With the ever changing geopolitical, marketing, economic, social and environmental changes, opportunities to earn a profit at various oil and gas value chain linkages starting from exploration and production to transportation, to refining and to marketing have been changing rapidly and unpredictably. This change has been the case especially after the first two oil shocks. Before then, it was readily accepted that vertically integrated oil companies generated maximum profits and refining, marketing and transportation sectors were not expected to earn much. However, once OPEC got control of international oil industry from the multinationals, oil industry is trying to maximize profits all along its value chain commensurate with the risks involved. In Graph-1, costs and values associated with different oil value chain sectors are shown for three different oil prices [GG1].
It should not come as a surprise that as crude prices increase, it is the upstream sector which is able to earn a higher profit. It is also the upstream where there is maximum risk involved in comparison to other sectors. These values are based on average US and European markets. [GG2]
The article analyses 11 different factors which have given rise to a New Era in the oil, gas and power value creation.[GG3]

1) Jump in future oil price band from $20 -30/b to above $80/b
Before the recent rise and fall of oil prices, most of the long-term oil price forecasts were predicting that they will remain in a narrow band of $25 to $35 per barrel. Though oil prices have fallen close to this band in recent months, most are not expecting them to remain at this level for more than three to five years. IEA's World Energy Outlook is predicting oil prices to reach $120/b by 2030. OPEC which used to be happy with oil prices around $30/b in early 2000s, wants oil prices above $75 per barrel. There are some oil economists who are even predicting more than $200/b before 2030. Oil price forecast has always been a difficult or even an impossible task for oil industry. But in the future years this will become even more complex while bidding for projects and competing with national oil companies from China and India among others. They are prepared to pay higher prices to get access to petroleum reserves to ensure energy security.

2) Price setting power has shifted from OPEC to Futures Market
Factors behind the crude price development during the second and third oil price shocks (see Graph-3 and Graph-4) show how the power to set oil pricing has moved from OPEC to the futures market. During the second oil shock, crude prices after reaching a high of $36/b, started to fall as a result of OPEC's failure to discipline its members. OPEC cartel could not remove excess production. Saudi Arabia took the brunt of reducing production in the beginning and took the role of balancing supply and demand. When Saudis lost too much market share this way, they increased their production by selling their production based on netback pricing. This caused a collapse of the oil price in the mid-1980s. However during the third oil shock of 2003-08[GG4] , there was really no shortage of oil. For most period oil was reasonably well- balanced with surplus capacity exceeding 3 to 3.5 million bd. [GG5] Unlike the case of gas price speculation by Amaranth[GG6], Hedge Funds (which subsequently had to sell its energy department after losing $6.3 billion), there is no conclusive proof to show that it is speculation which was behind the rise and fall of oil price during the third oil shock. However, large amounts of funds entering the oil futures trading with the expectation of ever rising prices and the desire to make a quick buck via speculative positions caused the price of oil to see historical highs in real terms.
When the price of a commodity is controlled more by speculators and not by market fundamentals, refining and marketing operations become even more complex and risky. The futures market provides a useful price discovery mechanism and allows for hedging price risk. Speculators play an important part of this role. In 2008, however, we have seen that the market can be led astray when speculative positions, especially those by non-traditional players and sovereign funds, dominate the trading. For many smaller industry participants, it is difficult to manage these wild fluctuations in the market. It could be necessary to control speculative trading better in order for the futures market to start serving the industry participants once again.

3) Political reality of carbon regulation to reduce global warming
Oil companies always had to deal with the environmental and health issues with increasing cost burden since the 1970s. In the 1970s, there were regulations on oil companies to reduce sulphur and lead levels in petroleum products and also to reduce sulphur levels in refinery emissions. Later in the 1980s, because of possible impact of carcinogenic emissions in auto sector from using petroleum products, gasoline had to be reformulated. Gasoline manufacturing today is very different than from what it was just 20 years back. Similarly, power plants had to comply with many regulations on pollutants such as SO2, NOx, particulate matter, mercury and so on. However, there was greater certainty and acceptance of the need to make investments to comply with environmental regulations.
But the current topic of global warming caused by greenhouse gases and its impact on climate change is very controversial. Although it is often presented as though the scientific community is fully united that global warming is caused mainly by human activities; many scientists, increasing in numbers and visibility, are challenging fundamental premises of the IPCC findings and policies that are being proposed to address the global warming problem. The political debate, however, has taken a life of its own; many OECD governments, including now that of the U.S, either have or are in the process of developing carbon regulations. The developing world will probably not join any such efforts, or only do so in words but not in action. After all, many European countries did not meet their Kyoto targets even though they ratified the treaty. Nevertheless, increasingly common and possibly stronger carbon regulations have huge implications for the energy industry in general.

4) Shift in energy demand growth from developed countries to developing countries
World oil consumption is predicted to go up from current 85 million barrels per day (MMBD) to 106 MMBD by 2030. While China, India and the Middle East account for most of this increase, oil consumption is expected to decline in industrialised countries as shown in Graph-5. While in 1980, OECD oil consumption accounted for 64 per cent, it will account only for 41 per cent by 2030. Thus it is the developing countries which will play a greater role in imports of oil. Since national oil companies are more dominant in these countries that are likely to have oil supplies based more on geopolitics and less on economics, it is bound to have impact [GG7] on international oil trade. In the future increasing amount of oil trading may be based more on long term and less on spot basis. Combined with the resentment and frustration expressed by developing countries like India with the ill effects of speculation in the futures market, we may expect pressure[GG8] to reform these markets.

5) Power has shifted from IOCs to NOCs
In a surprising development, IEA has accepted the possibility of conventional oil peaking before 2030. During 1980 to 2007, despite the prediction of non-OPEC oil production reaching a plateau or even declining, it continued to increase. However in the future it will be again OPEC which will be in the driver's seat meeting the increasing demand for world oil. OPEC is expected to produce 52.9 MMBD which is an increase of 16.9 MMBD above the current level. Investment decisions to increase oil and gas production in OPEC will be made mostly by National oil companies (NOCs) in the future. Unlike the decision making process of International oil companies (IOCs) which try to maximize profit for their shareholders, NOC decision will be influenced more by political considerations. Even if there are more than adequate proven reserves, NOCs may fail to develop the needed production capacity in a timely manner to balance world oil demand and supply as was done during the period when IOCs were in control of the oil market.
According to IEA's WEO2008, world oil, gas and power industry will need about $26 trillion of investment. Out of this $12 trillion will be for oil and gas sectors. More than 50 per cent of these capital needs will be required by NOCs. Will they have the capacity to raise that kind of huge capital considering the strong tendency on the part of the governments to divert resources for social causes? Pemex in Mexico, PDVSA in Venezuela, NNPC in Nigeria, and ONGC in India are some good examples of NOCs which have suffered because of lack of capital. Chinese NOCs look like exceptions to this rule as they have been able to find the needed capital to expand their operations all over the world.

6) Greater uncertainty in composition of refined products
Ever since the first two oil shocks, shares of transportation products like gasoline, diesel and jet fuel (in some places LPG also) have been increasing while fuel oil, naphtha and diesel used for power generation has been declining. Most energy economists are predicting this trend to continue in the future. But there are some great uncertainties. Hybrid, plug-in and fully electric powered auto cars coming into the market, may change the composition of refined products. Many countries have also adapted a policy of greater use of biofuels – ethanol from corn, sugarcane or other cellulosic feedstock and biodiesel – to replace petroleum products to ameliorate the impact of global warming and also for energy security. In recent years there has been greater controversy about the real contribution to reduce greenhouse gases through the use of biofuels and there have been several unintended consequences also. Even more troubling is the possible impact of biofuels on food prices and water resources.
In many developing countries as they start replacing fire wood by LPG, their composition of refined products will be vastly different from that of the developed world. For example, in India demand for gasoline is less than 7 per cent of total petroleum products while demand for LPG is more than 9 per cent; and demand for LPG is increasing faster than that for gasoline. The same is true for many developing countries where LPG is becoming the preferred cooking fuel. This phenomenon has not been fully appreciated yet.

7) Increasing profitability for sophisticated refineries
Historically refinery sector has not been attractive for oil industry excepting for very few who have some niche markets. However during the third oil shock, sophisticated refineries processing extra heavy and sour crude oils have been extremely profitable. Even the refineries with cat crackers processing sweet oil like Brent have been able to secure margins around $4.0 per barrel which is considerably higher than the earlier average profit margins of $2.0/b.
With the recent drop in oil prices, refinery profitability has also come down. Still coking refineries having the capacity to process extra heavy crude oil like Mexican Mayan or Venezuelan heavy crude oils are able to earn good returns. In the future as crude production gets heavier, this is likely to continue. World refining industry still has no adequate capacity to handle heavy and sour crude oil and it is expected that such refineries will continue to be profitable.

8) Greater use of technologies like LNG, GTL, to exploit stranded gas
Inter-regional trade in gas is expected to increase slightly more than the increase in world gas demand. LNG trade is expected to increase 300 per cent between 2006 and 2030. This is mostly because of technological advance in improving the efficiency in liquefying gas and transporting it over long distances. The reduced cost of LNG and better prices for natural gas have helped in the rapid expansion of the LNG trade. Even after such an expansion, inter regional gas trade accounts only for 31 per cent of total demand [GG9] versus 26 per cent in 2006.
Technology advances have made gas to liquids conversion competitive not only for stranded gas in some regions, but even in some situations where GTL is preferred over LNG for strategic reasons[GG10] of not depending upon only gas market. Despite the potential of GTL projects adding to oil supplies, it is not expected to make much difference to overall oil production. For gas rich countries like Qatar, Venezuela, Nigeria, etc, GTL can offer good opportunities to secure better values for their gas reserves.

9) Possibility of Organization of Gas Exporting Countries
Gas Exporting Countries Forum (GECF) was formed in 2001 with the goal of promoting transparent and stable gas market and it was specifically mentioned that its intention was not to form an Organization of Gas Exporting Countries, or OGEC. However, with world gas trade expanding in the future, there is a possibility of OGEC with Russia being its de facto leader. GECF was formed at a time of gas surplus and when the gas market became tight many members lost interest.
Though there are some fundamental differences between oil and gas, possibility of future OGEC cannot be ruled out. Unlike oil, there is no global market for gas and also there is no global gas price. Most of LNG trade is based on long term. However, these things can change in the future. Only after the second oil shock oil started to be traded on spot basis.
Russia has shown every indication of trying to control world gas trade by trying to get a dominant position either by buying gas as in the case of Turkmenistan or showing interest to invest in pipeline projects of transporting Libyan gas to Europe or from Nigeria to Europe.
Gas was considered at one time noble fuel and many governments even thought of restricting its use for such uses like home heating, cooking, producing fertilizers, etc. However, such attempts were given up later. Should OGEC become a reality, it is quite likely that gas may start commanding some premium over crude oil on heat equivalent basis.

10) Renaissance of nuclear power
'Nuclear Renaissance' was seen by the Group of 8 Leaders when they met in Japan in 2008. They have reiterated their commitment to build new nuclear power stations. Their goal is to reduce dependence on fossil fuels and greenhouse gas emissions and ensure energy security and mitigate climate change.
IEA has been pessimistic in its assumption of additions to nuclear capacity. It estimates an addition of only 65 GW by 2030 in the WEO2008. Some 29 countries worldwide have indicated their wish to introduce nuclear power, while most existing users have announced plans to expand their nuclear capacity.
After signing Indo-US nuclear pact, India alone is planning to add 41,000 MW if it succeeds in its fast breeder technology and is able to get multinationals to build Light Water Reactors for at least 10,000 MW. In addition Russia is planning to add 40 GW by 2020, and China 32 GW by 2025.
The US is trying to reduce the cost of constructing nuclear power plants by adapting pre-approved design and expediting the permitting procedures. There are several possible research breakthroughs in developing micro nuclear power plants of about 25 to 30 MW capacity which can promote distributed power competing with other alternate sources of energy.
While nuclear power plants are certainly attractive from the point of view of reducing greenhouse gases, the problem of waste handling has not yet been solved. Still there are indications that we may see a renaissance of nuclear power. This can have far reaching impact on the power sector.

Role of EITI in reducing corruption in upstream sector
It is a well-known fact that of all the industries, oil industry and that too upstream sector has the unusual characteristics to make it corruption- ridden. Because of this reason, oil has been felt to be a curse in most oil rich countries.
The Extractive Industries Transparency Initiative (EITI) aims to strengthen governance by improving transparency and accountability in the extractives sector. The EITI sets a global standard for multinational oil companies to publish what they pay and for governments to disclose what they receive.
Already 25 oil rich countries like Nigeria, Kazakhstan, Gabon, Congo, Equatorial Guinea, etc are members of EITI. As a result of this initiative, upstream operations for multinational companies should become more streamlined and transparent. It should also faciliate the investment decision- making which in the past was often bogged down by government officials to collect bribes.
While the corruption in upstream sector of oil and gas sector is well- recognized, rampant corruption in downstream sector is not yet recognized as a big problem. In many developing countries where huge subsidies are given to protect the poor, subsidies are often diverted into the pockets of the politicians and their supporters.
Economic misallocation of resources as a result of subsidy [GG11] and the danger it poses to the health of any economic system is a well-recognized problem. However, what has not yet drawn attention is the rampant corruption which results from such subsidies.
During the recent third oil shock, some analysts attributed the price rise to subsidies in developing countries. But it did not have much impact since political leaders have no interest to reform the subsidy system. However if in the future the real reason for giving subsidies is reserached and exposed, they will be better directed and oil companies will be able to operate more transparently without political harassment. For example, in India, misguided oil subsidy system forced the private oil company Reliance to close down its newly started 1500 gasoline stations.

11) Reforms in the power sector
In a natural monopoly like power distribution, politics always played a major role in the operations of power companies in developing countries. Often prices charged by these companies could not recover their costs. As a result most of them always were losing money and did not have enough funds to invest in the needed capital projects to meet the increasing demand.
In the developed world this problem was solved to a great extent by establishing autonomous administrative agencies to monitor the operations of electric utilities and approve price changes based on costs of operations to earn reasonable rate of return. The US was the first country to implement such a system. After several decades of experience power regulatory systems were working with reasonable efficiency in the US. In recent years the US and many developed countries have even succeeded in introducing competition in power generation and distribution by unbundling generation, transmission and distribution.
Developing countries have started to adopt such autonomous regulatory agencies in the last few years. There is a long way for them to go before these regulatory systems could work with degree of success. It is unfortunate that even before electric utilities could be put on a sound management system, the World Bank and some donors compelled some countries to change over to the more complex system of separation of generation, transmission and distribution. This had only mixed success.
IEA's WEO 2008 estimates that the world will be adding about 3100 GW of electric generation capacity by 2030. As shown in Graph-12, power consumption will increase the most in China, and India while it will decrease in OECD countries. While China may succeed in investing in the needed generation capacities, success for other countries will depend upon how they will succeed in achieving economic and operational efficiency as a result of the better functioning of their electric regulatory commissions. Otherwise they will continue to suffer brown outs and black outs like they are doing today. Also many poor will be without access to electric power.
Oil, gas and power sectors will be operating under vastly different conditions than they have been accustomed to in the past[GG12] . Still energy industry will continue to provide plenty of opportunities to earn attractive profits in different parts of the world for nimble entrepreneurs and companies. However, to face the challenges in the energy industry and to make the right decisions, energy managers need different kind of training. Uncertainties faced by the managers will only increase in the future and be more complex.
There are different types of risks and profit opportunities in the oil, gas and power value chain linkages of finding and producing oil, transporting oil to refineries, reforming oil into the needed products in the refineries, marketing the products, gas transportation through pipeline or as LNG, gas distribution, power generation, power distribution, etc. In short there is a New Era in the oil value creation as a result of complex interaction between geopolitics and supply/demand fundamentals superimposed with global warming and peak oil concerns. Will the public sector dominated energy sector in India be ready to face this new Era?