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OIL AND GAS UPSTREAM

AND DOWNSTREAM
MANAGEMENT
Marinos Stylianou, PhD
Chemical Engineer

30 September 2015
Oil and Gas Upstream and Downstream Management

 The objective of the course is:


 to introduce the student to the nature and function of
companies and other organisations involved in technical,
financial, commercial and contractual activities in the
North Sea and world-wide upstream oil and gas
industries.

 The nature of mid and downstream oil and gas


activities will be briefly examined to set an overall
context.
Oil and Gas Upstream and Downstream Management

 The course covers specific topics as follows:


 The life cycle of an oil field, from before discovery, through development to
decommissioning.

 The role of the various organisations involved in the oil industry - governments,
oil companies, service companies, regulators and external (i.e. non-oil) bodies.

 The concept of the Operator and how they discharge their legal and commercial
obligations (including e-commerce).

 Examine Joint Operating Agreements, Production Sharing Contracts, legal


arrangements and contractual relationships, petroleum economics and taxation,
including various international taxation regimes.

 Review the risks faced by the industry and means of identifying and managing
them. Awareness of future oil and gas sources and social responsibility and
climate change issues.
Oil and Gas Upstream and Downstream Management

 Upon successful completion of this course students should


be able to:

 1.Evaluate the primary uses of oil and gas and the significance of oil and
gas within the global energy industry with the broad technical issues
involved in the location and development of oil and gas reserves

 2.Critically present and evaluate the objectives and functions of and


commercial relationships between companies and organisations in the
upstream oil and gas supply chain

 3.Critically analyse the broad principles and practical implementation of


petroleum taxation regimes in various regions of the world.

 4.Evaluate the risks associated with the upstream oil & gas industry across
the life cycle of a development and/or life cycle of a basin.
Oil and Gas Upstream and Downstream Management

 Textbook:

 INKPEN, A. and MOFFETT,


M.H., 2011. The global oil
and gas industry:
management, strategy and
finance. Tulsa, Okla. :
PennWell Corp
Oil and Gas Upstream and Downstream Management

 Recommended Additional Readings:


 Lecture notes
 Project management for the oil and gas industry : Badiru, Adedeji Bodunde, 1952-
Osisanya, Samuel Olusola, 1951
 Natural gas engineering and safety challenges, New York : Springer, 2014
 Fundamentals of investing in oil and gas​, Clearwater Beach, Florida : Chris
Termeer, [2013]​
 The Oil & Gas Industry: A Nontechnical Guide by Joseph Hilyard
 LNG: A Nontechnical Guide by Michael D. Tusiani and Gordon Shearer
 PROJECT MANAGEMENT KNOWLEDGE.COM, 2010. Cost-reimbursable contract.
[online]. Project Management Knowledge.com. Available free on the internet.
 TORDO, S., 2007. Fiscal systems for hydrocarbons: design issues. World Bank Working
Paper 123. [online]. Washington: World Bank. Available free on the internet.
 YERGIN, D., 2009. The prize : the epic quest for oil, money and power. New York: Free
Press.
 Journals: World Oil; Energy Economics
Databases: OnePetro; Business Source Premier
Web site: BP Statistical Review of World Energy June 2011 Available free on the internet.
WEEK TOPICS
1. Lesson 1 / 30/9/2014 Introduction to the Oil and Gas Industry
2. Lesson 2 / 07/10/2015 Oil and Gas Technology
3. Lesson 3 / 14/10/2015 International Oil Companies and National Oil Companies
4. Lesson 4 / 21/10/2015 Oil Pricing – Fiscal Regimes
5. 28/10/2015 NATIONAL HOLIDAY
6. Lesson 5 / 04/11/2015 Oil and Gas opportunities and prospects upstream and
downstream
7. Lesson 6 / 11/11/2015 Midterm Examination
8. Lesson 7 / 18/11/2015 Developing Oil and Gas Projects
9. Lesson 8 / 25/11/2015 Oil and Gas Management Practices- Risk and Safety in the Oil
and Gas industry
10. Lesson 9 / 02/12/2015 Alternative energies and sustainable management
*Course/Instructor’s Evaluations
11. Lesson 10 / 09/12/2015 Research and development in oil and gas industry
*Course/Instructor’s Evaluations
12. Lesson 11 / 16/12/2015 Assignments/Cases
*Course/Instructor’s Evaluations
13. CHRISTMAS HOLIDAYS
*Course/Instructor’s Evaluations
14. CHRISTMAS HOLIDAYS
*Course/Instructor’s Evaluations
15. CHRISTMAS HOLIDAYS
16. 11-22/01/2016 FINAL EXAMINATIONS
17. 11-22/01/2016 FINAL EXAMINATIONS
Oil and Gas Upstream and Downstream Management

ASSESSMENT :
Percentage (%)
Midterm Examination 20
Final Examination 40
Assignments/Cases 30
Attendance/Class Participation 10
TOTAL 100%
INTRODUCTION TO THE OIL
AND NATURAL GAS
INDUSTRY
Marinos Stylianou, PhD
Chemical Engineer

30 September 2015
Course Content
 Introduction
 Historical facts on oil and natural gas

 Formation of oil and natural gas

 Basic knowledge on oil and natural gas

 Oil and natural gas reserves

 Organizations and companies

 Oil and natural gas industry chain


Introduction
 The oil and gas industry is one of the largest, most
complex and most important industries globally.
Introduction

Countries national security


elections
geopolitics

International conflicts
Introduction
Introduction
Introduction
 During the last years, the industry has seen many turbulent events:

Chinese companies
Attempt of the oil-producing acquire exploration
rights in historically high Global warming
countries to exercise
greater control over their prices
resources

Technological advances in
Conflicts in oil exporting
deepwater drilling
countries
Fluctuation in
prices

All these while estimates talk about increase of the global demand for energy by
30% to 40% until 2030.
Historical Facts
Historical Facts – Reports about the
existence of oil
 References on the existence of oil are made from
ancient times:
 Old Testament: Noah uses asphalt for smearing the inside
and outside of the Ark (Asphalt is the oxidised oil
distillation residue)

 Ancient Greece:
 The ancient Greek doctors Hippocrates and Galenos
considered oil a valuable medicine.

 Herodotus (450 BC) reports oil spills in Carthage (Tunisia) and


Zakynthos.
Historical Facts – Reports about the
existence of oil
 Persia:
 The first illustration showing
processed oil in the hands of the
Persian doctor Al Razi in miniature
(13th century) from the book of
Gerardo of Cremona “Collection of
Medical Treatments”

Source: Μαργαρίτη, 2014


Historical Facts – Reports about the
existence of oil
 Mesopotamia:
 The Sumerians, Assyrians and Babylonians used the large surface oil leaks in the
Hit of the Euphrates river, while use of similar oil leaks is known in many parts of
Mesopotamia and neighboring areas surrounding the eastern Mediterranean
Sea.

 Byzantium:
 The Byzantines used the “liquid fire”, which was invented by Kalinikos Heliopolis in
688 AD.

 Europe:
 Marco Polo in his trips mentions the existence of oil in today’s Iran (1295 AD)

 America:
 The Indians were aware of the existence of tar in the swamps of south California
for thousands of years, and were using it to waterproof their canoes.
Historical Facts

 The modern oil industry was not generated


from the abovementioned uses but, from the
need for better and more efficient lighting in
the 1850s.
Historical Facts

 In the abovementioned decade


the lighting kerosene or
paraffin-oil became available
for lighting in England.
 James ‘Paraffin’ Young
 Torban – Scotland: Oil distillery
(argillic schists of the
Carboniferous Torban) and
production of solid paraffin
(candles), liquid paraffin
(kerosene – lamps).

http://www.scottishshale.co.uk/HistoryPages/Biographies/JamesYoung.html
http://www.makers.org.uk/penicuik/heatandlight
Historical Facts

 James ‘Paraffin’ Young


 This material replaced the
increasingly more expensive
whale fat that was used until
then as an oil for lamps.

http://www.scottishshale.co.uk/HistoryPages/Biographies/JamesYoung.html
http://www.makers.org.uk/penicuik/heatandlight
http://www.demonoid.ph/files/details/2642142/?load_bal=02414508838&show_files=1&page=2
Historical Facts – First Drilling
 Although, the first intentional
attempt to drill an oil well begun in
April 1857 in Hamburg (and in the
same year two handcrafted wells
in Ploiesti Romania were
completed).

 Often, the drilling of a well on the


27th of August 1859 in Titusville,
Pensylvania by Edwin L. Drake, is
referred to as the beginning of the
oil era. This well was drilled upon
request of the manufacturer G.H.
Bissell. (Ανδρίτσος, 2008).
Historical Facts – First Drilling

 In 1859 an inventive former railway


engineer, Edwin Drake, better known
as ‘colonel’, applied drilling methods
that were already tested in Central
Europe, in the area of Ohio

 He used a drilling technique that was


developed by Chinese technicians
that went to the USA to work on the
railways.

 This drilling technique was used in


China from the 1st century BC at least,
with bamboo towers of 60 meters
height, for the exploitation of
underground aquifers.
http://www.oil150.com/history-fans/api-man-qith-an-idea/
Historical Facts – First Drilling

 With the help of steam-powered machines and


craftsmen with experience in salt mines, he dug, or
better drilled a well through the schist.
 After one month’s of effort and many disappointments, the
well reached a depth of about 35 meters and the oil begun
gushing to the surface.

 The scene was just a repeat of procedures that were


already applied in Europe and in Russia, but, for
reasons that we will see later, the oil story is an
American story mainly. Drake’s success in August 1859
was recorded as the beginning of the industry of
extracting the ‘black gold’.
Historical Facts – First Drilling

 In 1814, Silas Thorla and Robert McKee drilled a


small well looking for salt (after they had
observed that close to the area, deer came to lick
salt)
 They used blankets made of wool to absorb the oil
from the water-salt surface and then boiled the
water until only salt remained.
 Although, McKee proposed burning of the oil in
houses, the thick smoke made it impossible.
 Instead, after the neighbors' tried the oil, they suggested
that it is sold as medicine. Source: http://aoghs.org/news-events/

 So, Thorla’s και McKee’s squeezed oil from the blankets was sold in bottles as medicine
called Seneca Oil
 Their operation came to an end in 1831, when fire destroyed the construction that was
built in the area.
Historical Facts – First Drilling
Historical Facts – First Drilling

 The first oil property that ‘shocked’ the modern


world was related to one of its components,
kerosene.

 Inside cheap and simple lamps- that took their final


form around 1857- kerosene gave a relatively
strong white light, without its burning leaving
excessive smoke or unpleasant odors.
Historical Facts
 Initially, for the distillation of crude oil horizontal
cylindrical stills were used which were heated by steam
and produced three main products:

 (1) gasoline (the lightest fraction, which was


originally considered dangerous and useless),

 (2) kerosene and

 (3) the heavy residue that was sold as fuel.


Historical Facts
 Barrel-makers
 Coachmen built their reputation and union power upon oil
transport
 All kinds of technicians, scientists or simply empirical
inventors were involved in the refining process
Historical Facts
 The crowds of producers that invested their efforts and
hopes in the new product destroyed its price.
 The initial value of each barrel, about twenty dollars, successively
collapsed in half, in one fifth, in one tenth, until it reached 0,1
dollars (ten cents) in 1862!
 The black liquid literally crashed.

 In combination with the rise and consequently the rent of the


land on which oil was extracted from, the whole oil case
reached a dead end. It was not the end though.
 American Civil War
 Immigration of setelers towards the west in search of a better life
and,
 Rapid expansion of the rail network
Historical Facts
 The production of the black liquid passed rapidly
from small scale operations to industrial.

 1850 – the oil production globally could not have


exceeded 300 tons.

 1881 – 4.400.000 tons

 1891 – 22.500.000
Rockefeller – the Monopoly
 The collection and organization of production
and utilization of oil went through its processing
and refining.
 Initially it had the form of many hundred small
scale operations called ‘distilleries - refineries’
with limited mechanical means and many
operation methods.
 Large losses
 Bad product quality
 Smoke and pollution in the areas (Pittsburgh,
Baltimore, Philadelphia, New York)

 When in this aspect, as well, the situation


became suffocating, it was time for Cleveland
and Rockefeller.
Rockefeller – the Monopoly
 Cleveland, on the banks of Lake Erie, was not close
either to the production or the oil consuming centers

 It was 200 km away from the production centers


and from the consuming centers, New York for
example, it was almost 900 km away.

 It was though, on the crossroad of railways and


port that overlooked the large transport network
through lakes, rivers, canals and the sea.
Rockefeller – the Monopoly
 1863 – John Rockefeller was just 23 years old when he realized
or better sensed – the advantage of the location of Cleveland.
 In partnership he invested a relatively small amount in an oil
refining business in the city. The innovative ideas that he
implemented with Samuel Andrews highlighted the company
amongst competitors. Quickly the company prevailed,
 Creating storage areas,
 Producing its own sulfuric acid that he needed,
 The barrels and the specialized vehicles for the transport,
 Even the glue, tubes and sealing materials.
 The qualitative difference made the company name respectful and
allowed the owner to close down advantageous agreements with the
producers and transporters
 The company gave the purest kerosene in the market and at the same
time it took advantage of the oil derivatives, trading lubricating oils,
paraffin, vaseline.
Rockefeller – the Monopoly
 In 1870, the year that the Rockefeller
company took its historic name –
Standard Oil of Ohio – there were 250
more refinery companies in the USA and
the share of the Rockefeller company in
the total production was just 4%.

 In 1870 he founded the South


Improvement Company in order to
gather oil transport to the railways, with
a very low share price for potential
investors.
Rockefeller – the Monopoly
 1873 - Four years later, by acquiring his competitors or by leading them to
economic suffocation, he already controls 80% of the refining capacity of
Cleveland and possessed 1/3 of the total oil production in the US.

 1879 - Standard Oil, shuts down operations in 31 out of 53 of its refineries and
concentrates production in 3 gigantic refineries.

 1880 - The total number of refining companies in the USA did not exceed 100
and amongst them Standard Oil dominated, with a market share of almost 85%.

 1882 – 39 companies created the Standard Oil Trust of Ohio, in which of course
the Rockefeller brothers dominated and their immediate associates – First major
company with a monopoly
Rockefeller – the Monopoly
 1882 – Court in Ohio dissolves the monopoly, but its re-founded in New Jersey,
a state that accepts monopolies. The horizontal operation of the business is
abandoned and cooperate to establish a fully vertically integrated company.

 1892 – The Congress for Sherman's anti-monopoly Law and Standard Oil is
re-founded again in New Jersey as a joint-stock company.

 1900 - Standard Oil controls more than 90% of the oil products in the USA.

 1911 – The re-naming and adjustments have exhausted their dynamics. The US
government imposed the dissolution of the Standard company partnership and
the careful breakdown of the company in competitive businesses.
Rockefeller – the Monopoly
 The cleverness of Standard Oil was based on three
parameters:
 Their ability to create alliances and agreements that
ensured them funds,
 On the pursuit of technical innovation and those who
could apply it to production and
 A pressure policy on all the factors that were affecting
the commercialization of their production and the final
product price.
 The last factors were mainly transportation, railway, sea or
road.
Rockefeller – the Monopoly
 The company almost immediately started using a variety of techniques
to obtain or destroy its competitors and therefore the ‘consolidation’ of
the industry:
 (1) Lower prices than its competitors

 (2) The purchase of raw materials (e.g. oil barrels)

 (3) With an alliance with the railway

 (4) Secretly, by buying competitors - spying

 (5) Secret acquisition or creation of new firms (e.g. engineering


firms)

 (6) By sending “criminals”


Rockefeller – the Monopoly
Rockefeller – the Monopoly
Rockefeller – the Monopoly
Technologies and events that have affected
the history of oil
 1875 – The technological improvement of the refining processes - with the
introduction of cracking ( decomposition of crude oil in its derivatives in
combination with temperature and catalysts)

 1878 - The oil stove was presented at the International Exhibition of Paris.
Within a year half a million stoves were sold.

 1879 – Thomas Edison invented the light bulb and electricity in combination
with cheap gas progressively started dominating in the lighting market.
Kerosene, although its quality and cost were significantly improved, it was
certain that it could not beat under the new conditions of competition.

 1885 - Internal combustion engine. The invention of the petrol engine from
Daimler and Benz in 1885 brought the revolution in the use of petroleum
products as automotive fuel.
Technologies and events that have affected
the history of oil
 1896 – 1903 – Ford creates the first car lab – factory which was now
based on the new engines, that of course were moving thanks to oil.

 1901 – Oil discovery in Spindletop in east Texas.

 1903 – Airplane by the Wright brothers

 1911 – The British Admiralty, were the innovative Admiral Fisher


dominated, decided to convert the burners of the warships into oil
burners, replacing the solid fuel that was used until then, coal.

 1914 - 1918 – First World War

 1939 - 1945 – Second World War


The history of Europe’s oil
failure
The history of Europe’s oil failure

 In the USA oil deposits multiplied, as well as new


companies.
 Kansas, Oclahoma, Texas, California and the coast of the
Golf of Mexico began to gush oil.
 In 1895 Pure Oil was founded, in 1901 Associated Oil and
Gas, in 1902 Texaco, in 1907 the monstrous Gulf Oil.

 At the same time the federal US government intervened


in oil production, ensuring the country’s national- military
interests and created strategic reserve zones upon which
any unregulated extraction was forbidden.
The history of Europe’s oil failure

 In the distant colonies the discovery of oil resources was added to


the economic argument of colonization.
 The Dutch (Royal Dutch) discovered oil in the faraway Sumatra in 1885.
 The British, manipulated the oil prospecting in the 1900s in order to
prepare for the change in their fleet fuel.

 In 1907 the British company Shell Transport and Trading Company Ltd.
was united with the Dutch company Royal Dutch Petroleum Company
in order to cope the American companies. Royal Dutch Shell then
became one of the giants of the oil industry.

 The British, however, continued their searches. In the 1908 the Anglo-
Persian Oil Company was founded – afterwards know as BP- in
order to take advantage of the Persian oil.
The history of Europe’s oil failure
 1928 – ‘Red Line’ agreement
 The 1928 Group Agreement was
a deal struck between several
American, British, and French oil
companies concerning the oil
resources within territories that
formerly comprised the Ottoman
Empire within the Middle East
 Seven Sisters

 OPEC (1960)
1914
The history of Europe’s oil failure
1939
The history of Europe’s oil failure
The history of Europe’s oil failure

 For Europe inside the walls, development were not though so


linear.
 The really big hydrocarbon reserves of Europe were far
away on the shores of the Caspian.
 Distances here are measured in thousand of kilometers and not in
hundreds, as in the case of the USA.

 Furthermore, infrastructure in the Russian Empire- and


especially in Caucasus- the social hierarchy, and the fact
that the production would had to cross through many
borders of sovereign states constituted a political – we
would say- disadvantage for the Russian oil in comparison
with their counterparts in the USA.
The history of Europe’s oil failure

 Despite this the history of the Caspian oil started almost as


the American.

 In this case the developments were marked by the presence


of one of the economically strongest business families of
Europe, the Swedish Nobel.
 A family of chemists, engineers and inventors, the Robert and
Ludwig Nobel started, in 1873, their oil companies in Baku.
 Until then they had made great inventions in the field of
explosives (dynamite) and became rich by selling them at a time
when major construction projects, the railway network or the
underground expansion of mines, needed incredible amounts of
explosives.
The history of Europe’s oil failure

 Oil gradually became the main occupation and investment of the


Nobel brothers. Their companies did not undercut in innovative
applications from those of the Rockefellers in the US.
 They constructed in 1877 in Swedish shipyards the first real tanker,
Zoroaster, and very quickly a whole fleet of such ships with strange
mythological names crossed the Caspian and the Black Sea.
 The ships burned oil instead of coal in their burners, long before the British
Navy adapted the idea.

 Since 1878, oil pipelines transported crude oil from Baku on the
shores of the Black Sea, while gradually refining improved and the
sub-products multiplied. The Nobel company created in Baku an
entire community of scientists and technicians from Scandinavian
countries and Germany and the complex that was built, Villa
Petrolea , maintained until today, to some extend, in the capital of
Azerbaijan.
The history of Europe’s oil failure

 The Nobels’ though, did not become the Rockefellers' and


their company did not become Standard.

 The reason for this lies both in the initial conditions and the
peculiarity of Russia, as well as the social composition of
Azerbaijan.

 The specificities of Baku led to the major blow of 1905.

 The destruction of the oil facilities was the result of the


general social and political unrest that shook Russia and the
catastrophic war with Japan in 1904 – 1905.
The history of Europe’s oil failure

 The important strategic commodity of the 20th


century, oil, will now be beyond the oceans and
many European forces would depend on the
dominant force of the sea, at each time, to supply
them.
Development of the
principles and techniques of
oil research
Developments of the principles and techniques of
oil research

 In the early stages of oil research various non


scientific techniques were used, like:
 Wondering in the countryside with a torch

 Drilling of wells where there were old Indian graves

 One other researcher used to gallop with his horse


wearing an old hat, and started drilling were the had
would fall.
Developments of the principles and techniques of oil
research

 Another technique was ‘creekology’

 It seems that it gradually became conscious to early


researchers that oil was discovered more often in
wells that were drilled on riverbeds rather than hills.

source: http://dnr.louisiana.gov/assets/TAD/education/BGBB/5/prospects.html
Developments of the principles and techniques of
oil research
 Around 1865, a great increase in demand for land on the hills
north and south of Oil Creek was noticed, in order to explore for
oil.

 Productive sectors
at Benneoff Run
and Pioneer Run
proved that oil
could be found in
places other than
flat areas adjacent
to creeks, as
previously thought.

Source: http://explorepahistory.com/displayimage.php?imgId=1-2-33C
Historical facts on Natural
Gas
Historical facts on Natural Gas

 Recording on the existence of natural gas are from 6000


and 2000 BC in the area of today's Iran.

 It is reported that the Chinese were the first to make use of


natural gas in the 10th century BC.
 They transported natural gas in bamboo pipelines and burned it
in order to evaporate sea water for salt production.


 In many areas natural gas was released from fissures in the


ground, it was known that those who breathed it came in a
state of semi-unconscious or they talked incoherently.
 These phenomena were attributed to supernatural powers and
often in these positions temples and oracles were built.
 Lighting use of methane is reported from the 2nd century BC.
Historical facts on Natural Gas

 In Europe these achievements were unknown and


natural gas was not discovered until 1659 in England.

 Impressive is the fact that in 1821 Fredonia city in


New York region was lighted by natural gas.
 But the use of natural gas continued to be limited, because
there was no other way to transport it over long distances.
So, for one century natural gas remained on the sidelines
of the industrial evolution, which was based on coal, oil
and electricity. 


Historical facts on Natural Gas

 The natural gas transportation method with pipelines was developed in the 1920s and
constituted a significant stage in the use of natural gas.

 After the Second World War a period of huge consumption followed, which continues
until today.

 In 1960 the global natural gas production reached 470 billion cubic meters and
 In 1979 it was 1,459 trillion cubic meters

 1950 – 12% of the consumed energy worldwide


 1960 – 14,6% of the consumed energy worldwide
 1980 – 25% of the consumed energy worldwide

 According to the estimates of the International Energy Agency (IEA) the natural gas
consumption will exceed the coal consumption after 2010 and around 2030 will
cover ¼ of the global energy needs.
Formation of Petroleum and
Natural Gas
Formation of Petroleum and Natural
Gas
 Formation → 3 conditions:

Formation of Sediments must Time


sedimentary basin contain large Temperature
amounts of Pressure
organic matter
(source rock)
Marine plant microorganisms (single cell plants –
phytoplankton) animal single cell microorganisms
(zooplankton)

Maturation Migration Trapping

Source: Hilyard, 2012


Formation of Petroleum and Natural
Gas
 The different formation stages are:

1. Immature stage (diagenesis) 3. Post- mature stage.


low pressure and temperature, with the In extremely high temperature
assistance of bacterial action kerogen is crude oil is transformed into
created natural gas rich in methane.

2. Mature stage. In greater depths and


higher temperatures kerogen is transformed
into crude oil and natural gas, when out of
the kerogen oxygen and nitrogen were
removed with a mechanism.

Source: Hilyard, 2012


Fig 1-1
Source: Hilyard, 2012
Formation of Petroleum and Natural
Gas
 Because petroleum is liquid, it can ‘migrate’ inside the
subsurface as it is formed.

 A necessary condition for the formation of large and


economically recoverable oil reserves is the presence of
specific geological formations:
 (a) an oil reserve (or ‘lake’ – oil pool) and

 (b) a rock – cover (‘trap’ – oil trap, cap rock) for oil.

Migration Trapping
Formation of Petroleum and Natural
Gas
 Oil reservoirs can be formed in different ways:

Source: Hilyard, 2012


Formation of Petroleum and Natural
Gas
 The coverage of a rock formation that contains oil
from a rock-cap can be achieved with a
combination of faults.

Source: Hilyard, 2012


Basic Knowledge on Petroleum
and Natural Gas
Crude Oil
 Complex mixture of hydrocarbons (C1-C90+)
C – Carbon
 H – Hydrogen
Crude Oil
 Alkanes
 paraffins

 Cycloalkanes - napthenes
 Aromatic hydrocarbons
Elements Content (5)
Carbon 83-87
Hydrogen 10-14
Sulfur 0.06-8.0
Nitrogen 0.1-2
Oxygen 0.1-1.5
Metals (Fe, Ni, κ.α.) <0.1
Crude oil types
 Colour: Yellow, green, brown, dark brown, black.
 Age
 Depth
 Viscocity
Source: Cypraegean, 2013

 Categorization of oil based on:


 Production location
 Density, viscosity, (light or heavy)[oAPI]
 Sulfur content (sweet or sour whether they contain low
or high sulfur concentration)
Natural Gas
 Methane is the main component
 H2O, CO2, O2, N2, H2S, He
 Colorless, odorless (mercaptan)
 Light

Hydrocarbon Content (%)


Methane 70-98
Ethane 1-10
Propane Traces – 5
Butane Traces - 2
Natural Gas
 Classification:
 Dissolved

 Associated (gas cap)


 Not associated

USGS, 2002
Oil and Gas Reserves
Oil Reserves
 Since the beginning of the oil industry, oil producers and
consumers were afraid that at some point oil will come to an
end.

 In 1950, the United States Geological Service estimated that


the recoverable amount of oil that could be recovered
globally was about 1 trillion barrels.

 Fifty years later these estimates have tripled in 3 billion


barrels. In recent years the concept of oil peak has been
debated a lot.

 The oil peak theory is based on the fact that the quantity of
oil is finite.
Oil Reserves
 Hubbert Peak Theory
 The peak theory of Hubbert states that for any geographical
area, from a single oil field to the planet as a whole, the rate of
oil production follows a bell-shaped curve.
 At the beginning of the curve (before
the max value), the production rate
increases because of the rate of new
discoveries is increased as well as the
infrastructures.

 Later, after the peak of the curve, oil


production decreases due to the
exhaustion of the reserves.
Oil Reserves
 Hubbert Peak Theory (1956 )
 Hubbert’s theory is based on the observation that the amount of oil
underground in any region is finite.
 For this reason, the discovery rate of oil reserves initially increases
rapidly, reaches a maximum value and then decreases. The oil export
follows the discovery curve with a time lag (about 35 years).

Source: Hubbert , 1956


Oil Reserves
 Others argue that the peak in oil production is a myth. An article
in Science magazine suggests:

 If the hydrocarbon reserves are finite, no one knows exactly how


much.
 Oil is trapped in porous rock formations under the surface, making
it difficult to estimate how much oil there is and how much can be
extracted efficiently.
 Some areas are relatively unexplored or have been poorly
analyzed.
 The ‘hysteria’ about the availability of oil has the sole effect of
the enrichment of the wrong obsession regarding security and
the control of oil that is already rooted in western public opinion.
 An obsession that historically has always led to bad political
decisions.
Source: Inkpen and Moffett, 2011
Oil Reserves
 Regardless of whether the peak has or has not been achieved, oil and gas
are important sources of energy and petrochemical raw materials in the
world and will be for many years to come.

 The difficulty in determining the oil and gas reserves is that the real
reserves are a complex combination of:
 technology,
 price and
 politics.

 While technology changes and continues to reveal new oil and gas resources ,
the prices have shown less stability than ever, governments have attempted
more control on information on resources and access that ever.
 As prices rise, reserves that were once considered non-profitable to develop
may be possible to develop, and vice versa.

Source: Inkpen and Moffett, 2011


Oil Reserves
 The discovery of new oil and gas reserves is the soul
of the industry.
 Without new reserves to replace the oil and gas
production, the industry will die.
 However, the estimation and valuation of the
reserves is a scientific and business challenge,
because reserves may be counted only if they have
market value.

Source: Inkpen and Moffett, 2011


Oil Reserves
 Oil sands of Alberta, Canada
 An example of how difficult it is to accurately
measure the oil and gas reserves.
 Thick liquid which does not flow unless it is heated or dissolved
with other lighter hydrocarbons.
 Although the Alberta oil sands are now considered
second in rank after the Saudi Arabia reserves,
based on the potential amount of recoverable oil,
for many years, they were not considered as real
reserves, because it was not profitable to
develop…
 Due to a combination of higher oil prices and
technological innovation.

 Estimates say that oil sands production could reach


up to 3 million barrels a day by 2020 and possibly
even 5 million barrels by 2030. Source: Inkpen and Moffett, 2011
Oil Resources and Reserves
 Resources are hydrocarbons that may or may not be
produced in the future

 The total estimated amount of oil in a reservoir, including


both producible and nonproducible oil, is called oil in place
(OIP).
 However, because of reservoir characteristics, the limits of
extraction technologies, market prices, only a fraction of this oil
can be brought to the surface.

 → The producible fraction comprises the reserves

 The ratio of producible reserves to total OIP for a given


field is often referred as the recovery factor
Source: Hilyard, 2012
Oil Reserves
 Resources and Reserves
Total Oil or Gas Resources

Undiscovered Discovered Resources


Resources
Economically
Economically
Unrecoverable
Recoverable Resources
Resources
(Reserves)

Unproved Proved
Reserves (P90;
P=90%)
Possible Probable
Reserves (10%)[3P] Reserves (50%) [2P]

Source: Hilyard, 2012


Oil Reserves

‘Consuming’
Oil and gas
industry Countries

‘Producing’
Countries

Big
developed Geopolitical
economies
Importers issues
Oil Reserves

Oil and Natural Gas

STUDY GROUPS
1. RESERVES
2. PRODUCTION
3. CONSUMPTION

http://www.bp.com/en/global/corporate/about-bp/energy-
economics/statistical-review-of-world-energy.html
Oil Reserves

Source Inkpen and Moffett, 2011


Oil Reserves

Πηγή: Inkpen and Moffett, 2011


Oil Reserves

National Oil and natural gas


budgets exports
Oil Reserves

Oil and natural gas Lee Raymond


industry Exxon Mobil CEO

Excess Cyclical
Politicians
profit nature
Criticism
$$$$$
September 11th 2001

1979 -1980, Iran - Iraq

1974 Arab oil embargo

$2.5-$3.0/bbl
1948-1970
Seven Sisters
 1950 Enrico Mattei, Eni
 1. Anglo-Persian Oil Company (now BP);
 2. Gulf Oil,
 3. Standard Oil of California (SoCal),
 4. Texaco (now Chevron);
 5. Royal Dutch Shell;
 6. Standard Oil of New Jersey (Esso) and
 7. Standard Oil Company of New York (Socony)
(now ExxonMobil)
OPEC - Organization of the Petroleum Exporting Countries

 Bagdad, September 1960


Member Country Entry Exit
1 Saudi Arabia 1960
2 Venezuela 1960
3 Iran 1960
4 Iraq 1960 http://www.opec.org/
5 Kuwait 1960
6 Qatar 1960
Indonesia 1962 Suspended its participation since January 2009
7 Libya 1962
8 United Arab Emirates 1967

9 Algeria 1969
10 Nigeria 1971
11 Ecuador 1973 Suspended its participation. Dec 1992 – Oct 2007
Gabon 1975 Departed in 1995
12 Angola 2007
OPEC - Organization of the Petroleum Exporting Countries

 Mission
 To coordinate and unify the petroleum policies of its
member countries
http://www.opec.org/
 And ensure the stability of the oil market,
In order to ensure effective,
 economic and regular petroleum supply to consumers,

 a steady income for the producers and


Shifting the power
 a fair capital return to those investing in the petroleum
from oil
industry. companies to the
producing
countries.
OPEC - Organization of the Petroleum Exporting Countries

Cartel Price control


????????????????

Members
Discipline

PROBLEM!
OPEC - Organization of the Petroleum Exporting Countries
OPEC - Organization of the Petroleum Exporting Countries
“The resource curse”
 The oil curse
Big
Reserves

Oil and Natural


PARADOX
Gas Industry
Standard of
Leaving
“The resource curse”

The oil curse

Corruption Transparency Distortion of the Civil Wars etc.


Personal Wealth Constitution economy

NIGERIA VENEZUELA NORWAY CHINA IRAN


“The resource curse”

NIGERIA Big Reserves – Low Standard of Leaving

VENEZUELA Big Reserves – Little Development

NORWAY High Standard of Leaving

CHINA Small Reserves – Big Development

IRAN Big Reserves – Low Production - Imports


The Players

The ‘Players’
National Oil
Private oil Companies
companies (NOCs )

Integrated Oil International Oil


Independent Super Major
Companies Companies Oil Major
(IOCs) (IOCs)

Junior

Source: Inkpen and Moffett, 2011


The Players
Private oil companies: National oil companies
Independent – upstream or downstream NOCs

Junior – 500-10,000 oil b/d

Integrated Oil Companies (IOCs) –


upstream, midstream, downstream

International Oil (energy)


Companies (IOCs)

Oil Major

Super Major

Source: Inkpen and Moffett, 2011


The chain of the oil and natural gas industry

Oil industry chain

Exploration Extraction Transport and Refining, Trade


(upstream) (upstream) Trading Processing (downstream)
(midstream) (downstream)

Natural gas industry chain

Exploration Extraction Processsing Transport and Trade


(upstream) (upstream) (midstream) Trading (downstream)
(midstream)
The oil chain

Transport and
Trade
(midstream)

Exploration and
Extraction
(upstream) Refining,
Processing and
Trading
(downstream)

Source: API, 2013


The natural gas chain

Exploration and
Transport,
Extraction
Processing and
(upstream)
Trading
(midstream)

Transport, Trade
(downstream)
Source: API, 2013
Natural gas chain

Source: Weijermars, 2010


Bibliography
 Aleklett K., Peeking at Peak Oil,2012, Chapter 2, Springer Science+Business Media New York 2012
 API, American Petroleum Institute, 2013, http://www.api.org/policy-and-issues/policy-items/safety/understanding-the-oil-
natural-gas-supply-chains
 Cypraegean, 2013, http://www.cypraegean-neftegaz.com/blog-posts.html
 Hilyard Joseph F., The Oil and Gas Industry, A nontechnical quide, PennWell, 2012
 Hubbert K., Nuclear Energy and the Fossil Fuels, 1956, Houston Texas, Shell Development Company, Drilling and Production
Practice, American Petroleum Institute
 Inkpen and Moffett, 2011, The Global Oil and Gas Industry, Management, Strategy and Finance, PennWell
 Stoupakova A., et al., 2006, Trapping mechanisms – forming petroleum reservoirs,
http://www.carbonet.net/bjarne/Stoupakova%20et%20al%202006.swf
 USGS, Natural Gas Production in the United States, USGS Fact Sheet FS-113-01, U.S. Department of the Interior, January
2002
 Weijermars Ruud, Value chain analysis of the natural gas industrye Lessons from the US regulatory success and opportunities
for Europe, Journal of Natural Gas Science and Engineering 2 (2010) 86e104