You shake interviewer’s hand and head back home quite happily thinking that you have nailed the interview and you think you should be offered a job in oil and gas industry. One week later…. And still you haven’t received the call.

What did you do wrong?

The interview was quite smooth, wasn’t it?

A survey was conducted by Career Builder in December 2014. It involved 2,100 HR and hiring managers. According to this survey about 50% of the hiring managers said that they knew enough about the candidate within the first 5 minutes of the interview to make the hiring decision. And within 15 minutes of the interview about 90% of the interviewers make their decision. So the smooth interview you had could mean that hiring manger from very beginning had decided that you were not a good fit.

How can you be sure?

Following are 4 significant signs that your interviewer is not interested along with methods of turning around your performance.

1. Interviewer does not ask you about your availability to begin.

The company which to which you are giving interview has an empty spot which they have to fill. They will try their best to fill it quickly. In order to do this, there will be many things which they have to prepare: employee orientation, paperwork of new hire, pay schedule and more. These things require planning, so if the interviewer is interested he will like to know how soon you will be able to start.

In case the interviewer does not ask you about the availability, it might be a sign of your resume not being up to the mark.

What you should do about it: You should turn tables on interviewer. You should not wait for the interviewer to ask you about the availability. Mention your interest in position and company and tell how excited you are to begin right away. Your interest and confidence can change the opinion of the interviewer about you.

2. You are only being asked the easy questions.

 It might seem like an ideal scenario but when interviewer pitches only easy questions to you, odds are that you are not being considered seriously for the vacancy. The harder questions which challenge the candidates make them think hard and require them to solve problems are interviewers way of gauging how well prepared the candidates are and by this they determine if the candidate will be good fit in the organization.

In case you are continuously finding yourself answering the simple questions which do not give you the opportunity of connecting you experience with required skills for job, it can mean that interviewer does not think that you are strong candidate whom he should explore in more depth.

What you should do about it: You should be assertive. You can tell the interviewer that you want to ask a question and then say something such as: “In the last position I was working on if was often required from me to do ABC. I have noticed that this position has similar requirements. How does ABC play into day to day responsibilities of this role?”

3. The interview is shorter than was scheduled.

The interview was scheduled for half hour, but between good questions of interviewer and yourself, you are out of the room within 15 minutes. Is that a good then? Well not really.

Shorter interviews sometimes are faults of the poor scheduling. However, mostly it is the results of the interviewer’s early decision regarding you not being a goof fit in the company and it is the attempt of the interviewer to quickly move to the next applicant.

Often these interviews get characterized by one-to-one ratio of questions to answers. A question is asked by the in viewer and you give the answer. The interview will continue and there is not much back and forth.

What you should do about it: You should make your own back and forth. Ensure that you do have list of the questions before interview which you may refer to in case you think that you are not getting consideration which you deserve. After that find the ways for asking different questions as the follow ups in order to engage interviewer and to help yourself standout.

4. Interviewer does not discuss rest of hiring process.

Most of the organizations today have a prolonged process of hiring which can include many interviews, writing samples, portfolio submissions, assessments, and more. In case you are a great fit for position, it is likely that interviewer is going to talk about the hiring process with you in order to give you an idea of what you could expect in coming days.

In case you hear “Thank you for the time and good luck with job search” you are probably not shortlisted.

What you should do about it: You should be proactive and confident. Take few minutes as interviewer wraps up in order to summarize why you would be a good fit for position. After that ask interviewer about next steps of hiring process and when could you expect hearing form them.

 Additional Resources

Many people ask us every time about well control but many of them understand that well control is when the rigs are burn. This is not the right concept.

Well Control is a situation when hydrostatic pressure in a wellbore is less than formation pressure therefore reservoir fluid will come into a well. If a well control situation is not taking care of properly, it will result in blow like you can see in the VDO below.

The short VDO, only 1 minute and 34 seconds, clearly show that what will be happening if the well cannot be control.

This is another example of blow out.

If you want to learn more about well control, you can find more information here
Well Control Articles

Job Safety Analysis (JSA) is an important to any health and safety program. It is one of many risk assessment tools that can be used in a formal hazard assessment process to identify and control hazard.

Many works are injured or killed because they don’t know the right steps or don’t recognize the potential hazard of the job. JSA helps establish proper operating procedures and provide recommendations for preventing or eliminating hazards.  

A job safety analysis should be conducted by a team who is familiar with a task and it should include additional worker, supervisor and specialist. By involving the whole team, the likely hood of missing hazard is reduced. Workers who do the job regularly will recognize unsafe shortcuts or ways to get around protective devices. Therefore, this must be addressed during JSA discussion.

Creating a JSA begins by observing a job. For example, the task is manual lifting of a cross over sub into a basket for transferring to the rig floor. Each step must defined as the part of the operation necessary to advance the work. It is important not to make the steps too general which may result in hazard being missed or too detailed which may result in too many steps. A rule of thumb is to make steps less than 10 steps and also keep the steps in a correct order of operation. Step that is out of order may miss the potential hazards or even introduce hazards that don’t exist initially.

Once all the steps are listed. It is time to identify potential hazard for each step. Hazards are something that can lead to illness, injury, or environmental harm. Health hazard can be physical, chemical, biological or psychological which may cause effect to workers. Safety hazards are substances, processes, actions and conditions that may endanger the immediate workers.

Go through each step and identify potential hazards within that step. Each step may have more than one hazards so number each one with the step number. It is also important to assess the risk for each task and hazard. This can be done by showing the severity of hazard and probability of its occurring. Example of this is to rank the scale of the hazard from low to high or 1 – 5.  Finally, for each step, make recommendation on each hazard can be mitigated or controlled. It is good to make recommendations right away while workers are still focus on the working environment. This way, you will see how the recommendations will work or cause other hazards.

Start from the top of hazard list and work the way down. When making recommendation, you should eliminate hazard or substitute with something less hazard. If it is not possible, make recommendation to control hazard. Hazard controls can include Engineering controls, Administrative controls, or Personal Protective Equipment. Sometimes all types of controls and recommendations can be made. Explore as many as alternative ways possible. If the hazards can be controlled in several ways, each control should be listed. The JSA is not only useful to communicate hazards to the jobs but also form basic of safe work practices and safe job procedures. It also provides step by step training for new employees being taught on how to do the job or if the injury or illness occurs, a JSA can provide a starting point for any investigation and remind employees of safe working procedures. It is important to continually monitoring task and confirms the control is implemented and effective. Conduct JSA for each new task and review them at regular interval or when the change in a task is occurred. When done regularly, JSA helps keep workers safe and reduce the chance of injury, illness and environmental damage.

Wellhead installation is one of most fascinating topics and it is very difficult to  visualize how this operation is performed. However, if you see this VDO, it will make the learning process so easy. This vdo demonstrate how to a stack wellhead from the beginning to the end of the process. Furthermore, we also add full VDO transcript which may help some learners to let more understanding.

Full VDO Transcript

There may be several strings of pipe in any given well. The number of the strings is determined by the number of zones being drilled through. These can include freshwater, saltwater and potential productions zones. Depicted here are 4 production or ‘pay zones’. Each zone would be cased off or isolated until it is to be produced.

On land, a majority of wells begin with digging a cellar, which can be from 3 to 15 feet in depth. The primary purpose of a cellar is to align the Christmas tree at relative ground-level. Having the Christmas tree at relative ground level allows for easier access to the valves, chokes and other equipment. The first string of pipe to be used in a well is called the conductor pipe or drive pipe. To being, a large diameter hole is drilled to a specified depth, generally relatively shallow, such as 1 or 200 feet. The pipe is driven into the ground to a specified depth or to the point of refusal. In most cases, an adaptor flange or a drilling flange is welded to the conductor pipe as a means to connect a diverter system or blowout preventer system.

Upon completion of the surface hole, the surface pipe is run to a specified depth to isolate any freshwater, saltwater, oil or gas zones within that depth range. The surface pipe is run and cemented in place back to the surface. A cement plug is left in the surface pipe, so that a diverter system or a BOP system may be disconnected or nippled down safely.

After the diverter or BOP system has been nippled down, the surface pipe is drained. Then the adapter flange or drilling flange is cut off. The final cut-off height is determined by adding the height of each piece of wellhead equipment, plus the stand-off distance between each piece of equipment and the rig gasket height. Then the depth of the slip on socket in the bottom of the casing head housing. If a base plate is used, its height must also be considered. The sum of these heights is then deducted from the cellar depth to determine the final cut-off height, for both the conductor pipe and surface casing.

When the final cut on the conductor and surface pipe is completed, the casing head housing is prepared for installation. The casing head housing is welded in place on the surface casing. The pieces welded on the inside diameter and the outside diameter, then tested to assure there are no leak paths in the wells. This test checks the wells, but does not test the integrity of the casing head housing. The base plate which is slightly larger than the conductor pipe, may be tack welded to the conductor pipe, if desired. The base plate serves as a means to transfer weight from the casing head housing back onto the conductor pipe. When the casing head housing has been successfully welded and tested, the BOP system is installed or nippled up and preparations are made to drill out for the intermediate string of casing. To test the BOP system, the test plug is made up from the drilling string and lowered through the BOP system, until properly located in the casing head bowl. Pressure is applied from above the plug and the BOP system is tested.

Upon completion of the BOP tests, the wear bushing running tool is made up on the drill string and the wear bushing installed on the running tool. The wear bushing is then lowered through the BOP system until located in the casing head bowl. The wear bushing is locked in place, either by lockdown pins in the casing head housing flange or by lockdown pins located in a lockdown flange. The running tool is then removed and the drilling operation can resume.

After the hole has been drilled for the intermediate string, the casing is run in the hole and cemented in place. The intermediate string is cemented to a predetermined depth to ensure a good cement bond is obtained between the surface casing and the intermediate casing. A cement plug is left in the intermediate casing, just as it was in the surface casing. The casing is then suspended from the elevators at the rig floor, and the casing hanger is installed either through the BOP system or underneath the BOP system.

In this example the casing hanger will be installed underneath the BOP system. To begin, the BOP system is nippled down and picked up to a height approximately 3 feet. The casing hanger is then installed. Holes are cut in the casing to allow the drilling fluids to drain out of the casing riser. When the casing has drained, a rough cut is made and the balance of the casing riser is removed. The BOP system is removed. The casing spool with a crossover seal is installed. The BOP system is nippled up and preparation is made to drill out for the production casing string.

To test the BOP system the test plug is made up on the drill string and lowered through the BOP system, until properly located in the casing spool bowl. Pressure is applied from above the plug and the BOP system is tested. Upon completion of the BOP tests, the wear bushing running tool is made up on the drill string and the wear bushing installed on the running tool. The wear bushing is then lowered through the BOP system until located in the casing spool bowl. The wear bushing is locked in place either by lockdown pins and the casing spool flange or by lockdown pins located in a lockdown flange. The running tool is then removed and the drilling operation can resume.

The production casing string is generally run to the total depth of the well and is the casing string in which the production packer is installed. When the hole is drilled and the production casing is run and cemented in place, the casing hanger is installed. The casing riser is drained. A rough cut is made and the BOP system removed. The final cut is made to the production casing in preparation for installation of the tubing spool. The tubing spool with a crossover seal is installed in the same manner as the casing spool. After the tubing spool has been installed, the seals and connection are tested and the BOP system is nippled up.

Preparations are now made to run production tubing in the hole. Production tubing is considered any pipe string 4 inches in diameter or less, though sometimes larger sizes of pipe are used. When the plug has been drilled out and a cleanout trip completed, the perforating gun is run in the hole and the casing is perforated or shot. The downhole packer assembly is run and installed in the production casing. A packer is in essence a CO assembly that isolates the reservoir from all strings of pipe, except the production tubing. The production tubing is run with a bottom hole assembly to seal inside the packer. After the tubing is spaced out and proper weight set on the packer, the tubing hanger is installed at the tubing on the rig floor, then lowered into the bowl of the tubing spool. The BOP system is nippled down and preparations are made to install the production Christmas tree.

The production Christmas tree is made up of a seal flange which is often called the tubing head adapter, a series of gate valves, a T or cross, rig valves or side valves, and a choke. The Christmas tree is the group of equipment that controls the flow of the well. Each Christmas tree has one or more surface safety valves that will shutdown the well in an emergency, and prevent damage to the equipment downstream. To install the Christmas tree, determine the direction the Christmas tree should be installed, pick it up, level it and lower it over the extended neck of the well drill tubing hanger. The Christmas tree is nippled up to the tubing spool, and the connections and seals are tested. The well is now ready for production testing.

The Demand and Supply is one of fundamental concepts of economics that will help us understand about oil price in a free market environment.

In order to give you a  simple concept of demand and supply, please look at the fresh market image below (Figure 1).

Figure 1 – Fresh Market

What do you think about the price of fresh food in the morning and in the evening?

In the morning, the vegetables and fruits can be sold at a very good price. People want fresh product and sellers have a power to maintain good prices. However, in the evening the freshness is gone and the condition of the fresh products declines. The price goes down because sellers want to sell them but buyers don’t want to buy them so the sellers must reduce the price otherwise they can lose profit. This simple concept is a basic of the demand and supply in free market.

Sellers’ Viewpoint

In the seller viewpoint, the sellers want to sell their products at the highest price as much as they can. If price of goods goes up, the sellers are persuaded to make more products (Figure 2).

Figure 2 – Seller Viewpoint

Buyers’ Viewpoint

Buyers’ viewpoint is opposite to the sellers’ viewpoint. When price of goods is high, fewer buyers can effort to purchase the goods so low quantity of products will be sold (low demand). If the price drops down, there will be more buyers can buy the goods. It demonstrates that the lower price relates to increase in demand (high demand).

Figure 3 – Buyers’ Viewpoint

In a free market condition, equilibrium point reaches where the demand and supply curve are intercepted (Figure 4). According to the Figure 4, an equilibrium price is $60 and an equilibrium quantity bought and sold is 30.

Figure 4 – Equilibrium Point

What Will Happen if Price Above Equilibrium Point?

We will take a look when price is above an aquarium point. If the price of good is 70$, the demand will drop to 25 units but the supply will rise to 35 units (Figure 5).  High price situation will increase the supply but the demand will be depressed.  At 70$ at unit, sellers have 10 extra units of goods. If they don’t try to sell the extra unit on hands, they will be stuck with loss due to stock in hands. Sellers will lower their price to be able to sell their products so the price comes back to the equilibrium point of 60$

Figure 5 – Price Above Equilibrium Point

What Will Happen if Price Below Equilibrium Point?

This is the opposite case when the price is below an aquarium point. If the price of good is 50$, the demand will go up to 35 units but the supply will drop to 25 units (Figure 6).  At low price of 50$ at unit, the demand increases but it will not convince sellers to produce more products so there is 10 units in demand. Sellers increase the prices to compensate more demand. This will result in more sellers produce more goods to sell into the market. Eventually, the price comes back to the equilibrium point of 60$

Figure 6 – Price Below Equilibrium Point

Reference Books

 Basic Economics by by Thomas Sowell 

Demand changes can effect on quantity of supply in both positive and negative ways. For this time, we will look at 5 factors of demand shifters and how they affect on price and quantity of products in the market.

Five Demand Shifter Factors are as follows;

1. Number of potential buyers in the market – increase or decrease of buyers wanting to buy product in the market
2. Buyers’ taste and preferences – fashion products as jeans may be in trend this season, the buyers want to buy them so the price goes up. For next season, the same model of jeans may not be a fashion trend so buyers don’t want to buy them. The price will drastically drop.
3. Buyers’ income – Increase in buyers’ income will have a great purchasing power. Conversely, decrease in buyers’ income will badly affect on demand to buy things.
4. Buyers’ expectation – This is the expectation of buyers of future market conditions and it will impact on the economy outlook if there are a lot of buyers having the same expectations.
5. Price of substitute and complementary goods – Substitute goods are products that can be use in place of one another such as potatoes and rice. Complementary goods are products the used together such car and fuel.

Increase in Demand

An increase in demand is when the buyers want to buy more product than before so the demand curve moves to the right. This will result in a new equilibrium point which indicates an increase in both price and quantity of good supplied. There is no effect on the supply curve because of demand change. Sellers are attracted to produce more quantity to supply needs. According to the graphic shown in Figure 1, the positive demand shifting results in a new equilibrium supply of 74 units and a new equilibrium price of 36$.

Figure 1 – Demand Increases

Decrease in Demand

A decrease in demand means that buyers will buy less of product than before so the demand curve moves to the left. The new equilibrium price and supply decrease. There is no effect on the supply curve because of demand change. Sellers are not attracted to produce more quantity due to low demand. According to the graphic shown in Figure 2, the negative demand shifting results in a new equilibrium supply of approximately 48 units and a new equilibrium price of 24$.

Figure 2 – Demand Decreases

Reference Books

Thomas Sowell (2007) Basic economics: A Common Sense Guide to the Economy, New York, New York, USA: Basic Books.

Supply changes can affect on demand in positive and negative way. In this post, we will analyze 6 factors of supply shifters and how they affect on a new equilibrium point in the market.

Six Demand Shifter Factors are as follows;

1. Number of sellers –  more sellers =  more supply, fewer sellers = less supply
2. New technology – new technology = more supply
3. Resource price – high resource price = low supply, low recourse price = high supply
4. Taxes and Subsidies – More taxes = low supply, Less taxes = more supply, More subsidies = more supply, less subsidies = less supply
5. Expected price in the future – This is what producers predict what sells of product will look like and they will use the prediction to plan how they sell products in the future. If they predict that the price of product will be high in the future, they will stock supply in order to sell in the future. On the other than, if they think the future price is low, the will increase supply to get more money from sales before the price drops. more expectation (more expensive) = less supply now, less expectation (less expensive) = more supply now. This is similar to oil price, when a lot of companies expect high dollars per barrel of oil in the future, they tend to keep supply in the stock and sell later. This will reduce current supply and it will be more supply in the future.
6. Prices of other products the company could make – the company sometimes makes more profit on another product than one that they currently produce. The company will move resource to produce the new product that will generate more income so the supply of current product drops.

 Increase in Supply

When companies produce more products to the market and there is no demand change. This will result in a new equilibrium point which indicates an increase in supply but a decrease in price of a product. The Figure 1 illustrates a new equilibrium price of 50$ and a new equilibrium quantity of 35 units.  This level will maintain until the supply goes down to the former level.

Figure 1 – Increase in Supply

Decrease in Supply

When companies are unable to supply the same amount of products to the market and there is no demand change. This will result in a new equilibrium point which indicates a decrease in supply but an increase in price of a product. This will shift results to a new equilibrium price of 70$ and a new equilibrium quantity of 25 units as shown in Figure 2.  This level will maintain until the supply goes up to the previous level.

Figure 2 – Decrease in Supply

Thomas Sowell (2007) Basic economics: A Common Sense Guide to the Economy, New York, New York, USA: Basic Books.

From our informal exchanges with strangers to more formal exchanges with our associates, one can show what he/she is or is not to people with just little gestures and actions. For people who want to work in oilfield, body language is very important and it is one of getting hired by oilfield companies. There are a lot of people fail to this point.   This is can be applied to someone who has been in the oilfield but does not have any good progress in their career but their futures are not bright.

Positive body language is always a part of confident and successful people but a gentle reminder will be required for others. These are some important rules of body language that will help you progress in your job.

Avoiding Eye Contact – Avoidance of eye contact shows that a person has something to hide and lacks charisma and interest. Keeping eye contact is important for office communication. It portrays confidence, leadership traits and strength.

Credit – http://www.communiquepr.com/blog/wp-content/uploads/2011/05/body-language-interview.jpg

Weak Handshake – A handshake doesn’t take time, it’s meant to be a short experience, but a bad one can lead to an ugly impression on someone. A study carried out by the University of Iowa in 2008 showed that some individuals who commence job interviews with a strong handshake are always favored than those with a weak handshake.

Credit – http://seragpsych.com/wordpress/wp-content/uploads/2014/08/20140325_business_woman41.jpg

Slouching –  This shows lack of confidence and low energy levels. A person with curved back and inwardly pointing shoulders will appear small physically. On the other hand, a good posture, such as a straight back and high shoulders increases the amount of space occupied and indicates control and declaration.

Credit – http://www.staceyhankeinc.com/wp-content/uploads/2013/02/bad-posture-1.jpg

Crossed Arms – This is a physical barrier that shows someone is not interested in what the other person is saying. It shows defense. It does not show a person as open-minded and interesting.

Credit – http://blog.readytomanage.com/wp-content/uploads/2012/08/arm-cross.jpg

Exaggerated Gestures – This shows chaos or disarray. Small controlled gestures show confidence and leadership qualities. E.g showing the palms of hands indicates that there is nothing to hide.

Fidgeting –  This includes playing with hair, biting lip or tapping fingers on the table. It’s a sign that one is nervous and uninteresting and can be avoided to show self assurance. In a research of 2,100 job recruiters carried out by career builder, 29% indicate fidgeting as the biggest embarrassing body language always done by job seekers.

Credit – http://alphamalelifestyle.com/wp-content/uploads/2011/05/beta-male-traits-fidgeting.jpg

Invading Personal Space – This suggests there is no respect or understanding of personal space. Approximately 3-8 feet is the proper distance to give a person especially co-workers when in a conversation. Standing too close to someone can make the person feel uneasy.

Failing to smile -This shows energy, self assurance, openness. It also makes the person you are smiling at, to smile back. A little smile is better than no smile at all, but it should not be over done.

Always smile

Credit – https://pixabay.com/static/uploads/photo/2015/08/14/15/28/smiling-888532_640.jpg

Additional Resources for Oilfield Success

Oil price is quite unique from other products because it cannot be easily substitute. Therefore, the demand will be less elastic because many consumers will buy oil regardless of how much it costs. For this situation, the oil price is called as a price inelastic of demand.

What is it – price elastic of demand?

Price elasticity of demand (PED or Ed) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price (ref Wiki https://en.wikipedia.org/wiki/Price_elasticity_of_demand)

Price electricity of demand is determined by the following equation:

Price Elasticity of Demand (PED) >=1, this means the good or service is elastic.

Price Elasticity of Demand (PED) <1, this means the good or service is inelastic.

In this discussion, we will discuss only oil price which always has PED less than 1.

The slope of demand of oil price (shown in Figure 1) is steep and it means that big change in oil price has small effect on consumption.

Figure 1  – Demand and Supply of Oil (Supply Decreases)

Conversely, the slope of supply curve is shallow as shown in Figure 2 and it illustrates that only small increase in oil price will stimulate a big increase in oil production.  When oil price raises due to high demand, oil companies will increase their level of investment on exploration and production to produce more oil. Eventually oil companies can increase their profits.  The investment has minimal effect on oil price at the beginning because oil companies take long lead time to develop new fields. Once the new fields are developed and additional supply of oil is introduced into markets, oil price will drop.

Figure 2 – Demand and Supply of Oil (Demand Decreases)

Reference Book

Thomas Sowell (2007) Basic economics: A Common Sense Guide to the Economy, New York, New York, USA: Basic Books.

Every company in any business requires sources of fund to run the business. Two ways that companies can obtain funds are Debt Funding and Equity Funding.

Debt Funding

Debt funding is to borrow money from financial instructions and the companies must pay interest and load at some stage depending on payback scheme.

Short term borrowing can come from the following sources;

• overdraft
• commercial paper

Long term borrowing can come from the following sources;

• corporate bonds
• long term loans
• mortgages

Equity Funding

Equity often means an ownership interest in a business. The companies sell shares to equity investors as financial institutions, insurance companies, individual investors, etc and these equity investors become the owner of the companies (share holders). The equity investors expect to get regular dividends and a capital gain from the company’s growth. However, there will not guaranteed outcome of the future performance of the company to their share holders. If the company goes bankrupt, the ordinary share holders will be the last group of people who will get the money back.

Most of companies utilize a mix of debt and equity to run their businesses. This is known as the capital structure of the companies. Estimation of cost of capital of company requires combination of cost of debt and cost of equity and the method is known as “Weighted Average Cost of Capital” (WACC). WACC represents a minimum return for the selection of the discount rate to evaluate oil and gas project. The big number of WACC is not a good sign because it requires more return on investment on a project to justify the project start.

WACC is calculated by this formula;

The method for calculating WACC can be expressed in the following formula:

WACC = (E÷V) × Re + (D÷V) × Rd × (1-Tc)

Weighted Average Cost Of Capital (WACC)

Where:

Re = cost of equity

Rd = cost of debt

E = market value of the firm’s equity

D = market value of the firm’s debt

V = E + D = total market value of the firm’s financing (equity and debt)

E/V = percentage of financing that is equity

D/V = percentage of financing that is debt

Tc = corporate tax rate

Ref – http://www.investopedia.com/terms/w/wacc.asp

We will go through the calculations later.

Reference Book

Thomas Sowell (2007) Basic economics: A Common Sense Guide to the Economy, New York, New York, USA: Basic Books.

Cost of Debt (COD) is an effective rate that a company will pay on it current debt. The Cost of Debt (COD) can be measured in term before or after tax COD however the after tax Cost of Debt (COD) is often used.

After tax Cost of Debt (COD) is mathematically expressed in the equation below;

Where;

D_i = individual loan amounts

r_i = interest rate of the individual loan

D_t = total loans that a company has

t = company corporate tax rate, %

Note: the interest payment on loans is classified as an operating expense and it is a tax deductible.

Example:  Determine the after tax Cost of Debt based on the given information.

James oilfield services issues 500 million $ in corporate bonds 3 years ago at 6.5 % interest. The company gets a fixed term loan of 200 million $ at 8.5% interest. Short term debt is 50 million $ at 10.0% interest. Company corporate tax rate is 35 %.

Total debt (D_t) = 500 + 200 + 50 = 750 million $

After Tax Cost of Debt (COD) = 4.72 %

Reference Book

Thomas Sowell (2007) Basic economics: A Common Sense Guide to the Economy, New York, New York, USA: Basic Books.

The Cost of Equity is an investment return which a company offers its shareholders in compensation for their income stream and taking risk of investment with a company.

Cost of Equity which is based on the constant dividend growth model is mathematically expressed here.

Cost of Equity = [Dn ÷ P] + G

Where;

D_n = dividend per share to be paid next year

P = average stock price in the year the latest dividend paid

G = expected growth of dividend on next year

A next year dividend is mathematically expressed like this.

Dn = Dc × (1 + G)

Where;

Dc = dividend per share for present year

Therefore,

Cost of Equity = [Dc × (1 + G)] ÷ P + G

The Cost of Equity is tricky to determine since it depends on an estimate of how the company will perform in the future. The best way to estimate of the company dividend growth (G) is to study past financial performance overall economic trend and other factors. It becomes a judgment call for each individual investor to take a calculated risk on “G”.

Example: Determine cost of equity based on the given information.

James oilfield services Ltd has a share price of 50$/share and this year the company pay investors a dividend of 1.95 $/share. The company has a strong portfolio in term of work in the future with several oil companies. The company expected dividend growth rate for next year is 10%.

Cost of Equity = [Dc × (1 + G)] ÷ P + G

Where;

Dc = 1.95 $/share

G = 10 %

P = 50 $/share

Cost of Equity = [1.95 × (1 + 0. 1)] ÷ 50 + 0.1

Cost of Equity = 0.1429 (14.29 %)

Reference Book

Thomas Sowell (2007) Basic economics: A Common Sense Guide to the Economy, New York, New York, USA: Basic Books.

The basic concept of the Earth structure and Plate Tectonic is good to know for drilling oil and gas wells.

The image below (Figure 1) shows the Earth structure. There are tree compositional layers which are curst, mantel and core. At the center of the Earth, the center core is a solid iron core which is surrounded by a liquid iron core. Core has a range between 2,900 – 6,370 km from surface. Mantel which has its range between 100 – 2,900 km consists of upper and lower mantel. Lower mantle (Meshosphere) is hot but strong due to high pressure however upper mantle is weak, hot and molten. Crust is a surface of the Earth and a majority of the Earth crust is made up of iron, silicon, oxygen and magnesium.

Figure 1 – Earth Structure

The lithosphere is the solid outer section of Earth, which includes Earth’s crust and the upper mantle.

Plate Tectonics

Plate Tectonics was initially introduced in 1960’s. The concept of the Plate Tectonics is the division of Earth into 12 plates and each plate moves as distinct units.

Figure 2 – Plate Tectonics

The plates floats on the partially molten asthenosphere and the plates can be moved (“Plate Movement”) due to convection currents within the asthenosphere. The direction of plate movement is shown in Figure 3.

Figure 3 – Plate Movement

The mechanism of plate movement is thought to be caused by convection currents in the asthenosphere. Hot magma which has less density slowly rises to surface and when it reaches the lithosphere, it becomes to cool down, therefore its density increases and it will sink. Rising of convection currents will move the Earth plate apart and this process is called “divergent”. On the other hand, sinking convection currents will move the Earth plate together which is called “convergent”.

Figure 4 – Convection Currents and Plate Movement Theories

The margins between the Earth plates are classified into 3 types which are Convergent, Divergent and Transform. The plates are constantly moving at very slow rate, therefore, the plates are regularly consumed and produced over time.

References 

Richard C. Selley, 2014. Elements of Petroleum Geology, Third Edition. 3 Edition. Academic Press.

Norman J. Hyne, 2012. Nontechnical Guide to Petroleum Geology, Exploration, Drilling & Production, 3rd Ed.. 3 Edition. PennWell Corp.

Richard C. Selley, 1997. Elements of Petroleum Geology, Second Edition. 2 Edition. Academic Press.

Anasofiapaixao, (2013), Earth-cutaway-schematic-english [ONLINE]. Available at: https://commons.wikimedia.org/wiki/File:Earth-cutaway-schematic-english.svg [Accessed 17 November 15].

Map of earth’s tectonic plates – type of boundary and direction “G115 – Introduction to Oceanography.” G115 – Introduction to Oceanography. The Trustees of Indiana University, n.d. Web. 10 Apr. 2015.  <http://ffden-2.phys.uaf.edu/webproj/212_spring_2015/Ariel_Ellison/Ariel_Ellison/images1/earth_plates_lg.jpg>.

Surachit, (2007), Shows how ocean ridges are formed, lithosphere subducted at trenches; good for understanding plate tectonics. [ONLINE]. Available at: https://commons.wikimedia.org/wiki/File:Oceanic_spreading.svg [Accessed 17 November 15].

Weighted Average Cost Of Capital (WACC) is a calculation of company cost of capital which is based on a weighted average between debt and equity. Its mathematical expression is listed below;

WACC represents the minimum return on investment that can be a base line for a company to make a decision for new projects. Generally, companies will accept only projects that have returns more than WACC.

This example will use the previous information from Cost of Debt and Cost of Equity article to demonstrate WACC calculation.

Information

James oilfield services issues 500 million $ in corporate bonds 3 years ago at 6.5 % interest. The company gets a fixed term loan of 200 million $ at 8.5% interest. Short term debt is 50 million $ at 10.0% interest. Company corporate tax rate is 35 %. The company has a share price of 50$/share and this year the company pay investors a dividend of 1.95 $/share. The company has a strong portfolio in term of work in the future with several oil companies. The company expected dividend growth rate for next year is 10%. The company has a total of 30 million shares.

Total debt = 500 + 200 + 50 = 750 million $

After Tax Cost of Debt (COD) = 4.72 %

Cost of Equity = [Dc × (1 + G)] ÷ P + G

Where;

Dc = 1.95 $/share

G = 10 %

P = 50 $/share

Cost of Equity = [1.95 × (1 + 0. 1)] ÷ 50 + 0.1

Cost of Equity = 0.1429 (14.29 %)

Total Equity = 30 x 50 = 1,500 million $

Total Equity + Total Debt = 750 + 1,500 = 2,250 million $

WACC =11.1%

Reference Book

Thomas Sowell (2007) Basic economics: A Common Sense Guide to the Economy, New York, New York, USA: Basic Books.

Every company is required to submit a financial report every year to the government, potential investors, and shareholders to report the financial health of the company and its potential to grow in the future. This section will describe all about a balance sheet, a profit and loss account and some key numbers that you can use to assess a company situation.

Balance Sheet

A balance sheet is a legal document showing the quantity of a company’s assets and liabilities and it is usually issued at the end of a company’s financial year. However, companies in the stock markets are required to send their balance sheets to the public every quarter. This may depend on the existing regulations of particular countries in which the companies operate.

In a balance sheet, a company’s assets are equal to the summation of a company’s liability and a company’s equity.

Asset = Liabilities + Equity

Figure 1 – Example of Balance Sheet

According to Figure 1, Total assets in 2014 are 79,653 million $ equates to the summation of liabilities (49,761 million $) and equity (29,892 million $).

Please be reminded that the balance sheet is a capture of a company’s financial status at a reporting time and it may change dramatically due to several factors. It is the risk of investors to evaluate and estimate a company’s future monetary health based on this document alone.

 Assets

Assets are divided into two types, which are non-current assets and current assets.

Current assets: They are assets of a company that can reasonably be expected to be converted into cash within one year from a date shown in a balance sheet. The current assets of CG Oil Company in 2014 are 32,270 million $.

Non-current assets: They are assets of a company that are not likely to turn into cash within one year from a balance sheet date. It can be known as “long-term assets.”  The non-current assets of CG Oil Company in 2014 are 47,383 million $.

Total assets (79,653 million $) = Current assets (32,270 million $) + Non-current assets (47,383 million $)

Liability

A liability means a company’s legal debts or obligations occurred when the company does its business. Two types of liabilities are current liabilities and non-current liabilities.

Current liabilities: They are debts payable within one year. The current liabilities of CG Oil Company in 2014 are 36,843 million $.

Non-current liabilities: They are debts payable in a longer period than one year. The non-current liabilities of CG Oil Company in 2014 are 12,918 million $.

Total liabilities (49,761 million $)) = Current liabilities (36,843 million $) + Non-current liabilities (12,918 million $)

Equity

Equity is the value of assets after paying all liabilities of a company. It has a relationship like this:

Equity = Assets – Liabilities

From this example, CG Oil Company has a total equity of 29,892 million $.

All of the figures that you see from a balance sheet may not represent how healthy a company is. The best way to verify a financial situation of a company is to use some accounting factors. We will describe this in a later article.

Profit and Loss Account

A profit and loss account is a financial statement that summarizes revenues, costs and expenses occurred during a specific period of time. The profit and loss account is more dynamic than the balance sheet because it shows where the money comes and goes in a company during a given period. Figure 2 shows the profit and loss account of CG Oil Company in 2014.

Figure 2 – Profit and Loss Account

Reference Book

Thomas Sowell (2007) Basic economics: A Common Sense Guide to the Economy, New York, New York, USA: Basic Books.

In order to evaluate a company’s financial health, there are some important ratios which will help investors get a clearer picture of companies.

Current Ratio – It is the current assets divided by the current liabilities in a company. This measures the ability of a company to pay current its liabilities over the next 12 months. Quick ratio should be at least more than 1. If its value is less than 1, it means that a company has insufficient cash to meet short term debts.

Current Ratio = Current Assets ÷ Current Liabilities

Quick Ratio – It can be known as an “Acid Test.” It is the current assets subtracted by the current stock and divided by the current liabilities in a company. This value indicates a company’s short term liquidity. It can tell a company if it has the ability to meet its short-term obligations with its most liquid assets.

Quick Ratio = (Current Assets – Stock in Inventory) ÷ Current Liabilities

Typically, a quick ratio should be more than 1 for strong financial companies. However, for an oil company, stock in a company is oil, which is a very high liquidity asset. It may be acceptable if the quick ratio is below 1.

Debt to Equity Ratio – There are several meanings to determine a debt to equity ratio (http://accounting-simplified.com/financial/ratio-analysis/debt-to-equity.html). In this topic, the debt to equity ratio is the total financial debt divided by the equity of a company.

 Debt to Equity Ratio = Total Financial Debt ÷ Equity

It is the value showing how much a company utilizes a financial leverage. Debt financing often yields a good investment return because the cost of debt is cheaper than the cost of equity. Nevertheless, high debt to equity ratio increases risk of a company because a company has to pay high interest. If the conomic state goes down and/or an interest increases, a company with high debt will have a bad financial situation.

Debt to Ratio – It is a ratio of debt to total assets and it can be interpreted as the proportion of a company’s assets that are financed by debt. In this case, we will use total financial debt for this calculation.

Debt Ratio = Total Financial Debt ÷ Total Asset

Profit Margin – It is a ratio of profit to turnover (Sales). In a profit and loss account, there are 3 profits (Profit before interest and taxation (PBIT), Profit before tax, and Profit after Tax). The best figure to represent a company’s profit margin is Profit before interest and taxation (PBIT) because it directly reflects a business performance.

Profit Margin = Profit before interest and taxation (PBIT) ÷ Turnover (Sales)

Return on Asset (ROA) – This is a ratio of PBIT to total assets of a company and this value indicates the efficiency of a company to make a profit on a company’s assets.

Return on Asset (ROA) = Profit before interest and taxation (PBIT) ÷ Total Assets

Earnings Per Share (EPS) -This is a ratio of net earnings to total shares in a company.

Earnings Per Share (EPS) = Profit after Tax ÷ Total shares

Dividend Cover – it is a number showing how many times that a company can pay dividends to investors from the profits earned during an accounting period.

Dividend Cover = Earnings Per Share (EPS) ÷ Annual Dividend Per Share

Reference Book

Thomas Sowell (2007) Basic economics: A Common Sense Guide to the Economy, New York, New York, USA: Basic Books.

After learning about key financial ratio from the previous article (Key Financial Ratios To Evaluate Companies
), this article will show an example based on the financial statements of CG Oil Company in 2014.

Figure 1 and Figure 2 are a company balance sheet and profit and loss account, respectively.

Figure 1 – CG Oil Company Balance Sheet

Figure 2 – CG Oil Company Profit and Loss

Company has a total of 10,000 million shares.

Company plans to pay a dividend of 0.4 $/share.

These are calculations of the important financial ratios.

Current Ratio = Current Assets ÷ Current Liabilities

Current Ratio = 32,270 ÷ 36,843

Current Ratio = 0.876

This is not a good sign for this company since the current ratio is 0.875.

Quick Ratio = (Current Assets – Stock in Inventory) ÷ Current Liabilities

Quick Ratio = (32,270 – 8,745) ÷ 36,843

Quick Ratio = 0.639

Debt to Equity Ratio = Total Financial Debt ÷ Equity

Debt to Equity Ratio = (2,650 + 3,458) ÷ 29,892

Debt to Equity Ratio = 20.43%

Debt Ratio = Total Financial Debt ÷ Total Asset

Debt Ratio = (2,650 + 3,458) ÷ 79,653

Debt Ratio = 7.67 %

Profit Margin = Profit before interest and taxation (PBIT) ÷ Turnover (Sales)

Profit Margin = 18,627 ÷ 87,521

Profit Margin = 21.28%

You may need to compare it to other companies in the same business. This is a relative value. More profit margin = good.

Return on Asset (ROA) = Profit before interest and taxation (PBIT) ÷ Total Assets

Return on Asset (ROA) = 18,627 ÷ 79,653

Return on Asset (ROA) = 23.4%

Earnings Per Share (EPS) = Profit after Tax ÷ Total shares

Earnings Per Share (EPS) = 10,932÷ 10,000

Earnings Per Share (EPS) = 1.0932 $/share

Dividend Cover = Earnings Per Share (EPS) ÷ Annual Dividend Per Share

Dividend Cover = 1.0932 ÷ 0.4

Dividend Cover = 2.733

Reference Book

Thomas Sowell (2007) Basic economics: A Common Sense Guide to the Economy, New York, New York, USA: Basic Books.

Shell Offshore 101 is one of the excellent educational documents which help educate people to understand about the upstream business. All documents are written in simple English with a lot of images which are extremely useful for everyone, especially new people.

In this series, there are nice chapters listed below;

Table of Contents

Chapter 1 – The Origins of Oil and Gas

(Courtesy of Shell)

Chapter 2 – Oil and Gas Offshore Exploration

(Courtesy of Shell)

Chapter 3 – Oil and Gas Offshore Production

(Courtesy of Shell)

Chapter 4 – Transporting Oil and Gas

(Courtesy of Shell)

Chapter 5 – Shell in Offshore Alaska

(Courtesy of Shell)

Chapter 6 – Exploration and the Environment

(Courtesy of Shell)

Chapter 7 – Co-Existing with Subsistence Cultures

(Courtesy of Shell)

Chapter 8 – Offshore Development Benefits

(Courtesy of Shell)

Chapter 9 – How Shell Works

(Courtesy of Shell)

Download Here

Table of Contents
Chapter 1 – The Origins of Oil and Gas
Chapter 2 – Oil and Gas Offshore Exploration
Chapter 3 – Oil and Gas Offshore Production
Chapter 4 – Transporting Oil and Gas
Chapter 5 – Shell in Offshore Alaska
Chapter 6 – Exploration and the Environment
Chapter 7 – Co-Existing with Subsistence Cultures
Chapter 8 – Offshore Development Benefits
Chapter 9 – How Shell Works

After learning about the Earth’s structure and Plate Tectonics, it is known that the Earth’s plates move relative to nearby plates; therefore this will result in high geological activities such as volcanic eruptions and earthquakes at the plate margins. It is also possible to have geological activities in the middle of plates, but it is quite uncommon. There are three type of plate margins; convergent, divergent and transform.

Divergent Margins

This happens when the Earth’s plates are moving apart and a new lithosphere is created (Figure 1).  In the oceans, the divergent process has produced the mid-ocean ridge system, which can also be described as a global range of underwater mountains. There are several ocean ridges such as the Juan de Fuca Ridge, the Mid-Atlantic Ridge, the Galapagos Rise and the East Pacific Rise. On land, the divergent margins create rift valleys such as the Red Sea and East African Rifts (Figure 2).

Figure 1 – Divergent Margins

(Ref Image: http://wiki.aapg.org/images/3/31/Div_boundary-ivana.jpg)

Figure 2 – East Africa Rift

(Ref Image: http://www.geo.arizona.edu/geo5xx/geos577/projects/mooney/images/usgs.gif)

Convergent Margins

The convergent margins happen when two plates are pushed together. The heavier plate will go below the lighter plate; therefore, a subduction zone is created. Heavier oceanic crush normally resonates below the lighter, thicker continental crust. Geological features associated with subduction are trench formation, earthquake, mountain building and volcanism. Images in Figure 3, Figure 4 and Figure 5 demonstrate convergent margins.

Figure 3 – Ocean – Continental Convergence

(Ref Image: https://upload.wikimedia.org/wikipedia/commons/thumb/2/29/Active_Margin.svg/500px-Active_Margin.svg.png)

Figure 4 – Continental-continental convergence

(Ref Image:https://upload.wikimedia.org/wikipedia/commons/8/83/Continental-continental_convergence_Fig21contcont.gif)

Figure 5 – Ocean-ocean convergence

(Ref Image:https://upload.wikimedia.org/wikipedia/commons/0/0c/Oceanic-oceanic_convergence_Fig21oceanocean.gif)

Transform Faults

Transform faults, also known as conservative plate boundary, happen when two Earth plates slide past one another. The movement is usually irregular and non-uniform, but it happens rapidly as a series of slip faults and the transform faults will not create or destroy a lithosphere. However, sudden movement of slip faults produce earthquakes along the faults. Figure 6 shows an illustration of transform faults.

Figure 6 – Transform Faults

http://www.indiana.edu/~tecton/notes/lecture_4-2_transform_faults_files/slide0021_image021.gif

References 

Richard C. Selley, 2014. Elements of Petroleum Geology, Third Edition. 3 Edition. Academic Press.

Norman J. Hyne, 2012. Nontechnical Guide to Petroleum Geology, Exploration, Drilling & Production, 3rd Ed.. 3 Edition. PennWell Corp.

Richard C. Selley, 1997. Elements of Petroleum Geology, Second Edition. 2 Edition. Academic Press.

Understanding basic rock types gives you more ideas on how each type of rock is formed and this is a good basic for understanding geology.

Rocks can be classified into three main types which are igneous rocks, sedimentary rocks and metamorphic rocks. Figure 1 shows the relationship between the three main rock types.

Figure 1 – Rock Cycle

(Ref Image:  http://www.geolsoc.org.uk/ks3/webdav/site/GSL/shared/images/education_and_careers/RockCycle/Rock%20Cycle%20all%20labels.jpg)

Igneous Rocks

Igneous rocks are the most abundant type of rock on the Earth because it makes up about 70% of all rocks. Minerals such as quartz, plagioclase feldspar, pyroxene and olivine are important types of igneous rocks. Figure 3 illustrates minerals found in common igneous rocks.

Figure 2  – Minerals in Common Igneous Rocks.

(Ref Image:  https://upload.wikimedia.org/wikipedia/commons/thumb/f/f4/Mineralogy_igneous_rocks_EN.svg/640px-Mineralogy_igneous_rocks_EN.svg.png)

Igneous rocks are formed by the cooling and solidification of hot molten magma from the mantle and it can be categorized as intrusive (plutonic) or extrusive (volcanic). Intrusive igneous rocks are formed when magma from the mantle moves up through deep, narrow cracks in the Earth. Intrusive igneous rocks cool very slowly, so crystals have time to develop. Their crystal growth is large.

On the other hand, extrusive igneous rocks are formed when hot magma reaches the surface of the Earth and it is cooled down very fast. Extrusive igneous rocks have fine crystals because they don’t have time to develop the large structures like the intrusive igneous rocks. For instant, when lava from a volcano erupts and reaches the surface, it will be rapidly cooled down. With an extremely fast cool down process, the atoms in hot magma don’t have time to create crystalline structures and structures like glass or minaraloids are formed. The Figure 3 illustrates about intrusive and extrusive igneous rock formations.

Figure 3 – Intrusive and Extrusive Igneous Rock Sources

(Ref Image: http://static1.squarespace.com/static/51bbeba5e4b0510af19f26f7/t/51dc5285e4b083e539ef0117/1373393552981/extrusive-and-intrusive-rocks.jpg?format=500w)

Sedimentary Rocks

 Sedimentary rocks are formed when igneous, metamorphic or pre-existing sedimentary rocks are eroded by external forces such as wind, rain, snow and glaciations. Rock particles are always transferred from their original regions and deposited in low-laying areas. Crystals of sedimentary rocks tend to be a rounded shaped because of abrasion while being transported.  Figure 4 demonstrates a rock sedimentation process.

It is possible to have rocks which are half-way between igneous and sedimentary rocks. This case happens when hot lava is thrown into the air and spread around the area instead of flowing from a volcano.

Biogenic chemical sediments are formed from the accumulation of plants and animals in sedimentary areas and organic material within biogenic sediment has a possibility to be transformed into petroleum if conditions and chemical conditions are right. This is the reason why a majority of petroleum fields are discovered in areas of sedimentary rocks.

Figure 4 – Rock sedimentation

(Ref: http://www.goodrichscience.com/uploads/3/1/1/2/31129331/7317589_orig.gif)

Table 1 shows size of particle, sedimentary and rock type.

Table 1 – Clastic Particle Definitions

(Ref Image:  http://cramster-image.s3.amazonaws.com/definitions/9780071471091-t0137-01.jpg)

Metamorphic

Metamorphic rocks are formed when other rocks (igneous, sedimentary or pre-existing metamorphic rocks) are changed by pressure and heat due to hot molten rock intrusion or deep burial in the Earth.

This can be seen in subduction zones where rocks on the lithosphere plate sink into mantle underneath other plates. Pressure and temperate transform existing rocks into metamorphic rocks. Metamorphic rocks can be classified by type and grade of metamorphism. There are several factors contributing to the final result of metamorphism, for example temperature, pressure, chemical reactivity, stress across zone of metamorphism and time.

Metamorphism types are classified by the physical conditions during metamorphism. Regional metamorphism  commonly occurs in the continental crust and it may happen over a large area. This type of metamorphism involves a high differential stress level, as well as a high magnitude of mechanical deformation and chemical recrystallisation.

Contact metamorphism happens in areas close to the intrusion of hot magma, which creates chemical recrystallization.Cataclastic, or dynamic, metamorphism can be found along faults and their movement of tectonic creates rock deformation and high differential stresses. The rock has a pulverized texture due to fractures as the faults move. Most of the time the Cataclastic metamorphism rocks act as a fluid barrier between rocks. This is the reason why faults can trap oil or gas.

Burial metamorphism normally happens in very deep section of sedimentary basin rocks where the temperature is very high (300 C). Water in sedimentary rock accelerates the chemical recrystallization process.Hydrothermal metamorphism typically occurs because of the reactions of chemicals between heated rocks and fluids. This is usually associated with mid-ocean ridges. Figure 5 is a diagram of metamorphic facies with a common tectonic setting.

Figure 5 – Metamorphic Facies

(Ref Image: https://upload.wikimedia.org/wikipedia/commons/f/fe/Metamorphic_Facies.jpg)

Note – for petroleum exploration and production, we will focus on sedimentary rocks.

References 

Richard C. Selley, 2014. Elements of Petroleum Geology, Third Edition. 3 Edition. Academic Press.

Norman J. Hyne, 2012. Nontechnical Guide to Petroleum Geology, Exploration, Drilling & Production, 3rd Ed.. 3 Edition. PennWell Corp.

Richard C. Selley, 1997. Elements of Petroleum Geology, Second Edition. 2 Edition. Academic Press.