Advice to Undergraduate Student on Petroleum Engineering

Penn State UniversityRecently I was approached by a Penn State student (via Career Services) as an Alumni, for some advice on job prospects within the Oil and Gas industry. He asked about stability of the oil and gas industry and whether a petroleum engineering degree would be a versatile asset, or too specialised of a degree.

Here was my advice:


If you are serious about petroleum engineering, you should understand that the oil price is cyclical. As the oil price goes up, the industry booms and as the oil price comes back down, the industry shrinks. I don’t personally have a PE degree, however I have worked in the oil industry for the last 10 years or so in various roles. I interviewed for my first job while the oil price was high, and then by the time I was supposed to start the oil price had crashed – they tried to delay my start date , but I was able to talk them out of it. And then I watched many people get laid off during my first few months on the job.

But things got busy when the oil price rose and things were great. The last 10 years have been an amazing time to be in oil – I left to become an Investment Analyst in the Finance and Banking industry but still covering Oil and Gas as well as other alternative energies. I can say that in the next 50 years I expect many new forms of transportation utilizing alternative fuels, as well as power stations moving away from oil – but gas will still be important. Oil may become less important.

However, the skills you learn in Petroleum Engineering can be applied in other ways. As long as you are intelligent and flexible you will be able to find an interesting job. As well, once you get a few years experience you will start becoming more marketable in other areas. Remember – related areas can include IT, Banking, Environmental applications, and Management Consulting – so you are not locked in to working at an oil company.

Do I think you will be unemployed when you graduate? I have no idea. Have you done any internships? Have you taken advantage of the opportunity to work for an associated research centre at your campus? Have you started thinking about writing a thesis – try to make sure it is applied and perhaps even sponsored by an oil company? Have you entered any engineering competitions sponsored by oil companies?

The above are all ways to start making contacts in your industry or companies of choice. They are also good ways to understand if you have chosen the right major for yourself.

Good Luck and let me know if you have further questions


Cycles and Strategies in Oil Investment – Part 1: Forecasting the Oil price

The investable universe of oil and gas stocks can appear large at first, but the field can be narrowed significantly through an understanding of the major drivers of performance. Stocks which make it through this initial screening can then be subjected to more in-depth analysis (Figure 1).



The oil stocks which trade on the ASX show a strong correlation to the oil price, whether looking at TAPIS in AUD, WTI in USD, or Brent in either currency (see Table 1). As a result, identifying when a break from correlation should occur is critical when timing investment decisions and can contribute significantly to alpha.




Forecasting the oil price requires an examination of demand and supply in the oil market. Other important drivers include the excess production capacity, global inventories, the marginal cost curve, refinery efficiency and utilisation, speculative investment flows, and political risk. Past up cycles have been driven by political risk and spare capacity, but only when GDP was growing and demand was strong (see Figure 2). The trigger on oil price to recover from down cycles has always been positive demand growth based on GDP growth (see Figure 3).

oil-price-key-catalystsFIGURE 2: OIL PRICE AND KEY CATALYSTS

Equation 1: (%Δ GDP – 2%) = %Δ in global oil demand

global-demand-relative-gdpFIGURE 3: GLOBAL DEMAND RELATIVE TO GDP

A review of supply/demand balance indicates that the call on OPEC crude will be ~-2.6 mmbbl/d in 2009 including Natural Gas Liquids (NGLs), and OPEC’s April output was ~ -2.9 mmbbl/d compared to 2008. Therefore stocks should begin to decline over the next quarters. This will provide fundamental support to the oil price which is unsupported now at current stock levels (see Figure 4), especially leading in to the US driving season which appears to be strong this year.

days-of-stock-cover-vs-oil-priceFIGURE 4: DAYS OF STOCK COVER VS. OIL PRICE

Days of OECD stock cover still stand at ~61 days, with OPEC indicating a target of 52 days (equivalent to $75 oil price in OPEC estimation). There is an excess 405 mmbbl (Million Barrels) of stock at present demand levels. At a -0.3 mmbbl/d supply deficit, it will take several years to reach this target without demand increasing. However, demand is expected to recover through the next quarters, and the amount of demand recovery will determine how fast the extra stock will be used.

Coming up next month
Cycles and Strategies in Oil Investment – Part 2: Leverage to the Oils Price

Fundamental Analysis says the oil price should be lower – but speculative investment is keeping it high, why?

PlattsOilNYMEX June crude settles up $2.08/b at $53.20/b Friday despite staid equities, dollar. June RBOB, heating oil both settled up 5.16 cents

The oil price support continues to fascinate me given the current demand and days of stock cover.  I expected this quarter to be a very low demand cover leading into driving season, and it has been.  At the same time, inventories are full , so while governments in the past have used the 2nd quarter to refill reserves, there is no need for them to do so now.  I expected prices to fall, especially given the fact that driving miles are lower than usual for this time of year.  Refiners have been doing a good job of maintaining reasonable utilization rates and therefore gasoline stocks are below the 5 year average, providing support for the price.  But discussions with traders recently seem to suggest that even that isn’t enough to support a >$50 oil price.

Perhaps the speculative argument finally applies.  An expected weakening of the US Dollar is pushing investors into ‘real’ investments – commodities.  And gold is much more expensive than oil currently, so oil is benefitting.  It can only be at times when fundamentals don’t support price that the speculative investment effect becomes obvious, and this could be one of those times.  I will be interested to see what happens over the next few months – especially as we start to see how badly the recession affects the driving miles of the US.  I am betting on the oil price range trading between $40 and $60 – but I have a colleague willing to take me on and say the oil price gets near $100 again over the next few months.

Excellence in Oil & Gas 2009

Excellence in Oil and Gas

I have been invited to give a keynote presentation at the Excellence in Oil & Gas 2009 conference. I will be discussing “Oil and Gas Investment Outlook 2009: Cycles and Strategies”.

The Excellence in Oil & Gas investor congress showcases the Australian oil and gas industry to the investment community who are located here in Australia as well as international investors from the likes of China, India and Singapore.

For the full speaker line up, visit the Excellence in Oil & Gas website


See my conference presentation here: Investing in Oil and Gas – Strategies through the Oil Price Cycle

Restaurant Pricing and Customer Experience

In 2007, I went to a restaurant in Sydney for a Cajun meal.  New Orleans cajun/creole type food is rare in Sydney, so I was looking forward to the experience.  The restaurant was fairly new and had done a good job using the local restaurant review websites to increase awareness and provide coupons.  We arrived to the restaurant and noticed people had roses on their tables and most seem to be there for special occasions.  There was even a piano player in the eating area.  The whole atmosphere was great and the decor was cool.  We started looking through the menu and noticed good food, good drinks, and a footnote.

The footnote got our attention as it mentioned that we should ask the waiter to explain the pricing scheme.  Further pages had notes explaining the ordering rules and surcharges.  For example, if a plate was shared, there would be a 30% surcharge.  Also, if only mains were ordered and not an entree or a dessert, a surcharge would apply at the manager’s discretion.  On certain nights, there was a 10% entertainment surcharge.  Yes, we started getting confused and discussing whether it was cheaper to be surcharged for sharing a dessert or to order two desserts and throw one away.

How awful that a night that was meant to be enjoyed turned in to a night discussing a new style of restaurant pricing.  The owner of the restaurant overheard our discussions and came over for more conversation.  His belief was that this new pricing scheme was better for customers as they could see what they were paying for.  He was also of the mind set that people should have food left on their plate because they just were so full, therefore sharing was unacceptable (and a drain on owner resources).

Well, my feeling is, if I don’t see it , I won’t notice it.  Incorporate all those charges in to the price of the meal.  And, if we are great customers and order a lot of drinks, then comp us a bottle of wine or give us a 10% discount.  Our goodwill will go a long way to word of mouth and repeat business.  As it stands now, the restaurant is doing everything right with sending follow up coupons for birthdays, advertising, and having roses and wine for anniversary’s complimentary.

And yet, it’s empty.  I guess that goes a long way to say that people aren’t quite ready to pay for all the costs that go in to a night out.  Let me enjoy my night and make my dish price high and I will have no issue paying the bill.  Hit me with surcharges I am not used to seeing and I start to get annoyed.  What do you think?  Is this an innovative pricing structure or the demise of customer experience?