantity)
 Tariffs
 Competition regulation
 Government involvement in trade unions and agreements
 Environmental Law
 Education Law
 Anti-trust law
 Discrimination law
 Copyright, patents / Intellectual property law
 Consumer protection and e-commerce
 Employment law
 Health and safety law
 Data protection law
 Laws regulating environment pollution

3. Economic Factors

 Growth rates
 Inflation rate
 Interest rates
 Exchange rates
 Unemployment trends
 Labor costs

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 Stage of business cycle
 Credit availability
 Trade flows and patterns
 Level of consumers’ disposable income
 Monetary policies
 Fiscal policies
 Price fluctuations
 Stock market trends
 Weather
 Climate change

4. Socio-cultural factors

 Health consciousness
 Education level
 Attitudes toward imported goods and services
 Attitudes toward work, leisure, career and retirement
 Attitudes toward product quality and customer service
 Attitudes toward saving and investing
 Emphasis on safety
 Lifestyles
 Buying habits
 Religion and beliefs
 Attitudes toward “green” or ecological products
 Attitudes toward and support for renewable energy
 Population growth rate
 Immigration and emigration rates
 Age distribution and life expectancy rates
 Sex distribution
 Average disposable income level
 Social classes
 Family size and structure
 Minorities

5. Technological factors

 Basic infrastructure level

 Rate of technological change
 Spending on research & development
 Technology incentives
 Legislation regarding technology
 Technology level in your industry
 Communication infrastructure
 Access to newest technology

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 Internet infrastructure and penetration

6. Environmental (ecological)

 Weather
 Climate change
 Laws regulating environment pollution
 Air and water pollution
 Recycling
 Waste management
 Attitudes toward “green” or ecological products
 Endangered species
 Attitudes toward and support for renewable energy

7. Legal

 Anti-trust law
 Discrimination law
 Copyright, patents / Intellectual property law
 Consumer protection and e-commerce
 Employment law
 Health and safety law
 Data Protection

8. Ethical

 Ethical advertising and sales practices

 Accepted accounting, management and marketing standards
 Attitude towards counterfeiting and breaking patents
 Ethical recruiting practices and employment standards (not using children to produce goods)

9. Demographic

 Population growth rate

 Immigration and emigration rates
 Age distribution and life expectancy rates
 Sex distribution
 Average disposable income level
 Social classes
 Family size and structure
 Minorities

Identifying opportunities and threats

Gathering information is just a first important step in doing PEST analysis. Once it is done, the information has
to be evaluated. There are many factors changing in the external environment but not all of them are affecting or

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might affect an organization. Therefore, it is essential to identify which PEST factors represent the opportunities
or threats for an organization and list only those factors in PEST analysis. This allows focusing on the most
important changes that might have an impact on the company.

Oil terminal

An oil depot (sometimes called a tank farm, installation or oil terminal) is an industrial facility for the storage of
oil and/or petrochemical products and from which these products are usually transported to end users or further
storage facilities. An oil depot typically has tankage, either above ground or below ground, and gantries
(framework) for the discharge of products into road tankers or other vehicles (such as barges) or pipelines.

Oil depots are usually situated close to oil refineries or in locations where marine tankers containing products
can discharge their cargo. Some depots are attached to pipelines from which they draw their supplies and depots
can also be fed by rail, by barge and by road tanker (sometimes known as "bridging").

Most oil depots have road tankers operating from their grounds and these vehicles transport products to petrol
stations or other users.

An oil depot is a comparatively unsophisticated facility in that (in most cases) there is no processing or other
transformation on site. The products which reach the depot (from a refinery) are in their final form suitable for
delivery to customers. In some cases additives may be injected into products in tanks, but there is usually no
manufacturing plant on site. Modern depots comprise the same types of tankage, pipelines and gantries as those
in the past and although there is a greater degree of automation on site, there have been few significant changes
in depot operational activities over time.

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Queueing Theory

Queueing theory is the mathematical study of waiting lines, or queues. A queueing model is constructed so that
queue lengths and waiting time can be predicted. Queueing theory has its origins in research by Agner Krarup
Erlang when he created models to describe the Copenhagen telephone exchange.

At the oil terminal, loading trucks queue and load in turns. A berth (a fixed bunk on a ship) is a single service
facility. A queue is formed and service is on the basis of first come first served.
Inter-arrival time probability distribution f(t) is given as
𝑓(𝑡) = 𝜆𝑒 −𝜆𝑡 u
t >= 0
Where
1
𝜆=
arrival rate of tanker at port

1
µ=
service time (time to be load at terminal)
if
Traffic 𝜆
Intensity= 𝜌=
µ
Then average number of tankers waiting to be loaded is
(𝜆𝜎)2 + 𝜌2
Expected number of customers on the queue 𝐿𝑞 =
2(1 − 𝜌)

𝜎 = standard deviation of service time

Average number of tankers waiting to be loaded plus being loaded is
𝐿 = 𝐿𝑞 + 𝜌 L=Expected number of customers in the system
Average time a tanker will wait before being loaded is
𝐿𝑞
𝑊𝑞 = 𝜆 Wq= Expected waiting time of a customer on the queue

Average time a tanker will spend in the system (waiting and loading) is
𝐿
𝑊= 𝜆 W=Expected waiting time of a customer in the system

If there is more than one berth of surface facility, Wq and W will fall.
Given M berths, Po= probability that there are no tankers in the system. Then

(𝜆/𝜇)𝑚+1 𝑃0
𝐿𝑞 =
(m − 1)! [𝑚 − (𝜆/𝜇)2 ]

Or
(𝜌)𝑚+1 𝑃0
𝐿𝑞 =
(m − 1)! 𝑚 − 𝜌2

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 1
𝑃0 =
1 𝑛 1 𝑚 𝑚𝜇
∑𝑚−1
𝑛=0 [𝑛! 𝜌 ] + 𝑚! 𝜌 (𝑚𝜇 − 𝜆 )

for 𝜆 < 𝑚𝜇, n is the number of ship at the port.

LACT Unit

A Lease Automatic Custody Transfer unit or LACT unit measures the net volume and quality of liquid
hydrocarbons. A LACT unit measures volumes in the range of 100-1000 BOPD. This system provides for the
automatic measurement, sampling, and transfer of oil from the lease location into a pipeline.

A Flow Station

An oil production plant (sometimes called an oil terminal) is a facility which performs processing of production
fluids from oil wells in order to separate out key components and prepare them for export.

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Flow Station Onshore

Offshore Flow Station

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