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In this episode of the Oil 101 podcast series, we will discuss the fundamentals of the Downstream segment of the oil and gas industry. Key Downstream business sectors include refining, supply and trading, and marketing.
In this 8-minute podcast, we will discuss:
Listen to Midstream 101 below…
What is Upstream?
What is Midstream?
What is Downstream?
What is Refining?
What is Petroleum?
What is the difference between Upstream and Downstream?
Drilling Wells for Oil and Gas and Offshore Drilling
Oil 101
Hi, and welcome to Oil 101, the podcast. My name is Doug Stetzer and I'm content and community manager for EKT Interactive.
This content is taken from our Fundamentals of Downstream ebook which is available in our free members content library. If you missed our previous episodes on upstream, and midstream, be sure to go check those out.
So, What is Downstream?
Processing, transporting and selling refined products is the business of the downstream segment of the oil and gas industry.
The downstream industry provides thousands of petroleum products to end-user customers around the globe. Many products are familiar such as gasoline, diesel, jet fuel, heating oil and asphalt for roads. Others are not as familiar such as lubricants, synthetic rubber, plastics, fertilizers and pesticides.
Business Characteristics of the Downstream Segment
The downstream segment is a margin business. Margin is defined as the difference between the price realized for the products produced from the crude oil and the cost of the crude oil delivered to the refinery.
Although the price of crude sets the absolute level of product prices, it may or may not affect refining or marketing margins.
Downstream margins tend to be reduced, or squeezed, when crude price increases can not be recovered in the marketplace. On the other hand, margins tend to hold, or even increase, when crude prices drop and the marketplace more slowly adjusts to these lower crude prices.
The downstream segment includes complex and diverse activities including manufacturing, petrochemical refining, distribution, and retail.
A global perspective is important because of the global nature of the energy supply chain as well as the impact of supply and demand on both feedstock and product prices.
Crude oils are not uniform, but rather are mixtures of thousands of different compounds called hydrocarbons. Each component of each compound has its own size, weight, and boiling temperature
Lets talk about refining.
Refineries process crude oil into a variety of useful products through a number of different processing units using heat and pressure to separate the products. The resulting petroleum products are often classified as light, medium, or heavy.
Light products include Liquid Petroleum Gas (or LPG), Gasoline, and Naphtha, which is used as a solvent or paint thinner.
Medium products, or what are called middle distillates, include kerosene and related jet aircraft fuels as well as diesel fuel.
Heavy products include fuel oils, lubricating oils, paraffin wax, asphalt and tar, and petroleum coke.
Who are some of the key downstream participants?
Downstream participants include refining and marketing divisions of the major integrated oil companies as well as independents.
Integrated Refiners include:
BP
Independent Refiners:
Valero
Independent refiners will often have a chain of service stations to market their products. What makes them an independent is the fact that they have no upstream E&P operations.
Consumption
The final link in the oil and gas value chain is consumption. At the end of the day, it is the end users or customers of oil and gas products that give them their ultimate value.
Globally, the most widely known crude oil product is gasoline. In addition to the well-known products of gasoline, jet fuel and diesel fuel, the downstream industry touches every consumer.
Raw materials from the downstream are procured for the petrochemical industry as feedstock in the production of thousands of additional products such as synthetic rubber, plastics, nylon, polyesters for fabrics, fertilizers, antifreeze, pesticides and pharmaceuticals.
Natural gas products do not generally require more processing than was discussed in the podcast on midstream. Just to compare to the refined oil products, Natural gas products include:
Natural gas itself used in electricity generation and as fuel for home heating and cooking.
Consumption Current Global Energy Mix
Let's discuss the current global energy mix. Each region in the world has a different mix of hydrocarbon or fossil fuels needed and used to meet their total consumption.
Oil remains the leading energy source in North, South and Central America and the Middle East. Fuel products (gasoline, diesel and jet fuel) are 65% of total demand for refined products in the US and 40% of total global demand.
Alternatively, coal dominates in the Asia Pacific region while natural gas is the leading fuel in Europe and Eurasia.
As all global economies continue to expand, there will be continual balance and tradeoffs made between the fuel qualities, pricing and environmental impact of coal, oil and gas.
Marketing and Retail
Petroleum product marketing is the business of finding and supplying customers who possess either internal demand for refined fuels or distribution networks for reaching retail customers.
Direct consumers of energy products include petrochemical and industrial manufacturers, utilities, municipalities, trucking fleets, and airlines.
Other companies may possess distribution assets or brands aimed at reaching retail end users. These companies could include independent service station suppliers, motor oil products, home fuel oil supply companies, propane tank distributors, and many others.
The network of service stations, dealers, and jobber-distributors is a large franchise system similar to the fast food chains familiar to everyone. There are approximately 110,000 independent gas stations in the US.
Downstream Oil and Gas Summary
In Summary, the downstream segment of the oil and gas industry includes the refining of crude oil into consumable products and the marketing of these products to commercial or retail end users.
Downstream is a very complex, global business where profit is made from the margin between crude oil and refined products.
Gasoline, jet fuel, and diesel account for over 40% of global demand for refined products.
Thanks for listening, and we hope you've learned a few things about the downstream segment of the oil and gas industry.
Be sure to share this as you see fit, and review us on itunes if you have a chance. Your feedback really helps us improve as we move forward.
The post Oil 101 – Introduction to Downstream Oil and Gas appeared first on EKT Interactive.
In this episode of the Oil 101 podcast series, we will briefly discuss the key differences between conventional and unconventional resources as they pertain to oil and gas drilling and production.
In this 3.5-minute podcast, we will discuss:
Listen to Oil 101 – Conventional vs Unconventional Resources below:
Learn more about our Online Oil and Gas Training Courses
Thanks for listening to the EKT Interactive Oil and Gas Podcast Network.
There are two fundamentally different types of hydrocarbon resources: conventional and unconventional. Each type affects the exploration approach, drilling methods and commercial development strategy.
A conventional oil & gas resource is found in those reservoirs where the hydrocarbon is recovered through classic exploration techniques and vertical or deviated wellbores.
Most conventional hydrocarbon reservoirs have defined geological limits, with classic characteristics such as a source rock, seals, salt domes, traps and cap rock. These reservoirs are grouped by E&P companies into plays or discrete fields as development is anticipated and managed.
For conventional resources, the key economic driver is the exploration well or wildcat success. This well is drilled, logged, and maybe cored, and well productivity is then fairly easy to establish using conventional logging and evaluation techniques.
The major economic uncertainty is associated with the size and productivity of the overall reservoir.
Unconventional resources are controlled by wide regional geology, not a local reservoir. This leads to accumulations that cover huge areas often with poorly defined limits. In unconventionals, the word field is used more often to mean an administrative unit.
For unconventional resources such as shale oil, shale gas, oil sands, bitumen and coalbed methane, the priorities relative to conventional E&P are reversed. Typically, you know where all the hydrocarbons are located. The key to success is whether they can actually be economically produced, or brought to the surface.
Here, exploration is more like development and may require years of detailed geologic studies, great expense for numerous delineation wells, and long periods of testing called pilot projects.
Unconventional deposits require different and much more complex and costly production methods. Further, unconventional oil, especially from oil sands, may need additional upgrading to be usable as a refinery feedstock.
In summary, unconventional resources are more capital intensive (for development, production, and upgrading) than conventional ones. Future prospects for unconventional resources depend on the crude and natural gas price and the investment cost and technology needed to convert them into commercially usable reserves.
The total amount of unconventional oil and gas resources in the world considerably exceeds the amount of conventional reserves. BUT will not be developed unless the price is right.
What is Upstream?
What is Midstream?
What is Downstream?
What is Refining?
What is Petroleum?
What is the difference between Upstream and Downstream?
Drilling Wells for Oil and Gas and Offshore Drilling
Oil 101
The post Oil 101 – Conventional vs Unconventional Resources appeared first on EKT Interactive.
In this episode of the Oil 101 podcast series, we will discuss the fundamentals of the Midstream segment of the oil and gas industry. If Upstream is all about the wells, Midstream is all about processing, moving, and storing the produced oil and gas.
In this 13-minute podcast, we will discuss:
Listen to Midstream 101 below…
Hi, and welcome to Oil 101, the podcast.
Today we will be discussing the Midstream segment of the oil and gas industry. This content was developed by industry experts with decades of experience and used at Fortune 10 companies, oil and gas super-majors, financial services firms, and many more.
Our Fundamentals of Midstream ebook is available in the free members content library at www.ektinteractive.com.
So, What is Midstream?
As its name implies, the midstream segment of the oil and gas industry encompasses facilities and processes that sit between the upstream and downstream segments. Activities can include processing, storage and transportation of crude oil and natural gas.
In most cases, oil and gas reserves are not located in the same geographic location as refining assets and major consumption regions.
Transportation is a big part of midstream activities and can include using pipelines, trucking fleets, tanker ships, and rail cars.
Characteristics of the Midstream Segment
The midstream segment is separated from upstream and downstream in most integrated oil companies because it is considered a low risk, regulated type of business. It does not fit the risk profile or asset complexity of the other segments of the oil and gas industry.
Success in midstream depends on many external forces including Upstream operation's continuous delivery of reserves and refinery margins that encourage refined product production. Natural gas price levels that impact the attractiveness of NGL's as feedstock also impact midstream.
Healthy downstream, natural gas, and petrochemical markets are important to the midstream segment. After all, those segments contain a midstream operator's customers.
Finally political sentiment for pipeline expansion and not in my backyard hurdles can be challenges to midstream expansion.
While the midstream gathering and processing sector is relatively free of commercial regulation, the movement of oil and gas by interstate pipelines and subsequent state level distribution activities are highly regulated in the US by the Federal Energy Regulatory Commission (FERC).
Further, cross-border pipeline expansions can require approval from the
Executive branch and become part of the national political debate.
We've seen this scenario play out publicly with the segment of the proposed Keystone XL pipeline linking Canadian oil fields with US pipelines and refining capacity
Midstream Participants
Some of the largest North American midstream oil companies include Enterprise Products, Kinder Morgan, Enbridge, TransCanada, Williams Companies, Plains All-American, and Koch Industries.
These participants are categorized by the portfolio of midstream assets they own, such as distribution, storage, processing, fractionation, and marketing.
These assets will be discussed further in subsequent episodes and are covered in some of our upcoming more in depth content. We'll be sure to add links to the transcript as they become available.
Oil and Gas Processing Next Step in Adding Value
So, while producing crude oil and natural gas is the goal of upstream, processing oil and gas liquids into marketable products is the beginning of the midstream segment of the business. These products then continue into the refining or processing portion of the downstream segment.
Field processing is the first phase of oil and gas processing starting in the onshore or offshore production field.
Here, surface facilities are designed and installed that:
Fractionation plants, which remove natural gas liquids (NGL) from the produced oil and gas are also a component of the midstream activities. These NGLs are used as blend components in a refinery and used as fuel or feedstock in the manufacture of petrochemicals.
We have more materials as well as some articles on recent developments in the NGL markets that we'll link to in the program notes.
Transportation
After field processing, treated oil and gas is delivered via complex transportation, transmission and distribution infrastructure.
Crude oil and refined liquids start their journey in a spider web of small-diameter field gathering pipelines. Once accumulated, larger volumes are moved along the coast or through rivers in smaller barges and transported internationally in tankers or vessels.
Land transportation methods include pipelines, truck and rail.
Natural gas, which flows at much higher pressure than crude oil, is most often transported in large-diameter, high-pressure-handling pipelines called transmission lines.
A common point of confusion in our industry, whether you're new to it or not, is NGLs vs LNG.
Natural Gas Liquids vs Liquified Natural Gas.
NGL, LNG What's the Difference?
NGL is an acronym for Natural Gas Liquids which are the liquid hydrocarbons normally associated with Natural gas. Most common NGLs are methane, ethane, and heavies like propane and butanes. Depending on the gas pressure, the heavies will condense and constitute the liquid or wet portion of the natural gas.
You will commonly hear differentiation in natural gas fields as to whether they are predominantly wet or dry. NGLs are much more valuable as raw material for further processing than as fuel for simple combustion.
LNG on the other hand is an acronym for Liquefied Natural Gas the gaseous portion of natural gas (mostly the methane and a little ethane) in the liquefied state which occurs at -260 oF. LNG is an efficient way to move, transport and handle large quantities of natural gas instead of trying to store it in the gaseous state at elevated pressures.
While pipelines are the safest and most efficient and way to transport oil and gas, trucks and rail are more flexible in terms of timing and destination. Adding new pipeline infrastructure takes considerable time and investment, and often faces political resistance.
The recent growth in domestic US production has led to an expansion of crude-by-rail shipments since many new fields are not connected to existing pipeline infrastructure. A lack of pipelines exist to directly service domestic refining centers in the Northeast and Gulf Coast as these have traditionally been supplied by oil imported from overseas.
This concept will be discussed more in depth in the Industry Trends module.
Storage
Moving on from transportation, let's discuss storage. The methods of storage for crude oil and natural gas are quite different, so we'll break down each group separately.
Crude Oil
Storage facilities for crude oil and refined liquids is pretty straight forward. Methods include bulk terminals, refinery tanks and holding tanks to get material into pipelines, or ready to be shipped on a vessel.
Cushing, OK is the delivery point for the NYMEX/CME crude oil futures contract. As such, it is an important storage location for traders looking to deliver oil against these contracts.
There is currently storage capacity to hold about 65 million barrels of oil at this location (up from about 26 million in 2005).
The Strategic Petroleum Reserve (SPR) is an emergency storage of oil maintained by the US Department of Energy. Current storage capacity is approximately 727 million barrels, with about 695 million barrels (or 36 days consumption) in inventory.
Can anyone guess what brought about the development of the SPR?
If you guessed the oil embargo of 1973-74 you're right. This supply disruption really exposed just how reliant the US was on imported oil at that time.
Natural Gas
Natural gas is another story. Because of its extremely high pressure, natural gas must be stored in underground reservoirs until it is ready to be transported to market. Most commonly depleted gas reservoirs are used, with gas being injected back into the ground to await it's next move. Salt caverns and aquifers are other storage possibilities.
There is approximately 3.5 trillion cubic feet of working gas in nearly 400 facilities in the US.
Midstream Oil and Gas Summary
The midstream segment of the oil and gas business concentrates on the processing, transportation, and storage of crude oil and natural gas.
Midstream activities are considered a low-risk, highly-regulated segment of the oil and gas industry.
Field processing is the first phase of oil and gas processing starting in the onshore or offshore oil or gas production field. Fractionation plants, which remove natural gas liquids (NGL) from the produced oil and gas are also a component of the midstream activities.
After field processing, treated oil and gas is delivered via a complex transportation, transmission and distribution infrastructure.
Storage facilities for crude oil and refined liquids include bulk terminals, refinery tanks and holding tanks. Because of its extremely high pressure, natural gas must be stored in underground reservoirs until it is ready to be transported to market.
Thanks for listening, and we hope you've learned a few things about the midstream segment of the oil and gas industry.
Be sure to share this as you see fit, and review us on itunes if you have a chance. Your feedback really helps us improve as we move forward.
If you want more information about our Oil 101 content go to www.ektinteractive.com and register to access our free content library.
See you next time.
The post Oil 101 – Introduction to Midstream Oil and Gas appeared first on EKT Interactive.
The first 10 episodes of the Oil 101 podcast have covered the ‘Microbes to Markets’ journey of getting hydrocarbons out of the ground, converting them to useful products, and bringing them to consumers.
Now we turn to the ‘What is…?’ portion of Oil 101. We started with the most basic of oil and gas questions, What is Crude Oil?, now let’s do a quick discussion of ‘What is Natural Gas?’.
In this episode of the Oil 101 podcast series, we will discuss what exactly crude oil is and some of the key components of crude oil that affect it being refined into useful petroleum products.
In this 6-minute podcast, we will discuss:
Listen to ‘What is Crude Oil’ below:
Natural gas, like crude oil and coal, is a mixture of hydrocarbon compounds which are multiple combinations of carbon and hydrogen atoms. As far as the oil and gas industry is concerned, natural gas occurs in two principal forms: associated gas and non-associated gas.
Associated gas occurs in conjunction with crude oil reservoirs either dissolved in the oil or occurring separately in the same reservoir. Since it separates from the oil at the casing head of the production well, it is also known as casing head gas or oil well gas. There are huge quantities of associated gas produced with Middle East crude oil.
Associated gas often is re-injected into the producing well to raise the pressure to get more oil out of the well, or held in the reservoir until a distribution system can be developed to move the gas to market.
Non-associated gas occurs in gas-only reservoirs separate from crude oil. The majority of US natural gas production is non-associated gas.
The principal components of natural gas are methane and ethane with varying amounts of heavier hydrocarbons including propane, butane and pentane. Methane is a light hydrocarbon. It has a relatively low boiling point, so at room temperature it is a gas.
Natural gas is the cleanest of all the fossil fuels. The main products of the combustion of natural gas are carbon dioxide and water vapor, the same compounds we exhale when we breathe.
Unlike coal or oil, combustion of natural gas releases very small amounts of sulfur dioxide and nitrogen oxides, virtually no ash or particulate matter.
Like crude oil, natural gas has a variety of global and US measurements. We will focus on Heating Value and Volume measurements.
Natural gas, like other forms of energy, is measured in terms of heating value, or British thermal units, often called BTUs.
Natural gas is valued for its heating ability with end use heating values generally ranging between 950 and 1150 Btu per cubic foot.
One Btu is the heat required to raise the temperature of one pound of water one degree Fahrenheit. To put the Btu in perspective, ten burning matches release 10 Btu.
When measuring volume, natural gas is commonly measured in cubic feet. One cubic foot of natural gas releases approximately 1,031 Btu.
Natural gas reserves are measured in terms of volume as Millions , billions or even trillions of cubic feet (TCF). or billions of cubic meters (BCM or Bm3).
In natural gas production, prolific wells produce and deliver hundreds of thousands or even millions of cubic feet of gas per day (MMcfd).
Purchases and sales of natural gas are generally measured in millions of BTU's (MMBTU's).
Transportation capacity of natural gas, which is a function of pipeline size and compression capability, generally is measured as a consistent stream, expressed in volume per day – such as million or billion cubic feet per day.
Pipeline size is measured in terms of pipe diameter. Compression is measured in terms of pressure relative to atmospheric pressure at sea level, expressed as pound-force per square inch gauge (psig).
Because of its clean burning characteristics and heating value, natural gas is used around the world as follows:
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In this brief 2-minute podcast, we discuss the Nelson Complexity Index as it pertains to refinery complexity in downstream oil and gas.
Listen to Oil 101 – Nelson Complexity Index below or view all Oil 101 podcast episodes:
Thanks for listening to the EKT Interactive Oil and Gas Podcast Network.
Oil 101 – A FREE introduction to the oil and gas industry
What is Refining?
What is the difference between Upstream and Downstream?
A refinery's complexity is assessed based on a concept known as the Nelson Complexity Index, or NCI.
This concept, developed by W.L. Nelson in the 1960s, is a pure cost index that provides a relative measure of the construction costs of a particular refinery based on its crude and upgrading capacity.
Under the Nelson Complexity Index, the most simple refinery that only distills crude oil, called a topping refinery, is considered to have a complexity factor of 1.0.
All other processing units are rated in terms of their cost relative to this unit.
For example, a catalytic hydrotreating unit has a complexity of 2.0 while a coking unit is assigned a complexity of 6.0.
As more processes are added to a refinery, its complexity factor increases.
While the complexity factor is independent of the refinery capacity, multiple units of the same process – multiple hydrotreaters for example – do increase complexity.
A deep conversion refinery, with numerous and varying processes has the highest complexity factor of all, typically 9.0 or higher.
As an example, Marathon Petroleum's most complex refinery is its Galveston Bay Refinery which had a Nelson Complexity Index factor of 15.3 as of 2013.
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In this first episode of the Oil 101 podcast series, we will discuss the fundamentals of the Upstream segment of the oil and gas industry. Upstream is all about the wells, but first you have to figure out where to drill.
In this 12-minute podcast, we will discuss:
Listen to Upstream 101 below…
Oil 101: Introduction to Upstream
The first lesson in our Microbes to Market' coverage will be discussing the Upstream segment of the oil and gas industry.
This content was taken from our Fundamentals of Upstream ebook, which is available in the free members content library at www.ektinteractive.com.
This Upstream overview includes segments on:
So, What is Upstream?
Most oil and gas companies' business structures are organized according to business segment, assets, or function.
The upstream oil and gas segment is also known as exploration and production, or E&P because it encompasses activities related to searching for, recovering, and producing crude oil and natural gas.
Upstream is all about wells, where to locate them; how deep and how far to drill them; and how to design, construct, operate and manage them to deliver the greatest possible return on investment with the lightest, safest and smallest operational footprint.
In fact, the E&P sector should probably be called the EDP sector – because you can't find oil if you don't drill wells.
Exploration
Obtaining the Lease
Let's start with exploration which involves the operator obtaining a lease and permission to drill from the owner of onshore or offshore acreage thought to contain oil or gas.
Then the operator must conduct geological and geophysical surveys to select the first well site to explore for, and hopefully find, economic accumulations of oil or gas.
This well is often called a wildcat well.
Drilling is physically creating the borehole in the ground that will eventually become a productive oil or gas well.
This work is typically done by rig contractors and service companies in the Oilfield Services business sector. On a wellsite, there can be as many as 30-40 different service contractors providing expertise to the operator.
Wells can be relatively simple or unbelievably complex. Wells can totally vertical for miles or both deep and horizontal.
There are also highly complex J and S configured wells with numerous branches, or laterals, emanating from the original, or mother , hole. These are called deviated wells.
Production
Finally, let's discuss production, where reserves are converted to cash by maximizing the recovery of hydrocarbons from subsurface reservoirs. Essentially, production is efficiently bringing the hydrocarbons to the surface and treating them as needed to make them marketable.
So that's the basics of E&P. We will drill deeper into each of these operations in the complete Oil 101 course at a later date. Now, let's talk about unconventional resources, clearly the hottest topic in oil and gas over the last decade.
Unconventional Future of Oil and Gas
Unconventional resources are defined as any resource extracted, or produced, by any method other than the traditional vertical or slightly deviated well.
The three main sources of technological breakthroughs that have made unconventional developments profitable include:
Horizontal Drilling
Horizontal drilling is not new, but the technology has matured quickly. Horizontal wells reduce the size of the drill pad footprint and enable production along the length of a reservoir. Today, some horizontal sections can exceed 7 miles!
Hydraulic Fracturing
Hydraulic fracturing, or fracking, is the process of injecting water, chemicals, and sand into wells under very high pressures. The resulting fractures in surrounding rock formations allows for microscopic hydrocarbons to be recovered.
Deepwater Engineering
Even with all of the talk and public awareness of shale, some of the largest oil and gas discoveries continue to be found in deep water off the coasts of Africa, South America and the Gulf of Mexico. Recently a very large discovery was made in the Mediterranean of the coast of Egypt.
Deepwater subsea engineering innovations have made production economic from water depths exceeding 10,000 ft.
Upstream Business Characteristics
It is important to note that there are four key business characteristics of upstream. It is a high risk, high return segment, it is highly regulated, it is impacted by global politics, and it is very technology intensive.
The upstream industry is arguably the most complex of all the oil and gas business sectors. There are many risks and unknowns in the exploration process. Often hundreds of millions of dollars and many years are spent before an oil and gas field becomes productive, especially offshore..
The upstream segment is regulated in terms of production, access to reserves, pricing and taxation, and more and more stringent environmental regulations.
Upstream is a global business. Politics between producing nations and major oil companies can be very complicated.
Finally, as we've seen in the last decade with developments of unconventional prospects, upstream is extremely technology, and thus capital, intensive.
Who are the Players?
The four main categories of participants in the upstream sector are the Majors, the NOC's, Independents, and Oilfield Services companies.
Major Oil Companies, also called Integrated Oil Companies also operate assets in other segments of the industry.
These companies include the prominent global brands that you are familiar with including ExxonMobil, BP, Chevron and Shell.
National Oil Companies are those industry participants owned and managed by governments around the world. These include Saudi Aramco in Saudi Arabia, PEMEX in Mexico, and many others. We'll include a link to a list of all the NOC's in the program notes to this podcast.
Independents exist in each segment of oil and gas. What makes them independent is that they are not integrated into other segments. Independents in the Upstream are those E&P companies that concentrate solely on finding and producing oil and gas.
Examples include Apache and Anadarko, but there are many others.
Oilfield Services
Oilfield Services companies are an important and often misunderstood part of upstream operations.
This sector includes those companies that provide the specialized equipment, services and technical skills needed for exploring, drilling, completing, testing, producing and maintaining crude oil and natural gas wells.
Oilfield services and supply companies do not typically produce oil and gas or own the assets that contain hydrocarbon reserves.
As we mentioned earlier, at a typical wellsite, there could be 30 or more different oilfield service companies handling the mechanical, technical and analytic operations needed to successfully drill and complete the well.
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In this episode of the Oil 101 podcast series, we will discuss the origin of OPEC and what roll they play in the oil markets today.
In this 4-minute podcast, we will discuss:
Listen to Oil 101 – What is OPEC? below:
Welcome to Oil 101.
Let's talk about OPEC. So What is OPEC?
Beginning in the 1950s, numerous shifts occurred that transferred control over oil and gas production and pricing from Big Oil and oil-consuming countries to oil-producing countries.
The governments of many oil-producing nations, particularly in the Middle East and South America, saw the big Integrated Oil Companies (IOCs) operating there as instruments of the governments of their countries of origin, usually the U.S. or European countries.
For both economical and geopolitical reasons, the leaders of the producing countries began asserting their authority for control of their countries' oil and gas resources and associated wealth.
To signify their newfound authority, in 1960 the governments of Venezuela, Saudi Arabia, Kuwait, Iraq, and Iran founded the Organization of the Petroleum Exporting Countries, or OPEC, for the purpose of negotiating with major oil companies on matters of oil production, oil prices, and future concession rights.
OPEC had little impact during its first decade of existence. However, the tide turned in the early 1970s with the confluence of rising energy demand, re-negotiation of terms of business in Libya by Qaddafi, and the fourth Arab-Israeli war.
Today, OPEC represents a considerable political and economical force. According to their estimates, 81% of the oil reserves in the world belong to their members.
Saudi Arabia has the majority of OPEC reserves, followed closely by Iran and Venezuela.
OPEC as an organization is based in Vienna, Austria and was created primarily in response to the efforts of Western oil companies to drive oil prices down. OPEC allows oil-producing countries to manage their income by coordinating policies and prices. Although, the recent development of unconventional and deepwater oil and gas reserves outside of OPEC has diminished their ability to control global supply.
The caveat with OPEC participation is that the member countries cannot set individual production quotas. This can be troublesome, because political interests and economic considerations vary widely from country to country.
The U.S. historically has seen OPEC as a threat to its supply of cheap energy, as the cartel was able to set high world market oil prices at its pleasure. Additionally, the current U.S. policy of lowering dependence on OPEC-dominated Middle East oil can present diplomatic problems with those countries tied to the U.S. interests.
Today, members of OPEC are: Algeria, Angola, Ecuador, Iran, Iraq, Indonesia, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela. Although this list does change from time to time.
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In this episode of the Oil 101 podcast series, we will discuss the difference between contango and backwardation.
The shape of the oil price curve has many implications in trading, storage plays, and physical investments.
In this 3-minute podcast, we will discuss:
Contango vs Backwardation
Welcome to Oil 101. Today we're going to talk about contango vs backwardation.
You hear a lot about contango and backwardation of the oil price curve in the financial press. The first thing to understand is that crude oil futures, like most other commodities, are not priced as a single data point like a stock.
There are futures contracts for each month heading out many years in the future. When you hear the current price of oil on the news, you are usually getting the price of the front month contract, but there is much more to the story.
The price curve is established when you plot the prices of the contracts going out into the future. The shape of this curve, determined by whether the front months are cheaper or more expensive than the back months, tells a lot about current and future expectations of the supply/demand balance.
Contango
A contango market occurs when prompt crude oil prices fall below those further out in the future. These prices reflect the market's current as well as future expectations of oil prices.
It is important to note that a Contango price structure is considered normal for a non-perishable commodity, like crude oil and products, which have a cost of carry. What this means is that if you were to buy come crude oil today and store it for sale later, you would include such costs transportation and storage fees and interest forgone on money that is tied up in inventory. Therefore you would expect a higher sale price in the future to recoup these costs
A steep contango price curve can also suggest that there is currently pressure on the front months due to oversupply, lack of demand or some combination of the two.
Plotted in a chart with time on the x-axis and oil prices on the y-axis, these points create what is called the oil price curve'.
The opposite of contango is a backwardated market, where there is a premium on current oil prices over the future. This occurs when there is increased demand for a product NOW, as can be the case in an expanding global economy or in times of supply constraint, such as wars or unrest in the Middle East.
A market that is steeply in backwardation often indicates a perception of current shortage in the commodity and will encourage owners of the product to pull it out of storage.
So that's a brief explanation about contango vs backwardation. Be sure to visit www.ektinteractive.com to learn more about the oil and gas industry and our free Oil 101 materials.
See you next time.
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In this episode of the Oil 101 podcast series, we will discuss Natural Gas Liquids.
Raw natural gas produced at the wellhead contains various heavier hydrocarbons that can be liquefied into condensate and removed from the natural gas stream.
These are called natural gas liquids or NGLs
In this 4-minute podcast, we will discuss:
Listen to Oil 101 – What Are NGLs? below:
What are NGLs?
The processed natural gas used by consumers is composed almost entirely of methane.
But raw natural gas produced at the wellhead also contains various heavier hydrocarbons that can be liquefied into condensate and removed from the natural gas stream.
These are called natural gas liquids or NGLs and include ethane, propane, butane, pentane and pentanes plus.
NGLs have higher values as separate products, making it economical to remove them from the gas stream.
While the chemical composition of NGLs is similar, their applications vary widely. For example, ethane is used to produce ethylene, which is turned into plastics. Propane, in contrast, is burned for heating.
NGLs are also often used as feedstocks for petrochemical plants. Butane is usually further processed in refineries and added to gasoline.
For reporting purposes, reserves associated with NGLs are typically combined with oil reserves, not natural gas.
Producers often target liquids-rich production during periods of higher oil prices, as the value of NGLs is influenced by oil prices.
The US is the largest producer of NGLs in the world, reaching nearly 3.3 million barrels per day in 2015.
NGL extraction
There are two principle techniques for removing NGLs from the natural gas stream – the lean absorption method and cryogenic processes.
Lean Absorption Method
Most NGLs can be removed by passing the raw natural gas through an absorption tower.
The natural gas is brought in contact with a pool of gas-absorbing oil that catches the heavier hydrocarbons but allows the methane to move through.
The mixture of absorbing oil and NGLs is fed into an oil still. Here it is heated to a temperature above the boiling point of the NGLs, but below that of the oil, to separate them.
Cryogenic Processes
While absorption methods can extract almost all of the heavier NGLs, the lighter hydrocarbons, such as ethane, are often more difficult to recover. In some cases, it is economic to simply leave the lighter NGLs in the natural gas stream.
But if needed, cryogenic processes can be used to extract ethane and other lighter hydrocarbons.
The cryogenic process consists of dropping the temperature of the gas stream to around minus 120 degrees Fahrenheit using a turbo-expander.
At this temperature, methane remains a gas while the heavier hydrocarbons become liquid and can be removed.
The collected NGLs are then separated by passing them through a series of progressively warmer distillation columns, starting with a demethanizer.
Each column is controlled to a temperature that will vaporize a specific hydrocarbon from the remaining liquid.
The post Oil 101 – What Are NGLs appeared first on EKT Interactive.
In this episode of the Oil 101 podcast series, we will discuss what determines reportable reserves in an oil and gas company’s balance sheet.
In this 3-minute podcast, we will discuss:
Listen to Oil 101 – What Are Reserves? below:
Welcome to Oil 101.
So, what are oil and gas reserves?
The vast amounts of crude oil and natural gas trapped underground are referred to as reserves.
As we have discussed in other lessons, locating and developing the reserves is the key function of the upstream segment of the oil and gas business. Reserves are the lifeblood of an exploration company, and every year they must find enough reserves to replace their annual production or the oil company is being liquidated.
However there are rules as to which discoveries can be added to an oil and gas companies reserves.
Proven reserves are the estimated quantities which geological and engineering data demonstrate can be recovered in future years from known reservoirs, assuming existing economic, technical and operating conditions. Proven reserves have a more than 90 percent probability of recovery, while what are called probable reserves have greater than 50 percent probability of recovery.
Again, reserves can only be booked as proven if they can be developed at the current crude price. So when crude prices fall, exploration companies are forced to write down their reserves.
Reserves definitions are based on sophisticated engineering estimate calculations set by two industry bodies:
Engineering estimates are the summation of production forecasts and are based on quantitative tools that use well data and production histories to estimate remaining oil or gas.
Accounting definitions, on the other hand, are set by the US Securities and Exchange Commission (SEC). From 1982 to 2009 the SEC restricted public companies to publishing only proved reserves at the year-end price in their annual reports.
In new 2009 guidelines, the SEC rules were better aligned with the SPE-AAPG rules to get consistency between the accounting and engineering definitions.
The SEC now requires oil companies to disclose the year-end economic producibility of proved reserves.
In making this calculation, companies must use the unweighted average of oil and gas prices on the first day of each month for 12 months preceding the end of the company’s fiscal year. This is a change from the prior SEC requirement of calculating the year-end economic producibility of a reserve based on oil and gas prices on the last day of the year
Note that under Canadian rules, most companies report proven and probable reserves.
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