Week 8 - Chapter 14 - Oil Flashcards
(43 cards)
Crude oil
crude oil is a liquid consisting of naturally formed hydrocarbons extracted from the earth, which is refined throughout the oil/petroleum supply chain.
Hydrocarbons
Hydrocarbons, collections of molecules consisting almost exclusively of hydrogen and carbon, are created under different circumstances and have modestly varying characteristics that affect their suitability for providing energy.
Collectively, these hydrocarbons provide a widely available and very high-density source of combustible energy. They also have the advantage of being easily and cost-effectively transported, particularly when in their stable liquid state.
Petroleum
Petroleum (a word derived from the Latin for “rock-oil”) is a term that is slightly differentiated from “oil.”
While petroleum can include both the natural crude oil and refined fuels and products that were introduced in the previous chapter, crude oil refers only to the hydrocarbons obtained from the underground reservoirs in which it formed.
- source rock
The sediment in underground or in the ocean where organic matter collects and matures to eventually become oil. From here, it migrates into a reservoir.
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After significant amounts were deposited, the organic material was slowly buried by layers of sediment and sometimes further shifted through tectonic activity, which increased the pressure and temperature under which these deposits matured.
Once formed in this source rock and allowed to mature for a long time, other geologic conditions were necessary for the hydrocarbons to accumulate in easily accessible reservoirs. As organic matter in the source rock matures into oil, it tends to change in density and volume. This has the result of forcing the oil out of the source rock and upward into cracks and fissures as it escapes the containment of its original location, which is dependent on the permeability of the nearby geology.
- reservoir
Natural formation with a top impermeable layer that creates a trap, collecting oil.
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As organic matter in the source rock matures into oil, it tends to change in density and volume. This has the result of forcing the oil out of the source rock and upward into cracks and fissures as it escapes the containment of its original location, which is dependent on the permeability of the nearby geology.
This migration continues until it finds a reservoir to fill. Finally, containment occurs only when the reservoir has a top impermeable layer that creates a trap, arresting the upward mobility of the migrating oil with a correctly shaped impermeable top seal, usually made of shale rock or salt.
API gravity
Heavy / Light
API gravity is the measure developed by the American Petroleum Institute (API) to gauge how heavy or light a petroleum liquid is. The higher the API gravity, the less dense the liquid is. (Lower gravity is “heavy”).
Using water as a benchmark with an API gravity of 10, nearly all petroleum liquids have a higher API gravity value and, therefore, float on water. Crude oil from oil wells generally falls on a spectrum of API gravity from the 20s to nearly 50.
API = 141.5/(specific gravity at 60F) - 131.5
Crude oil with the higher scores (38 or more) is usually referred to as light crude and generally has a mix of shorter hydrocarbon chains than other crude oils. Light crude tends to be easier to pump and transport, due to a lower concentration of wax in the crude oil.
Crude oil with a slightly higher density and lower API score is classified as medium crude.
Crude oil with the lowest scores (22 or less) tends to be called heavy crudes and have a range of higher density and higher viscosity due to the presence of longer and heavier hydrocarbon chains. This creates a product that is harder to pump and requires more processing to break down the oil into useful refined fuels, so it often sells at a discount compared to the lighter and easier-to-handle grades.
The most extreme forms of heavy crude can have API gravity less than 10 and are called extra-heavy crude or bitumen, which is the type of oil found in tar sands.
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Crude oil can vary slightly in its chemical composition, depending on the characteristics of the geology in which it forms. These variations in crude oil characteristics determine optimal methods of drilling and extraction, as well as the processing and handling that it requires once produced. Crude oil is classified by a number of measured characteristics, but the two most important are the API gravity and the sulfur content. In addition, acidity and volatility are important considerations for managing oil safely for both humans and equipment.
Sulfur content
Sweet/Sour (Low sulfur content is sweet)
Sulfur content is another important consideration when looking at the quality of crude oil. The amount of sulfur is measured as a percentage of the weight of the crude oil and typically ranges from zero to about 3.5%.
There is a negative correlation between API and sulfur content. Lighter oils tend to have less sulfur, and vice versa, though this relationship is not perfect.
Crude oil that has very low sulfur content is referred to as sweet crude. Sweet crude generally has less than 0.5% sulfur by weight, which makes the crude easier to manage and process into fuels. It is referred to as sweet crude because of the lack of sour-smelling sulfur in the oil.
Crude oil with higher sulfur content is referred to as sour crude due to its unpleasant odor. In addition to having an unpleasant odor, sour crudes are both more toxic and corrosive, requiring expensive processing and removal of the sulfur before transporting it on ships and through pipelines. Sulfur can also be a breathing hazard for workers if it is converted into hydrogen sulfide.
Associated gas
Gas coming out of the oil well
Hydrocarbons extracted as petroleum are not only liquid crude oil but also contain other hydrocarbons with various molecular weights and properties.
Of these hydrocarbons, a substantial amount of natural gas (methane, or CH4) comes out of the oil well and is referred to as associated gas.
While natural gas is described in great detail in Chapter 18, within this associated gas (as well as within unassociated gas wells that do not produce crude oil directly) are a number of other gaseous and liquid hydrocarbons with varying chain lengths of carbon and hydrogen.
Condensates
Some of these hydrocarbons exist as a gas under high pressure and temperature inside a reservoir, and they condense into liquids at the surface; these are referred to generally as condensates.
Lease condensate (captured on-site): Many of these hydrocarbons can be extracted from the gas stream by condensing them into liquids and are referred to as lease condensate. This lease condensate is usually captured at the well and reinjected directly into the crude oil stream, thereby supplementing the liquids that go to the refinery.
Plant condensate (captured at processing facility): Condensate can also be captured from natural gas extraction and processing facilities, which is then available for use in oil processing. Called plant condensate to distinguish it from the lease condensate captured on-site at oil and gas wells, these condensates are also comingled with crude oil supplies to supplement the liquids that go into the refining process.
Natural gas liquids (NGLs)
Natural gas liquids (NGLs) - types of hydrocarbon molecular chains gathered during process that exist as gas underground. All of them are used as petrochemical feedstocks in producing other products, including ethane, a precursor for plastics production.
- Ethane
- Propane
- Butane
- Isobutane
- Pentane
- Pentane Plus
Benchmarks
Regional hubs exist through which a lot of the oil travels, which helps standardize the location of crude oil with similar characteristics within a region. These benchmarks exist around the world to establish a standard price for standardized grades of fuel at the same hub locations.
The largest producing areas tend to have the most active benchmark locations:
■ West Texas intermediate (WTI) crude—A light sweet grade of fuel, often priced at the transshipment point of Cushing, Oklahoma, in the United States.
■ Brent crude—Originally a benchmark set up from a field producing in the North Atlantic, Brent crude represents a light sweet fuel (though in neither characteristic as light or sweet as WTI) that comes from over 15 fields and can be delivered to one of four physical locations (Brent, Forties, Oseberg, and Ekofisk fields), collectively referred to as BFOE.
■ Dubai crude—A benchmark used to price the oil trade from the Middle East to Asia (with WTI and Brent being used in the Atlantic trade primarily). Dubai crude is a medium crude (API of 31) and is relatively sour (with 2% sulfur content).
Each of these benchmarks can be used to establish a standardized price (benchmark price) that allows pricing and trading of other crudes with slightly different quality or geographic characteristics. Contracting, buying, and selling at a premium or discount to the benchmark price simplifies trading and reduces the inefficiency of trying to constantly set prices across many small markets.
Cartel
When firms collude to establish higher prices, or are forced to behave in this coordinated fashion by a government oversight body, it is called a cartel.
The world’s first oil cartel was formed in Texas, as the Texas Railroad Commission (TRC). Faced with dramatic oil production overcapacity by the 1920s, the TRC reduced the amount of oil that could be produced in Texas by all operators with the express intent to stabilize prices.
At the same time, a group of oil-producing firms with increasingly global footprints, known as the Seven Sisters, attempted to consolidate and eliminate “ruinous competition” in oil markets. The Seven Sisters included Exxon, Mobil, Chevron, Gulf, Texaco, Royal Dutch Shell, and British Petroleum (BP), and they protected their profits through market share allocation, price fixing, and other anticompetitive behavior in the regions in which they operated. Not only did these firms have substantial control over oil operations in the United States, but they also controlled every major supply and delivery franchise in the emerging supply regions of Saudi Arabia, Iraq, Iran, and other Middle Eastern nations. It is estimated that by 1960 they controlled 90% of crude oil exports to world markets. Collectively, these firms are referred to as international oil companies (IOCs), or sometimes the Oil Majors.
The power dynamics of the oil industry began to shift in the second half of the twentieth century as a rising percentage of global oil production came online in the Middle East, South America, and Southeast Asia. As early as 1949, a few of these countries, such as Venezuela, Iran, Iraq, Kuwait, and Saudi Arabia, began to discuss coordinated behavior to increase their market power vs. the Seven Sisters. In 1960, in response to a series of oil export pricing cuts by the oil-producing and oil-exporting companies, these five countries founded an oil producers’ cartel called the Organization of the Petroleum Exporting Countries (OPEC).
Upstream
First part of petroleum industry supply chain, production of crude oil.
The upstream portion of the petroleum industry involves everything necessary to find and produce oil.
This part of the supply chain represents a very risky and capital-intensive set of activities, so it tends to be the most constrained part of the oil delivery system. As the bottleneck for the system, this is typically where the bulk of the value added (i.e., profit) is captured in the oil supply chain, and therefore is of great interest to many players.
Production of the crude oil (upstream) to its transport to refineries (midstream) to the refining of that crude oil into other fuels or non-fuel outputs into the various wholesale and retail channels (downstream).
Concession
In countries in which mineral rights belong to the government, either exclusively or partly, the right to explore and drill for oil is usually established through the granting of a concession.
Concessions can take many forms, but they usually allow the operator to exclusively explore and develop a tract of land for a period of time, though many contiguous tracks may be issued at the same time to different companies. These concessions can be granted or can be subject to a bidding process, whereby operators will offer upfront and shared revenue arrangements, plus any necessary guarantees, in line with the bidding procedures and requirements established by the government grantor.
Production sharing contract
Other times, the concession is compensated through a production sharing contract, which essentially claims physical ownership of a portion of the production above what is required to pay for the direct costs of the drilling and transport.
The shared revenue arrangements for oil production are different in various countries, but they generally take on one of two forms. Some systems use a tax or royalty system that effectively absorbs a meaningful percentage of the gross (before expenses) or net (after expenses) revenues of the drilling operation. Other times, the concession is compensated through a production sharing contract, which essentially claims physical ownership of a portion of the production above what is required to pay for the direct costs of the drilling and transport.
In both cases, the share of the remaining cash flow from the operation (after direct costs) that goes to the host government tends to be quite high, ranging from 50 to 90%, but averaging about 67%.
Fugitive resources
Fugitive resources, like oil, are difficult to fence in and can be accessed by multiple players, influencing the decision to access sooner.
Connected to Theory of the Mine
One common concern involves fugitive resources, or those that are difficult or impossible to fence, brand, or partition to prohibit others from producing them.14 While lumps of coal do not flow freely across property boundaries or mines, oil, which is liquid, does flow. Drilling operators in adjacent territories in a conventional play will access the same pool of oil. Drawing from a portion of the reserve under one person’s property has the potential to reduce the amount available under neighboring properties.
Exploratory wells
Once a location is deemed to be of sufficient size and potential quality, initial drilling of exploratory wells needs to take place. The purpose of these initial wells is to increase confidence in the subsurface conditions and potentially to strike oil deposits that can be tested for their pressure, flow rates (the natural rate at which oil and gas emerge from the well), and product quality.
These variables are essential to be able to determine the long-term production profile and economic value of additional drilling activity in that area, which can be confirmed through additional appraisal wells to test these conditions over a larger area before committing substantial capital to field development.
Before this, sophisticated seismic surveys are used to map the various rock layers underground to see if the necessary density and topology exist to form oil traps. Seismic data can also be used to determine whether the necessary seal on top of the reservoir, which holds the oil in place, exists. Once the conditions are identified, understanding how large a geographic area shares those conditions is important in establishing initial estimates of the economic potential of a particular reservoir.
Flow rates
the natural rate at which oil and gas emerge from the well
Directional drilling
Historically, drilling rigs drill vertically into the earth to tap conventional reservoirs of oil and gas, but technical advances in directional drilling have allowed turning the direction of the drill bit and casing to allow angled approaches to reservoirs and along the contours of underground formations.
With some techniques, it is even possible to turn them a full 90° and conduct horizontal drilling, when the geology or circumstances require. Directional and horizontal drilling allows improved economic access to less productive rocks by increasing the contact area within the hydrocarbon-bearing strata of rock.
Hydraulic fracturing
Additional well stimulation techniques can be useful in increasing the productivity of a well, including the use of explosives or hydraulic fracturing using high-pressure water to break up the rock.
Recovery rate
the percentage of hydrocarbons in the reservoir recovered
Once a well is producing oil, it is important to ensure its long-term productivity through well maintenance and additional interventions to maintain reservoir pressure at the optimal level. The goal of this process is typically to maximize the recovery rate (the percentage of hydrocarbons in the reservoir recovered) for the field.
Production profile
The production profile for an oil well or field is constructed to compare the quantity of crude produced per unit time over the lifetime of the well. The size and length of the respective phases of a well’s production are described as (1) ramp-up, (2) plateau or peak, and (3) post-plateau or decline. The rates of decline vary widely across well types, based on geography, viscosity of the oil, and temperature.
(Upside down U, increases quickly to reach 100% peak, then decreases somewhat linearly)
As shown, the decline phase can be further subdivided. Decline phase 1 covers the period when the well produces at least 85% of its peak production. Together, peak and decline phase 1 are referred to as the production plateau. Decline phase 2 covers the period when the well produces at least 50% of its peak, and decline phase 3, the period when the well produces less than 50% of its peak. Decline phases 2 and 3 are collectively referred to as post-peak. A nuanced understanding of the decline phase by field or region is important for understanding world supply dynamics, corporate profits, and appropriate policy responses because many wells and fields are past peak.
According to the EIA, the average rate of reduction in annual production (decline rate) per field for conventional reserves is 6%, though individual wells decline much faster. Initially, oil fields are established over larger areas, with wells spaced apart to increase initial production and minimize the loss of pressure in a given area. As the field matures, some infield drilling, or drilling activity among existing wells to extract remaining pockets of oil, will occur. This infield drilling helps keep field decline rates lower, but it is still significant over many years.
Time x Share of Peak Production
Unconventional oil
Oil from oil sands, tight oil, and oil shales (not reservoirs)
Oil sands: Heavy bitumen, nearer to surface (Canada and Venezuela)
Tight oil / Shale oil: Oil from shale rock using hydraulic fracturing techniques is discussed later in this chapter and in detail in Chapter 18. These innovations are extensions from traditional conventional oil and gas production, though they rely much more heavily on deeper wells, horizontal drilling, and hydraulic fracturing to stimulate sufficient production from the hard shale to make it economical.
Oil shales: fine-grained rocks containing kerogen, a solid mixture of organic chemical compounds, which has a different chemical composition than the oil-bearing shale rocks referred to as tight oil. Because of the combination of economic and environmental costs in this process, it is not currently widely used, but it could become an added resource in the future if high oil prices persist.
Most of the techniques described above relate to the oil exploration and production process for conventional oil deposits—that is, those that have developed in reservoirs. However, crude oil is increasingly being produced from other types of hydrocarbon deposits, called unconventional oil, including (1) oil sands, (2) tight oil, and (3) oil shales.
This unconventional oil production requires different techniques for extraction, creating different technical and economic challenges and opportunities. While unconventional oil production represents less than 10% of current global oil output, it is forecast to make up all of the net new oil supply added globally in the future, or even more as the world’s conventional oil fields continue to deplete.
Midstream
Second part of petroleum industry supply chain,
focused on transport / distribution.
- Transport of crude oil to refineries
- transport of petroleum products from refineries to wholesale distribution
- transport of petroleum products from wholesale distribution to gasoline retail outlets
PIPELINES, RAIL, TANKERS AND BARGES,
Production of the crude oil (upstream) to its transport to refineries (midstream) to the refining of that crude oil into other fuels or non-fuel outputs into the various wholesale and retail channels (downstream).
