Oil companies and investment

The path of oil from the reservoir to the consumer is divided into three links (segments of the oil business). Exploration and production (upstream, or E&P): seismic surveys (mapping the rocks with sound waves), drilling, building the field facilities, production, and treatment of oil and gas (cleaning them and preparing them for sale). Transport and storage (midstream): pipelines, tankers, railways, terminals and tanks. Refining and marketing (downstream): oil refineries and petrochemical plants (which turn oil into fuels and chemicals), wholesale trading and filling stations.

The links earn money in different ways. Production receives the oil price minus costs and payments to the state. It also bears the greatest risk: dry holes (wells that find no oil), cost overruns and a fall in the price. This is also where the rent arises, and the state, as owner, and the investor share it (resource rent). Transport receives tariffs (fees) for pumping and storage. Its income is steadier and depends less on the oil price. Refining earns on the difference between the prices of oil products and of crude oil. This difference moves for its own reasons and is only loosely tied to the oil price.

A company that works at all the links is called vertically integrated (in Russian-language practice, VINK). Integration gives some protection against swings in the oil price: cheap oil hurts production, but it also makes the raw material for the refineries cheaper (company diversification).

State-owned, or national, oil companies (national oil companies, NOCs) belong to the state, either wholly or through a controlling stake. They are expected to deliver not only profit but also budget revenue, economic development and fuel for the domestic market. Sometimes they have special rights. In Kazakhstan, only the national company in the field of hydrocarbons can receive a hydrocarbon subsoil use right without an auction, by direct negotiation (how licence areas are awarded). Some state companies have part of their shares traded on an exchange: 1.5% of Saudi Aramco's shares were placed in December 2019, and 3% of KazMunayGas's shares in December 2022.

International oil companies (IOCs) are privately owned, and their shares are traded on stock exchanges. The largest of them — ExxonMobil, Chevron, Shell, BP and TotalEnergies — are called majors. They are usually integrated and work in many countries. Their strengths are capital, technology and experience in managing large projects. That is why states bring them into the most complex projects, as in Kazakhstan at Tengiz, Kashagan and Karachaganak. But the oil in the ground belongs to states, and international companies gain access to it only under contracts (Licences and contracts for subsoil use).

Independent companies (independents) are engaged only in exploration and production, with no refining or marketing. They are smaller. They often concentrate on one region or one type of accumulation (an oil pool in the ground), as many American tight oil producers do (shale oil). They take decisions faster, and they depend more strongly on the oil price and on borrowed money.

Oilfield service companies (oilfield services) do not produce oil themselves. They drill wells and carry out logging (measuring the rocks with instruments lowered into the well), cementing (fixing the steel casing in the well with cement) and hydraulic fracturing (cracking the rock with fluid under high pressure). They also supply equipment. They work under contracts with subsoil users, the companies that hold the right to produce (who takes part in drilling). Their revenue follows the investment of their customers. There are also other market participants: pipeline companies, independent refiners, and traders who buy and sell oil and oil products around the world.

Half a century ago, most of the oil outside the US and the USSR was produced by international companies (the “Seven Sisters”). Now, according to the International Energy Agency (IEA) estimate for 2023, state companies account for more than half of the world's oil and gas production and about 60% of their reserves. The seven largest international companies account for less than 13% of production and reserves. For international companies this means that most of the world's oil is open to them only in partnership with states and their companies.

The central place in the industry is held by KazMunayGas (KMG), the national company. It was created in 2002 by the merger of the national oil and gas company Kazakhoil and the company Transport Nefti i Gaza (Oil and Gas Transport). As of October 2026 its shareholders are the national wealth fund Samruk-Kazyna (67.42%), the Ministry of Finance (20%) and the National Bank (9.58%), and minority shareholders (3%). The fund manages the shares of the ministry and the bank in trust. The fund placed the 3% on the Kazakhstan exchanges KASE and AIX at the end of 2022 at 8406 tenge (KZT) per share. Trading began on 8 December 2022. According to the company's annual report for 2025, KMG accounts for 26% of the country's oil production, about 55% of oil transportation and about 80% of refining within the country.

The three largest fields are developed by consortia (groups of companies) in which KMG is one of the participants. The work is done by the consortia's operating companies (Field development concepts: surface facilities):

Dozens of smaller companies produce the rest of the oil. They include KMG subsidiaries at the old fields of the Atyrau and Mangystau regions (for example, Embamunaigas and Ozenmunaigas), companies with Chinese, Russian and other foreign capital, and private Kazakhstani subsoil users. Drilling, service and construction contractors work around them, many of them Kazakhstani. Lists of operators and contractors with their contacts are in the investors section of the site.

Money goes into production in step with the stages of a project. In exploration it is spent on seismic surveys and exploration wells, and many of these wells turn out to be dry (Geological risk and chance of success). Appraisal makes the size of the discovery more precise (appraisal). Development needs the largest investments: wells, treatment facilities, pipelines, and sometimes platforms or artificial islands (Field development concepts: surface facilities). In the production period the company needs operating expenditure and sustaining capital expenditure (sustaining capex): new wells and workovers (repair work on existing wells), without which production falls. At the end comes the abandonment of the wells and facilities, which means closing them safely and for good (abandonment in the model).

Sustaining capex keeps production in place. Fields deplete, so to stop production from simply falling, the company drills new wells every year. Growth capex goes into new projects that will increase production years later. The advanced section at the end of the lesson shows how much it costs to hold production steady against natural decline.

Investment follows the price with a delay. When the price is high, companies have a lot of money and expand exploration and development. A few years later new oil comes onto the market and the price falls (how the oil market works). When the price is low, companies cut investment, and a few years later supply falls short. According to an IEA estimate made in mid-2020, world investment in oil and gas production in 2020 was set to fall by almost a third compared with 2019. Everyone cut, but by different amounts. The largest international companies announced cuts of more than 25% on average, Petrobras and PetroChina 30%, Saudi Aramco up to 25%, and independent companies in North America in many cases by more than half. Investment in shale production was set to fall by half.

The service sector takes part of the blow: when there are fewer orders, contractors lower their prices. According to the IEA, from 2014 to 2019 nominal investment in production (in the money of each year) fell by 40%, while the amount of work fell by only 12%, because drilling and equipment became cheaper.

Production reduces reserves, so a company that only produces “eats itself away”. Reserves are replaced in three organic ways: by discoveries and extensions (new finds and the growth of known fields), by revisions of earlier estimates, and by improved recovery (getting more oil out of the same field). These are the organic additions. The fourth way is to buy reserves from other companies. Companies usually report proved reserves, the part that can be recovered with a high degree of certainty (proved reserves, Classification of reserves and resources).

What replacement costs is shown by finding and development cost (F&D). It is the costs of exploration, appraisal and development divided by the organic additions to reserves (more on the indicator). Money and reserves match poorly in time, because a discovery is booked (entered in the company's reserves) years after the money is spent. So the indicator is calculated over several years:

Reserves in reports also depend on the price. Companies that report to the US Securities and Exchange Commission (SEC) calculate proved reserves at a price equal to the 12-month average of the prices on the first day of each month. In a probabilistic estimate (one that treats the uncertain numbers as ranges with probabilities), the quantity recovered must equal or exceed the stated amount with a probability of at least 90%. When the price falls, some barrels become unprofitable and leave the proved reserves through a revision, although nothing in the reservoir has changed. When the price rises, they come back. That is why the replacement ratio for a year of sharp price change says little about how well the company is doing.

An example from Kazakhstan. According to KazMunayGas's annual report for 2025, the reserves were audited under the international Petroleum Resources Management System (PRMS) and are those attributable to KMG's share. Proved plus probable reserves (2P) at the end of the year were 724 million tonnes of oil equivalent, against 716 a year earlier. Proved reserves (1P) were 455 million tonnes, against 452. The company puts its 2P replacement ratio at 100%. This is what comes out for oil and condensate: their 2P reserves are about 592 million tonnes at both the start and the end of the year, and the addition equals production, 26.2 million tonnes. There are no discoveries in this addition, only revisions: $29 + 6.2 - 9 = 26.2$ million tonnes. The largest part, 29 million tonnes, came from Kashagan and Dunga, where production sharing agreements apply. With a lower oil price forecast ($60/bbl instead of $75), more barrels go to recovering the contractor's costs, and KMG's calculated share grows (Licences and contracts for subsoil use). A further 6.2 million tonnes came from more well work at the old fields and from the transfer of reserves between categories. Nine million tonnes were taken away by the same low price and by rising costs, because some barrels became unprofitable. All hydrocarbons together, including gas, rose from 716 to 724 million tonnes, so for them the full replacement ratio by the lesson's formula is above 100%. At the current production, proved reserves will last the company 13 years, and 2P reserves 22 years.

A company's portfolio is the set of licence areas and fields that it holds, at different stages. Exploration areas give a chance of great value but bring in no money. Areas under development absorb investment. Producing areas bring in the cash flow on which the company lives. Late-life areas give less and less, and they will need money for abandonment. A good portfolio combines different stages, regions and cycle lengths, so that the cash from production is enough for the next steps (a portfolio of licence areas).

Large projects are almost always joint. The participants share costs, risks and production in proportion to their interests. One of them, or a joint company, carries out the work: this is the operator. Companies enter and leave projects by trading interests. When a company transfers part of an area to a partner, the partner pays for part of the work (working interests, farm-out, carried interest).

Companies also grow through acquisitions: they buy interests in fields or whole companies. An acquisition adds reserves to the buyer but not to the world, and it costs money. What is sold is usually what no longer fits the seller's strategy. The lesson Valuation methods: book value and market value shows how to estimate the value of an asset or of a company.

The main source of money is operating cash flow (cash flow from operations, CFO): the money from the sale of oil and gas, less running costs, taxes and interest (Project cash flow). The company pays for investment out of it first. What remains is free cash flow (FCF). It goes to dividends (payments to shareholders), share buybacks (the company buying back its own shares) and debt repayment.

Borrowed money means bank loans and bonds. Lenders are paid before shareholders, and under a contract, so they take less risk. Interest also usually reduces taxable profit. So debt costs less than equity, which is the money of shareholders (cost of capital). But debt has to be serviced (interest and repayments have to be paid) at any oil price, and the larger the debt, the more dangerous the years of low prices (financial risk). The debt burden is often measured by the ratio of net debt (debt minus cash) to EBITDA, which is earnings before interest, taxes, depreciation and amortisation.

Equity is the shareholders' money: what was invested when the company was created, what was raised by new share issues, and the profit left in the company. Shareholders receive dividends and growth in the share price, but if things go wrong they lose first, because debt is repaid before them. State companies also bring in private shareholders while keeping control with the state, like Saudi Aramco in 2019 and KazMunayGas in 2022.

Project finance is a loan that is repaid from the cash flow of a single project, and the lenders' claims are limited to that project. This is how fields that have already been appraised, and pipelines, are financed, but not exploration (transferring risk for a fee). Independent companies often take out reserve-based loans: the bank lends part of the value of the proved reserves and reviews the limit from time to time. Another source is partners. By transferring an interest in an area, the company gets part of the work paid for (a carried interest).

An oil company's report is easier to read when you know what each number tells and where it can mislead. In reports, gas is converted into barrels of oil equivalent (boe) by its heat of combustion (the heat it gives when burned). A common rule is that 6 thousand cubic feet of gas, about 170 m³, count as one barrel.

What the company and its shares are worth is a different question. A company is valued from its cash flow and by comparison with similar companies (Valuation methods: book value and market value). The lesson Market, financial and regulatory uncertainty shows how uncertainty about the price, the exchange rate and the rules affects the decisions of companies.