Layman\'s Guide to the OIl & Gas Industry

7,787 views
7,680 views

Published on

A casual guide for the uninitiated to the workings of the oil and gas industry (Version 1.1)

Published in: Business, Technology
16 Comments
32 Likes
Statistics
Notes
No Downloads
Views
Total views
7,787
On SlideShare
0
From Embeds
0
Number of Embeds
3
Actions
Shares
0
Downloads
0
Comments
16
Likes
32
Embeds 0
No embeds

No notes for slide

Layman\'s Guide to the OIl & Gas Industry

  1. 1. A Layman’s Guide to the Oil and Gas Industry Logan Yeo Lune Gene 1 November 2010 International Asset Management Sdn. Bhd. A LAYMAN’S GUIDE TO THE OIL AND GAS INDUSTRY Disclaimer: Petroleum, hydrocarbons, oil and gas are interchangeable terms referring to the same resource type in mass media. This does not correspond to their actual physical definitions. This content is purely off the top of the author’s head based on his experience, conversations and reading and as such, references to some of the information presented may not be cited. The author’s views do not represent those of any companies or institutions. This document is a casual guide to the oil and gas industry for the uninitiated and is not meant to be a technical or academic document; and as such contains language native to an informal nature. Financial terms used are explained in a glossary at the end of this document. For any other unfamiliar terms, Google is your best friend. All images here are either the work of the author or taken off the internet (which is public property and hence not subject to copyright). The author welcomes all comments.
  2. 2. A Layman’s Guide to the Oil and Gas Industry November 2010 International Asset Management Sdn. Bhd. The oil and gas industry is essentially a resources, known as petroleum (oil and gas) civilization. To truly understand the whole tale, The Big Idea Millions of years ago, tiny plants and animals these organisms died, their corpses accumulated on layers of rock and soil before them, other sediments get deposited on top of these even as life died out in the area, seas dry and continents move. kilometers in depth) gets deposited illustrates this process. Layers of rock rich with organic material are known as source rocks. “raw material” for the formation of petroleum/hydrocarbons. Zoom out to the rest of the Earth. (speculated) core of iron, hot semi “floating” above that. The crust isn’t one single intact piece. It’s fragmented in many parts. it? “Seabed” of iron, sea of magma and fragmented lay gets hotter as you go deeper, towards the core. Figure 1: Source rock formation A Layman’s Guide to the Oil and Gas Industry Logan Yeo Lune Gene International Asset Management Sdn. Bhd. The oil and gas industry is essentially a global hunt for resources from Mother Nature (oil and gas), help fuel the workings of modern day human To truly understand the whole tale, let us go back to the very beginning , tiny plants and animals inhabited seas and lakes, much like today. these organisms died, their corpses accumulated on the sea beds and lake bottoms. layers of rock and soil before them, other sediments get deposited on top of these even as life died out in the area, seas dry and continents move. As more and more sediment (meters to kilometers in depth) gets deposited, the sediments below get compacted to form rocks. Layers of rock rich with organic material are known as source rocks. These are essentially the of petroleum/hydrocarbons. out to the rest of the Earth. The Earth itself is a multilayered ball (see Figure semi-liquid rock (mantle) above that and solid rock (crust) The crust isn’t one single intact piece. It’s fragmented in many parts. of iron, sea of magma and fragmented layers of rock floating on the sea er as you go deeper, towards the core. Logan Yeo Lune Gene 2 from Mother Nature. These modern day human go back to the very beginning. , much like today. When beds and lake bottoms. Like the layers of rock and soil before them, other sediments get deposited on top of these even as life As more and more sediment (meters to e sediments below get compacted to form rocks. Figure 1 These are essentially the (see Figure 2) with a liquid rock (mantle) above that and solid rock (crust) The crust isn’t one single intact piece. It’s fragmented in many parts. Got ers of rock floating on the sea. And it
  3. 3. A Layman’s Guide to the Oil and Gas Industry November 2010 International Asset Management Sdn. Bhd. The ground on which we stand (continental crust) and the sea bottom (oceanic crust) constitute layers of rock fragments (tectonic these tectonic plates stretch out 100s of kilometers. one sometimes gets dragged under another And in the process, rocks that were in shallower depths get buried deeper and thus get exposed to higher temperatures beneath. rifting) subsequently filled in by younger rocks and sediments are known as “basins”. shows how a basin forms via rifting: Remember our source rocks (rocks laden with the organic goodness of dead bodies these get buried to the depths at certain temperature ranges to form hydrocarbons (compounds of hydrogen and carbon atoms case equals petroleum! more porous rocks (reservoir rocks) or Figure 4: Hydrocarbon generation (“cooking”) A Layman’s Guide to the Oil and Gas Industry Logan Yeo Lune Gene International Asset Management Sdn. Bhd. The ground on which we stand (continental crust) and the sea bottom (oceanic crust) constitute tectonic plates) which float on the mantle. A little reminder of the scale: these tectonic plates stretch out 100s of kilometers. As these plates interact with each other, one sometimes gets dragged under another (subduction) or gets ripped in the middle (rifting) ere in shallower depths get buried deeper and thus get exposed Depressions in the Earth (which result from subduction or subsequently filled in by younger rocks and sediments are known as “basins”. w a basin forms via rifting: Remember our source rocks (rocks laden with the organic goodness of dead bodies at certain temperature ranges, the organic material gets hydrocarbons (compounds of hydrogen and carbon atoms, see Figure 4 The products of this “cooking” are diverse: liquids (oil) and gases (natural gas and other gases like carbon dioxide). Sulfur rich oils are known as “sour oil” whereas non-sulfur rich oils are known as “sweet oil”. The type of hydrocarbon formed also depends on the nature of the raw material (look up “kerogen” types). There are other distinctions to be made chemically, but I shall not go into this here. But wait. The story does not end here. For after the hydrocarbons form, they tend to migrate through (reservoir rocks) or cracks in Earth’s rock crust (faults). Their final Figure 2: Layers of the Earth (Source: American Museum of Natural History) : Hydrocarbon generation (“cooking”) Figure 3: Rift basin formation (Source: Logan Yeo 2010) Logan Yeo Lune Gene 3 The ground on which we stand (continental crust) and the sea bottom (oceanic crust) constitute A little reminder of the scale: As these plates interact with each other, or gets ripped in the middle (rifting). ere in shallower depths get buried deeper and thus get exposed (which result from subduction or subsequently filled in by younger rocks and sediments are known as “basins”. Figure 3 Remember our source rocks (rocks laden with the organic goodness of dead bodies ☺)? As , the organic material gets “cooked” , see Figure 4), which in this The products of this “cooking” are diverse: liquids and other gases like carbon dioxide). Sulfur rich oils are known as “sour sulfur rich oils are known as “sweet The type of hydrocarbon formed also depends on the nature of the raw material (look up “kerogen” are other distinctions to be made chemically, but I shall not go into this here. But wait. The story does not end here. For after the hydrocarbons form, they tend to migrate through Their final Figure 3: Rift basin formation (Source: Logan Yeo
  4. 4. A Layman’s Guide to the Oil and Gas Industry Logan Yeo Lune Gene 4 November 2010 International Asset Management Sdn. Bhd. destinations are “traps” – blockades formed in the Earth out of less porous rock types (seals) which trap the migrating hydrocarbons in place (Figure 5). This theory of how hydrocarbons form is known as the Big Idea. Fast forward millions of years into the future, a fossil fuel hungry human civilization taps into this resource via groups united in economic purpose we call “oil companies”. Cue in Figure 6. Within these oil companies, a class of human specialists known as “geoscientists” (geologists and geophysicists) leads the technical search for hydrocarbons. To achieve this, they utilize existing knowledge and theories about a prospective area, rock samples, observations made at rock outcrops at Earth’s surface and “seismic data”. The geoscientists interpret and map the areas of interest at selected depths by integrating all available data. The maps are updated and often remapped as new information comes in at different stages of the business. The life cycle of the oil and gas mining process is a long one – which I divide into the bidding, exploration, appraisal, development and production stages. The timeline involved for each stage depends on a variety of factors: politics, regulation, technical progress amongst others. This goes up to years and sometimes even decades. In the larger firms, there are often separate subsidiaries of a firm for each stage: stages often overlap each other in the process though: exploration and appraisal can be one single exploration project, (re-)appraisal and development constitutes a single field development program; and production naturally follows a development well being drilled (if all goes good). Figure 5: Hydrocarbons trapped Figure 6: Oil & gas companies drill for hydrocarbons
  5. 5. A Layman’s Guide to the Oil and Gas Industry Logan Yeo Lune Gene 5 November 2010 International Asset Management Sdn. Bhd. Stage: Bidding To mine for something, one must first acquire the rights to the area first. Oil companies select areas to bid for based on pre-existing data (if any), and weighing the chance of success in the area versus the estimated capital required – just like any other investment. Pre-existing data may include “seismic data” from survey companies, data from open sources (e.g.: North Sea Millennium Atlas and BP Wytch Farm dataset), “well log data” from any pre-existing wells in the area, and/or pre-existing interpretations. Once the prospective area(s) have been selected, the bidding starts. Blocks, which are like property boundaries, are put up for bidding for rights to oil and gas exploration (see Figure 7 for examples of this). In an open bidding process, such as in US Gulf of Mexico and in Nigeria (since 2005), it basically functions like an auction (a bidding company can also partner with others in the bidding). Highest offer wins. In some countries, however, a negotiated bidding process (such as with Petronas of Malaysia) functions due to government regulations – this are essentially negotiations with the state-owned oil company, Petronas, for stakes in operating oil and gas fields in Malaysia. So who stands to gain from this? Survey companies may gain future contracts to gather data for the winners of the bid(s). The local government gets royalties and fees from the bidding (varies with local laws). And let us not forget the future wells to be drilled on the newly acquired acreage. Offshore structure, marine and machinery construction companies and drilling related services get in on the action too. For the types of structures and vessels used in the next stage, see Drilling under Stage: Exploration. Potential gainers: - survey (services) companies like Western Geco of Schlumberger - the local government (royalties) - future or pre-negotiated contracts for service companies (Halliburton, Baker-Hughes) and rig/platform/marine/equipment construction companies (Atwood, Vicksburg, Figure 7: Blocks on Gulf of Mexico, US side (Source: GOMData.com 2010)
  6. 6. A Layman’s Guide to the Oil and Gas Industry Logan Yeo Lune Gene 6 November 2010 International Asset Management Sdn. Bhd. MMHE, Kencana Petroleum, Ezra Holdings) to explore and (possibly) develop the area - Drilling fluid (mud) production companies (Scomi Oilfield Services) and mud logging services (International Logging Orogenic Sdn. Bhd.) - Software companies for basin modeling (Beicip-Franlab, Petromod software by Schlumberger) Big players So who are the big boys in the picture? During the turn of the 20th century, a significant firm to thoroughly dominate the global oil industry was Standard Oil (which controlled 91% of oil production in the United States in 1904, then the leading oil producing country in the world). In 1911, the U.S. Supreme Court dissolved Standard Oil and broke it up into 34 different firms. Jim Fink, a future and options trader, estimates that Standard Oil would be worth over USD 1 trillion in 2007 if it had not been dissolved. Standard Oil’s “children” includes some of the leading names in the oil and gas industry today: ExxonMobil and Chevron. These “children” are part of the Seven Sisters of the oil industry, which controlled 85% of the oil reserves in 1973. The Seven Sisters are international oil companies (IOCs) many of which are household names even today. Seven Sisters: - Standard Oil of New Jersey (Exxon)* - Standard Oil Company of New York (Mobil)* *Exxon and Mobil merged in 1999 to become Exxonmobil, currently the largest IOC in the world. - Standard Oil of California (Chevron) - Gulf Oil (merged with Chevron in 1985) - Texaco (now part of Chevron) - Royal Dutch Shell - Anglo-Persian Oil Company (now BP) In recent decades, however, the dominance of the Seven Sisters has been eroded by states gaining more control over their own national oil and gas assets; and thus the global oil and gas power map is much more complicated today. As of April 2009, the global oil production is comes from (by percentage) - [30%] Organization of Petroleum Exporting Companies (OPEC): Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, U.A.E, Venezuela - [23.8%] Organization for Economic Cooperation and Development (OECD): 33 member countries including the US, EU members, Japan and Australia. - [14.8%] Former Soviet Union: 15 members
  7. 7. A Layman’s Guide to the Oil and Gas Industry Logan Yeo Lune Gene 7 November 2010 International Asset Management Sdn. Bhd. The most influential oil and gas firms outside the OECD were named the “New Seven Sisters” by Financial Times in 2007: - China National Petroleum Corporation (China) - Gazprom (Russia) - National Iranian Oil Company (Iran) - Petrobras (Brazil) - PDVSA (Venezuela) - Petronas (Malaysia) - Saudi Aramco (Saudi Arabia) Saudi Aramco is arguably the “big sister” of the group, holding 25% of the world’s oil reserves and triples the capacity of any other group. Out of the New Seven Sisters, only Saudi Aramco, Petrobras and Petronas have been able to turn themselves into international players able to compete with the “old” Seven Sisters (now only four remaining: ExxonMobil, Shell, Chevron and BP). The biggest bump in the road for the New Seven Sisters is their state ownership, which subjects much of their earnings to the political use of their native countries. In more recent news (2010): Petronas (state oil company of Malaysia), after this year’s departure of its former CEO, Tan Sri Hassan Merican, has adopted a new policy of stopping its international ventures and “going home deep” (i.e.: focusing on deep water activities in Sabah). In October 2010, it sold off its assets in Ethiopia to SouthWest Energy (H.K.) Ltd, an Ethiopian-owned company registered in Hong Kong. Petronas offered its petrochemicals division, Petronas Chemicals, in the largest IPO in Southeast Asia yet, with potentially USD4 billion raised. Petrobras, which operates in 28 countries on five continents, is the world’s second-largest oil company by market capitalization after carrying out a massive share offering in September (USD 70.1 billion – largest offering in the world). Saudi Aramco raised its official November premium for crude (Arab Super Light) to Asia from USD0.90 to USD1.90 (Bloomberg Nov 1, 2010). What is seismic data? The basic method is to shoot sound waves (seismic waves) onto the surface of the rocks of interest, and record the time at which they take to reflect of the individual layers, thereby deriving the individual depths of these layers. The velocity at which the waves pass through rock layers with different properties also varies. This concept was developed by the military during World War 2, and later found its way to industry, like the internet.
  8. 8. A Layman’s Guide to the Oil and Gas Industry Logan Yeo Lune Gene 8 November 2010 International Asset Management Sdn. Bhd. Stage: Exploration After exhausting pre-existing knowledge about a certain area, a 2D seismic survey would be shot along the area of interest. 2D seismic sections are single slices across the map – cross sections to view the depths along a certain line on the map. Humps on these cross sections (if hydrocarbons are deemed present in the vicinity) are generally considered good prospects for the next step: drilling. Drilling A hole is drilled into the ground to prove the existence of hydrocarbons once and for all. The geoscientists work together with drilling engineers to figure out a feasible well path – a practical path for the hole to be drilled to hit the target (where the hydrocarbons are supposed to be). This hole is called an “exploration well”: drilled solely for gathering information about the subsurface. An exploration borehole/well is typically vertical in nature. Exploration wells can be drilled from drillships (shallow or deepwater offshore), jackup rigs (shallow offshore <400 feet), onshore drilling rigs and semi-submersibles (deepwater offshore 200-10000 feet). See Figure 12 under Stage: Development (page 14) for depictions of such offshore structures. During drilling, “mud” (a usually water or oil based synthetic drilling fluid) is used to lubricate the drill bit as it drills into the Earth. Mud is also used to maintain pressure in the borehole and to transport rock shavings (from the drilling) up to the surface; where it will be analyzed by a mud logger to help predict the rock type and possibly the presence of hydrocarbons at various depths. From the borehole, fluid samples are taken at target depths and survey tools are lowered down the borehole to measure certain properties of the rock (such as resistivity and radioactivity). These properties tell us whether the rock layer at a certain depth is a reservoir rock, source rock or seal rock. They also tell us what type a fluids/gas a reservoir rock holds. The measurements of these properties are known as “well log data”. Core samples of the rock may also be taken from the borehole. In-depth and more fanciful interpretations of well log data and core samples are done by a group of specialists known as “petrophysicists”. See borehole sketch (Figure 8): Figure 8: Sketch of a (straight) borehole (Source: www.oil-gas.state.co.us)
  9. 9. A Layman’s Guide to the Oil and Gas Industry Logan Yeo Lune Gene 9 November 2010 International Asset Management Sdn. Bhd. Wait…..a what-rock now? A reservoir rock is a relatively porous rock that can contain hydrocarbons (or just water). A source rock is an organic rich rock in which hydrocarbons are formed (see The Big Idea above). A seal rock is a relatively impermeable rock, which blocks the movement of fluids and gas. These elements form part of a Petroleum System as illustrated by Figure 9. In some places, regulations require a company to announce its results as the drilling occurs, leading to certain ups and downs in its share price. Sterling Energy PLC announced its drilling results on 20th September 2010 – two of its prospective reservoirs in Iraq produced copious amounts of water after an initial production of gas. Its equity price plunged from £1.28 to £0.78 on that very day. At the exploration stage, oil companies (especially smaller ones) have high capital expenditure to earnings ratio as everything is an investment at this point and there are no returns yet. Thus, exploration stage companies will tend to have lower liquidity. Again, at this point, with the exploratory drilling, drilling, offshore and marine related firms get their revenue (and future or extended contracts if there are asset development opportunities). Core samples of the rock from the borehole may be taken at this point to analyze the permeability and other properties of the rock layers. Potential gainers: - Well survey service companies (Halliburton, Baker-Hughes) - Rig/platform/marine/equipment construction companies (Atwood, Vicksburg, MMHE, Kencana Petroleum, Ezra Holdings) - Drilling companies (Tioman Drilling Co. Sdn Bhd, Transocean, Maersk Drilling) - Drilling fluid (mud) production companies (Scomi Oilfield Services) and mud logging services (International Logging Orogenic Sdn. Bhd.) - Core analysis labs (Core Laboratories (M) Sdn. Bhd.) - Software companies for basin modeling (Beicip-Franlab, Petromod software by Schlumberger) and (possibly) field level modeling (Petrel by Schlumberger) and seismic software Figure 9: Petroleum System Seal rock
  10. 10. A Layman’s Guide to the Oil and Gas Industry Logan Yeo Lune Gene 10 November 2010 International Asset Management Sdn. Bhd. Stage: Appraisal Reserves If hydrocarbons (oil and/or gas) are proven in the hole, the next step would be to quantify them as accurately as possible (volumetrics). The collective amount of hydrocarbons in the ground is known as resources, while the resources that are recoverable (assuming no prior production has taken place) are known as reserves. Reserves are generally taken to be a measure of the worth of an oil company. The classification of reserves varies across different organizations; but the reserves are generally divided into proven, probable and possible reserves. Proven reserves are defined by fluid samples collected from a specific depth, definitive log data and production tests. Proven reserves are also known as 1P or P90 (90% chance of being producible) Probable reserves have less certainty attached to them. An example of this would be say everything above a certain depth is proven oil (say, 1200m below the sea bed) and everything below 1400m is proven water. The fluid content between 1200 to 1400m is uncertain. If we take the contact between oil and water to be halfway through at 1300m, the probable oil reserves are situated at 1200 to 1300m depth. Probable reserves are also known as 2P or P50 (50% chance of being producible). Many oil companies state the sum of their proved plus probable reserves (P+P) on their public statements. Possible reserves have the least certainty of being produced (10% chance of being producible) and are known as P10 or 3P. This is usually due to high uncertainty in the geological analysis or being unrecoverable due to technology or cost constraints. Figure 10 illustrates a reserve classification system used by some prominent organizations. This classification method is very much alike for metal mining companies. Figure 10: SPE/WPC/AAPG Reserve Classification (Source: PetroBras 2010)
  11. 11. A Layman’s Guide to the Oil and Gas Industry November 2010 International Asset Management Sdn. Bhd. After a geoscientist finishes with his/her/its maps of the prospective areas, a model may be made of the prospects by a specialist known as a “geological modeler” sufficient data to make one. The reserve volumes can then be model. One can take a deterministic approach to quantifying reserves each parameter in a volumetric equation Hydrocarbon volume = (gross rock volume x net saturation)/formation volume factor Another approach is a stochastic (probabilistic) one where the answer is distribution curve (Monte Carlo Simulation) The resultant volume of reserves estimated (prior to production). Marking territory The smallest unit at which appraisal is done is by individual reservoirs individual layers of relatively porous rock which (potentially) contain hydrocarbons. A field may contain several reservoirs within its depths. (licensed) block. And a basin can contain several blocks. crust infilled with younger sediments and rocks (see The Big I article, let’s just refer to them collectively as “assets” A Layman’s Guide to the Oil and Gas Industry Logan Yeo Lune Gene International Asset Management Sdn. Bhd. After a geoscientist finishes with his/her/its maps of the prospective areas, a static ( model may be made of the prospects by a specialist known as a “geological modeler” he reserve volumes can then be estimated from the maps or the One can take a deterministic approach to quantifying reserves, which uses single values for equation: ross rock volume x net-to-gross ratio x porosity x hydrocarbon )/formation volume factor Another approach is a stochastic (probabilistic) one where the answer is from a statistical Carlo Simulation). of reserves estimated is the “static volume” or the volume initially in place appraisal is done is by individual reservoirs – again, these are individual layers of relatively porous rock which (potentially) contain hydrocarbons. ld may contain several reservoirs within its depths. There are typically several fields within a And a basin can contain several blocks. A basin is a depression in the Earth’s crust infilled with younger sediments and rocks (see The Big Idea, page 3). For the rest of this article, let’s just refer to them collectively as “assets” (Figure 11). Figure 11: Different “asset” levels in the Malay Basin (Source: modified from Deliwali Engineering Sdn. Bhd. 2010 Logan Yeo Lune Gene 11 static (geological) model may be made of the prospects by a specialist known as a “geological modeler”, if there is from the maps or the , which uses single values for hydrocarbon a statistical he volume initially in place again, these are individual layers of relatively porous rock which (potentially) contain hydrocarbons. typically several fields within a is a depression in the Earth’s For the rest of this 2010)
  12. 12. A Layman’s Guide to the Oil and Gas Industry Logan Yeo Lune Gene 12 November 2010 International Asset Management Sdn. Bhd. Counted my chickens – so what’s next? Cue in the reservoir engineers. After an estimate of static volumes of reserves is made, the reservoir engineer will engineer recovery factors for the individual reservoirs, and calculate the final volumes which can be recovered from the ground. The final volumes are known as “Estimated Ultimate Reserves (EUR)”. If a static model was created, this can be used to generate a dynamic model. A dynamic model is essentially a static model that can move through time. It can churn out EUR estimates as well as predict fluid flow throughout time. An oil or gas production chart can then be drawn, showing the production throughout time for a particular reservoir, field or any bigger denominations. This gives the lifetime of an asset – as long as there is production at an economically viable level, the asset has tangible value. Intangible value after the field has been depleted will consist of geological knowledge gleaned from the field which can be applied to neighboring assets or be used as an analogue for similar assets worldwide. Appraisal is the defining stage for any oil company as reserves are generally taken to be a measure of an oil firm’s worth, which has obvious implications for its equity price. Now it’s time to develop the assets and give out contracts. Potential gainers: - Well survey service companies (Halliburton, Baker-Hughes) - Rig/platform/marine/equipment construction companies (Atwood, Vicksburg, MMHE, Kencana Petroleum, Ezra Holdings) - Drilling companies (Tioman Drilling Co. Sdn Bhd, Transocean, Maersk Drilling) - Drilling fluid (mud) production companies (Scomi Oilfield Services) and mud logging services (International Logging Orogenic Sdn. Bhd.) - Core analysis labs (Core Laboratories (M) Sdn. Bhd.) - Software companies for field level modeling (Petrel by Schlumberger) and seismic software
  13. 13. A Layman’s Guide to the Oil and Gas Industry Logan Yeo Lune Gene 13 November 2010 International Asset Management Sdn. Bhd. Stage: Development Ah, now that we know how much we can produce, let’s find out where we can suck it out. After conducting studies on our assets and finding the sweet spots (areas and depths with the highest concentration of trapped hydrocarbons with the highest certainty), geoscientists work with drilling engineers to determine a suitable well path trajectory to reach those spots (see Stage: Exploration, page 8). More Drilling This time, however, things are not quite the same. While exploration wells are typically straight vertical holes in the ground, with the purpose purely being reconnaissance, development wells are aimed at producing hydrocarbons. Wells have to be set at an angle so that the natural pressure difference needed to push the hydrocarbons to the surface is reduced. Gas wells are set slightly deviated, but oil wells are highly deviated (Figure 13). Structures are now built near the sweet spots to allow multiple wells to be drilled into the prospects. These include fixed platforms (for water depths up to 1700 feet), compliant towers (designed to sustain significant lateral deflections, used in water depths from 1,500 to 3,000 feet), tension-leg platforms (for water depths from 1000 to 4900 feet; use has also been proposed for wind turbines) and spars (for deepwater, up to 10000 feet). Floating Production Storage and Offloading (FPSO) units are also used, particularly in deepwater locations. Wells are not actually drilled from FPSOs, which are used for processing and storage. Figure 12 shows the different structures offshore where oil and gas wells can be drilled from.
  14. 14. A Layman’s Guide to the Oil and Gas Industry November 2010 International Asset Management Sdn. Bhd. The holes are then cased: metal sleeves (casing) is (the holes are perforated at depth intervals where production of hydrocarbons is to take place). In the case of a horizontal well, a slotted liner is slid onto the end of well (think of it as a giant metal condom with holes). For traps with gas, oil and water phases, one strategy would be to put in horizontal wells 13) to produce at the oil interval. level rises and gas cap comes down post After the initial development wells are planned and drilled to capture additional targets in between the existing wells. These wells, which fill in the spaces in between Deviated well Figure 12: Different types of offshore oil and gas structures ( A Layman’s Guide to the Oil and Gas Industry Logan Yeo Lune Gene International Asset Management Sdn. Bhd. The holes are then cased: metal sleeves (casing) is set in place; and subsequently completed (the holes are perforated at depth intervals where production of hydrocarbons is to take place). In the case of a horizontal well, a slotted liner is slid onto the end of the horizontal part of the (think of it as a giant metal condom with holes). traps with gas, oil and water phases, one strategy would be to put in horizontal wells This is to optimize the amount of oil produced before the water level rises and gas cap comes down post-production. After the initial development wells are drilled and (hopefully) producing, additional wells may be planned and drilled to capture additional targets in between the existing wells. These wells, which fill in the spaces in between existing wells, are known as “infill wells”. The acts of Figure 13: Deviated and horizontal wells (Source: U.S. Geological Survey) Different types of offshore oil and gas structures (source: 2005 US National Ocean and Atmospheric Logan Yeo Lune Gene 14 set in place; and subsequently completed (the holes are perforated at depth intervals where production of hydrocarbons is to take place). the horizontal part of the traps with gas, oil and water phases, one strategy would be to put in horizontal wells (Figure This is to optimize the amount of oil produced before the water additional wells may be planned and drilled to capture additional targets in between the existing wells. These wells, The acts of source: 2005 US National Ocean and Atmospheric
  15. 15. A Layman’s Guide to the Oil and Gas Industry Logan Yeo Lune Gene 15 November 2010 International Asset Management Sdn. Bhd. repairing a well or stimulating it to enhance production (e.g.: fracturing the rock around the borehole) are known as “workovers”. Apart from the usual suspects involved with drilling; plants to refine crude and natural gas, pipelines to transport hydrocarbons to the plants and transportation for the hydrocarbons to their markets will need to be in place. Potential gainers: - Well survey service companies (Halliburton, Baker-Hughes) - Rig/platform/marine/equipment construction companies (Atwood, Vicksburg, MMHE, Kencana Petroleum, Ezra Holdings) - Drilling companies (Tioman Drilling Co. Sdn Bhd, Transocean, Maersk Drilling) - Drilling fluid (mud) production companies (Scomi Oilfield Services) and mud logging services (International Logging Orogenic Sdn. Bhd.) - Core analysis labs (Core Laboratories (M) Sdn. Bhd.) - Software companies for field level modeling (Petrel by Schlumberger), seismic software and reservoir simulation modeling (Petrel) - Contracts for plant construction? Offshore Marine Services Alliance (OMSA) bidding for Gorgon Projects Phase 2 (client: Chevron) - Pipeline and petroleum transport and distribution firms (Malaysia Gas)
  16. 16. A Layman’s Guide to the Oil and Gas Industry Logan Yeo Lune Gene 16 November 2010 International Asset Management Sdn. Bhd. Stage: Production Oil or gas is then hopefully produced out of the ground. At this point geoscientists will be relegated to a supporting role, and reservoir engineers take over monitoring pressure and production. Not all of the oil or gas can be produced in the first run, though. Primary production consists of utilizing the natural pressure difference between the reservoir subsurface depths and the surface. Secondary production typically involves water being injected into the producing well to displace the remaining hydrocarbons in order to gain extra production. Tertiary production goes one level further (with gas, polymer injections etc.). After the asset has been produced to an economically acceptable level for big firms, the scraps left (remaining reserves too small for big firms) may be sold off to a smaller firm. Barrels of oil is measured and traded in bbl (blue barrels as oil was historically stored in blue coloured barrels) while natural gas is measured in scf (standard cubic feet). Gas, however, is traded in MMBTU (million British thermal units) – a measure of how much energy it produces, rather than its volume. 1 scf of natural gas produces around 1030 BTU. Oil and Gas Trading The Brent Crude classification is used to price two-thirds of internationally traded crude oil supplies. Brent Crude itself is sourced from the North Sea (UK, Norway). It is light, sweet crude (~0.37% sulfur content). The symbol for Brent crude is LCO. Other famous benchmarks for oil prices are the West Texas Intermediate (WTI), the OPEC Basket and Dubai Crude. WTI is produced in North America and is sweeter and lighter than Brent Crude. It is typically $1 more expensive than Brent, and $2 more than the OPEC Basket. The OPEC Basket is a weighted average of prices for petroleum blends produced by OPEC countries (see Big Players under The Big Idea). OPEC attempts to keep the price of the OPEC Basket between upper and lower limits, by increasing and decreasing production. This makes the measure important for market analysts. The OPEC Basket, including a mix of light and heavy crudes, is heavier than both Brent crude oil, and WTI. Dubai Crude is a light sour crude oil (2% sulfur) extracted from Dubai. Dubai Crude is generally used for pricing Persian Gulf crude oil exports to Asia. The Dubai benchmark is also known as Fateh in the United Arab Emirates. Forward trade of Dubai Crude is limited to one or two months. Tapis Crude is a Malaysian crude oil (ostensibly from Tapis field the Malay Basin offshore Peninsular Malaysia, currently jointly operated by Exxonmobil and Petronas) used as a pricing benchmark in Singapore. It is not traded, but is often used as an oil marker for Asia. It is lovely sweet crude at 44º API. American Petroleum Institute (API) gravity, by the way, is used to compare the relative densities of petroleum liquids.
  17. 17. A Layman’s Guide to the Oil and Gas Industry Logan Yeo Lune Gene 17 November 2010 International Asset Management Sdn. Bhd. Crude oil is classified as light, medium or heavy, according to its measured API gravity. • Light crude oil is defined as having an API gravity higher than 31.1 °API. (less than 870 kg/m3 ) • Medium oil is defined as having an API gravity between 22.3 °API and 31.1 °API. (870 to 920 kg/m3 ) • Heavy oil is defined as having an API gravity below 22.3 °API. (920 to 1000 kg/m3 ) • Extra heavy oil is defined with API gravity below 10.0 °API. (greater than 1000 kg/m3 ) The oil market is exceptionally sensitive to politics of volatile regions as compared to other commodity markets. As with any other commodity, this varies with demand and supply (from both OPEC and non-OPEC countries – see Big Players under Stage: Bidding, page 6). Figure 14 shows some major events post WW2 to 2009 and how they influence the price of crude (in USD). Natural gas prices are more subject to supply and demand fundamentals, although major gas suppliers in continental Europe do peg natural gas prices to oil prices. Apart from economic growth, weather also has a major effect on natural gas demand as it is widely used for heating. Widely traded oil futures, and related natural gas futures, include: • Petroleum: o Nymex Crude Future o Dated Brent Spot o WTI Cushing Spot o Nymex Heating Oil Future Figure 14: Historical prices for crude oil for the past half century
  18. 18. A Layman’s Guide to the Oil and Gas Industry Logan Yeo Lune Gene 18 November 2010 International Asset Management Sdn. Bhd. o Nymex RBOB Gasoline Future • Natural gas: o Nymex Henry Hub Future o Henry Hub Spot o New York City Gate Spot Most of the above oil futures have delivery dates in all 12 months of the year. NYMEX Division light sweet crude oil futures contract is the world's most liquid form for crude oil trading, as well as the world's largest-volume futures contract trading on a physical commodity. Oil and gas markets So, who are the big customers? Big and growing economies with giant appetites, mostly. The United States of America. China. India. Europe is a big market for gas (largest of which is the UK). See Figure 15 for global oil consumption in 2007. Statement on the Malaysian Industrial Development Authority (MIDA) website (dated 2008): “Malaysia has the world's 14th largest natural gas reserves and 23rd largest crude oil reserves. In 2008, Malaysia produced 5,891 million standard cubic feet per day of natural gas and 691,600 barrels of oil equivalent per day of crude oil. Malaysia also has the world's largest production facility at a single location of liquefied natural gas with production capacity of 23 million metric tonnes per year. The existence of a trans-peninsular gas transmission pipeline system and six gas processing plants has resulted in a ready supply of gas to the industry. To complement the existing gas reserves and to ensure further security of gas supply, Malaysia has forged partnerships with other ASEAN members for the supply of gas such as Vietnam, Indonesia and the Malaysia-Thailand Joint Development Area (JDA).” Figure 15: Global oil consumption Source: http://www.oceanchampions.org, 2007
  19. 19. A Layman’s Guide to the Oil and Gas Industry Logan Yeo Lune Gene 19 November 2010 International Asset Management Sdn. Bhd. Application So far we have gone at length and detail at how oil and gas is formed naturally, how they are found and produced. But what are these hydrocarbons used for, anyway? Figure 16 gives a clue. Most of petroleum is processed to become fuel. Crude oil is distilled fractionally (separated into different chemical compounds by their boiling point via heating them to different temperatures) to form (by boiling point ascending order) gasoline (petrol), kerosene, diesel and fuel oil. Sour crude oil contains >0.5% total sulfur content, and this sulfur needs to be removed before the crude can be refined into gasoline. Sweet crude oil, on the other hand, contains <0.5% sulfur, and thus has higher demand. Sweet crude is produced in Malaysia. Petroleum gas, which is a by product of the distillation process, is a mixture of ethane, propane and butane. This gas is liquefied under pressure to form Liquefied Petroleum Gas (LPG) – which is mainly propane or butane or both. Figure 17 hints at the demands for crude oil derivatives in the US domestic and export markets. Meanwhile, natural gas is cooled to cryogenic temperatures to be liquefied to form Liquid Natural Gas (LNG), which consists mainly of methane. Figure 17: Petroleum products made from a typical barrel of US oil (Source: 2007 Energy Information Administration) Figure 16: Petroleum refining processes and its products (Source: 2010 Logan Yeo, compiled from various reading materials)
  20. 20. A Layman’s Guide to the Oil and Gas Industry November 2010 International Asset Management Sdn. Bhd. Fuel The bulk of petroleum volume goes into fossil fuel which makes upmost of the world’s energy supply at present (see Figure 18). Gasoline is mainly used for internal combustion engines (basically most forms of motorized vehicles – cars, vans, motorcycles, airpl engines. Diesel is used by larger vehicles and ships. Tar and asphalt (bitumen) is used in (tarred) road construction. Fuel oil is industrial fuel for ships. LPG is used for cooking (butane) and transpo primarily as fuel and as feedstock for producing fertilizers. The costs for the transportation industry planes need fuel to run!). Figure 19 budgets) taking a dip which coincides with the 2008 was also the start of the current global economic depression beginning in the US and EU. This hit the aviation and travel industries on both the cost side (higher oil price) and revenue side (individuals and groups cutting back on flights). Figure 18 energy supply in 2007. (Source: International Energy Agency) A Layman’s Guide to the Oil and Gas Industry Logan Yeo Lune Gene International Asset Management Sdn. Bhd. bulk of petroleum volume goes into fossil fuel which makes upmost of the world’s energy ). Gasoline is mainly used for internal combustion engines (basically most forms of motorized cars, vans, motorcycles, airplanes etc.). Kerosene is mainly used as fuel for jet engines. Diesel is used by larger vehicles and ships. Tar and asphalt (bitumen) is used in (tarred) road construction. Fuel oil is industrial fuel for ships. PG is used for cooking (butane) and transport fuel for some vehicles (propane). primarily as fuel and as feedstock for producing fertilizers. The costs for the transportation industry are highly dependent on oil prices (after all trucks and Figure 19 below shows the stock price of 3 airlines: 1 major, 2 taking a dip which coincides with the 2008 huge oil price spike. It should be noted that 2008 was also the start of the current global economic depression beginning in the US and EU. This hit the aviation and travel industries on both the cost side (higher oil price) and revenue ing back on flights). Figure 18: A breakdown of the world energy supply in 2007. (Source: International Energy Agency) Figure 19 versus prices of 3 different airlines Bloomberg, extracted 2010) Logan Yeo Lune Gene 20 bulk of petroleum volume goes into fossil fuel which makes upmost of the world’s energy Gasoline is mainly used for internal combustion engines (basically most forms of motorized anes etc.). Kerosene is mainly used as fuel for jet engines. Diesel is used by larger vehicles and ships. Tar and asphalt (bitumen) is used in rt fuel for some vehicles (propane). LNG is used highly dependent on oil prices (after all trucks and : 1 major, 2 It should be noted that 2008 was also the start of the current global economic depression beginning in the US and EU. This hit the aviation and travel industries on both the cost side (higher oil price) and revenue Figure 19: Price of oil versus prices of 3 different (Source: Bloomberg, extracted
  21. 21. A Layman’s Guide to the Oil and Gas Industry Logan Yeo Lune Gene 21 November 2010 International Asset Management Sdn. Bhd. Petrochemicals So what happens to petroleum products which are not burnt as fuel? Petrochemicals are chemical products derived from petroleum. Petrochemicals are divided into three classes: 1) Olefins: The most important products in crude distillation are gasoline, kerosene and diesel. Conversely, the higher-boiling fractions are of lesser use. Hence, cracking is performed on these higher boiling fractions to increase the yield of low boiling fractions (gasoline, kerosene and diesel). The by-products arising from the cracking process are low boiling alkenes known as olefins. 2) Aromatics: Reforming or aromatization converts aliphatic hydrocarbons (sweet crude and natural gas) into aromatic hydrocarbons (benzene, toluene, xylenes). 3) Synthesis gas: Produced from reformation (which converts natural gas to hydrogen) One could deduce that the costs of petrochemicals correlate directly with the price of crude and gas (being the raw materials for their production) and the costs of setting up and maintaining the plants necessary for their production. Finding out the market prices of upstream petrochemical products (at ethylene level) just requires typing “PTCH” in Bloomberg. As depicted on the right hand side of Figure 16, petrochemical derivatives has such wide usage in manufacturing (plastics alone are used in automobile, computer, furniture, packaging and many other manufacturing industries). Petronas Chemicals derives 75% of its revenue from olefins and most of the other quarter from synthesis gas (ammonia, urea and methanol). All of its feedstock (namely gas) is provided by its mother company, Petronas on long-term contracts from Peninsular Malaysia and Sabah. Methane (34% of feedstock) is used to produce ammonia, urea and methanol. Naturally, ammonia and urea is used for fertilizers and thus finds its main consumers in agriculture. Ethane (23% of feedstock), used to create olefins and aromatics, is one of the lowest priced globally. All products (except for ethylene, a derivative of ethane) are sold at market price. Statement on the Malaysian Industrial Development Authority (MIDA) website (dated 2008): “With the full implementation of AFTA, petrochemical manufacturers in Malaysia will benefit from a single market. Manufacturers based in Malaysia will also benefit from the access to a much larger Asia Pacific market. With China being a net importer of petrochemicals, Malaysia's 'early harvest' Free Trade Agreement with China will open up new business opportunities for petrochemicals manufacturers in Malaysia. The presence of world renowned petrochemical companies, such as Dow Chemical, BP, Shell, BASF, Eastman Chemicals, Toray, Mitsubishi, Idemitsu, Polyplastics, Kaneka, Dairen and West Lake Chemical speaks clearly of Malaysia's potential as an investment location for petrochemical industries. Most of these companies are working in collaboration with Malaysia's national petroleum company, PETRONAS. Three major petrochemical zones have been established in Kerteh, Terengganu; Gebeng, Pahang; and Pasir Gudang/Tanjung Langsat, Johor. Each zone is an integrated complex with crackers, syngas and aromatics facilities to produce feedstocks for downstream products.
  22. 22. A Layman’s Guide to the Oil and Gas Industry Logan Yeo Lune Gene 22 November 2010 International Asset Management Sdn. Bhd. There are also other petrochemical plants in Malaysia such as the ammonia and urea plants in Bintulu, Sarawak and Gurun, Kedah; acrylonitrile butadiene styrene plant in Pulau Pinang; methanol plant in Labuan and the nitrile-butadiene rubber plant in Kluang, Johor. From being an importer of petrochemicals, Malaysia is today an exporter of major petrochemical products. A wide range of petrochemicals are produced in Malaysia such as olefins, polyolefins, aromatics, ethylene oxides, glycols, oxo-alcohols, exthoxylates, acrylic acids, phthalic anhydride, acetic acid, styrene monomer, high impact polystyrene, ethyl benzene, vinyl chloride monomer and polyvinyl chloride and polybutylene terephthalate. These factors have led the plastic products industry to become one of the most dynamic industries in Malaysia's manufacturing sector. The plastic industry can be divided into four sub-sectors, namely packaging sub-sector, electrical & electronics and automotive components sub-sector, consumer and industrial products sub-sector and others. The packaging sub-sector, both flexible and rigid (including bags, films, bottles and containers), remains the largest market for the plastic industry. The main production processes involved in the plastic producers industry are injection moulding, pipes and profiles extrusion and foam moulding. There are more than 1,550 companies in operation, producing products ranging from common household items, packaging materials and conveyance articles to parts and components for the electrical and electronics, automotive, office automation, computer and telecommunications industries. Malaysia is currently a net exporter of plastic products. The total export of plastic products amounted to RM9.34 billion in 2008, an increased of 11.5 per cent compared with 2007. The main products exported were containers of plastics, plates, films, sheets, foils, strips and other articles of plastics. The main export destinations included the EU, China, Hong Kong, Singapore, Japan and Thailand.”
  23. 23. A Layman’s Guide to the Oil and Gas Industry Logan Yeo Lune Gene 23 November 2010 International Asset Management Sdn. Bhd. To infinity and beyond…. The primary source of global energy today is still fossil fuel from oil, gas and coal (Figure 17). The world’s oil reserves are not only constrained to conventional oil. In fact, most of the world’s oil reserves are composed of unconventional oil. The Association for the Study of Peak Oil and Gas (ASPO) is a good source for published peak oil studies. A quick online check reveals that most scenarios project peak oil to be reached this year (2010) and later. Peak gas may be reached between 2030 to 2035. Gas, being a clean(er) fossil fuel compared to oil and coal, which is economic at the same time, is a natural successor to crude oil. Figure 18 shows the peak oil scenarios projected by various studies at ASPO. Fossil fuels being used as the primary fuel for industry are a fact that is unlikely to change dramatically unless oil and gas production declines to a rate which makes alternatives (renewable energy like solar, wind, hydro, biofuels) more price attractive. This may very likely happen late within our lifetimes, which makes the developments in the highly technologically driven alternative fuel industry worth monitoring. Figure 17: Global oil reserves by type (Source: Alboudwarej et al. (2006), Highlighting Heavy Oil, Oilfield Review) Figure 18: Global peak oil (Source: ASPO, accessed 2010)
  24. 24. A Layman’s Guide to the Oil and Gas Industry Logan Yeo Lune Gene 24 November 2010 International Asset Management Sdn. Bhd. Oil Sands & Oil Shales Two major unconventional oil types are produced from oil sands and oil shales. Oil sands and shales basically go through the same geological processes as conventional oil and gas source rock formation, but stop before getting “cooked” (see The Big Idea, page 2). Oil sands (also known as tar sands or bituminous sands) are naturally occurring bitumen deposits. Naturally occurring bitumen is the stuff that is produced in source rocks apart from kerogen (which can later on form petroleum when “cooked”). Oil sands make up the same percentage of the world’s oil reserves as crude oil in 2006 (see Figure 17). Extra-heavy oil and bitumen is produced from oil sands via strip mining or injection techniques, rather than by drilling wells. These are then pre-processed via a procedure known as “upgrading”, which prepares it for processing at conventional refineries; or processed directly at special refineries. Natural gas is used to “cook” the bitumen during processing (The Christian Science Monitor, May 12, 2006). The world’s largest deposits of oil sands are the Athabasca Oil Sands in Canada and the Orinoco Oil Sands in Venezuela. At the Athabasca Oil Sands, there are three large oil sands mining operations in the area run by Syncrude Canada Limited, Suncor Energy and Albian Sands owned by Shell Canada, Chevron, and Marathon Oil Corp (Alberta Oil Sands Discovery Centre, accessed 2010). The Orinoco Oil Sands is operated on by PDVSA (Venezuela’s state oil company) with partnerships with several other firms under the Oil Sowing Plan (PDVSA’s website, accessed 2010). In all these partnerships, PDVSA holds 60% interest (Reuters, Feb 12, 2010). Other locations of known oil sand activity are Eastern Utah, Russia, Congo and Madagascar. The additional processing required and the difficulty of transporting the produce (extra heavy oil and bitumen is very viscous and does not easily flow at normal oil pipeline temperatures), incurring extra costs, does not deter the large scale mining of oils sands due to the conventional oil reserve situation. Oil shales are basically “uncooked” source rocks (rocks which contain kerogen). Oil shales are mined using open pit or strip mining methods. Pyrolysis then converts the kerogen in the oil shales to shale oil. Shale oil serves best for producing middle-distillates such as kerosene, jet fuel, and diesel fuel. Worldwide demand for these middle distillates, particularly for diesel fuels, increased rapidly in the 1990s and 2000s (Andrews, 2006, Oil Shale: History, Incentives, and Policy, Congressional Research Service). Estonia accounts for 70% of the world’s shale oil production (Non-Nuclear Energy Research in Europe – A comparative study, Country Reports A – I. Volume 2, European Commission, Directorate-General for Research, 2005) Environmental concerns have been expressed over the extraction of oil sands and shale oil, which has environmental effects that eclipse even that of conventional oil.
  25. 25. A Layman’s Guide to the Oil and Gas Industry Logan Yeo Lune Gene 25 November 2010 International Asset Management Sdn. Bhd. Reputation “Big Oil”, a term which collectively refers to all major oil firms, is the reviled arch-enemy of the environmentalists; the Dark Lord that will ravage the Earth’s oceans. Oh yes, from Piper Alpha (oil platform explosion), Valdez (oil tanker spill due to drunk driver, er, captain) to this year’s Gulf of Mexico epic screw-up by BP (the world’s largest oil spill to date – The New York Times August 2, 2010); it is little wonder that Big Oil has a horrid reputation in the green department. So much so that many large environmental NGOs (like WWF) refuse to work with Big Oil firms on their “social responsibility” community projects. Such accidents come with a big price. Apart from the obvious legal, financial and reputation costs to the firm involved and the scar left on Mother Earth, it affects other industries attached to the oil and gas industry and the area affected geographically. Following BP’s Gulf of Mexico incident, President Barack Obama of the United States announced tightened regulations on offshore drilling in the US, which set new standards for cementing, blowout preventers and well design for offshore oil and gas projects (Reuters November 3, 2010). It also hurts the industry as a whole: according to BP, any offshore drilling in Gulf of Mexico will only resume in 2011. This affects the whole chain in the business and those dependent on them. Further Reading • Yergin, Daniel (2008), The prize: the epic quest for oil, money and power, Free Press • American Association of Petroleum Geologists (AAPG) and Society of Petroleum Engineers (SPE) articles • http://www.wikinvest.com/industry/Oil_%26_Gas_Drilling_%26_Exploration
  26. 26. A Layman’s Guide to the Oil and Gas Industry Logan Yeo Lune Gene 26 November 2010 International Asset Management Sdn. Bhd. Glossary Equity price – share price Capital Expenditure (Capex) – the amount of money spent on fixed assets Liquidity – the ability of a firm to raise cash NGO – non-governmental organizations Bloomberg – in the context of this document, software to monitor news and financial data Initial Public Offering (IPO) - the first sale of stock by a private company to the public

×