The Basis of Oil & Gas

The Basics of Oil & Natural Gas

Supply vs. Demand

Oil and Natural Gas hydrocarbons are decayed plants and animals from millions of years ago. They cannot be replaced. Our domestic supply is limited to the cost and participation to get it out of the ground. We have been relying on foreign imports to feed our needs. Approximately 70% of our daily usage is from imported oil. We are constantly looking for more economical ways to reduce our dependency on foreign oil. It will not happen anytime soon.

Domestic consumption of oil and natural gas is constantly changing. The fact is the United States and the rest of the world are very dependent on hydrocarbons for our day to day lives. There is no substitute for oil. Although wind, solar, and hydro will help offset the world demand for oil, we have yet to see another way to make a plastic bottle!

Upstream vs. Downstream
The term “upstream” refers to the process of exploration and production. The U.S. is the world’s third largest producer with more than 500,000 wells and 4,000 platforms producing nearly 2 billion barrels of oil annually.

The term “downstream” is the process by which crude oil is converted to petroleum products we use every day. Nearly 165,000 miles of pipeline transport crude from the field or ocean platforms to the 141 U.S. refineries, where 15 million barrels of oil is processed each day and delivered to more than 161,000 retailers across the country.

Petroleum Products from Crude
Gasoline is the life blood of our country and allows for an unprecedented level of freedom. Diesel fuel is critically important to our economy powering trucks and freight trains that transport 70% of this nation’s goods. The use of natural gas has increased in popularity for those who wish to heat and cool their homes using a clean, safe and clean-burning alternative. Heating oil, extremely popular in the northeast, is used by 8.5 million households.

Finding Oil & Natural Gas – Know Your Team

An important aspect of oil and natural gas exploration is knowing where to look. That job falls to the geologist who employs science and reasoning to raw data. Over the last few years, the technology used to locate and evaluate prospects (commercially exploitable accumulation of oil and natural gas) has improved significantly resulting in greater success in establishing commercial wells.

Basins are the best sources of crude oil with more than six hundred identified around the world, 25% of which have produced most of the petroleum to date. Some contain oil, some contain natural gas, and some contain both. Either way, Geologists look for basins – that’s where the money is.

Permission to Explore and Produce
It stands to reason that when a geologist identifies the best place to drill, that land and/or minerals will ultimately belong to someone. Therefore, the team also includes a “landman” whose job it is to negotiate the right to drill with the owners who control the surface, the airspace above, and the minerals below (referred to as mineral rights).

Getting to the Minerals
Once the prospect has been identified by the geologist, the operator takes over. They are responsible for drilling, completion and production operations including maintenance of the leased property. Operators provide partners with daily drilling reports, keep all records, and pay the bills.

Getting the Minerals Out
The next player on the team is the Petroleum Engineer. Once the well is drilled, the P.E., along with our geologist and geophysicist evaluate the well logs, pressures, and production test data. They estimate the reserves and production capabilities. This is a critical point of the process – the “go, no-go” point. If the scientific data and test results are positive, a decision is made to complete the well with surface equipment and begin its production life.

Production – What to Expect
As with most wells, the initial production is robust. The well production declines as the hydrocarbons are extracted and the pressure within the reservoir is diminished. Over time, all of the commercial production is withdrawn and the well is plugged.

Glossary of Terms Worth Noting

  • AFE (Authorization for Expenditure) – an estimate of drilling costs provided by the operator to general partners prior to drilling
  • BBL (Barrel) – the standard unit of measurement used by the US Oil Industry, equal to 42 US gallons
  • Basin – natural depression where sediments accumulate over millions of years
  • Completion – the process by which a well is made ready for commercial production after the well is drilled
  • Crude Oil – the natural mixture of liquid hydrocarbons as it leaves the ground and prior to distilling and/or refining.
  • Front End Costs – expenses that are incurred and paid from the initial investment in a venture before the venture activities commence
  • IDC (Intangible Drilling Costs) – expenses like wages, repairs, hauling, fuel, water, and drill bits.
  • Lease – a contract whereby the owner of mineral rights conveys the exclusive right to another party to explore and develop the minerals on the property, usually for a specified period of time
  • Pay Zone – the interval of rock from which oil and natural gas is expected to be produced in commercial quantities
  • Spud – to start the initial drilling operations
  • Working Interest – the exclusive right to explore for oil and gas, including the obligation to pay the costs of drilling, completion, and producing any oil and natural gas found