Oil & Gas Industry Overview

Module Objective:
The objective of this module is to provide a comprehensive overview of the

industry in which you will learn what petroleum is, where it comes from and how
it affects all of our lives on a daily basis. You will become familiar with the various
phases of the Oil and Gas Value Chain - upstream, midstream and downstream the key industry players, the basics of oil and gas supply, demand and pricing
and the challenges that the industry faces as demand for these important forms
of energy grows by 50% in the next 25 years
Overview
There are many ways to look at the oil and gas industry.
From a personal perspective, oil and gas provide the world's 7 billion people with 60
percent of their daily energy needs. The other 40 percent comes from coal, nuclear and
hydroelectric power, "renewables" like wind, solar and tidal power, and biomass products
such as firewood.
As fuels, they keep us warm in cold weather and cool in hot weather; they cook our food and
heat our water; they generate our electricity and power our appliances; and they take us by
car, bus, train, ship or plane to places near and distant. We all feel the economic pinch when
the prices of gasoline (Figure 1), home heating fuel or electricity increase sharply, even
though in many developed countries, they still cost less than some brands of bottled water!
Figure 1: The rising fuel prices affect us all.

As petrochemical feedstocks, oil and gas are the raw materials used to manufacture fertilizers,
fabrics, synthetic rubber and the plastics that go into almost everything we use these days
(Figure 2), from toys to personal and household items to heavy-duty industrial goods.
Figure 2: Plastics and many other products are derived from petrochemical feedstocks.
From a business perspective, oil and gas represent global commerce on a massive scale
(Figure 3). World energy markets are continually expanding, and companies spend billions of
dollars annually to maintain and increase their oil and gas production. Over 200 countries
have invited companies to negotiate for the right to explore their lands or territorial waters,
hoping that they will find and produce oil and gas, create local jobs and provide billions of
dollars in national revenues.
Figure 3: The oil and gas industry influences virtually every aspect of the global economy.
From a geopolitical perspective, large quantities of oil and gas flow daily from "exporting"
regions such as the Middle East, Africa and Latin America to "importing" regions such as
North America, Europe and the Far East. This creates political, trade, economic and even
national security concerns on both sides (Figure 4). Oil and gas exporters want to maximize
their revenues and improve their trade balances while maintaining control and sovereignty
over their natural resources. At the same time, importing nations want to minimize trade
deficits and ensure a steady, reliable oil supply. China, for example, has recognized that it
must obtain access to oil in order to continue its long-term sustained growth and is actively
seeking new sources of supply in the major producing companies.
Figure 4: Maintaining a steady supply of oil and gas is vital to a country's long-term
economic growth (Houston Port).
From an internal policy perspective, producing countries continually wrestle with questions
of how best to develop their resources and attain long-term sustainable benefits for their
people. At the same time, consuming countries are always considering how to reduce their
dependence on imported oil, either by imposing higher energy taxes to spur conservation,
tapping into domestic resources such as coal (less costly but more polluting than imported
oil) or developing alternative energy sources such as nuclear power (Figure 5).
These issues have major long-term impacts, both within individual countries and on the world
at large, even affecting such fundamental issues as war and peace.
Figure 5: Both exporting and importing countries face major policy decisions related to oil,
gas and other energy resources.
Finally, from a health, safety and environmental (HSE) perspective, there is a continuous
concern for safety in oil and gas operations, the impact that new projects have on surface
environments, the possibility of oil spills and the effect of pollutants such as CO 2 (carbon
dioxide, a product of hydrocarbon combustion) on global climate change and air quality
(Figure 6).
Figure 6: Air pollution ("smog") over the city of Los Angeles, California impacts the health
of local society.
The oil and gas business is clearly a multifaceted, global industry that impacts all aspects of
our lives. And yet it is one that we tend to take for granted until a crisis emerges-a tanker runs
aground, a hurricane damages a refinery, a country changes political leaders or revises its
energy policies. Then we blame "big oil" or OPEC or the politicians or the local service
station attendant before things quiet down again.
In this module, we will learn about the nature of oil and gas, define some basic industry terms
and list common units of measurement and conversion factors. We will introduce the concept
of the Oil and Gas Value Chain, and examine its structure and functional relationships. We
will then look at sources of oil and gas supply, major areas of demand, pricing fundamentals,
drivers of demand and future trends. Finally, we will identify some of the key players who
make up this dynamic and vibrant industry.
Crude Oil and Natural Gas: From Source

to Final Products
Crude oil and natural gas are mixtures of hydrocarbons-chemical molecules that contain
only hydrogen and carbon. Crude oil is a liquid both underground and at normal surface
conditions. Natural gas is a vapour at normal surface conditions; underground, it can exist
either as a vapour or something like a bottle of carbonated soda-"in solution" with crude oil
until the pressure is reduced.
The term "petroleum" collectively refers to crude oil, natural gas and solid hydrocarbon
mixtures like tar and asphalt. In addition to hydrocarbons, petroleum may contain impurities
such as water, sulphur compounds, oxygen, nitrogen, carbon dioxide and traces of metals.
Chemistry of Hydrocarbons
The smallest unit of a hydrocarbon compound is a molecule consisting of hydrogen and
carbon atoms. The physical properties of a hydrocarbon mixture - whether it exists as a solid,
liquid or gas under a given set of conditions, how much energy it contains, what products can
be derived from it and so on - are determined by the numbers and configurations of atoms
contained within each of its molecules, and how much these molecules weigh.
The simplest hydrocarbon molecule is methane. It is the essential ingredient of natural gas,
and the source of the "blue flame" that we see when we turn on a gas stove or furnace
(Figure 7). Methane consists of one carbon (C) atom and four hydrogen (H) atoms. Thus, its
chemical formula is CH4 or, in abbreviated form, C1.
Figure 7: The familiar blue flame that characterizes the combustion of methane, the key
component of natural gas.
The molecular weight of a molecule is equal to the total weight of its constituent atoms.
Hydrogen, the smallest atom, has an atomic weight of 1 by definition. Carbon has an atomic
weight of 12. Thus, we can determine the molecular weight of methane as follows:
Total atomic weight of carbon atoms: 1 x 12 = 12

Total atomic weight of hydrogen atoms: 4 x 1 = 4
Total molecular weight = 12 + 4 = 16
Figure 8 shows the names, chemical formulas, molecular weights, structures and key
physical properties of the "lighter" hydrocarbons C1 through C4. Note that:
The more atoms a molecule contains, the heavier it is. The molecular weight of ethane
(C2) is 30, while that of propane (C3) is 44 and that of butane (C4) is 58.
The heavier a molecule, the more likely it is to exist as a liquid at normal surface
conditions. This is based on its higher boiling point (i.e., the temperature above which
it changes from a liquid to a gas at atmospheric pressure). It is also more likely to
have a higher energy content or heating value per unit volume.
Methane, ethane and propane each have a single molecular configuration. Butane
(C4H10), however, shows two possible arrangements (normal butane and iso-butane),
and each arrangement has unique physical properties. Because a simple, heavy
hydrocarbon molecule can contain as many as 66 or more carbon atoms, the variety of
molecular arrangements that can be present in a mixture and therefore, the range of
physical characteristics is immense.
Figure 8: Atomic structure, chemical name and potential uses of the hydrocarbon molecules
methane (C1) through normal and iso-butane (n-C4 and i-C4).
Natural gas mixtures fall into two general categories: dry or lean natural gas has high
concentrations of methane and ethane (typically 95 percent or more), while wet, or rich,
gases have higher concentrations of propane, butane and the intermediate-weight

hydrocarbons pentane (C5) through heptane (C7). As the proportions of heavier molecules in a
hydrocarbon mixture increase, it is more likely to exist as a liquid at atmospheric conditions.
Origins of Crude Oil and Natural Gas

Naturally occurring hydrocarbons come from the decomposed remains of ancient plants and
animals. Through a sequence of geologic events that occurred over millions of years, organic
material was deposited on the Earth's surface and then transported to depressions or basins,
where it accumulated and gradually became buried at great depths under layers and layers of
sediments. There, in what geologists refer to as source rocks, it was subjected to much higher
pressures and temperatures. Over time, and through a series of intermediate chemical
reactions, some of this material eventually turned into petroleum.
In general, the deeper a rock formation is located in the Earth's crust, the higher its
temperature will be. Thus, the type of petroleum that formed through these processes
depended largely on the depth of the source rocks.
In relatively shallow source rocks, where temperatures ranged from about 60 to 80C
[140 -176F], the organic matter was converted into heavy oil.
At lower depths and higher temperatures, from about 80C to 175C [176F to
347F], the heavier, long-chain organic molecules began to break up into shorter
molecules and form medium and light oil.
Where temperatures exceeded 175C [347F], the molecules became even shorter and
lighter, with more and more matter transformed to rich gas until, by the time it had
reached 600F [315C], all of it had been transformed to dry gas (methane).
Figure 9 shows the wide diversity that exists among petroleum fluids discovered worldwide.
Figure 9: Selection of petroleum samples ranging from a heavy black oil on the right to a
light condensate on the left.
Petroleum Migration and Accumulation
The source rocks in which petroleum formed millions of years ago are not the same rocks in
which it is found today. Rather, oil and gas, being lighter than the water normally contained
in rock formations, moved upward by gravity forces from the source beds along permeable
migration paths. Eventually, it accumulated in reservoirs contained within geologic traps,
surrounded by impermeable cap rocks or seals that keep it from traveling any farther (Figure
10).
Figure 10: Cross section showing source rocks, migration paths and reservoirs in a
sedimentary basin similar to the North Sea basin. After oil and gas form in the source rocks,
gravity causes them to migrate upward until they are trapped in a reservoir waiting for
discovery.
Petroleum Reservoirs
The term "reservoir" brings to mind the image of a large pond or lake, so it is natural to hear
the term petroleum reservoir and picture a huge underground "pool" of oil. In reality, a
petroleum reservoir is a porous, permeable rock formation, in which oil and gas are contained
in the empty spaces between the rock grains. These spaces are interconnected, thereby
forming channels or conduits through which fluids can flow to a well, and from there to the
surface.
Separation and Treatment of Produced Oil and Gas

The fluid that comes out of a typical oil well is actually a combination of crude oil and
natural gas, often mixed with water, non-hydrocarbon gases and other impurities. That is the
reason why the volume of crude oil and natural gas is so different from the reservoir
conditions and surface conditions, as shown in Figure 11.
Figure 11: Hydrocarbon fluids change state as they travel from the reservoir to the surface.
The first step in processing this fluid is to route it to centralized surface handling facilities,
where carefully designed vessels are used to separate the oil, water and gas into individual
streams. The water is pumped back into the reservoir or otherwise disposed off in an
environmentally friendly manner. The oil is metered and stored in tanks to await pipeline or
tanker transport to the point of sale, and the gas is treated or conditioned to remove water
vapour and other impurities and processed to recover gas liquids before being metered and
sold.
Figure 12 shows the representative compositions of various produced fluids after separation
at the surface, including a crude oil with associated gas, a wet (rich) gas and a dry (lean) gas.
Figure 12: Representative compositions of various produced fluids after separation at the
surface. Note that C7+ refers to the composition of C7 plus all the heavier hydrocarbons.
Gas Handling and Processing

If the treated gas is dry or lean (i.e., contains mostly methane), it may either be compressed
and sent directly to its point of sale through high-pressure pipelines, or it may be turned into
liquefied natural gas (LNG) by cooling it to temperatures as low as -160C [-258F]. LNG
occupies only about 1/625 of the volume of dry gas, allowing it to be transported to distant
markets in specially designed ships.
If the gas is wet or rich (i.e., has substantial amounts of ethane or heavier hydrocarbons), one
post-treatment option might be to send it to a gas processing plant. There, it may be cooled to
around -150F [-101C], causing these hydrocarbons to condense to NGL (natural gas
liquids). The NGL is then sold to a refinery or petrochemical plant.
If sufficient NGL is available, it may be economical to separate it further into its constituent
hydrocarbons. This involves a process called fractionation in a series of columns, where the
NGL is sequentially warmed to higher temperatures, causing the individual hydrocarbonsethane first, then propane, then butanes-to boil off and then condense. Propane, butanes and
their mixtures are referred to as liquefied petroleum gases (LPGs).This leaves a residual,
Natural Gasoline, which can be stored at atmospheric conditions (Figure 13).
Natural gas, LNG, NGL, LPGs and the hydrocarbons that come from them all have
individual markets, and all of them are in their final form to be used as fuels or for
manufacturing petrochemicals.
Figure 13: Rich gas is separated by gas processing into dry gas and NGLs. The NGLs may
be sold to a refinery or petrochemical complex, or separated by fractionation into individual
hydrocarbon liquids.
Crude Oil Refining

Except for a few special power generation applications, most crude oils are not suitable for
use as finished products. In nearly all cases, they must be refined to satisfy specific markets.
Figure 14 illustrates, from left to right, the basic processes involved in refining crude oil.
Initially, products may range from light gasoline vapours and LPG to heavy residuals
("residuum"). Depending on market demand, these first "cuts" will proceed to more
complex processing into final product blends (e.g., seasonal transportation fuels, heating fuels
and special products like lubricating oils and asphalt). The refiner's ultimate goal is to
maximize the crack spread, i.e. the per-unit difference between the product revenue and the
cost of the crude oil. If the products sell for $52 per barrel, for example, and the cost of crude
is $47 per barrel, then the crack spread is ($52-$47), or $5 per barrel.
Figure 14: Simplified schematic of a refinery showing how a crude oil turned into an initial
"cut" of refined products.
Petrochemicals
Natural gas, natural gas liquids (including LPG) and the various refinery cuts may also be
used as raw materials or feedstocks for manufacturing petrochemicals. For example, methane
can be used to make ammonia for fertilizer, and ethane can be used to make ethylene, the first
step in making plastics.
Table 1 lists some of the major categories of products that come from petrochemicals.
Consider which of these products you use daily, and what would you do or what would be
your alternatives if these products did not exist.
Some Major Categories of Petrochemical Products
Plastics
Lubricants
Process Chemicals
Carpeting
Pharmaceuticals
Rubber Goods
Adhesives
Cosmetics
Footwear
Paints
Detergents
Inks
Sealants
Fragrances
Solvents
Caulking Compounds
Fertilizers
Apparel
Fibers
Transparent Sheets
Tires
Table 1: Major petrochemical products produced from hydrocarbon feedstocks.
Measurement Units and Conversion

Factors
Depending on the purpose of the measurement-and on regional or national preferences - oil,
gas, gas liquids and their products may be measured in terms of volume, weight or thermal
energy. For example:
Petroleum engineers, particularly those working in the Western Hemisphere, measure

oil and gas volumes to answer questions like, "How much oil or gas do I have in my
reservoir? How much can be produced during the life of the field? What is the daily
production rate?"
In contrast, ship owners would want oil shipments to be measured in weight to avoid
overloading their tankers.
Marketers, on the other hand, are interested in the value of the products to their
customers. When they sell oil and gas products for fuel, they charge on the basis of
thermal energy units rather than volume or weight.
Crude Oil Measurement

Crude oil, as shown in Figure 15, is measured in units of volume, weight and thermal energy.
The standard volume unit for crude oil measurement, the 42-gallon barrel ("bbl"), dates back
to the 1860s, when Pennsylvania producers actually stored and transported petroleum in
wooden barrels. To this day you may hear a petroleum engineer say, "This field has reserves
of 1 billion barrels and we expect to produce it for 20 years at a design rate of 150,000
bbl/day." In countries that use the SI or "metric" system, oil volumes may be measured in
metric tonnes.
In Europe and especially the former Soviet Union, crude oil is measured in terms of weight
and expressed in metric tonnes ("mt"), where one mt equals 2,204 lb. Although crude oils
vary in density, a good "average" volume-to-weight conversion is 7.33 bbls/mt. Based on this
conversion factor, a Russian engineer would refer to production not as 150,000 bbl/day but as
20,464 mt/day.
The thermal energy content or heating value of crude oil depends on its composition, but
generally averages about 6 million BTU per barrel, where a BTU (British Thermal Unit) is
the amount of energy required to increase the temperature of one pound of water by 1F.
Thus, a barrel of oil that sells for $48 would provide energy at an equivalent cost of:
($48/bbl) (6 million BTU) = $8/million BTU (per barrel of oil).
(For those familiar with the SI unit of energy, the Kilojoule (kJ),1 BTU = 1.055 kJ.)
Figure 15: A barrel of crude oil and its measurement units in volume, weight and thermal
energy units.
Oil Quality: API Gravity

A crude oil's density is an important measure of its overall quality. This is because lighter oils
are generally easier to produce and refine than heavy oils, and therefore tend to have higher
value.
Oil density is sometimes expressed in terms of its specific gravity, but more often is given as
API gravity.
The specific gravity (S.G.) of a liquid is defined as the density of that liquid divided
by the density of fresh water. Fresh water has a density of 62.4 pounds per cubic foot.
An oil with a density of 53 pounds per cubic foot, therefore, would have a specific
gravity of (53/62.4), or 0.85. Fresh water, by definition, has a specific gravity of 1.0.
The American Petroleum Institute (API) has developed a special measure that
expresses oil density in terms of API gravity, or API. It is related to the specific
gravity as follows:
S.G. = 141.5/(131.5+API)
or
API = (141.5/S.G.) - 131.5
From these relationships, we can determine that fresh water, with a specific gravity of 1.0,
has an API gravity of 10 degrees, while our 0.85 S.G. oil above has an API gravity of 35
degrees; almost all crude oils are lighter than water and so they will have higher API
gravities. Figure 16 shows the correlation between specific gravity and API gravity for
various crude oil and condensate samples.
Figure 16: Correlation between specific gravity andAPI gravity. Note the API gravities of
crude oils from different fields, including Lagunillas (Venezuela), Prudhoe Bay, (Alaska),
Ghawar (Saudi Arabia), Ninian (offshore UK), and the very light condensate produced from
the Arun Field (Indonesia).
Natural Gas Measurement

Natural gas is typically measured in terms of its volume at surface conditions and in thermal
energy units. It is measured by weight only when it is in the liquid state (LNG).
Because gas is compressible, its volume varies significantly with changes in temperature and
pressure. In order for gas volume measurements to have any meaning, they have to have
some standard frame of reference. For this reason, the industry has established standard
conditions for referring to all gas volumes (Table 2).
Unit of Gas Volume
Standard Conditions
Area of Common Usage
Measurement
Standard Cubic Foot
14.696 psi (1 atmosphere)
USA, Latin America, Africa,
(SCF)
and 60F
Middle East.
Standard Cubic Meter 100 kPa (0.987
Europe, Canada, Russia.
(Sm3)
atmosphere) and 15C
Conversions: 1 m3 = 35.315 ft3; 1 ft3 = 0.0283 m3
Table 2: Standard units and conditions for measuring gas volumes.
The standard cubic foot and the standard cubic meter are the most widely used (1 m 3=35.31
SCF). Some European countries use conditions called "Normal" which are for pressure 760
mmHg (14.696 psia or 1 atmosphere) and temperature 0 C. It is important that these
conditions are clearly defined at the time of signing any gas contract.
Figure 17 demonstrates the compressibility of natural gas. The gas has a volume of 1 unit (ft 3
or m3) in the reservoir at 4,000 psia pressure. When it is produced to surface conditions of
temperature and pressure it expands to 238 units, and when it is compressed into a highpressure pipeline at 1,000 psia pressure it becomes 3 units. In all three conditions the
engineer will refer to the gas volume as 238 standard units (ft3 or m3 ).
Figure 17: Compressibility of natural gas. This Figure shows the effect of pressure and
temperature on natural gas volumes in the reservoir, pipeline and at surface conditions.
Because the cubic foot and cubic meter are too small for practical use, the industry uses larger
standard quantities with appropriate symbols (Table 3). Thus, rather than saying that a gas
well produces at a rate of 10,000,000 SCF/day, we say that the well produces at 10
MMCF/day.
Units
Quantity
Thousand
Million
1000
1,000,000
Symbol
ft3
MCF
MMCF
Symbol
m3
Mm3
MMm3
Application
Basic unit of sale

Daily well
production
3
Billion
1,000,000,000
BCF
bm
Annual field
production
3
Trillion
1,000,000,000,000
TCF
tm
Field reserves
If gas volume is measured in m3, simply replace CF with m3 within the above
symbols. Some companies use K, M, Giga ("G") and Tera ("T") in place of
thousand, million, billion and trillion.
Table 3: Common practical units of gas measurement.
The heating value of natural gas depends upon its composition. Pure methane has a heating
value of 1,010 BTU/SCF [35,663 BTU/m 3], while propane has a heating value of 2,516
BTU/SCF. A gas that contains 50% methane and 50% propane will have a heating value that
is midway between 1,010 and 2,516 BTU/SCF.
Gas Liquids and Petroleum Product Measurement

LNG (liquefied natural gas) is typically measured in metric tonnes or cubic meters. The
normal conversion to volume units in the liquid state is that 1 mt equals 2.12 m3 or 79.5 ft3.
When 1 tonne of LNG is vaporized to become natural gas it expands about 625 times to equal
1380 m3 or 48,700 ft3 at atmospheric conditions.
LPG and petroleum products are generally measured in gallons in the United States and
certain other Western Hemisphere countries, and kiloliters or metric tonnes in Canada, and
in Europe and other Eastern Hemisphere countries. Their conversion from volume to weight
will depend on the density of the product. Thus, one metric tonne of propane is equal to 521
gallons or 1.97 kiloliters, while one metric tonne of fuel oil is equal to 281 gallons or 1.064
kiloliters.
LPG must be stored at an elevated pressure or be refrigerated in order to remain in the liquid
state, and so it is measured at these high-pressure and/or low-temperature conditions rather
than at "atmospheric" conditions (Figure 18).
As is true for oil and natural gas, the heating value of a petroleum product depends upon its
composition. For example, the heating value of propane is 91,500 BTU/gal, while that of
heavy fuel oil is 150,000 BTU/gal. However, because each product has a standard, relatively
narrow industrial specification, their individual heating values will not vary significantly and
so they are usually traded on the basis of weight (e.g., $/mt) or volume (e.g., $/gallon).
Figure 18: Propane must be stored at a pressure of 200 psi or be cooled to -44F (-42C) in
order to remain in the liquid state. This photo shows an outdoor grill with a storage tank in
which liquid propane is maintained at 200 psia pressure and may be exposed to a
temperature up to 100F (38C) and still remains as liquid.
Energy Content and Equivalency

From the standpoint of meeting heating requirements, is it better to have a tonne of crude oil
or a tonne of coal or a tonne of LNG?
To answer this question, we can look at the heating values of crude, gas and products as
shown in Table 4:
Fuel
Crude Oil
Crude Oil
Natural Gas (LNG)
Coal
Quantity BTU Equivalent (approximate)

1 bbl
6 million BTUs
1 tonne
44 million BTUs
1 tonne
49.2 million BTUs (48,700 ft3 x 1010 BTU/ft3)
1 tonne
24 million BTUs
Table 4: BTU equivalents of hydrocarbon fuels.
Thermal Energy Equivalency:

Using the thermal energy relationships from Table 4, we can relate the value of any
hydrocarbon to a common measure based on thermal energy equivalency. The normal unit is
either the barrel of oil equivalent (BOE) or tonnes of oil equivalent (TOE).
Example: Last year, Colombia produced 551,000 bbls/day of crude oil, 619 million ft3 /day of
natural gas and 65.6 million tonnes of coal. Express their annual production in barrels of oil
equivalent and tonnes of oil equivalent.
Solution: Barrels of Oil Equivalent
Annual oil production:
551,000 bbl/day x 365 days
= 201.1 million barrels of oil equivalent
Annual gas production:
619,000 MCF x 365 days x (1 million BTU/MCF) / (6 million BTU/bbl)
Annual coal production:
65.6 million tonnes x (24 million BTU/tonne) / (6 million BTU/bbl)
BOE = 201.1 + 37.7 + 262.3 = 501.1 million
Solution: In terms of Tonnes of Oil Equivalent
We use the relationship that 1 tonne = 7.33 bbls.
Tonnes of oil equivalent = (501.1)/7.33 = 68.4 million TOE
Hydrocarbon Price Equivalency:

We can also relate the price of the various hydrocarbons on the basis of their thermal energy
equivalency.
Example: If the price of oil is $48/bbl what are the equivalent unit volume prices of natural
gas and coal?
Solution
Oil price = ($48/barrel) / (6 million BTU / bbl) = $8/million BTUs
Natural Gas thermal sales unit = 1 MCF = 1000 ft3 x 1000 BTU/ft3 = 1 million BTUs /MCF
Natural Gas price equivalent to the oil price= 1 million BTUs/MCF x $8/million BTUs =
$8/MCF
Coal thermal sales unit = 1 metric tonne = 24 million BTUs
Coal equivalent price = (24 million BTU/tonne) x ($8/million BTUs) = $192/tonne
In reality, as shown in Figure 19a and Figure 19b, each of these hydrocarbons has its own
regional or international market prices. In the major consuming countries, gas approaches oil
equivalent prices, but in countries like Qatar, which have large isolated gas reserves, gas
prices are much lower relative to oil. Because of a large oversupply, coal prices have been
much lower than the oil equivalency price shown above-on the order of $35/tonne for many
years-but have increased in recent years, especially on the spot markets. Industrial companies
can easily switch the burner tips of their boilers back and forth to burn natural gas or fuel oil
to take advantage of regional price differences. The residential, commercial and power
generating customers do not normally have that flexibility.
Figure 19a: This figure shows historical data of daily crude oil consumption rate and
average annual crude wholesale price for the two major marker crudes: Brent and West
Texas Intermediate.(Source: BP Statistical Review of World Energy, June 2014. Current
prices and annual consumption (2014) are estimated based on EIA and IEA publications)
Figure 19b. This figure shows the average annual natural gas prices in three regions (LNG
delivered into Japan, UK Heren Index, and Henry Hub price in the USA) and BTU equivalent
price for crude oil (Brent crude price divided by 6).(Source: BP Statistical Review of World
Energy, June 2014. Current prices (2014) are estimated based on EIA and IEA publications)
Conversion Table and Electronic Calculator

Table 5 below lists some of the more widely used factors for converting crude oil, petroleum
products and natural gas into their various equivalents. To do your own quick unit
conversions, you may use the IHRDC Oil & Gas Unit converter.
Table 5: Conversion Table for crude oil, natural gas and gas liquids. (Source: BP
Conversion Factors).
Oil and Gas Unit Converter for crude oil, natural gas, LNG, gas liquids and
petroleum products.
Review Questions
Oil & Gas Industry Overview - 1 - Assessment
The following questions correspond to the Oil & Gas Industry Note: You have 3 attempts.
Overview - Section 1 assessment. Complete this page with your
answers, and hit the 'submit' button at the end of the page to
continue.
1 What is the molecular weight of Carbon?
(a) 1
(b) 4
(c) 12
(d) 16
2 What is the reduction in volume while converting dry gas to LNG?
(a) 1/200 of the volume of dry gas
(b) 1/250 of the volume of dry gas
(c) 1/625 of the volume of dry gas
3 Petroleum engineers measure the production potential of oil and gas reservoirs on
the basis of:
(a) Thermal energy units
(b) Weight and volume units
(c) Only mass units
4 Which of these liquids has the LOWEST density?
(a) Fresh water (API gravity = 10 degrees)
(b) Lagunillas crude oil (API gravity = 21.5 degrees)
(c) Ghawar crude oil (API gravity = 34 degrees)
(d) Cannot determine; API gravity does not give an indication.
5 Oil and gas as petrochemical feedstock are used to make:
(a) Fertilizers
(b) Fabrics
(c) Plastics
(d) All of the above
6 Which of the following non-hydrocarbons may be present in petroleum reservoirs?
(a) Water
(b) Sulfur
(c) Carbon dioxide
(d) Nitrogen
(e) All of the above
(f) (a) and (b)
(g) (a), (b) and (c)
7 What is the API gravity of a crude oil with a specific gravity of 0.86?
(a) 11 degrees API
(b) 22 degrees API
(c) 33 degrees API
(d) 44 degrees API
8 When a petroleum reservoir contains rich gas, some of its heavier molecules at the
surface may separate as a liquid called:
(a) Benzene
(b) Ethylene
(c) Condensate
(d) Wet gas
9 Which of these statements is true?
(a) The heavier a molecule, the more likely it is to exist as vapor at normal surface
conditions
(b) The heavier a hydrocarbon molecule, the more likely it is to exist as a liquid at
normal surface conditions
(c) The lighter a hydrocarbon molecule, the more likely it is to exist as a liquid at
normal surface conditions
10 The first step in processing the fluid that comes out of a typical oil well is:
(a) To separate the oil, water and gas into individual streams in centralized surface
handling facilities
(b) To store the fluid in tanks to await pipeline or tanker transport to the point of
sale
(c) To compress the gas produced and send it to markets
11 Which of the following statements is FALSE about a Petroleum Reservoir?
(a) It is a porous rock formation
(b) It is where the original organic matter is deposited
(c) It is a permeable rock formation
(d) It typically contains oil, gas and water
12 Which of these following provides the greatest amount of energy, expressed in

BTUs?
(a) Five barrels of crude oil
(b) 2 MCF of natural gas
(c) One metric tonne of coal
(d) (a) and (b) provide equal amounts of energy
13 Which of these is NOT one of the "oil and gas importing" regions of the world?
(a) Far East
(b) North America
(c) Africa
(d) Europe
14 What is a measure of heating value of oil and gas?
(a) Barrel
(b) Metric Tonnes
(c) BTU (British Thermal Unit)
(d) Fahrenheit
15 What is the first process that produced crude oil should undergo in order to be
used in finished products?
(a) Refining
(b) Hydrocracking
(c) Separation
16 What chemical is a major feedstock in making plastics?
(a) Coke
(b) Ethylene
(c) Diesel
(d) Olefins
17 What percentage of the daily energy needs of world comes from oil and gas?
(a) 30 percent
(b) 50 percent
(c) 60 percent
(d) 75 percent
18 Which condition is needed to keep stored LPG in a liquid state?
(a) Low pressure
(b) Elevated pressure
(c) Heated

(c) 12
2 What is the reduction in volume while converting dry gas to LNG?
(c) 1/625 of the volume of dry gas
the basis of:
4 Which of these liquids has the LOWEST density?
(c) Ghawar crude oil (API gravity = 34 degrees)
6 Which of the following non-hydrocarbons may be present in petroleum reservoirs?
(c) 33 degrees API
8 When a petroleum reservoir contains rich gas, some of its heavier molecules at the
surface may separate as a liquid called:
(c) Condensate
9 Which of these statements is true?
(b) The heavier a hydrocarbon molecule, the more likely it is to exist as a liquid
at normal surface conditions
(a) To separate the oil, water and gas into individual streams in centralized
surface handling facilities
11 Which of the following statements is FALSE about a Petroleum Reservoir?
(b) It is where the original organic matter is deposited
BTUs?
(c) Africa
(c) Separation
16 What chemical is a major feedstock in making plastics?
(b) Ethylene
17 What percentage of the daily energy needs of world comes from oil and gas?
(c) 60 percent
(a) Barrel
(b) Metric Tonnes
(d) Fahrenheit
2 The per-unit difference between the value of refined products and the cost of the
crude oil is know as:
(a) Spark spread
(b) Residual margin
(c) Fraction spread
(d) Crack spread

3 Which of the following is NOT a potential health and safety concern inherent in oil
and gas operations?
(a) Air quality
(b) Trauma disorders
(c) Global warming
(d) Carbon dioxide emission
(a) Far East
(b) North America
(c) Africa
(d) Europe
BTUs?
(c) One metric tonne of coal
(d) (a) and (b) provide equal amounts of energy
the basis of:
(a) Thermal energy units
(c) Only mass units
7 What is the temperature range at which organic matter is transformed to gas?
(a) 60C to 80C [140F -176F]
(b) 80C to 175C [176F to 347F]
(c) 175C to 315C [347F to 600F]
(a) Fertilizers
(b) Fabrics
(c) Plastics
9 What is the heating value of pure methane?
(a) 960 BTU/SCF
(b) 1010 BTU/SCF
(c) 1120 BTU/SCF
(d) 2516 BTU/SCF
(a) To separate the oil, water and gas into individual streams in centralized surface
handling facilities
(b) To store the fluid in tanks to await pipeline or tanker transport to the point of
sale
(c) To compress the gas produced and send it to markets
11 Price equivalency of the various hydrocarbons can be established based on:
(a) the thermal energy content.
(b) the unit density.
(c) the total volume.
12 Oil and natural gas are formed in what type of sedimentary rocks?
(a) Traps
(b) Reservoir rocks
(c) Source rocks
(d) Igneous rocks
(a) 1
(b) 4
(c) 12
(d) 16
14 Which of the following hydrocarbon molecules has the highest energy content?
(a) Butane
(b) Propane
(c) Ethane
(d) Methane
15 Which of the following is a standard unit for measuring gas volumes?
(a) Standard cubic feet at 100kPa psi and 15 degrees F
(b) Normal cubic meter at 0.987 atmosphere and 15 degrees C
(c) Standard cubic meter at one atmosphere and 60 degrees F
(d) Standard cubic feet at 14.696 psi and 60 degrees F
(a) 11 degrees API
(b) 22 degrees API
(c) 33 degrees API
(d) 44 degrees API
(a) Refining
(b) Hydrocracking
(c) Separation
(a) Low pressure
(c) Heated

2 The per-unit difference between the value of refined products and the cost of the
crude oil is know as:
(d) Crack spread
3 Which of the following is NOT a potential health and safety concern inherent in oil
and gas operations?
(b) Trauma disorders
(c) Africa
BTUs?
the basis of:
7 What is the temperature range at which organic matter is transformed to gas?
(c) 175C to 315C [347F to 600F]
9 What is the heating value of pure methane?
(b) 1010 BTU/SCF
(a) To separate the oil, water and gas into individual streams in centralized
surface handling facilities
11 Price equivalency of the various hydrocarbons can be established based on:
(a) the thermal energy content.
12 Oil and natural gas are formed in what type of sedimentary rocks?
(c) Source rocks
(c) 12
14 Which of the following hydrocarbon molecules has the highest energy content?
(a) Butane
15 Which of the following is a standard unit for measuring gas volumes?
(d) Standard cubic feet at 14.696 psi and 60 degrees F
(c) 33 degrees API
(a) Refining
Oil and Gas Value Chain

The Oil and Gas Value Chain represents the sequence of functions that occur from
Upstream sources of supply, to Midstream transportation and refining or processing, to
Downstream retail markets (Figure 20). It reflects the "flow" of hydrocarbons as they move
like a river from Upstream to Downstream. It is also a way of expressing the increase in
commercial value that is created as crude oil and gas are sold Upstream at wholesale prices,
transported and processed or refined at Midstream for fees or margins, and eventually sold
Downstream at retail prices.
Figure 20: Traditional sectors comprising the oil and gas industry value chain from
Upstream to Downstream, from wholesale to retail markets and from crude to refined
products.
Upstream Sector
The Upstream sector is where oil and gas is discovered, developed, produced and sold to the
wholesale market. It represents the source of oil and gas supply and encompasses the
functions shown in Figure 21.
Figure 21: Major stages of the Upstream sector.
Negotiation of Upstream Agreements

Before a company can commence exploration, it must negotiate an agreement with the
owner of the area's mineral rights. Individuals own mineral rights in certain parts of the US,
Canada and the UK but in most onshore and offshore locations, these rights are owned by a
national or state government, and so the negotiations are between the company and a
designated government agency.
Exploration
Once an agreement is in place, the company's exploration team begins gathering the
subsurface data that it will use to select locations for drilling one or more exploration or
"wildcat" wells. If an exploration well indicates that oil and/or gas are present in potentially
commercial amounts, appraisal wells are then drilled to determine the extent of the discovery.
Technical specialists then estimate how much oil and gas are present in the subsurface. If the
resources are sufficiently large and the economics appear to be attractive, the field becomes a
candidate for development.
In many exploration areas several companies typically join together in a joint venture to share
the risks, technology and major capital investments required for full development. One
company is usually named to be the operator; however, all of the participating companies will
have a "say" in major decisions as specified in a Joint Operating Agreement.
Field Development
Once a promising discovery is made, teams of specialists prepare an optimal development
plan that integrates the field production schedule with market needs.
A technical team analyzes the subsurface reservoir in detail and prepares several
development options by selecting the number and location of development wells and
specifying the surface facilities required to process production into marketable
products.
A marketing team may enter into a Letter of Intent for the long-term sale of the
produced hydrocarbons, especially for natural gas, which is not yet an international
commodity.
Financial analysts incorporate the technical and marketing teams' work into financial
models and prepare a detailed report of the project economics for each proposed
development option. They include the fiscal terms of the Upstream Petroleum
Agreement so as to allocate the future cash flow to both the mineral owner and the
contractor or joint venture.
Ultimately, through an iterative process, the technical, marketing and financial specialists
decide on an optimal development plan and recommend it for funding. Once approved it is
submitted to the appropriate governmental agency for final review and approval.
After all approvals are received, engineering design and construction can begin. Development
wells are drilled and connected to centralized surface facilities, and one or more pipelines
(and, if necessary, port facilities) are constructed to deliver oil and gas to a sales or transfer
point, and from there to wholesale markets.
If the discovery is made offshore the development decision is more complicated. Now the
technical team must decide whether to set a fixed platform on the sea floor that is high
enough to sit above the surface to contain the wells' surface facilities and living quarters.
Alternatively, they may use various forms of floating systems including a floating vessel that
can serve as a "floating" production, storage and operating (FPSO) facility with the wellheads
on the FPSO or, in far deep water, on the sea floor. Whatever the decision, offshore field
development is much more expensive than onshore. A deepwater FPSO system off the coast
of Angola costs about $3 billion for a production rate of 250,000 B/D.
Figure 22a: Various options for developing an offshore field.

Figure 22b shows the subsurface geology and proposed development plan, including 15 well
locations, and five platforms for an offshore gas field in Indonesia.
Figure 22b: Map view of proposed development plan for a gas field in Indonesia. It shows 15
well locations and five platforms.
Long-term Production
A newly developed field's oil and gas production often builds to a sustained plateau, which
may continue for many years before declining to a level where it is no longer economical.
During this time, engineering and operating personnel design, construct and manage the
producing wells and maintain surface facilities to meet daily production targets in a prudent
and safe manner, while applying best practices to maximize hydrocarbon recovery.
Meanwhile, marketing personnel manage the sale of produced hydrocarbons, and financial
personnel report fiscal results and distribute payments to the host government and project
participants. A field's producing life may be as short as 15 years, as was the case for some
recent Gulf Coast fields, or more than 50 years, such is the case for the currently producing
Ghawar Field in Saudi Arabia.
Not all of the hydrocarbons that are identified as being present ("in-place") in a field can be
economically recovered with current technology. Those hydrocarbons that can be recovered
are referred to as reserves. A field's recovery factor is the ratio of its reserves to its
hydrocarbons in place. Typical recovery factors for oil reservoirs may range from around 15
to 70 percent. Because gas is lighter and has much lower viscosity, recovery factors are
usually higher, on the order of 60 to 85 percent.
Figure 23: Typical production stages for a producing field.
Wholesale Hydrocarbon Markets

Many oil and gas companies (E&P companies) restrict their activities to the Upstream
business; they sell their production exclusively to wholesale markets and do not venture into
the Midstream or Downstream sectors.
Crude Oil Markets

Crude oil is a worldwide commodity. This means that it can be sold into a global market, so
long as a producer can deliver oil from the field to a pipeline or a port that can accept crude
oil tankers. It is sold directly to customers or indirectly through brokers. The sale may be
made at the loading port (FOB, or freight on board) or discharge port (CIF, or cargo,
insurance and freight), in which case the seller is responsible for shipping.
Figure 24: Crude oil may be sold in the physical market FOB a loading port or CIF a
receiving port.
Crude oil prices are both volatile and transparent; therefore, the sale price of a cargo is
usually specified as a differential from one of three standard "marker" crude oils (Figure
25):
West Texas Intermediate ("WTI") Cushing, Oklahoma

Brent in Northwest Europe
Dubai in the Arabian Gulf
(Note: Marker crude oils are blends of crude oils within a narrow range of gravity that are
produced in substantial qualities, of a geographical trading location, with a market that does
not have a documented buyer or seller.)
The differentials may be positive or negative depending upon the location of the sale, quality
of the crude, supply/demand for the grade, seasonal needs and market perception. For
example, Nigeria's Bonny Light may sell for up to a $1.00 premium to Brent, and Colombia's
Cano Limon, a heavier crude, up to a $5.00 discount to WTI. The prices of daily transactions
in these and other crudes are reported by such entities as Platt's (www.platts.com) and may be
used as a basis for selling wholesale cargos.
Figure 25: Sales locations of the three major "marker" crudes: WTI, Brent and Dubai.
For example, a spot cargo sale of 220,000 barrels of crude was sold by a Latin American
producer. The WTI price is referenced in the agreement as the daily price published by
NYMEX (New York Mercantile Exchange) for WTI in the next trading month ("prompt
month"). (www.nymex.com)
Crude oil may also be bought or sold on a fixed price basis in some future month using
special financial instruments called forward and future contracts (Table 5a). These contracts
allow buyers and sellers to enter into contracts in advance of a sale month at a fixed and
known price, thus avoiding price volatility and eliminating the volume risk.
Forward Contract
Standard contract for sale or purchase of commodity in some future month, traded
over the counter (no exchange) at fixed prices set by the oil trade. Participants are
large International Companies.
Futures Contract
Standard contracts for sale or purchase of specific quality, gravity and delivery point,
on a commodity exchange (NYMEX, IPE) traded for a number future months.
Physical delivery is made upon maturity. Many participants.
Table 5a: The two major forms of financial contracts used for oil and gas commodities.
A forward contract is entered into by counter parties directly or through a broker,

without the involvement of an exchange or clearing mechanism. The Brent Forward
Contract is a standard contract for the purchase or sale of 600,000 bbls of Brent crude
in some future month. The contract may be traded a number of times before its date of
maturity among parties but the parties holding the buy and sell sides of the agreement
on its date of maturity must complete the transaction. Because of its size, there are
only 8-12 players in this market.
A futures contract is offered through a commodities exchange, such as the New York
Mercantile Exchange (NYMEX -- www.nymex.com) and the International Petroleum
Exchange in London (IPC -- www.theice.com). It allows for the purchase or sale of a
specific amount of a defined crude, to take place at a given location in some future
month.
The NYMEX, for example, has a standard futures contract with the following
stipulations:
o
Purchase or sale of 1000 bbl of crude oil
Oil is specified as light, sweet crude (West Texas Intermediate (WTI), Low
Sweet Mix, New Mexican Sweet, North Texas Sweet, Oklahoma Sweet, South
Texas Sweet)
The date of the purchase/sale is 30 months from the date of the contract.
A contract may be bought and sold many times before its closing date, which
normally takes place three business days before the 25th day of the month that
precedes the delivery month--for example, if a futures contract stipulated a
delivery month of December, then the closing date would be at least 3 days
before November 25 (i.e., November 22).
Once the closing date has passed, the holders of the contract are obliged to buy
or sell the 1000 bbls during the contract month, at the specified place of
delivery or some other arranged location.
You can appreciate that the crude oil market involves many different groups of oil companies,
traders and financial institutions that are involved in the physical and/or financial markets.
Although most of the major oil companies do not use financial instruments, many other
organizations do: E&P companies to manage price or volume risks, trading companies to
hedge positions (Glencoe, Vitol, Arcadia), financial institutions to arrange transactions
(Morgan Stanley, Barclays Bank, Louis Dreyfus) and investment banks and hedge funds for
speculation (Merrill Lynch, Prudential Bache). These entities use a number of different
financial instruments and strategies to manage risk, including hedges, options and swaps.
Midstream Sector
The Midstream Sector is where crude oil, natural gas and gas liquids are transported and
transformed into products for the retail market. Traditionally, produced fluids have been
refined or processed near the retail markets; however, the evolution of new oil and gas
products and/or the difficulty of locating new facilities in market areas have led to the more
recent construction of refinery and processing facilities near the producing facilities.
Midstream Crude Oil Value Chain

The midstream crude oil value chain, shown in Figure 26, involves the transportation,
storage and refining of crude oil into products that can be sold into the retail markets.
Figure 26: Shows Midstream Crude Oil Value Chain. In this case crude is transported to
refineries located near retail markets. In some cases refineries are located near producing
facilities and products are transported to the markets.
Crude Transportation
Midstream Transportation of crude oil typically takes place by pipeline and/or crude oil
tankers.
Crude Tankers
Crude oil tankers are typically large ships that carry cargoes to a single destination and then
return to the loading port with only seawater for ballast.
Crude oil tankers range from coastal vessels to the largest ships ever built. They are
classified according to their cargo-carrying capacity and suitability for particular trade routes,
as shown in Table 6.
Vessel
Classification
Panamax
Capacity, Deadweight Tonnes (DWT); Remarks

1 DWT = 2205 lb
60,000 - 80,000 DWT (approximately 440,000 - 586,000 barrels).
Ship dimensions based on the largest vessel size that can pass
through the Panama Canal.
Vessel
Classification
Capacity, Deadweight Tonnes (DWT); Remarks

1 DWT = 2205 lb
80,000 -120,000 DWT (apx. 586,000 - 880,000 barrels).
Represents Standard American Freight Rate Association (AFRA)
Aframax
size. Commonly used in Caribbean/Latin America/US East Coast
trade, as well as within Asia Pacific region. Can load and unload at
most shallow water US East Coast ports.
120,000 -160,000 DWT (apx. 880,000 - 1.2 million barrels). Ship
dimensions based on the largest vessel size that can pass through
Suezmax
the Suez Canal. Major trade routes include West Africa to US Gulf
Coast and East Coast.
160,000 -350,000 DWT (apx. 1.2 - 2.6 million barrels). Limited to
Very Large Crude deepwater ports; unable to transit Panama or Suez Canals. Most
Carrier (VLCC) economical for large-volume, long-haul transportation (e.g.,
Arabian Gulf to Japan, US or Western Europe).
Ultra-Large Crude Over 350,000 DWT (> 2.6 million barrels). Limitations and areas
Carrier (ULCC) of application similar to VLCCs.
Table 6: Crude oil tanker classifications.
As shown in Table 6, different types of crude tankers are suitable for different trade routes,
and no one vessel type is ideal for all routes. On average, however, tankers today travel about
5,000 miles on a single voyage. About 60 percent of the world's oil production is transported
by sea and a majority of these shipments are from the Middle East. At present, the world's
crude oil tanker fleets total roughly 3,500 vessels (Figure 27).
Figure 27: The MT Four Sun, a Suezmax Tanker, carrying 1 million barrels of crude oil to
the US Gulf Coast (Courtesy of Hansa Hamburg Shipping)
Tanker Charter Rates

About 80 percent of the world's tanker capacity today is provided by independent ship
owners (e.g., Frontline Ltd., Knightsbridge Tankers Ltd., Nordic American Shipping, General
Maritime and Tsakos Energy), who charter their vessels to major oil companies and other
clients. The other 20 percent is provided by private and national oil companies.
The tanker market is highly competitive with charter rates responding to supply/demand. One
measure of the competitiveness of tanker freight rates in the spot market is to refer to their
deviation from WorldScale 100 (WS 100). WS 100 is a nominal freight index, expressed in
$/metric ton, published annually by the WorldScale Association, for all potential trade routes
for a standard 75,000 DWT tanker operating under assumed conditions and earning a nominal
daily hire of $12,000. It reflects a starting point for charter negotiations.
(www.worldscale.co.uk)
In times of surplus tanker capacity, as occurred during the oil industry downturns of the
1980s and 1990s, WS falls below 100. More recently, as oil demand has increased, WS has
become very volatile. For example, it moderated for the larger tankers at WS100 in the 20012004 periods as oil demand grew. This spurred construction of new tankers and very few
scrappings, which, in turn, caused an excess of tanker capacity and a drop in WorldScale by
2005.
As an example of WorldScale calculations, consider a VLCC carrying about 300,000 DWT of
crude and required fuel between Ras Tanura (Saudi Arabia) and Houston (a metric tonne
corresponds to about 7.33 barrels). The amount of crude oil in this cargo is 280,000 DWT,
with the other 20,000 DWT being fuel.
If the WS100 rate for this voyage is $22 per tonne, then we can determine the per-barrel
transportation cost for the oil as follows:
Total cost of voyage at WS100 = $22 x 300,000 = $6.6 million

Crude transported = 280,000 x 7.33 = 2,052,400 bbls
Transportation cost = $6,600,000/2,052,400 = $3.22/bbl
Figure 28 shows the WorldScale Index for several trade routes and cargo types.
Figure 28: WorldScale Index for several trade routes and cargo types. Note that the product
rates have been higher than the crude rates.Source: OPEC
Tanker Safety
There are a number of safety codes and pollution prevention/response initiatives that have
been imposed by governments or instituted voluntarily by the tanker industry. From a safety
perspective, for example, tankers serving the US and certain other countries are required by
the US Oil Pollution Act and, more recently, MARPOL (established by the International
Maritime Organization), to phase-out the industry's remaining single-hull tankers and replace
them with double hull tankers (Figure 29) by 2010. This was a substantial undertaking by the
industry.
Figure 29: A double hull configuration provides an extra layer of protection for the tanker's
cargo in case of an outer hull rupture.
Ship Transportation: LNG

A growing alternative for Midstream gas transportation is in the form of LNG ships. When
gas is cooled to very low temperatures, -258F (-160C), it shrinks by a factor of 625,
becomes a liquid and can be transported in LNG ships to distant markets where it is
vaporized and delivered into pipelines for the Downstream market.
LNG Ships (Figure 30) built in the 1990s typically carried a cargo of 138,000 m 3; in the
early 2000s they increased to 145,000 m3. Then, in 2008, they increased to 260,000 m3 to
achieve economies of scale on longer voyages between Qatar and Europe and the United
States.
Figure 30: There are two major LNG ship designs: the membrane design shown on the left
and the self-supporting Moss-Rosenberg spheres shown on the lower-right. Photo courtesy of
www.lngoneworld.com.
Crude Transportation by Pipeline

Pipelines (Figure 31) are also used to transport crude oil, natural gas and products over
relatively long distances. Crude pipelines carry supply from producing fields to shipping
ports or refineries, product pipelines carry refined products to regional distribution centers,
and gas pipelines carry rich or dry gas to retail markets. Storage facilities are an integral part
of the pipeline system, whether for crude, products, natural gas or gas liquids.
Figure 31: Crude production from the Prudhoe Bay Field, Alaska is transported by pipeline
to Valdez, Alaska and then by tankers to California refineries or to Panama, where the cargo
is transferred to smaller ships to make the transit through the Panama Canal and thence to
refineries in Houston.
There are thousands of miles of pipelines in this world and more being built every year. For
2013, for example, a total of 15,358 miles of pipelines are planned to be built: 4,469 miles of
crude oil lines, 4,726 miles of product lines and 6,163 miles of gas pipelines (Oil and Gas
Journal, Feb. 2013).
Pipelines represent a major investment and are built to meet long-term market demand. Their
designs are based on the most economical way to meet the demand. Greater efficiencies are
achieved at higher throughput rates using larger diameters lines (Figure 32).
Figure 32: Substantially higher throughput is achieved as the diameter of a pipeline is

increased.
Fluids in a pipeline flow from points of high to low pressures. Along the way, the pressure
drops because of energy losses caused by friction and changes in elevation. To overcome
these pressure losses and keep the fluids flowing, pumps (for liquid pipelines) or compressors
(for gas pipelines) have to be installed at intervals along the line to increase the pressure and
give the fluids an extra "boost" as they move along.
Figure 33 shows the BTC (Baku-Tbilisi-Ceyhan) pipeline that carries crude from Baku,
Azerbaijan to Ceyhan, Turkey, a distance of 1,100 miles (1,760 km). It is 42-46 inches in
diameter, has eight pump stations and a capacity of 1 million barrels/day. (BTC pipeline)
Figure 33: The BTC (Baku-Tbilisi-Ceyhan) pipeline carries crude from Azerbaijan to Turkey.
Refining of Crude Oil
Crude oil is refined in the Midstream sector of the value chain, generally near the market, in
such places as the US Gulf Coast, Rotterdam and Singapore, where it can be integrated with
gas processing and petrochemical plants to achieve higher margins. When located near the
market it is also possible to optimize the daily "run" of a refinery to meet short-term product
needs. However, there are a number of refineries in the producing countries and others at
points between the upstream and the market (Figure 34).
Figure 34: Fawley refinery, located in Hampshire UK, has an annual production capacity of
15 million tonnes per year (330,000 barrels of crude oil per day). It provides 20% of the
UKs total refining capacity. Over 2,000 ships arrive to Fawleys marine terminal each year,
delivering more than 22 million tonnes of crude oil and transporting other products from the
site. About 80% of products is pumped through underground pipelines (450 miles (700km) to
distribution terminals as far afield as London, Bristol and Birmingham; 15% is taken by sea
to export markets; and about 5% travels by road or rail.(Source: ExxonMobil 2011)
Refineries (see Figure 14) can be relatively simple in design or very complex and may vary
widely in their throughput capacities. The more complex refineries cost much more to build
but are able to "crack" the heavier hydrocarbon molecules into the lighter gasoline molecules.
A simple hydroskimming refinery, with a capacity of 50,000 bbl/day, may cost $130 million
to build ($2,600 per barrel/day of capacity), while a more complex coking refinery, with a
capacity of 200,000 b/d, may cost $2 billion ($10,000 per barrel/day of capacity). The more
complex coking refineries can "crack" the longer chain, heavier hydrocarbon molecules into
shorter chain, lighter molecules that may be in greater demand and realize a greater "margin"
per barrel. US refineries tend to be quite complex because of the high market demand for
lighter molecules that can be made into gasoline blends. Europe, on the other hand, can have
less complex designs because their demand leans more toward the heaver molecules ("middle
distillates") used to make diesel fuel.
Figure 35 and Figure 36 show the daily demand for gasoline and middle distillate products,
respectively, in various regions of the world. Note the strong demand growth for all of these
products is driven by the transportation markets. Note also the proportionately higher use of
gasoline in the US compared to diesel in Europe and Asia Pacific. Where is the most rapid
growth in the last few years? Where did the consumption decline in 2008? Why?
Figure 35: Daily demand for gasoline in various regions of the world. (Source: BP
Statistical Review of World Energy, June 2014).
Figure 36: Daily demand for middle distillate products in various regions of the world.
(Source: BP Statistical Review of World Energy, June 2014).
Midstream Natural Gas Value Chain

The Midstream Natural Gas Value Chain, shown in Figure 37, begins at the point where gas
has been separated from other produced fluids and treated to remove impurities. The gas is
now dry and meets pipeline specifications for delivery to market or is wet or rich and
requires processing to strip out the natural gas liquids.
Figure 37: Shows the Midstream Gas Value Chain from the point of gas supply to its delivery
to the Downstream Sector.
Gas Processing
Gas processing facilities may be built at the production facilities, typically at a centralized
location where gas may be gathered from a number of producing fields or near the market.
Most centralized plants are located at or near the Upstream sector, allowing the dry gas and
liquid products to be transported separately to their own markets.
In the De-Methanizer Column the gas stream is cooled to a temperature at which all of the
hydrocarbons, except methane, are transformed to liquid mixture. The methane gas comes off
the top of the column and enters the gas stream. The liquid mixture, referred to as NGLs,
comes off the bottom, where it may be sent to the refinery or petrochemical plants as
feedstocks or separated into individual hydrocarbon products by fractionation. Separate
fractionation columns are needed to separate ethane, propane, butanes, and natural gasolines
into individual components. Ethane becomes a petrochemical feedstock (eventually becoming
plastic products), and the other liquid products are used as fuels or sent to
refineries/petrochemical complexes. If there is no local market for ethane it is left in the gas.
Figure 38a shows the Alliance gas pipeline that delivers "rich" gas from Western Canada to
the Chicago area. The main pipeline is 1,855 miles long, with 14 compressor stations spaced
roughly 120 miles apart. It operates at a maximum pressure of about 1,200 psi and delivers up
to 2 BCF of natural gas combining 80,000 gals of natural gas liquids daily to the Chicago
regional market (www.alliance-pipeline.com).
Figure 38a: Alliance Gas pipeline.
Figure 38b: Alliance Pipeline Gas processing facility near Chicago.
Natural Gas Pipeline Transportation and Storage

The majority of natural gas in the Midstream sector is transported in high-pressure pipelines
over long distances to meet Downstream market demand. Underground gas storage, in the
form of cavern or pore storage facilities (see Figure 37), are found along the pipeline route to
respond to daily and seasonal market demand swings. Pipeline companies have protocols and
electronic "bulletin boards" that allow their third party shippers to nominate and confirm their
daily transportation and storage movements along the pipeline. The management of the daily
flows on one pipeline that may be connected to many other pipelines requires careful
planning and good IT systems. The North American Standards Board (http://www.naesb.org/)
sets out the standards used in the United States and the Uniform Network Code provides the
standards in the UK (https://www.ofgem.gov.uk/licences-codes-and-standards/codes/gascodes/uniform-network-code).
Figure 39 shows the natural gas supply and pipeline system in Europe. Notice that the only
major domestic source of gas supply is in the North Sea. However, there is not enough supply
in the North Sea to meet all of Europe's demand, so all other gas is supplied by fields in
Algeria and Russia. The brown line shows the Nordstream route that goes through the
exclusive economic zones of Russia, Finland, Sweden, Denmark and Germany.
Figure 39: Natural gas pipeline network in Europe. Gas flows into the system from Russia,
Norway, UK and Algeria. Pipelines in blue are currently in place and the brown line shows
the Nordstream route which is in operation as well.
Upstream pipelines, which deliver crude or petroleum products, for example, from producing
fields or refineries to a market sales point are often built, owned and operated by a
consortium of producers. Each producer owns rights to use the pipeline and pays annual fees
in proportion to its share of production. The Alaska pipeline, which carries Prudhoe Bay
crude to the port of Valdez, operates under this type of arrangement (http://www.alyeskapipe.com/).
Pipeline Regulation and Tariffs

Pipelines, especially for gas, are often considered to be "natural" monopolies because their
owner can control access to markets; if a second, competitive pipeline were to be built it
would only increase the price to the end consumers because then each pipeline would only be
half full. For this reason, pipelines are often regulated by government agencies that issue
construction and operating permits, set tariffs and issue "open access" regulations to ensure
competitive opportunities for qualified shippers to obtain pipeline access. The Federal Energy
Regulatory Commission ("FERC") regulates the tariffs that are charged as well as shipper
access to US gas pipelines that transport gas in interstate commerce (http://www.ferc.gov ).
Similar regulatory agencies exist in other countries. Once gas buyers and sellers have open
access to pipelines to market and trade natural gas a set of procedural standards and
guidelines are developed by the industry to manage access (see, for example,
www.naesb.org).
Downstream Sector
The Downstream sector of the oil value chain where petroleum products are distributed to
retail markets is shown in Figure 40.
Figure 40: Shows the downstream sector of the oil value chain.
Petroleum products include the major transportation fuels (LPG, gasoline, diesel and jet
fuel), heating products (LPG, light fuel oil and residual fuel oil), specialty products
(lubricating oils, asphalt, etc.) or feedstocks to the petrochemical plants. These products are
transported from refineries by pipeline, ship, barge, truck and rail to regional distributions
centers where they are stored on a short-term basis in appropriate storage facilities. The
products are then transported to their final wholesale or retail outlets for sale to large and
small customers.
Product tankers (Figure 41) are built to carry different types of refined products ("clean"
cargos) simultaneously to multiple destinations-thus, although they are not as large as the
bigger crude oil tankers, their designs are more complex. They are typically divided into three
classes: Handy (25,000 to 50,000 deadweight tonnes), Large (50,000 to 100,000 deadweight
tonnes), and Very Large Product Carriers (VLPC - 100,000+ deadweight tonnes).
Figure 41: Product tanker on the St. Lawrence River in Quebec, Canada.
LPG Carriers (Figure 42) are special types of product tankers. They are refrigerated to
-50F (-46C) to avoid vaporization of the liquid cargo. In this way the LPGs do not need to
be pressurized during transportation.
Figure 42: This photo shows the refrigerated ship Berge Danuta 78,500 m3 that is used to
transport LPGs.
Petroleum products, as shown in Figure 43, are transported by pipeline in the Colonial
pipeline that runs from the Houston refinery area to the US East Coast. Products are separated
by transition fluids ("transmix"), where necessary, that are compatible with the products that
they isolate. This pipeline is 5,519 miles long and typically transports more than 2 million
barrels per day of up to 62 grades of products in minimum batches of 75,000 barrels. It has
many pump stations and storage terminals along the route. (http://www.naesb.org)
Figure 43: Different products are transported by pipeline from the US Gulf Coast refineries
to the East Coast as batches in pipelines as shown here for the colonial pipeline.
Downstream Natural Gas Value Chain

The Downstream Natural Gas Value Chain, as shown in Figure 44, shows how gas may be
sold directly from the Midstream pipeline or LNG receiving terminal, after vaporization, to a
large customer (typically an industrial or gas-fired power plant) or be delivered to a Local
Distribution Company ("LDC"). The distribution company, in turn, meters and odorizes the
gas and distributes it to its various classes of customers: residential, commercial, industrial,
power plants and, where the market has developed, motor vehicles.
Figure 44: Shows the Downstream sector of the gas value chain.
Traditionally, an LDC has a monopoly to sell gas in its territory. It buys the gas from the
pipeline and charges its customers for both the gas and its distribution. Where market
liberalization has occurred at the distribution level (for example, in the UK and certain US
states), customers will buy their gas from their selected retail marketers and pay the
distribution company a fee only for distributing the gas.
LNG can also be delivered by truck directly to LDC's storage tanks of gas distribution
companies where it is vaporized as needed to meet short-term market swings (Figure 45).
Figure 45: Specially designed trucks allow LNG to be distributed to regional tank storage to
satisfy peaking service.
Review Questions

The following questions correspond to the Oil & Gas Industry Note: You have 3 attempts.
Overview - Section 2 assessment. Complete this page with your
answers, and hit the 'submit' button at the end of the page to
continue.
1 What is the approximate number of tankers that make up the world's crude oil
tanker fleet?
(a) 1000
(b) 1500
(c) 2000
(d) 3500
2 What are the most common financial instruments used to buy and sell crude oil on
a fixed price basis in some future month?
(a) Futures Contract and Basis Trade
(b) Time Spread and Forward Contract
(c) Forward Contract and Futures Contract
(d) Hedge Fund and Options Contract
(e) Put Option and Risk Array
3 What is the definition of a field's recovery factor?
(a) Its production capacity divided by its reserves in place
(b) Its production capacity divided by its hydrocarbons in place
(c) Its reserves divided by its areal extent
(d) Its reserves divided by its hydrocarbons in place
4 What is the approximate carrying capacity of the largest vessel that can pass
through the Suez Canal?
(a) 80,000 DWT

(b) 160,000 DWT
(c) 120,000 DWT
(d) 200,000 DWT
5 What are the typical recovery factors for gas reservoirs?
(a) 60 to 85%
(b) 15 to 70%
(c) 30 to 60%
6 Which is a nominal freight rate index for a given voyage, expressed in $/metric ton,
published annually by the World Scale Association?
(a) WS 100
(b) WS 500
(c) WS 1000
(d) WS 250
7 What is the maximum vessel size that can pass through the Panama Canal?
(a) 50,000 DWT
(b) 80,000 DWT
(c) 160,000 DWT
(d) 350,000 DWT
8 Which of the following is NOT one of the standard marker crude oils used for
pricing purposes?
(a) West Texas Intermediate (WTI) in Houston
(b) Northwest Blend in Calgary
(c) Brent in Northwest Europe
(d) Dubai in the Arabian Gulf
9 What is the international safety code imposed by governments and also instituted
voluntarily by the tanker industry?
(a) ISO 9000
(b) MARPOL
(c) NFPA 72
(d) ILO Standards
10 In the Oil and Gas Value Chain, the Midstream corresponds to:
(a) markets
(b) source of supply
(c) transportation and refining
1 What is the approximate number of tankers that make up the world's crude oil
tanker fleet?
(d) 3500
2 What are the most common financial instruments used to buy and sell crude oil on
a fixed price basis in some future month?
(c) Forward Contract and Futures Contract
3 What is the definition of a field's recovery factor?
(d) Its reserves divided by its hydrocarbons in place
(b) 160,000 DWT
(a) 60 to 85%
6 Which is a nominal freight rate index for a given voyage, expressed in $/metric ton,
published annually by the World Scale Association?
(a) WS 100
(b) 80,000 DWT
pricing purposes?
(b) MARPOL
(a) markets
(b) source of supply
(a) 80,000 DWT
(b) 160,000 DWT
(c) 120,000 DWT
(d) 200,000 DWT
(a) ISO 9000
(b) MARPOL
(c) NFPA 72
(d) ILO Standards
4 Which of the following countries has quite complex refineries because of the high
market demand for the lighter molecules that can be made into gasoline?
(a) United States
(b) Kuwait
(c) India
(d) Italy
(a) 50,000 DWT
(b) 80,000 DWT
(c) 160,000 DWT
(d) 350,000 DWT
pricing purposes?
(a) West Texas Intermediate (WTI) in Houston

(c) Brent in Northwest Europe
(d) Dubai in the Arabian Gulf
7 To overcome the pressure losses in a natural gas pipelines, _____________ need to
be installed at specified intervals along the line
(a) compressors
(b) pumps
(c) thermometers
(d) underground gas storage facilities
8 Pipelines are often considered to be "natural" monopolies because:
(a) Their owners can control access to markets
(b) Their owners set tariffs and issue open access regulations
(c) Their owners issue construction and operating permits
(d) Both a and b
(a) 60 to 85%
(b) 15 to 70%
(c) 30 to 60%
10 The daily and seasonal market demand swings for natural gas are managed by:
(a) Gas storage tanks
(b) Gas tankers
(c) Power plants
(d) Underground gas storage facilities
(b) 160,000 DWT
(b) MARPOL
4 Which of the following countries has quite complex refineries because of the high
market demand for the lighter molecules that can be made into gasoline?
(a) United States
(b) 80,000 DWT
pricing purposes?
7 To overcome the pressure losses in a natural gas pipelines, _____________ need to
be installed at specified intervals along the line
(a) compressors
8 Pipelines are often considered to be "natural" monopolies because:
(a) Their owners can control access to markets
(a) 60 to 85%
10 The daily and seasonal market demand swings for natural gas are managed by:
(d) Underground gas storage facilities
Main Global Players in the International

Petroleum Industry
In reflecting as the many functions of the oil and gas value chains, you will appreciate that
the industry requires many "players" to make it function on a global basis. These players
include national oil and gas companies, OPEC, vertically integrated companies ("the majors")
and a host of others who provide specialty services or focus on particular areas of the value
chain.
National Oil and Gas Companies
National oil companies are formed by national government to participate in one or all value
chain sectors. The government may own all or a major portion of its shares. There are over
115 national oil companies (NOCs), but some are more active players than others. We may
classify them into four broad categories:
1. Seekers have very limited or no reserves, and are seeking to attract foreign
exploration companies.
2. Guardians of Reserves have some reserves, but are not active operators.
3. Operators have reserves, own surface facilities and are active operators in their own
country.
4. Internationalists are active oil and gas industry players both at home and abroad.
For an NOC to move from one category to another, for example, from Guardian of Reserves
to Operator, it must have sufficient capital and develop special competencies in petroleum
technology, operations, management and finance.
Only a few NOCs can be considered Internationalists. They include Petrobras (Brazil),
Saudi Aramco (Saudi Arabia), Statoil (Norway), Petronas (Malaysia), Petroleos de
Venezuela and Kuwait Petroleum Corporation. These companies have entered the
international arena to grow their business and develop high levels of technical and
management competency. Other NOCs-notably PetroChina and the CNOOC (China) and
the Oil and Natural Gas Corporation (ONGC, India)-are rapidly expanding internationally,
mainly to gain access to energy so as to support their growing economies. Gazprom, the
Russian national gas company, is very active in forming international joint ventures,
especially in Europe, that allow it to sell its gas into those markets.
Figure 46 shows the top countries in terms of domestic crude oil reserves as of 2013. For
comparison, the reserves of a few major companies are also shown. Figure 47 is a similar
chart for natural gas reserves.
Figure 46: List of producing countries and larger companies in terms of crude oil reserves,
with major companies shown for comparison. Individual companies are shown in red.
(Source: BP Statistical Review of World Energy, June 2014 and Company information)
Figure 47: Listing of countries and companies by natural gas reserves as of 2013. (Source:
BP Statistical Review of World Energy, June 2014 and Company information)
OPEC
Much of the world's petroleum is found in countries that have oil and gas production
capacities in excess of their domestic energy needs. This excess is exported to satisfy
international demand. In 1960, five of these countries - Iran, Iraq, Kuwait, Saudi Arabia and
Venezuela - formed the Organization of Petroleum Exporting Countries (OPEC) for the
stated purpose of "seeking to assert its Member Countries' legitimate rights in an
international oil market" (www.opec.org, 2005). In addition to its five founding members, the
OPEC countries today include Algeria, Libya, Nigeria, Qatar, the United Arab Emirates,
Ecuador (rejoined in December 2007), and the new member Angola (2007). Indonesia
suspended its membership since January 2009.
OPEC exerts control over the world oil market by increasing or decreasing the combined
daily exports of its member countries through a country-by-country production quota system
based on each country's oil reserves. While non-OPEC countries produce to their productive
capacity, OPEC reviews and adjusts its target production levels at least quarterly after
reviewing the oil prices, inventory levels and near-term world needs for oil products (e.g.,
winter heating, summer driving).
Saudi Arabia, the country with the highest production capacity in the world, in excess of 10
million barrels per day, has been the major "swing" producer. OPEC countries have produced
about 40 percent of the daily oil production for the past 15 years. This is expected to increase
to 50% by 2030. There is no organization similar to OPEC in the gas industry.
Vertically Integrated Global Companies

Vertically integrated companies are active in all areas of the oil and gas value chains, from
exploration to the distribution and sale of products. In earlier days, the largest members of
this group were referred to as the "majors". With recent mergers, their numbers have declined
to three companies: Royal Dutch/Shell, ExxonMobil and BP, each with assets exceeding
$300 billion. Today there are many more integrated oil and gas companies (many of them
nationally owned) with assets in excess of $75 billion as shown below.
Table 7 shows the total assets of vertically integrated companies with assets greater than $75
billion during 2012. The top five exceed $300 billion, while the others are clustered between
$75 and $300 billion. Those companies, shown in bold, are owned partially or totally by the
country of domicile. All but Gazprom, the Russian gas company, are involved in the full oil
and gas value chain. Companies that do not publish financial information, such as Saudi
Aramco, are not shown here but they may be the largest of all.
Company
Gazprom
Royal Dutch/Shell
PetroChina Co Ltd
ExxonMobil
Petrobras
BP PLC
Chevron
Assets, US$ Domicile

Billion
368.1
Russia
360.3
Netherlands
348.1
China
333.8
USA
331.6
Brazil
300.2
UK
232.9
USA
TOTAL
226.7
France
ENI
184.1
Italy
Petronas
160.2
Malaysia
Pemex
155.6
Mxico
StatoilHydro
141.0
Norway
BHP Billiton Petroleum
129.3
Australia
Conoco-Phillips
117.1
USA
Rosneft
115.7
Russia
BG PLC
106.1
UK
Lukoil
98.9
Russia
Repsol YPF S.A.
85.6
Spain
Suncor Energy Inc.
76.1
Canada
September, 2013
Table 7: Listing of producing companies with assets greater than $75 billion. Source Oil and
Gas Journal, September 2013
Other Active Players

There are many other players in the oil and gas industry that limit their roles to one or two
major sectors or provide specialty services to the industry:
Independent Producers, such as Devon Energy, Anadarko Petroleum and Talisman

Energy, who limit their strategic focus to the Upstream sector and the exploration and
production business.
Refiners, such as Valero, who limit their activities to refining and sale of products.
Service Companies, consultants and other specialists, ranging from such seismic
service companies (CGG, CogniSeis, Geco-Prakla, Geoquest), drilling contractors
(Global Marine, Global SanteFe), integrated service companies (Schlumberger,
Halliburton, Baker Hughes) and surface facilities construction Contractors (Kellogg,
Brown and Root, Foster Wheeler, Technip, Fluor, Parsons) to independent
consultants, training companies, bankers, investment services, auditors and others
who provide essential services to the Upstream oil and gas sectors. (see
http://www.explorationist.com/Service.htm).
Manufacturers, who provide specialty equipment, tubular goods and supplies to the
industry and Consultants, who assist with analysis and design services
(www.rigzone.com).
Midstream transportation companies, such as oil and gas Pipeline Companies (El
Paso, Gazprom), and crude, petroleum products and LNG Shipping Companies
(dispersed ownership with many tankers owned by Greek companies).
Traders, who are specialists in the marketing and trading of hydrocarbons in the
wholesale or retail markets (Glencore, Vitol Arcadia).
Petrochemical companies, who focus on the manufacturing and sale of

petrochemical products (BASF, Dow, Bayer, Dupont).
Utility companies, who transport and distribute natural gas and/or electricity to
customers, often under regulated conditions (Tokyo Gas, Consolidated Edison,
Centrica, RWE, E.ON and Duke), those companies that use gas or other fuels to
generate electricity as Independent Power Producers or regulated entities.
World Primary Energy Markets and the

Role of Hydrocarbons
Energy Supply and Demand Fundamentals
As a consumer, you have a number of options available for meeting your energy needs. When
it comes to selecting a heating system for your home, for instance, you may choose between
fuel oil, natural gas, propane, coal, electricity or biomass (i.e., wood, peat, etc.). For
transportation, you may choose a car that runs on gasoline or diesel-you may even be able to
select a gasoline/electric hybrid vehicle, or one that uses natural gas, propane or electricity.
Once you make your fuel choice, typically on the basis of price or availability, you rely on
the market to supply the energy when you need it, that is, to meet your demand for heating
fuel in the winter and for transportation fuel during the summer driving season.
Industrial consumers can switch between, say, gas and fuel oil very quickly whenever a price
advantage exists. Residential and retail customers are a bit more constrained. Their major
long-term shifts in fuel choice occur when new regulations, tax incentives, new technologies
and higher energy prices spur them to replace their furnaces or cars or power plants to take
advantage of lower costs or new realities. Of course, a new consumer, who finally has enough
money to pay for a "better form" of energy (from gathering wood to buying a propane stove,
for example), adds to the consumer list.
Table 8 lists the various forms of energy that are available to consumers. These include the
basic three fossil fuels (oil, gas and coal), the two major non-fossil fuel electricity sources
(hydro and nuclear) and the various renewable energy resources, including biomass, waste
products and other sources (wind, solar, tidal).
Primary Energy Sources
Hydrocarbons
Petroleum products
Natural gas
Coal
Other forms
Nuclear
Hydro
Renewables
Wind, Solar, Tidal, Geothermal, Biomass and Waste,

other renewables
Table 8: Various forms of energy.
Energy Demand
"Economic growth remains the major determinant of energy demand. The link between
energy demand and economic output remains roughly linear" (World Energy Outlook 2004,
IEA (www.iea.org).
The energy demand in a given country and indeed throughout the world, increases with
population and GDP per-capita growth. It is inhibited somewhat by increased energy prices
(including energy taxes) and economic downturns. It is further impacted by government
policies relating to industrialization, subsidization of energy prices, and urbanization (in
developing countries, people become connected to energy in the cities).
In order to appreciate energy demand, it is helpful for us to review the process used by the
International Energy Agency ("IEA") in its published world energy demand scenarios. Its
economists divide the world into regions and countries as shown in Figure 48. The OECD
(Organization for Economic Cooperation and Development) members are the developed
countries of North America, Europe and Asia; the Transition Economies are Former Soviet
Union countries.
Figure 48: Countries and regions that constitute study units for the IEA world energy
demand analysis.
The IEA divides the energy market into four major categories as shown in Table 9, and then
projects the demand for each form of energy in each of these markets for each geographical
unit shown in Table 10.
Four Major IEA Energy Market Areas
Residential/Commercial
Industrial
Transportation
Electricity
Table 9: The four major IEA energy market areas.

Table 10 shows the historical and projected GDP and population growth for the world for the
period 2011-2035, broken down by market region.
World Projected Population and GDP Annual Growth Rates (20112035)
Market Region
Population
GDP
OECD
0.4
2.1
North America
0.8
2.5
Europe
0.3
1.7
Pacific
0.0
1.8
Non-OECD
1.0
4.8
E.Europe/Eurasia
-0.1
3.3
China
0.2
5.7
India
0.9
6.3
Middle East
1.5
3.7
Africa
2.3
4.0
Latin America
0.8
3.3
World
0.9
3.6
Source: World Energy Outlook OECD/IEA, 2013
Table 10: Population and GDP Growth Projections, 2011-2035. (Source: World Energy
Outlook OECD/IEA, 2013).
We see immediately that GDP's will grow in all regions but more rapidly in the Developing
Countries, where populations will also grow substantially. India leads the way with GDP
growth but, its population will grow more modestly. Africa has both substantial population
and GDP growth.
Overall the world population growth rate will moderate but is still expected to exceed 8.5
billion by 2035. More importantly GDP's will grow in all regions, with high growth rates in
the developing countries, especially China and India. About 68 percent of growth in energy
demand during the next 25 years will come from the developing countries.
Primary energy demand growth is shown in Table 11. In quantitative terms, primary energy is
expected to grow at an average rate of 1.2 percent, with fossil fuels (oil, gas and coal)
accounting for about 80 percent of energy growth. Oil demand will increase from 82 million
b/d in 2011 to 94 million bbl/day in 2035, driven by the transportation markets. Coal and
natural gas demand will increase at the rate of 0.7 and 1.6 percent per annum respectively,
driven mainly by the power generation market. Other renewables (wind, solar, geothermal,
tidal and wave energy) grow faster than any other source, 7.4 percent average annual rate.
Primary Energy Demand Projections 2011-2035
(million tonnes of oil equivalent)
Average
Annual
2011
2035
Growth Rate %
Coal
3,773
4,428
0.7
Oil
4,108
4,461
0.5
Gas
2,787
4,119
1.6
Nuclear
674
1,119
2.1
Hydro
300
501
2.2
1,300
1,847
1.5
127
711
7.4
13,609
17,386
1.2
Bioenergy
Other Renewables
Total
Table 11: World primary energy demand by sector, 2011-2035 (Source: World Energy
Outlook OECD/IEA, 2013)
This projected demand growth in daily production of oil and gas during this 25 year period is
simply enormous and will strain the industry's resources and capabilities. You will certainly
ask "Is it possible?" or "Where will it come from?" For that we need to turn to the supply side
of the equation - who will supply it and from what sources?
Hydrocarbon Supply
Classification of Hydrocarbon Resources and Reserves
Hydrocarbon resources are being found every day in the world, just as they are being
produced each day to meet demand. A new discovery adds to our known hydrocarbon
resource base but production reduces our reserves base. The industry's terminology for
classifying known sources of oil and gas is shown in Figure 49. This chart is published by
the Society of Petroleum Engineers and is an important tool for engineers who make these
assessments.
Figure 49: Classifications of hydrocarbon resources and reserves (Courtesy SPE

http://www.spe.org).
The SPE classifies oil and gas into three broad categories arranged according to technical
certainty and commerciality: Reserves, Contingent Resources and Prospective Resources.
Note that only one section of the chart is referred to as "reserves."
Prospective resources are those petroleum resources that may be

recovered from undiscovered accumulations in future projects.
Contingent resources are quantities of petroleum anticipated to be
commercially recoverable from known accumulations from projects that
are not yet mature enough to be considered commercial (For example,
ExxonMobil discovered the Natuna Gas Field offshore Indonesia in 1992
with 45 TCF of gas resources. It contains 65% carbon dioxide, a gas that
must be separated from the natural gas and reinjected into the subsurface
at considerable cost. So the field has not yet been developed and its
contents are Contingent Resources.)
Reserves, on the other hand, are quantities of petroleum accumulations
that are anticipated to be commercially recoverable from developed or
soon to be developed projects. Engineers face substantial uncertainty
in characterizing a newly discovered subsurface hydrocarbon reservoir
because they rely on subsurface data collected from widely spaced wells.
For this reason the SPE Guidelines recommends engineers to estimate
reserves for a field as a simple number (deterministic estimate) or a
probabilistic estimate (Monte Carlo Simulation). Volumetric estimates of
petroleum resources and reserves should be provided at three levels of
certainty Low, Medium (Best) and High (1C, 2C,3C or 1P, 2P,3P). Of
course, after a reservoir has been producing for some time, engineers
have greater amounts of reservoir data to evaluate. This allows them to
refine their estimates and move reserves from a less certain to a more
certain category.
As we discuss reserves, keep in mind that the industry has substantial more "resources" that
have been discovered and not yet developed and converted to "reserves". They will be the
targets of exploration and development programs in the future.
Crude Oil Reserves

Figure 50 shows the world's crude oil reserves, by region, as of January 2014. Note that they
total 230.2 billion tonnes or 1,687.9 billion barrels, and that the Middle East countries have
more reserves than all of the other regions combined. The OPEC countries have about 75
percent of these reserves. These estimates include 169 billion barrels of oil sands in Canada
and 220 billion barrels of the Venezuelan heavy-oil.
Figure 50: World crude oil reserves as of January 2014 (Source: BP Statistical Review of
World Energy, June 2014).
Notwithstanding the fact that the production of crude oil has increased annually, thereby
depleting the crude reserves base, exploration and enhanced recovery have caused the
reserves to increase over the past 28 years as shown in Figure 51.
Figure 51: Increase in crude oil reserves over the past 28 years. (Source: BP Statistical
Review of World Energy, June 2014).
In fact, our inventory of crude reserves, measured as the R/P ratio (current reserves divided
by current annual production) is about 53 years.
Crude Oil Supply, Demand and Cross-border Trade

You can imagine that countries that have oil reserves will make every effort to supply their
own needs. Deficiencies will be satisfied by imports from countries with excess reserves notably the Middle East. Figure 52 shows the crude oil production, consumption and trade
conditions for each region of the world during 2013. World oil production averaged 86.8
million bbl/day during 2013 reflecting an increase of 0.6% compared to 2012.
Figure 52: Crude oil production, consumption and trade (2013). (Source: BP Statistical
Review of World Energy, June 2014)
Table 12 shows the world's major producing, consuming and importing countries in 2013.
Note that Saudi Arabia is the largest producer followed by Russia; that the USA is the largest
consumer by far and that six countries, although different, produce and consume about 50
percent of each. The United States, Europe, China, Japan and India account for about 70
percent of imports. Consider the geopolitical pressures that these imbalances cause! They
raise issues of both security of supply and security of demand.
Rank
Production
Consumption
Imports
Exports
Coun
try
Millio
n
bbl/d
ay
Count
ry
Millio
n
bbl/d
ay
Countr
y
Millio
n
bbl/d
ay
Count
ry
Millio
n
bbl/d
ay
Saudi
Arabia
11.5
USA
18.9
Europe
12.6
Saudi
Arabia
8.5
Russia
10.8
China
10.8
USA
9.8
Russia
7.5
USA
10.0
Japan
4.6
China
7.7
Iraq
3.1
China
4.2
India
3.7
Other
Asia
7.6
UAE
2.9
Pacific*
5
Canad
a
3.9
Russia
3.3
Japan
4.5
Kuwait
2.6
UAE
3.6
Saudi
Arabia
3.1
India
4.1
Nigeri
a
2.3
Subtotal
MMbbl/day
44.1
44.3
46.3
26.9
World Total
MMbbl/day
86.8
91.3
55.3
55.3
of 51%
49%
84%
49%
Percent
Total
*It does not include: China, Japan, India and Singapore

Table 12: This table shows worlds major oil producing, consuming, importing and exporting
countries. (Source: BP Statistical Review of World Energy, June 2014)
Crude Oil Prices

Crude marker prices have increased in recent years because of strong growth in demand,
upsets in supply, a perceived shortage of available supply and some speculation. Figure 53
shows the recent history of crude production and the two major marker prices, Brent and
West Texas Intermediate. Note how prices were in the $25/bbl range through 2003, and then
rose in response to demand, especially from China and the US. The prices exceeded $140/bbl
in the middle of June 2008 because of the perceived shortage in production, inventories and
speculation by hedge funds, but after the 2008 economic crisis, prices fell to about $30/bbl,
for a short period of time, before rising again to the $100-120/bbl level.
Figure 53: History of crude oil production and price of Brent and West Texas Intermediate
marker crudes. (Source: EIA and OMR OECD/IEA, 2014)
High energy prices in 2008 led to significant reductions in product demand, especially in the
US and Europe, after the price at the pump reached all-time highs in June. High prices also
led to increases in exploration and production of oil and unconventional gas activity and
substantial run up in contractor (e.g. drilling) and commodity (steel, etc.) costs until the third
quarter of 2008 when the financial crisis occurred. Notwithstanding the greater investment in
both oil and gas exploration Matthew Simmons pointed out that the majors have not
increased their daily oil production significantly since 2000 and was concerned that the supermajor Saudi Arabian oil fields the linchpin of future supply projections may not live up
to their perceived recovery potential. He felt that the continued growth in demand, driven by
economic growth especially in Asia, will lead a return to high oil prices as the world financial
crisis abates. (Simmons, Matthew R.: Twilight in the Desert, The Coming Saudi Oil Shock
and the World Economy, Wiley (2005)). As you can see during 2013 oil prices are high again!
Stay tuned!
Only time will tell how the price changes; however, it is clear that price volatility will
continue, that the industry has major challenges in meeting primary demand and that the oil
business continues to have a major impact on the world's economy. At $100/bbl every day
$8.6 billion change hands simply in crude oil sales! (86 million barrels per day x $100 per
barrel = $8.6 billion).
Natural Gas Reserves
The natural gas story is very similar to that of crude oil. Annual production has increased
significantly in recent years in response to the higher demand of the more efficient combinedcycle gas-fired power plants.
Natural gas reserves, as of January 2014, are shown in Figure 54 by region of the world.
Note that the world's reserves total 6,557 trillion cubic feet (TCF) (185.7 trillion m 3) have
grown by 17 percent in the last 10 years. Of this total, 1,867 TCF or 28 percent are located in
the Former Soviet Union and 31 percent are in Iran and Qatar. In the U.S. the natural gas
reserves have increased about 22 percent in the last 10 years mainly due to the development
of new sources of shale gas.
Figure 54: This figure shows the location of conventional world's gas reserves by region.
Note how the Middle East and the Former Soviet Union control more than two-thirds of the
total. (Source: BP Statistical Review of World Energy, June 2014)
Figure 55 shows that we are not running out of natural gas. Despite growing annual
production rates, gas reserves have continued to grow. The major issue, of course, is that,
except for the potential unconventional gas resources of the US, they are located far from the
three major markets: US, Europe and Asia.
Figure 55: We see here the growth in reserves of natural gas from 1985 to 2013. Source: BP
Statistical Review of World Energy, June 2014
A reserves statistic that energy economists like to use is the reserves/production ratio (R/P
ratio). It tells us, in the case of natural gas, that, at the current annual gas production rate, we
have sufficient proved gas reserves to last 56 years. For comparison the R/P ratio for crude oil
is 53 years. As mentioned above we have sizeable gas reserves - they are just not located
where we need them!
Natural Gas Supply, Demand and Cross-border Trade

Countries that have gas reserves generally supply their own needs from domestic reserves
and then import any deficiencies via regional pipelines or LNG carriers. Some countries, like
Japan, have no production and so they import large quantities of LNG. The United States, for
example, have been a gas importer (by pipeline from Canada and LNG mainly from Trinidad)
because of gas production deficiency. Although, during the last couple of years this scenario
has been changing. The historical decline in US gas production has been reversed due to the
considerable rise in unconventional gas production reducing demand for LNG. However, the
future potential for natural gas production from unconventional sources will mainly be
determined by the level of natural gas prices and the development of production costs. Stay
tuned and watch the evolution of natural gas markets!
Gas production, consumption and net trade, on a regional basis, is shown in Figure 56. Note
that the major producing regions are North America and the Former Soviet Union and the
major consumption occurs in North America, Asia Pacific, Former Soviet Union and Europe.
The major regional trade movements are from the Former Soviet Union, Africa and the
Middle East to Europe, Asia Pacific and North America.
In 2013 global natural gas production increased about 1.2 TCF compared to 2012 led by the
US, Russia, and the Middle East countries. The US natural gas production represents
approximately 21% of the total gas produced in the world.
Figure 56: This figure shows the natural gas production, consumption and trade condition
for each region of the world during 2013. (Source: Source: BP Statistical Review of World
Energy, June 2014)
The major gas producing and consuming players on a country basis are listed in Table 13.
Note that the major producing countries by far are the USA and Russia. They are also the
major consuming countries followed by Iran, China, Japan and Saudi Arabia.
Major
Country
Gas
Production
and
Consumption
(2013)
(billion m3 /year)
Major Gas Producing Countries
Major Gas Consuming Countries
Country
Production
Country
Consumption
USA
688
USA
737
Russia
605
Russia
413
Iran
167
Iran
162
Qatar
159
China
162
Canada
155
Japan
117
Norway
117
Saudi Arabia
103
World Total
3363.9
World Total
3314.4
Percent of Total
56%
Percent of Total
51%
Table 13: Major Country Gas Production and Consumption 2013. (Source: BP Statistical
Review of World Energy, June 2014)
The major gas trading between countries takes place by pipeline between Russia and Europe,
between Canada and the USA and within Europe, that is, from Norway and the Netherlands
to other European countries. The major LNG trade takes place into Japan followed by South
Korea from Asia Pacific, Middle East and more recently from Russia.
Natural
Gas
Exporting
and
Importing
Countries
(2013)
(billion m3 /year)
Major Gas Importing Countries
Major Gas Exporting Countries
Country
Imports
Country
Exports
Japan
119.0
Russian Federation 225.5
Germany
95.8
Qatar
125.5
USA
81.6
Norway
106.2
Italy
57.1
Canada
78.9
South Korea
54.2
Netherlands
53.4
China
51.9
USA
44.5
World Total
1035.9
World Total
1035.9
Percent of Total
44%
Percent of Total
61%
Table 14: Major Natural Gas Exporting and Importing Countries 2013. (Source: BP
Statistical Review of World Energy, June 2014)
Natural Gas Prices

Gas prices paid by the end consumers are set in a number of different ways. Because natural
gas is not yet a commodity like crude oil, its market price depends on local market conditions
and whether market liberalization ("open access") has occurred.
Regulated Prices
In developing countries with plentiful gas supplies and a nationally owned gas company, the
price may be set at a relatively low level and subsidized by the government. Where the gas
industry is vertically integrated and regulated, the gas price and transportation/distribution
charges are set by one or more government agencies. In the pre-liberalization days in the US,
the price of gas that moved in interstate commerce was federally regulated at a relatively low
level ($0.33/million BTU). Pipelines entered into long-term purchase contracts with
producers, added a regulated transportation charge to the price and sold the gas to the local
distribution companies that, in turn, added a distribution fee and sold it to end consumers.
This constituted full regulation of both the gas price and the tariffs required to deliver the gas
to the end consumer.
Gas Price Indexed to Oil

In other countries, such as the European countries before its transition to "open access", gas
has been sold on an "oil equivalent" basis. This means that the price of gas is indexed to the
price of oil on a thermal energy equivalent basis. Examples of this type of indexing are
shown in Figure 57 for the sale of gas to customers in the Netherlands before open access.
Note that the price to residential customers is indexed to light fuel oil on a quarterly moving
average basis and that to industrial customers is indexed to heavy fuel oil on a more
immediate basis.
Figure 57: This figure shows how gas price was indexed to oil on a thermal energy basis in
the Netherlands from 1989-2001. Note how it was indexed to light fuel oil for residential
customers (left side) and heavy fuel oil for industrial customers (right side).
LNG delivered to the Japanese market, for example, is typically sold at a base price indexed
to the Japanese Crude Cocktail ("JCC"), which is the average price paid for all crude oil
imported into Japan in a specific period and reported by the Japanese Ministry of Finance.
Gas-to-Gas Competition
In Open Access countries, such as the United States and the UK, the price of gas is
determined on a gas-to-gas competition basis. In essence the price is set by gas producers
competing with each other in monthly and daily markets. In the United States the major
trading hub is at Henry, Louisiana ("Henry Hub"), where purchased gas may be transferred
within an integrated system of onshore and offshore pipelines for delivery to end customers.
Sales are made on monthly and daily spot basis. The recent history of the monthly Henry Hub
Index price is shown in Figure 58.
Figure 58: Shows the monthly Henry Hub price, which was relatively flat for many years and
then increased as gas supply became tight and oil prices grew rapidly in the 2000-2008
period. After the world economic crisis during the third quarter of 2008, and the USA shale
gas boom, gas prices came down and have been stable since 2009 to these days.
There is also a competitive market for pipeline transportation capacity between Henry Hub
and other trading hubs throughout North America, as shown in Figure 59. The difference in
price between Henry Hub and other hubs is referred to as the "Basis Difference", which
represents the price of pipeline transportation capacity charged by these companies that own
the long-term capacity and "release" it to others. It is normally high in winter and low in the
summer.
Figure 59: shows the price of gas and basis differentials at various trading hubs throughout
North America on July 21, 2014 (Courtesy of Energy Intelligence Group).
(www.energyintel.com)
The reference gas price, in the fully liberalized "open access" UK gas industry, is referred to
as the Heren Index. It is set daily at the National Balancing Point (NBP), a fictitious point in
the UK transport system through which the entire amount of gas is considered to flow. The
flow includes all supply "entries" (gas terminals onshore and offshore, gas storage) and sales
"exits" (local supply zones, bulk buyers, and gas storage).
A second spot market point in Europe, now gaining in importance with the liberalization of
the gas market there, is located at Zeebrugge, Belgium. Zeebrugge is not only the southern
point of connection of the Interconnector pipeline from the UK, but also the location of the
recently expanded Zeebrugge LNG receiving terminal as shown in Figure 60.
Figure 60: Shows the Interconnector pipeline joining Bacton, UK and Zeebrugge, Belgium.
Gas can flow in either direction depending on demand and prices. (www.interconnector.com)
Emerging Commodity Price

There is a growing sense that natural gas is becoming more of a commodity because of two
major new developments in the LNG market: the emergence of agreements by buyers and
sellers to divert cargoes to higher priced customers and share in the excess profits, and the
existence of spare ship capacity that allows for the expansion of spot LNG sales. The
movement of LNG carriers to higher demand areas cause the price of gas to normalize
between the three major gas markets: the US, UK and Japan. The suggestion, then, is that gas,
like crude oil, is becoming more of a commodity. LNG prices in the 2008-2012 period, as
shown in Figure 61, indicate that the prices in these three major markets, notwithstanding
significant spot LNG sales, have moved in different directions in response to different
drivers: Japans need for gas to make up for a shut-down nuclear power plant; Europes need
for gas to offset Russian gas curtailments and the US abundance of gas because of the rapid
expansion of its unconventional gas supply. Stay tuned! (See Jensen, James T: The
Development of a Global LNG Market, Oxford Institute for Energy Studies
www.oxfordenergy.org).
Figure 61: Shows that the LNG prices in several key markets of the world tracked each other
quite closely in the first half of 2008. Then prices fluctuated significantly in the US, UK and
China markets in response to events in each of the respective markets as the financial crisis
hit the world economy in the last quarter of 2008. (Source: Global View, EIA, World Bank
Commodity Prices)
Natural Gas Liquids: Supply, Demand and Pricing

The stability of global LPG markets during 2010 were affected by several issues around the
world: civil war in Libya, Japan's earthquake, government changes in Egypt and Tunisia,
LPG exports from Venezuela have been falling for several years. It is important to watch the
development of this important market!
There has been a continuously growing demand for natural gas liquids during the past ten
years, in fact, demand has exceeded the average annual growth rate of crude oil (3.2% during
2012). The annual demand for these products is about 7.9 million barrels/day.
The main drivers of LPG demand are demand for fuels in the developing world and
petrochemicals in the developed world. In the developing countries LPG can be easily
transported in pressurized containers to new customers in rural communities who use it for
cooking. This is often their first contact with a fuel that does not require daily searching for
wood or other forms of biomass.
Demand has grown substantially in the past ten years. Largest shared in demand during 2012
was in Asia (35%). Other high LPG demand regions include North America, Europe, and
Latin America. About 60 percent of supply comes from natural gas processing plants and the
balance from refineries. The US and Canada have the highest LPG production at about 24%
of the world total, followed closely by the Middle East and Asia. (Source Oil & Gas Journal,
June 3, 2013).
LPGs are commodities with major trading taking place in three key centers: Mont Belvieu,
TX (near Houston), ARA, Amsterdam-Rotterdam-Antwerp, and Saudi Aramco in the Arabian
Gulf. The prices for propane and butane in these locations since 2000 are shown in Figures
62 and 63. Note how the prices tend to rise in the winter months and fall in the summer
months in response to seasonal demand.
Figure 62: Price of Propane in the last fourteen years.(Source: Global View and Reuters)
Figure 63: Price of Butane in the last fourteen years. (Source: Global View and Reuters)
Final Thoughts
In this module you have gained a broad overview of the oil and gas industry, its structure,
sectors, players, and the economics of: the supply-demand-pricing both oil and gas. As we
said at the outset, it is a big, integrated industry that affects all of our lives in many ways. We
now encourage you to look deeper into the industry by pursuing other modules in this series.
By doing so you will learn much more about the fascinating oil and gas business.
Review Questions

You've already completed this assessment 0
Note: You have 3 attempts.
Times. You can try again now. Complete this
page with your answers, and hit the 'submit'
button at the end of the page to continue.
1 The primary factor(s) affecting energy demand is (are):
(a) GDP
(b) Population growth
(c) a) and b)
(d) Government policies
2 What is the crude oil Reserves/Production ratio for the World?
(a) 10 to 20 years
(b) 21 to 30 years
(c) 31 to 40 years
(d) > 50 years
3 The UK gas market is:
(a) A fully liberalized open access market
(b) A regulated market
(c) Linked to the price of oil
4 Which of the following countries is NOT among the founding members of the
Organization of Petroleum Exporting Countries (OPEC)?
(a) Qatar
(b) Venezuela
(c) Kuwait
(d) Iraq
(e) Iran
5 What percent of the world's crude output is produced by OPEC countries?
(a) 25 percent
(b) 40 percent
(c) 55 percent
(d) 65 percent
6 Which of the following National Oil Companies is considered as an active industry
player both at home and abroad?
(a) Statoil (Norway)
(b) Petrobras (Brazil)
(c) GAZPROM (Russia)
(d) ONGC (India)
(f) (a) and (b)
7 Which of these companies can be classified as a vertically integrated global
company:
(a) Valero refinery
(b) Any independent oil and gas producer

(c) ExxonMobil
(d) None of them
8 What is the major natural gas trading hub in the United States?
(a) New York City Gate
(b) Wall Street
(c) NYMEX
(d) Henry Hub
9 The price of natural gas in European countries has historically been indexed to:
(a) Price of natural gas in North America
(b) Inflation
(c) Price of crude oil
(d) Price of electricity
10 Typically, __________ consumers are capable of switching fuels between natural
gas and fuel oil very quickly depending on price.
(a) Industrial
(b) Residential
(c) Commercial

(c) a) and b)
2 What is the crude oil Reserves/Production ratio for the World?
(d) > 50 years
3 The UK gas market is:
(a) A fully liberalized open access market
(a) Qatar
(b) 40 percent
6 Which of the following National Oil Companies is considered as an active industry

player both at home and abroad?
company:
(c) ExxonMobil
(d) Henry Hub
9 The price of natural gas in European countries has historically been indexed to:
(c) Price of crude oil
(a) Industrial
1 Which of the following countries is the largest LNG importer?

(a) Spain
(b) United States
(c) Canada
(d) Japan
(e) France
company:
(a) Valero refinery
(b) Any independent oil and gas producer
(c) ExxonMobil
(d) None of them
(a) Qatar
(b) Venezuela
(c) Kuwait
(d) Iraq
(e) Iran
(a) GDP
(b) Population growth
(c) a) and b)
(d) Government policies
5 Discovered resources that have not been developed because of a lack of reservoir
information or commercial viability, are called:
(a) Possible resources
(b) Contingent resources
(c) Assessed resources
(d) Probable resources
(a) Industrial
(b) Residential
(c) Commercial
7 More than 30 percent of all crude oil imports are delivered to:
(a) The United States alone
(b) The United States and Japan
(c) The United States, Europe and China
(d) The United States, Japan and Europe combined
(a) 25 percent
(b) 40 percent
(c) 55 percent
(d) 65 percent
(a) New York City Gate
(b) Wall Street

(c) NYMEX
(d) Henry Hub
10 Which of the following regions have the two largest natural gas reserves?
(a) North America and Asia Pacific
(b) Former Soviet Union and the Middle East
(c) The Middle East and Africa
(d) Asian Pacific and the Middle East
1 Which of the following countries is the largest LNG importer?
(d) Japan
company:
(c) ExxonMobil
(a) Qatar
(c) a) and b)
5 Discovered resources that have not been developed because of a lack of reservoir
information or commercial viability, are called:
(b) Contingent resources
(a) Industrial
7 More than 30 percent of all crude oil imports are delivered to:
(c) The United States, Europe and China
(b) 40 percent
(d) Henry Hub
10 Which of the following regions have the two largest natural gas reserves?
(b) Former Soviet Union and the Middle East
Important Oil and Gas Statistical

References
There are a few good references that we will rely on in this series and you may wish to
become familiar with. Historical statistics of energy supply, production, consumption and
pricing are published by BP (http://www.bp.com/content/dam/bp/pdf/statisticalreview/statistical_review_of_world_energy_2013.pdf) and updated annually in June.
The Energy Information Adminstration of the US Department of Energy
(http://www.eia.doe.gov/oil_gas/natural_gas/info_glance/natural_gas.html) also publishes
historical statistics of all forms for both the US and the world.
Finally the International Energy Agency in Paris, an agency set up by the OECD countries at
the suggestion of Henry Kissinger when the oil prices grew so quickly in the1970's, publishes
"scenarios" or "projections" for the future biannually referred to as World Energy Outlook.
(http://www.worldenergyoutlook.org). Of course there are many other publications offered
free or for a service. See the Reference box on the opening page for suggestions for further
reading.
Websites of Importance
The New York Mercantile Exchange (NYMEX) (www.nymex.com) in New York
Intercontinental Exchange (ICE) (www.theice.com ) in London
Acknowledgments
IHRDC gratefully acknowledges the assistance and/or media contributions
of the following companies in the publication of this module.
Anadarko Petroleum Corporation
http://www.anadarko.com
Baker Hughes
http://www.bakerhughes.com
BP
http://www.bp.com
Chevron Corporation
http://www.chevron.com
Cable News Network
http://www.cnnimagesource.com
Occidental Petroleum Corporation
http://www.oxy.com
Qatargas
http://www.qatargas.com.qa
The Port Of Houston Authority
http://www.portofhouston.com
Western Geco
http://www.westerngeco.com

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Module Objective:

The objective of this module is to provide a comprehensive overview of the

Figure 1: The rising fuel prices affect us all.

Crude Oil and Natural Gas: From Source

Total atomic weight of carbon atoms: 1 x 12 = 12

gases have higher concentrations of propane, butane and the intermediate-weight

Origins of Crude Oil and Natural Gas

Petroleum Migration and Accumulation

Separation and Treatment of Produced Oil and Gas

Gas Handling and Processing

Crude Oil Refining

Measurement Units and Conversion

Petroleum engineers, particularly those working in the Western Hemisphere, measure

Crude Oil Measurement

Oil Quality: API Gravity

Natural Gas Measurement

Basic unit of sale

Gas Liquids and Petroleum Product Measurement

Energy Content and Equivalency

Quantity BTU Equivalent (approximate)

Thermal Energy Equivalency:

Hydrocarbon Price Equivalency:

Conversion Table and Electronic Calculator

Oil & Gas Industry Overview - 1 - Assessment

12 Which of these following provides the greatest amount of energy, expressed in

1 What is the molecular weight of Carbon?

(d) Crack spread

1 What is a measure of heating value of oil and gas?

Oil and Gas Value Chain

Figure 21: Major stages of the Upstream sector.

Negotiation of Upstream Agreements

Figure 22a: Various options for developing an offshore field.

Figure 23: Typical production stages for a producing field.

Wholesale Hydrocarbon Markets

Crude Oil Markets

West Texas Intermediate ("WTI") Cushing, Oklahoma

Dubai in the Arabian Gulf

A forward contract is entered into by counter parties directly or through a broker,

Purchase or sale of 1000 bbl of crude oil

Midstream Crude Oil Value Chain

Capacity, Deadweight Tonnes (DWT); Remarks

Capacity, Deadweight Tonnes (DWT); Remarks

Tanker Charter Rates

Total cost of voyage at WS100 = $22 x 300,000 = $6.6 million

Transportation cost = $6,600,000/2,052,400 = $3.22/bbl

Ship Transportation: LNG

Crude Transportation by Pipeline

Figure 32: Substantially higher throughput is achieved as the diameter of a pipeline is

Refining of Crude Oil

Midstream Natural Gas Value Chain

Figure 38a: Alliance Gas pipeline.

Figure 38b: Alliance Pipeline Gas processing facility near Chicago.

Natural Gas Pipeline Transportation and Storage

Pipeline Regulation and Tariffs

Downstream Natural Gas Value Chain

Oil & Gas Industry Overview - 2 - Assessment

(a) 80,000 DWT

(c) transportation and refining

(a) West Texas Intermediate (WTI) in Houston

Main Global Players in the International

National Oil and Gas Companies

Vertically Integrated Global Companies

Assets, US$ Domicile

Other Active Players

Oil & Gas Industry Overview

Oil & Gas Industry Overview