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JARGON BUSTER: GLOSSARY 38

Jargon Buster: Glossary


anticline back-in right
In geology, a rock formation under A feature of oil and gas contracts
which oil and gas are often found; that allows a party, often a govern-
they look like domes sticking up out ment, to acquire an equity particip-
of the ground and for the first cen- ation once a commercial discovery
tury of the oil industry, before more has been made without carrying the
sophisticated measuring devices risk of exploration. See also:
were developed, they were how COMMERCIALITY
geologists looked for hydrocarbons. "The President of Guinea Bissau called
Anticlines show structural traps, for 33% back in rights for the State into
which are relatively easy to spot, all mineral projects in order to establish
but in recent years oil exploration a large and fundable National Mining
has been forced by the end of easy Company."
discoveries to look for more com- - Brian Menell Group 2010
plex stratigraphic traps.
barrels of oil equivalent (boe)
API gravity index A way of measuring energy produc-
A system of measurement de- tion or consumption across different
veloped by the American Petroleum energy sources. Other hydrocar-
Institute used worldwide to denote bons like NATURAL GAS and coal and oc-
how "light" or "heavy" a grade of casionally even renewables are
CRUDE OIL is. The higher the API index measured for the amount of energy
the lighter the crude oil is, so that they produce compared to a barrel
"light" crudes (such as Libyan) are of oil.
35° and above, heavy grades (such
as Iranian) are below 30°. Su- barrels per day (bpd)
per-heavy grades (such as some The standard way of measuring oil
grades from Venezuela) are below production. A barrel is about 42 US
20°. See also: HEAVY OIL, LIGHT OIL gallons or 158 litres, though the ex-
act number varies according to
appraisal well CRUDE OIL GRADES. The world currently
Appraisal wells are drilled after consumes around 90 million barrels
SEISMIC SURVEYS and a DISCOVERY WELL have of oil a day, a quarter of it in the
shown some oil or gas is present, in United States.
order to determine if the find is big
enough to be a commercial discov- benchmark crude
ery. See also: WILDCAT WELL, DEVELOPMENT Oils against which other oils are
WELL, SHOWING, COMMERCIALITY priced, either at discount or premi-
um depending on the CRUDE OIL GRADES.
associated gas There are three primary benchmark
Natural gas mixed up, or "associ- crudes which serve in the different
ated", with oil in a rock structure oil markets of the world: BRENT CRUDE,
and produced at the same time as WEST TEXAS INTERMEDIATE (WTI), and
the oil. Sometimes the gas is dis- DUBAI CRUDE.
solved within the oil but separates
as it comes up to the surface. For a bitumen
long time, such gas was treated as A component of CRUDE OIL which is
a waste product disposed of by very heavy and viscous; high
FLARING or VENTING. See also: NON- amounts are extracted from OIL
ASSOCIATED GAS, LIQUID PETROLEUM GAS SANDS, although it has low value rel-
39 JARGON BUSTER: GLOSSARY

ative to other products of the refin- fuels are burned, with coal produ-
ing process and so is often CRACKED to cing 25 million Btu of energy per
form other more commercially valu- ton and oil producing 5.6 million Btu
able products. In its raw form, it is per BARREL.
used to make roads in the form of
asphalt. bunkering
The illegal removal, or theft, of oil
block from a PIPELINE or other distribution
Method used to designate an area system. Bunkering is sometimes as
of land which could be made up of simple as drilling a hole in a PIPELINE
several OIL FIELDS, which divides up and collecting the oil in a drum.
land into workable areas for separ- More complex operations involve
ate CONSORTIA or companies to work equipping tankers with false bot-
on. toms to conceal extra-legal ship-
ments, or to make unauthorised
blowout shipments from well site storage
The sudden and uncontrolled re- tanks. Bunkering is a chronic issue
lease of CRUDE OIL or NATURAL GAS from a in Nigeria and Iraq, although it ex-
well when pressure control systems ists in many other countries.
fail. This risk can be mitigated by "The theft of oil – known in Nigeria as
using a blow-out preventer (BOP), “bunkering” – along with fraud in the al-
however only as a last line of de- location of a controversial fuel subsidy,
fence to shut off the top of a well may together have cost the state US $14
and prevent a GUSHER. It was a blo- billion in 2011."
wout which was responsible for the - Financial Times 2010
Deepwater Horizon oil spill in the
Gulf of Mexico in 2010. cap rock
A layer of impermeable rock which
booking may trap oil, gas or water beneath it.
The process by which RESERVES are
added to the balance sheet of an oil coal bed methane (CBM)
company. This is a crucial point, as NATURAL GAS found in coal beds during
reserves form key assets for the underground mining operations.
company. Oil companies such as Sometimes referred to as coal seam
the SUPERMAJORS who have shares lis- gas (CSG), it is already in significant
ted on major stock markets must production in the United States and
conform to regulations concerning Canada, and enormous resources are
how they book oil and gas assets. proven in Australia and China. Glob-
Royal Dutch Shell triggered a global ally, it makes a modest contribution
scandal in 2004 when it was forced to the ENERGY MIX but this is expected to
to admit that it had overbooked increase. See also: UNCONVENTIONAL ENERGY
many of its assets. SOURCES

Brent crude commerciality


The leading global benchmark for A legal term widely applied in con-
Atlantic basin crudes, it is used to tracts to describe a situation in which
price two thirds of the world's inter- hydrocarbon reserves exist in suffi-
nationally traded crude supply. cient quantities to justify further in-
Brent is a light, sweet crude pro- vestment to bring a field to produc-
duced in the North Sea, which usu- tion. From the moment an operating
ally trades within a few dollars of company declares commerciality, a
WTI. See also: BENCHMARK CRUDE set of regulatory and fiscal conditions
kicks in. See also: RESERVES, APPRAISAL WELL,
British thermal unit (Btu) GIANT FIELD
A unit used to describe the amount "Further drilling will be required to establish
of energy released when different the commerciality of the block SL 2007-01-
JARGON BUSTER: GLOSSARY 40

001 discovery." dustry between contingent resources


- Petroleum Economist 2011 and UNPROVEN RESOURCES.

completion cost recovery


The final stage in the installation and Part of a PRODUCTION SHARING AGREEMENT
development of an oil or gas well, en- which allows IOCs to claim and recov-
abling it to begin producing, often er the investments they made to ex-
taken on by oilfield SERVICE COMPANIES. plore, develop and start producing oil.
The important point to note is that
concession cost recovery comes before any split
A lease agreement by which an oil of profits. Cost recovery can often
company can enjoy the exclusive reach billions of dollars. It is usually
right to produce oil in any given area, capped at a certain percentage of the
as ownership of the oil is transferred value of production in any given year.
from the natural owner, such as the Cost recovery can become a point of
state or landowner, to the lease hold- contention between companies and
er at the WELLHEAD. Concessions were governments since governments are
used widely in the early days of the often unable to verify the reasonable-
oil industry and came to be viewed as ness of costs submitted by the IOCs
symptomatic of exploitation by IOCS, with their sophisticated accounting
particularly the SEVEN SISTERS, and were and hundreds of global affiliates.
replaced in many countries by Such disputes have recently occurred
PRODUCTION SHARING CONTRACTS. But some in Indonesia, India and Iraq. See also
countries, such as the United King- PROFIT OIL, COST OIL
dom and Norway, still operate them
today. See also: SERVICE CONTRACT cracking
A second stage refining process
condensates, natural gas which has become widespread in the
Liquid fuels such as ethane, butane last 20 years. After FRACTIONAL DISTILLATION
and pentane, which are present in the has produced a range of commer-
mix of NATURAL GAS when it comes out of cially valuable fuel products, there
the ground. These liquids are con- are byproducts like tar and bitumen.
densed out of gas before they are Since demand for these is limited,
shipped by PIPELINE and captured for cracking is applied to convert them
separate sale. Also known as natural into more in-demand products, such
gas liquids (NGLs). See also: WET GAS as gasoline and diesel oil, by subject-
ing them to high temperatures and
consortium pressures. The term is chemical in
A group of companies which join origin, as the process involves break-
forces to pursue a joint project, and ing up or "cracking" the longer
may submit joint bids for projects HYDROCARBON chains in the lower value
during a LICENSING ROUND. The trend in products into the shorter ones in fuel
the oil industry over the last genera- products.
tion is for companies to collaborate
more and more, on a case by case crude blends
basis, forming consortia, to share the A mixture of different CRUDE OIL GRADES
risk of projects which demand ever designed to raise the value of the
high amounts of investment. See also: grades. For example, a certain grade
JOINT VENTURE, PROJECT FINANCING, WORKING of HEAVY OIL may not be so commer-
INTEREST cially valuable alone, but when mixed
with LIGHT OIL the blend produced may
contingent resources be more valuable than the value of
RESOURCES estimated to be potentially the initial volumes of individual heavy
recoverable but, at a given date, not and light crude, so overall, the com-
commercially viable. There is acknow- mercial value is increased. Blending
ledged lack of clarity within the in-
41 JARGON BUSTER: GLOSSARY

can happen either in PIPELINES or at the managed by implementing suitable


REFINING stage where a company may 'depletion policies' such as ENHANCED OIL
seek to be producing a particular mix RECOVERY. See also: HUBBERT CURVE, PEAK OIL,
of fuel products in response to fluctu- PLATEAU PRODUCTION.
ating market demand. "The most important depletion policy instru-
ments have been the frequency in licens-
crude oil ing rounds, awards of licenses, and use of
A fossil fuel formed from organic ma- the fiscal system."
terial over millions of years and ex- - Chatham House 2010
tracted directly from the rocks where
it is found, which can be further pro- development well
cessed into various fuels and A well drilled at an existing oil field
PETROCHEMICAL products for consumers. which is already producing. Many
NATURAL GAS is often found dissolved in fields require continuous drilling of
the oil. See also: PETROLEUM, PETROLEUM new wells to maximise production,
PRODUCTS, ASSOCIATED GAS and development wells can far out-
number the WILD CAT WELLS that were
crude oil grades made to discover the resource in the
The qualities of oil from a particular first place.
field which determine the steps
needed to process it into usable diesel
products and its marketability. Crude One of a series of PETROLEUM PRODUCTS
oils can be "light" or "heavy" depend- produced out of CRUDE OIL during
ing on their API GRAVITY INDEX. They can FRACTIONAL DISTILLATION, commonly used to
also be "sour" if they contain a lot of power our cars as a heavier alternat-
sulphur or "sweet" if they do not. ive to PETROL using a special compres-
Beyond these major characteristics, sion engine. Diesel is also widely
which dictate a crude grade's market used by military vehicles.
value when sold against BENCHMARK
CRUDES, there so many other character- discovery well
istics that every crude can be chem- see WILDCAT WELL
ically "fingerprinted". See also: LIGHT
OIL, HEAVY OIL
downstream
The series of operations that take
dependency, natural resource place once oil has been found and
Although the dependency of econom- produced out of the wellhead. Some-
ies and government spending in times divided into midstream and
many countries has been widely re- downstream, with transport and the
ported, the International Monetary REFINING process taking place mid-
Fund has provided a formal definition stream and marketing and distribu-
of the concept: where natural re- tion occurring in the downstream
source exports have accounted for phase. See also: UPSTREAM, INTEGRATED
either at least 25% of a country's ex- ENERGY COMPANY
ports over the previous few years or "ConocoPhillips announced it would separ-
at least 25% of a government's ate its profitable 'upstream' oil exploration
budget. The IMF identified 34 coun- and production business from the low-mar-
tries which fit that definition in 2008. gin “downstream” jobs of refining and mar-
Natural resource dependency is keting."
linked to the concept of RESOURCE CURSE. - Economist 2011

depletion drilling mud


The decline in production that begins A mixture of clay, water and chemic-
to appear in oil reservoirs as RESOURCES als pumped down a well to make
become exhausted. Global depletion drilling more effective, by lubricating
is currently estimated at between 3% and cooling the mechanism and
and 5% per year. The impact can be flushing rock cuttings to the surface.
JARGON BUSTER: GLOSSARY 42

Also known as 'drilling fluids'. energy security


The concept that energy is so essen-
dry well
tial to modern economies that gov-
A well which is drilled but fails to pro- ernments need to plan to ensure se-
duce oil or gas in commercially viable curity of access, even when the in-
quantities. Sometimes known as a DRY dustry itself is in the hands of the
HOLE. See also: COMMERCIALITY, APPRAISAL WELL,
private sector. This often involves try-
DEVELOPMENT WELL
ing to diversify energy sources. For
Dubai crude example, the USA seeks to diversify
from Middle Eastern oil, or Europe
One of three global BENCHMARK CRUDE oils.
from Russian gas.
Also known as Fateh, it is produced in
the United Arab Emirates and was for enhanced oil recovery (EOR)
many years the only CRUDE OIL GRADE in A set of technologies to increase the
the Middle East freely traded on the RECOVERY RATE of a producing field and
SPOT MARKET.
offset DEPLETION. Methods can include
Dutch disease injecting natural gas, chemicals, or
water into a field to increase pres-
A factor in the RESOURCE CURSE, so named
sure, as well as HORIZONTAL DRILLING. They
after the crisis following large gas dis-
account for an increasingly important
coveries in the Netherlands in the
part of global oil production. See also:
1960s, whereby large inflows of for-
DEPLETION
eign PETRODOLLARS can have damaging
consequences for an economy. As the environmental impact assessments
local currency appreciates, the produ-
(EIA)
cing country's non-commodity ex-
ports become less competitive on Carried out by companies before be-
world markets, and inflation can oc- ginning a project to identify any pos-
cur on the domestic market. sible environmental, social or eco-
nomic impacts, both positive and
elephant field negative, and any measures needed
A field with RESERVES totalling over 1 bil- to mitigate. Contracts now often spe-
lion barrels. See also: GIANT FIELD cify the implementation of such stud-
ies but although various best practice
energy mix initiatives exist at a global level such
The combination of energy sources as those of the Global Reporting Initi-
used to satisfy a country or region's ative in Amsterdam or the Interna-
energy consumption. The energy mix tional Petroleum Industry Environ-
evolves over time in response to mental Conservation Association
changing lifestyles and technologies. (IPIECA) in London, they are rarely
For example, oil has dropped from specified in contract. EIAs are rarely
about half of global primary energy made public, existing as a document
consumption in 1973, when the oil held between companies and host
crisis tripled prices overnight, to governments.
about a third today, while use of
NATURAL GAS has risen, particularly with
Extractive Industries Transparency
the development of SHALE GAS. Many Initiative (EITI)
countries are now trying to diversify The major existing TRANSPARENCY mech-
their mix to maximise modern renew- anism in the oil industry. EITI started
ables such as solar and wind power, in 2002 and now has 35 countries as
which now account for 3% of total members or candidates. To achieve
global energy consumption. compliance, a government and the oil
"A diversified mix of energies will increase companies have to release informa-
security of supply." tion about the payments they have
- European Commission 2007 made to each other, in a process
overseen by civil society. EITI's cur-
43 JARGON BUSTER: GLOSSARY

rent chair is the British politician is due to be completed in 2017.


Clare Short.
fracking
farmout agreement see HYDRAULIC FRACTURING
The sale of rights to a discovery once
oil has been struck. Also known as a fractional distillation
'farm-down', this is a common prac- How crude oil is refined into usable
tice among smaller exploration com- products like PETROL and NATURAL GAS.
panies funded by seed and venture Crude oil enters one of a series of
capital but who cannot then bear the chambers, each one hotter than the
costs of getting the oil out of the last. Individual products such as DIESEL
ground alone. The 'farmee' usually or GAS OIL are distilled out of the mix at
pays the 'farmor' a sum on signature, each stage.
and bears a proportion of operational
costs. There may or may not be an frontier exploration
agreement for the farmee to be in- High-risk exploration activities in un-
volved in actual production activities. chartered territories, or in challenging
See also WORKING INTEREST environments such as Somalia. See
also: WILDCAT WELL
flaring, gas
Oil production is sometimes accom- fuel oil
panied by ASSOCIATED GAS. When infra- One of the heavier, more viscous
structure to capture the gas does not products obtained from the FRACTIONAL
DISTILLATION of crude oil. Fuel oil mostly
exist, the gas is often burned at the
wellhead, or flared, to get rid of it. has industrial uses in engines and fur-
This is a waste of energy as well as a naces.
source of greenhouse gas. According futures contract
to the World Bank, the top five gas
An agreement between two parties to
flaring countries in the world are Rus-
buy and sell a specified quantity of
sia (26%), Nigeria (11%), Iran (8%),
CRUDE OIL, with the price agreed today,
Iraq (7%) and Algeria (4%). The Glob-
and the delivery and payment to take
al Gas Flaring Reduction partnership
place at a specified date in the fu-
was set up in 2002 to address the
ture. The main crude oil futures mar-
problem, grouping companies, gov-
kets are the New York Mercantile Ex-
ernments and international agencies
change (NYMEX) and the Intercontin-
such as the UN. The World Bank es-
ental Exchange (ICE). Futures com-
timates the total amount of gas flared
bine with the SPOT MARKET to form the
was reduced by 22% between 2005
overall trading environment for oil
and 2010.
and gas.
"The annual 35 bcm of gas flared in Africa
alone is equal to half the continent’s power gas to liquids (GTL)
consumption." see LIQUEFACTION
- Financial Times 2012
gasoline
floating liquefied natural gas (FLNG) see PETROL
A concept being developed by Royal
Dutch Shell to access OFFSHORE gas giant field
fields which might otherwise remain Sometimes defined in terms of RESERVES
'stranded'. Instead of the need for (exceeding one billion barrels) and
costly seabed PIPELINES to onshore pro- sometimes in terms of production
cessing facilities, the idea is to build a output (exceeding 100,000 BARRELS PER
platform which floats above the field DAY). Even larger super-giant fields are
on the sea surface and can liquify the generally those whose reserves ex-
gas into LNG ready for shipping dir- ceed five or even ten billion barrels.
ectly to market. The first FLNG facility However the definitions remain con-
JARGON BUSTER: GLOSSARY 44

tested. See also: ELEPHANT FIELD safety concerns associated with the
procedure. See also: ENHANCED OIL RECOVERY
groundwater
Water held in rocks beneath the wa- hydrocarbons
ter table. It can be polluted or de- Compound existing exclusively of hy-
pleted during the drilling process, drogen and carbon; the majority of
particularly HYDRAULIC FRACTURING. See naturally occurring hydrocarbons are
also: ENVIRONMENTAL IMPACT ASSESSMENT found in CRUDE OIL, and all oil and gas
products as well as coal are hydrocar-
gusher bons.
A well from which oil gushes without
being pumped, and an icon of oil ex- Hubbert's curve
ploration during the 19th and 20th A mathematical model developed in
centuries, perhaps most memorably 1956 by the US geologist Marion King
depicted in the 1956 film 'Giant' star- Hubbert which depicts the life cycle
ring James Dean. Nowadays thought of a drilling operation as a bell
of as wasteful and polluting, gushers shaped curve and predicts extraction
usually happen as the result of tech- rates will slow once peak production
nical failures. at a field has been reached. It is
widely disputed but is seen as the
heavy oil foundation of PEAK OIL theory. See also:
More viscous grade of crude oil with a DEPLETION, PLATEAU PRODUCTION
lower API GRAVITY than LIGHT OIL. Produc-
tion of heavy oil is becoming more International Energy Agency (IEA)
common around the world despite Created in 1974 in response to the oil
greater extraction and processing crisis, the IEA first had the mandate
costs, because light oil supplies have of coordinating energy policy among
dwindled. Extra-heavy oil, such as consumer countries, particularly glob-
that found in the Orinoco belt of al disruptions of supply. Based in Par-
Venezuela, is generally defined as is, it has evolved into an influential
having an even lower API Gravity of 7 government-sponsored think tank
to 11°. See also: OIL SANDS and is sometimes seen as "the con-
sumers OPEC".
horizontal drilling
A type of directional drilling which al- integrated energy company
lows drillers to access pockets of re- A company active in all stages of the
serves that are harder to reach by a value chain, from exploration through
vertical well, often used as a cost-ef- production to shipping and refining,
fective technique at OFFSHORE locations. to distribution and retail marketing of
In 1990, Iraqi leader Saddam Hussein fuel products. Most SUPERMAJORS are in-
accused Kuwait of using horizontal tegrated energy companies.
drilling to steal Iraqi oil and used it as
a pretext to invade in the first Gulf international oil company (IOC)
War. See also: ENHANCED RECOVERY A private sector oil company with op-
erations in many countries. The
hydraulic fracturing largest IOCs are SUPERMAJORS and the
Also known as FRACKING, it involves largest historically were the SEVEN
shooting water, sand and other com- SISTERS. The term is often used in con-
pounds at rock structures at such trast to NATIONAL OIL COMPANIES, state-
high velocity that they produce small owned entities created after waves of
fractures through which CRUDE OIL and RESOURCE NATIONALISM in the 1960s and
NATURAL GAS can then be extracted. The 1970s led to nationalisation of the
development of fracturing in the sector in many countries.
United States since 2005 has led to a
massive increase in SHALE GAS produc- joint venture (JV)
tion, despite environmental and A well-established feature of the oil
45 JARGON BUSTER: GLOSSARY

and gas industry whereby two or liquefaction


more companies agree to share Conversion of gases to liquid form,
profit, loss and control in a certain usually for ease of storage and/or
project, common in the 'UPSTREAM sec- transport.
tor where projects can be too big for
a single company to finance on its liquefied natural gas (LNG)
own. Partners can be from both the NATURAL GAS which has been converted
public and private sectors. into liquid form by cooling it to ap-
"JVs are a useful way of gaining the bene- proximately −162 °C (−260 °F), for
fits of collaboration without the economic ease of storage and transport. This
and political risk associated with a merger expensive process is used when a gas
or other business combination." pipeline is unavailable to transport
- Ernst & Young 2011 the gas produced to the marketplace.
The first LNG plant was built in Alger-
kerosene ia in 1962. Qatar accounts for 25 per-
The primary source of fuel for many cent of global LNG production. LNG's
types of aircraft, produced from market position has been challenged
FRACTIONAL DISTILLATION. Until the invention in recent years by the explosive
of electricity it was the main source growth in SHALE GAS inside the United
of lighting in the home, as it was used States, leading to recalculations of
in lanterns, and it was the most how much gas the US, once seen as a
widely used product of PETROLEUM be- major LNG market, will import in fu-
fore the invention of the motor car. ture years. See also: LIQUEFACTION
LIBOR liquid petroleum gas (LPG)
The London Interbank Overnight Often referred to as 'liquefied petro-
Rate, a rate of interest often used in leum gas', an example of an ASSOCIATED
the financial terms which govern oil GAS produced as a byproduct of oil ex-
contracts. traction and refining, which is popular
as a fuel for domestic use in India and
licensing round other countries without reliable oil or
An event at which oil and gas acre- natural gas supplies.
age is opened up by a government to
competing bids by exploration and local content
production companies or consorti- The purchasing of local goods and
ums. Licenses are then awarded to services and training and develop-
the most attractive bid. Competitive ment of national staff as a result of oil
and TRANSPARENT licensing rounds are production with the goal, from the
seen as key to efficient management host government side, of maximising
of a nation's resources and are often broader economic growth as a result
implemented by using auctions which of the oil industry and building na-
publicly state the criteria under which tional expertise which over time al-
bids will be judged. See also: BLOCK, lows full national control of the in-
WORKING INTEREST dustry. Local content is often a nego-
tiation point between companies and
light oil governments stipulated in the terms
Light crude oil is made up of smaller of contracts. Brazil is sometimes seen
molecules than HEAVY CRUDE OIL and as one of the most successful ex-
therefore produces a higher percent- amples of local content application.
age of commercially valuable
products (like gasoline and diesel) metering
when refined, thus fetching a higher Measuring the amount of oil or gas
price on global markets. See also: produced out of a well or flowing
GRADES OF CRUDE OIL , HEAVY OIL down a PIPELINE for commercial pur-
poses. Meters can now measure
JARGON BUSTER: GLOSSARY 46

many different CRUDE OIL GRADES flowing nodding donkey


down one pipe to up to 0.15 percent A device used in oil production when
accuracy. See also: BUNKERING the pressure inside a well is not suffi-
cient to force oil to the surface, con-
midstream
sisting of a long beam which 'dips' in
see DOWNSTREAM and out of the well to extract crude. A
migration common feature of oil landscapes
also known as a 'pumpjack' or
The process whereby conventional oil
'grasshopper pump'.
and gas resources gradually 'migrate'
away from the SOURCE ROCK where they non-associated gas
were generated into CAP ROCK which im- NATURAL GAS found in reservoirs where
pedes their rising to the surface and no liquid HYDROCARBONS are present or
leaking. It can take millions of years where no significant quantities of li-
for oil and gas deposits to migrate a quid hydrocarbons exist. Contrasts
few kilometres within rock forma- with ASSOCIATED GAS.
tions.
offshore
muds
The drilling of wells into the seabed.
see DRILLING MUD
Offshore drilling began in the nine-
naphtha teenth century and significant pro-
duction was achieved on Venezuela's
Similar in form to petrol (gasoline),
Lake Maracaibo in the 1920s but
naphtha is produced from FRACTIONAL
modern techniques began in the Gulf
DISTILLATION. It is primarily used in the
of Mexico in the 1940s. Offshore is
chemical industry, including to make
generally regarded as drilling that
lighter fluid, cleaning solvents and
takes place on the continental shelf in
fuel for camp stoves, and can also be
less than 200 metres of water, but in
further refined through CRACKING to pro-
recent years deep offshore has
duce more valuable products such as
evolved with drilling in water deeper
high octane gasoline.
than 2,000 metres. Offshore is often
national oil company (NOC) controversial because of environ-
A state-owned oil exploration and mental risks but is a growing com-
production company, usually used in ponent of global production and is
contrast to the idea of IOCS. Because particularly significant to production
of the wave of nationalisations in Brazil, West Africa, the Gulf of Mex-
caused by RESOURCE NATIONALISM, the ico and increasingly the Levantine
NOCs now represent 18 out of the basin. See also: PRE-SALT
biggest 20 oil companies in the world,
oil in place (OIP)
measured in terms of their oil and gas
CRUDE OIL estimated to exist in a field
assets. Some NOCs are run on corpor-
or a reservoir. Not all that oil will be
atised lines and have started to com-
extracted, however, because of the
pete internationally, notably CNPC
properties of a rock formation. The
from China, Algeria's Sonatrach, Pet-
exact percentage will depend on the
ronas from Malaysia and Petrobras
RECOVERY RATE.
from Brazil. Petrobras and Colombia's
Ecopetrol also have minority private oil sands
sector shareholders. An UNCONVENTIONAL ENERGY SOURCE, made up
natural gas of a mixture of sand, water and
BITUMEN. Usual techniques cannot be
Primarily methane. It occurs naturally
applied here and extraction often re-
and is used as a fuel.
sembles mining more than conven-
natural gas condensates tional drilling, using techniques that
see CONDENSATES, NATURAL GAS are far more energy- and capital in-
47 JARGON BUSTER: GLOSSARY

tensive. Oil sands have only recently Peak Oil


been included in the world´s oil re- The controversial idea that the world
serves due to high oil prices and will soon run out of oil and gas.
technological advances. The largest Everyone agrees that oil and gas, as
deposits currently known are the Ath- depletable resources in contrast to re-
abasca tar sands in Canada. See also: newables, will run out sometime. But
HEAVY OIL peak oil says that moment is very
close because global oil production
oil-backed loan
has already peaked. The theory relies
A loan in which future oil revenues on HUBBERT'S CURVE.
are pledged as collateral by a produ-
cing country. A prominent feature of petrochemicals
Chinese engagement in resource-rich Chemicals derived from PETROLEUM or
African countries such as Angola and other fossil fuels, largely used in the
Nigeria, and often used to finance plastics industry. There are currently
large infrastructure projects. 4,000 chemicals classified as petro-
"If the Government of South Sudan feels chemicals.
that oil-backed loans are currently neces-
sary to prevent economic collapse, it is crit- petrodollar
ical that robust protections are put in place Since oil sales are generally denomin-
to minimize future costs and con- ated in US dollars, petrodollars are
sequences." the funds from oil sales. The dollar
- Global Witness 2012 denomination has had implications
for linkages between the oil industry
oilfield service companies and the US economy which has led
see SERVICE COMPANIES some producers, notably Venezuela in
recent years, to debate ending it.
OPEC
The Organization of the Petroleum Ex- petrol
porting Countries, a cartel formed in Or gasoline, one of the key products
1961 through which 12 member of crude oil used mostly for transport.
states agree on a shared quota for
the production and sale of petroleum. petroleum
OPEC is intimately linked to the rise The term of art to denote both crude
of RESOURCE NATIONALISM and the industry oil and petroleum products produced
in all of its member states is domin- by REFINING. The terms "oil" and "petro-
ated by NATIONAL OIL COMPANIES. As of leum" are sometimes used inter-
2012, OPEC produced about 40 per- changeably.
cent of the world’s oil. With its large
share of global production, OPEC has pipeline
become effective in determining the A pipe, usually underground, used to
price of oil on international markets, transport oil or gas over long dis-
but there can be sharp divergence of tances. Although pipelines can be
interests between its various mem- constructed underwater most oil
bers, who are all in different situ- transport by sea is done by tankers.
ations as regards their state of Because pipelines are so expensive
DEPLETION and degree of DEPENDENCY on oil and significant ones often cross mul-
revenues. See also: SWING PRODUCER tiple national borders, pipeline nego-
tiations often involve complex geo-
operator politics.
The company within a CONSORTIUM with
overall decision-making authority at plateau production
an operational level on an oil or gas Keeping production out of a mature
project, usually also with the greatest oilfield steady for a number of years.
financial stake. See also: JOINT VENTURE, This usually involves using ENHANCED OIL
WORKING INTEREST RECOVERY techniques to mitigate
JARGON BUSTER: GLOSSARY 48

DEPLETION. covered its investment by deducting


COST OIL production.
play "As the profit oil is split between the com-
A slang term commonly used in the panies and the state, the cost of “allowable
industry for an investment decision. expenditures” is passed on to the state in
"International players are taking a closer the form of reduced profit oil."
look at Australia's Cooper-basin shale - Civil Society Coalition on Oil in
play." Uganda 2010
- Petroleum Economist 2012
project financing
possible reserves Arrangements for capital linked to in-
Have a 10 percent certainty of being dividual production projects. Even
produced. Combined with PROVEN SUPERMAJOR oil companies use financing
RESERVES and PROBABLE RESERVES in the in- from banks and financial instruments
dustry term 3P. See also: RESERVES such as bonds extensively because of
the increasingly capital-intensive
pre-salt nature of oil exploration and produc-
Oil and gas deposits that are found tion. Global investment in UPSTREAM has
beneath huge layers of salt, deep in risen from about US $100 billion in
the rocks. Pre-salt deposits could not 2000 to about $600 billion in 2011, a
be exploited commercially until re- level which the industry anticipates is
cently because of technological limit- likely to hold or rise in the next dec-
ations but now represent a significant ade.
portion of projected future finds. The
most famous pre-salt region is Brazil's prospective resources
Tupi field, under 2,000 metres of wa- see RESOURCES
ter and a further 5,000 metres of salt,
sand and rock. See also: OFFSHORE proven reserves
Classified as having a 90 percent cer-
probable reserves tainty of being produced at current
Have a 50 percent certainty of being prices, with current commercial terms
produced under current market condi- and government consent, and are
tions. Probable and PROVEN RESERVES are also known in industry as 1P. See also:
often combined in a definition known RESERVES
as 2P, which is the most common way
to assess the amount of oil a field is recovery rate
likely to produce. See also: RESERVES The amount of oil that will be extrac-
ted compared to the amount of oil in
production sharing contract (PSC) place. Historically rates of 25 percent
An agreement between a company were common but rates are now
and a host country on the percentage rising to 50 percent and above be-
of oil each party will receive after cause of extensive use of ENHANCED OIL
specified costs and expenses have RECOVERY.
been paid under COST RECOVERY. Under a
PSC, the company generally gives the refining
state cash payments in the form of Processes which convert crude oil and
ROYALTIES and income tax. Also known gas into usable products, such as
as a production sharing agreement FRACTIONAL DISTILLATION and CRACKING. Refin-
(PSA). See also: CONCESSION, SERVICE ing is a huge industry in its own right
CONTRACT but with volatile profit margins in re-
cent years which have caused some
profit oil INTEGRATED ENERGY COMPANIES to consider
The portion of revenues divided up getting out of it.
between participating parties and a
host government in a PRODUCTION SHARING rent
CONTRACT, once the operator has re- A revenue stream that accrues above
49 JARGON BUSTER: GLOSSARY

and beyond a normal economic re- resource diplomacy in the Gulf, and
turn on activity or profit. The concept China is increasingly using it in Africa.
was first developed by economists
Adam Smith and David Ricardo in the resource nationalism
18th and 19th centuries. It dominates The political feeling that control of
the economics of the global oil in- natural resources should be in the
dustry because of sharply varying hands of the countries which own
costs of production for a commodity them. Resource nationalism grew in
sold at roughly the same price. For the oil industry as a result of domin-
example, it could cost US $5 to pro- ance by the SEVEN SISTERS and led to
duce a barrel of oil in Libya and $60 the creation of OPEC and nationalisa-
in some fields in Canada, yet both sell tion of the industry in many coun-
for the same price, meaning the mar- tries, leading to the rise of the NATIONAL
gins are massively different. Econom- OIL COMPANIES.

ists differentiate between rent and a


normal return on capital, or profit, resource-backed loans
and argue that it should be treated see OIL-BACKED LOANS
differently. Rent encourages rent- resources
seeking, an integral part of the
All quantities of petroleum which are
concept of RESOURCE CURSE.
known to exist including those which
reserves are not, at that time, considered to be
A subset of oil and gas RESOURCES, commercially viable to extract. This
which are commercially viable to ex- can change as technology develops
tract. Definitions used around the and with higher oil prices. For ex-
world still differ somewhat but there ample, the OIL SANDS were previously
is increasing standardisation under a classified as RESOURCES but are now
RESERVES.
series of definitions produced by the
US Society of Petroleum Engineers resource curse
(SPE). Reserves are further divided
The theory that natural resource
into the sub-categories: PROVEN RESERVES,
wealth can sometimes paradoxically
PROBABLE RESERVES, AND POSSIBLE RESERVES .
create negative development out-
Classification of reserves can be cru-
comes in producing countries, due to
cial to the value of a company, as it is
weakened government institutions,
a key way for a company to show its
neglect of other key sectors of the
assets through BOOKING RESERVES.
economy (known as DUTCH DISEASE),
reserves-production ratio corruption, high income inequality
The number of years a country can and pollution. Sometimes called the
continue producing at its current rate 'paradox of plenty'. See also: RENTS
given the level of its PROVEN RESERVES. "The resource curse is not inevitable.
BP's Statistical Analysis for 2012 es- What's needed is transparency and ac-
timated the global R/P ratio at 54 countability."
years. At one end of the spectrum are - Petroleum Economist 2011
the United States, Norway and the
royalties
United Kingdom with respectively 10,
nine and seven years production left. A percentage share of production, or
At the other, Saudi Arabia has 65 of the value of the production which
years left, Kuwait 97 years and Iran goes to the government regardless of
99 years. the rate of production or costs to the
operator. Royalty rates often change
resource diplomacy incrementally as production in-
The use of state diplomacy to negoti- creases. In calculating revenue flows
ate access to natural resources. For from an oil project, royalties take pre-
example, the United States has used cedence, with other categories such
as COST OIL and PROFIT OIL subordinate.
JARGON BUSTER: GLOSSARY 50

CONCESSION type contracts are almost tion and interpretation technology.


entirely based on royalties. See also: ANTICLINE, SOURCE ROCK,
COMMERCIALITY
royalty interest
In contrast with a WORKING INTEREST, the service companies
ownership of a portion of revenues Oil companies which do everything
produced from an operation without but actually own or bid on resources
bearing the ongoing production costs. with governments. The oil industry
See also: ROYALTY, PRODUCTION SHARING has been subject to outsourcing since
CONTRACT the 1980s meaning that SUPERMAJORS of-
"It's generally recommended that investors ten contract large parts of their oper-
without deep pockets and a solid working ations to service companies. The
knowledge of oil and gas exploration stick largest, such as Schlumberger and
with limited liability royalty interests." Halliburton, employ tens of thousands
- Investopedia of employees and can win single field
contracts worth hundreds of millions
sedimentary basin of dollars.
Geologically, areas where there have
been huge deposits of organic matter service contracts
millions of years ago which may then An agreement whereby a foreign oil
have become compacted and company is contracted to produce a
'cooked' into oil and gas. Because of country's oil reserves on a simple fee
continental shifts and other geologic- basis. The state maintains sole rights
al movements, such areas can now over the RESERVES, and the contractor is
be deep inland even if they were ori- compensated by a fee per barrel, plus
ginally underwater. For example, the COST RECOVERY. See also: PRODUCTION SHARING
Texas and Oklahoma oilfields of the CONTRACT, CONCESSION
United States are part of a sediment-
ary basin formed in what was an ex- Seven Sisters
tended Gulf of Mexico while in Libya A term coined in the 1950s to de-
oil-bearing formations of the Sirte scribe the oil companies which dom-
Basin extend a thousand kilometres inated the early years of the global oil
inland, into the Sahara desert. See industry. They were Anglo-Persian Oil
also: CAP ROCK, ANTICLINE Company (now BP), Gulf Oil, Standard
"The sedimentary basins in New Zealand Oil of California (Socal) and Texaco
that are likely to contain oil and gas are (now Chevron), Royal Dutch Shell,
young (less than 80 million years old)." Standard Oil of New Jersey (Esso) and
- Encyclopedia of New Zealand 2012 Standard Oil Company of New York
(Socony) (now ExxonMobil). See also:
seismic survey INTERNATIONAL OIL COMPANY

Technology similar to ultrasound used


shale gas
to build a picture of underground rock
structures during early stage oil and NATURAL GAS formed from being trapped
gas exploration. Seismic works by within shale rock formations; cur-
sending out sound pulses and using rently the source of 20 percent of US
the measurements of how and when natural gas production due to the in-
they return to estimate rock struc- crease in HYDRAULIC FRACTURING, or FRACKING,
tures, since different kinds of rock of- and predicted to increase in import-
fer different levels of resistance to ance in the future by the EIA.
the signals. Combined with informa- showing, oil or gas
tion from an APPRAISAL WELL these sur-
When a company announces that oil
veys form the basis for further invest-
has been found in an exploratory
ment decisions. Seismic data has in-
well. Exploration companies often use
creased exponentially in recent years
showings to make dramatic public an-
with the development of data acquisi-
nouncements to boost their profile
51 JARGON BUSTER: GLOSSARY

and share price, but a showing does spudding


not necessarily mean that COMMERCIALITY The very start of the drilling process
will be declared. at a new well by getting rid of any
bits of rock, dirt or other sediment.
signature bonus
Lump sum of money paid up front by stabilisation fund
companies to governments upon A fund used to smooth government
signing a PRODUCTION SHARING CONTRACT or income between one year and the
CONCESSION agreement. Sometimes next to mitigate the high volatility of
used as the deciding factor in a tie- revenues that economies with natural
breaker between bidders. resource DEPENDENCY suffer from. Stabil-
"Under the last bid round in Libya, Occi- isation funds are different to SOVEREIGN
dental paid $1 billion as a signature bonus" WEALTH FUNDS.

slant drilling strategic reserves


see HORIZONTAL DRILLING Government-held stocks of crude to
guarantee a country against econom-
sour oil
ic breakdown in the case of major
CRUDE OIL GRADES which have high sul- world turbulence, and a key part of
phur, decreasing their market value, ENERGY SECURITY. These reserves were de-
in contrast to SWEET OIL. veloped after the 1973 oil crisis. Up
source rock to five billion barrels are held globally
Organic-matter rich rocks- typically, in such reserves, with the United
shales, sandstones or carbonates- in States alone holding nearly a billion
which petroleum forms, if it is subjec- barrels.
ted to high temperatures over pro- subsidies, energy
longed periods of time. See also: CAP Most oil exporting countries have tra-
ROCK
ditionally heavily subsidised energy
sovereign wealth fund (SWF) at home. Over time the cost of these
Government-held investment funds to subsidies has become crippling to
hold budgetary surplus, often result- many state budgets, but they are al-
ing from RENTS as a method of better most impossible to remove politically.
managing resource revenues by in- subsoil rights
vesting rather than spending, and in- Who owns resources under the
creasingly popular as an attempt to ground. In many countries, subsoil
shield against the RESOURCE CURSE. In rights belong to the state which is
2012 SWFs were estimated to hold why the state develops an oil industry
nearly US $5 trillion. when deposits are found. In the
"Although sovereign-wealth funds hold a United States, by contrast, subsoil
bare 2% of the assets traded throughout rights attach to the landowner at the
the world, they are growing fast." surface, which is what triggered oil
- Economist 2008 rushes in Texas, Oklahoma, and else-
where.
spot market
The global market where oil can be super-giant field
traded dynamically. Before the spot see GIANT FIELD
market appeared in the 1970s, oil
was traded largely in long-term fixed supermajor
contracts. But now a single shipment The world's largest publicly owned oil
of oil can be traded up to ten times and gas companies and the modern
from the time it leaves a producing day equivalent of the SEVEN SISTERS,
country to the time it reaches port. considered to be BP, Chevron, Exxon-
Mobil, Royal Dutch Shell and Total,
with ConocoPhillips sometimes also
JARGON BUSTER: GLOSSARY 52

included. See also:: INTERNATIONAL OIL method. This is an umbrella term that
COMPANY shifts over time, but currently used to
refer to sources such as SHALE GAS, COAL
sweet oil BED METHANE and OIL SANDS.
CRUDE OIL GRADES which have low sul- "While these reserves may hold the key to
phur, increasing their market value, the future oil supply, companies must deal
in contrast to SOUR OIL. with the additional time, cost and resources
it takes to extract the unconventional oil."
swing producer
- Financial Times 2010
A country which has production capa-
city significantly above what its actu- unitisation
al levels of production are, allowing it The way a single oil bearing rock
to raise production overnight and formation is divided by two countries
therefore lower market prices. Saudi when it straddles a border. For ex-
Arabia has been the sole swing pro- ample the United Kingdom and Nor-
ducer for the last 30 years. Other way have a unitisation agreement in
countries such as Iraq and Libya the North Sea. Unitisation requires
sometimes debate a similar role. agreed borders, but since the oil
could be sucked from one side of the
tar sands
border to the other also goes beyond
see OIL SANDS
it to require agreement and coopera-
tight hole tion on geological studies and produc-
A drilling well about which all inform- tion figures.
ation is kept confidential, most often unproven reserves
used for APPRAISAL WELLS.

transit fees An umbrella term for PROBABLE RESERVES

Fees charged by a country to allow oil and POSSIBLE RESERVES.


or gas to be transported across its see RESERVES
territory, either by pipeline or through upstream
shipping channels such as the Suez
The capital-intensive, high risk-high
and Panama Canals.
reward initial stages of the industry
transparency involving exploration and production.
Improved access to information such See also: MIDSTREAM, DOWNSTREAM, INTEGRATED
ENERGY COMPANY
as revenues, prices and contract
terms, helping to 'follow the money' venting
and prevent corruption. Transparency
When ASSOCIATED GAS is simply released
first emerged as a high profile norm
into the atmosphere. Venting is even
in the 1990s as issues of governance
more harmful to the environment
came to dominate the global debate
than FLARING since methane is many
on development. A growing move-
times more potent as a greenhouse
ment demanding greater transpar-
gas than the carbon dioxide produced
ency in the oil and gas industry
when it is burned.
centres around the EITI initiative. See
also: RENT AND RENT-SEEKING well completion
"Transparency of payments made from a see COMPLETION
company to a government can help to
demonstrate the contribution that their in- West Texas Intermediate (WTI)
vestment makes to a country." The US crude oil BENCHMARK, tradition-
- EITI ally trading within a few dollars of
BRENT CRUDE. It is a LIGHT OIL with a low
unconventional energy sources sulphur content, so it is considered to
Any resources accessed by means be a high quality crude. See also:
other than the conventional oil well BENCHMARK CRUDES
53 JARGON BUSTER: GLOSSARY

wet gas
NATURAL GAS containing other hydrocar-
bons that condense as the gas rises
to the surface and lower temperat-
ures than existed in the reservoir.
Typically, wet gas contains less than
85 percent methane. The natural gas
liquids are generally separated from
the methane to ensure that the nat-
ural gas sent to consumers has a con-
sistent thermal energy content;
though wet gas is sometimes more
valuable than DRY GAS, as the liquids
are themselves sellable commodities
such as butane. See also: DRY GAS,
CONDENSATES

wildcat well
An exploratory well into rock struc-
tures not known to contain oil
RESOURCES, under conditions of little or
no geological certainty. A high risk
"make or break" venture for drilling
companies. If the well is in a field that
has not produced before it is known
as a "new-field wildcat". If it is more
than 3 kilometres away from any pro-
ducing well it is called a "rank wild-
cat". If the well discovers oil, it is
known as the "discovery well" of that
field. See also: APPRAISAL WELL DEVELOPMENT
WELL

working interest
The percentage stake taken by a
company in an oil or gas operation,
where they are liable for a proportion
of the ongoing operating costs but
also has a claim to a share of the
profits. This contrasts with a ROYALTY
INTEREST. See also: PRODUCTION SHARING
CONTRACT, COST RECOVERY

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