Petroleum Production, Markets & Prices

Crude Oil

Crude oil formed from terrestrial and marine organisms and marine algae plankton remains that settled at the bottom of isolated (from marine currents), inland ocean basins and were then buried millions of years ago beneath the Earth's surface. This thick layer of organic material was buried beneath mud, sediment and soil, which itself was then buried and eventually solidified into rock. The pressure and heat exerted by the rock on this organic matter results in the low- or non-oxygen anaerobic decay of organic material, which can become reservoirs of coal (and bitumen), oil (petroleum), and natural gas as long as the prerequisite geologic conditions are in place (the greater the depth and the higher the temperature the more the likelihood that petroleum will develop rather than bitumen). Similarly, the mixture of this insoluble organic matter (kerogen) in sediment rock also leads to the formation of oil (and gas) shale, again as the result of the existing geologic conditions. Once formed, the oil will collect in locations such as the undersides of domes of impermeable stone. The usual formation is that directly below the impermeable layer is natural gas, which forms a gas cap; crude oil is below the gas and under the oil is the saline water of the primeval oceans. Because of the variety of subsurface conditions the composition of the crude oil differs from one reservoir to another.

Crude Oil is a mixture of hydrocarbons that exist as a liquid in natural underground reservoirs and remains liquid at atmospheric pressure after passing through surface separating facilities. Crude oil with a similar mix of physical and chemical characteristics, usually produced from a given reservoir, field or sometimes even a region, constitutes a crude oil "stream." It is possible to locate a pool of crude oil but in many cases crude oil is also embedded in porous rock, and as the rock is broken the oil tends to flow. Crude oils are classified by their density and sulfur content.
  • Sour or Sweet Crude: Industry terms which denote the relative degree of a given crude oil's sulfur content. Sour crude refers to those crudes with a comparatively high sulfur content, 0.5% by weight and above; sweet refers to those crudes with sulfur content of less than 0.5%. The terms Light and Heavy refer to the density (API gravity) of the crude.
  • Light, sweet crudes are preferred by refiners because their sulfur content and relatively high yields of high value products such as naphtha, gasoline, middle distillates, and kerosene allow them to be economically processed in the typical cracking refinery. The denser ("heavier") crude oils produce a greater share of lower-valued products with simple distillation and require additional processing to produce the desired range of products.
  • However, most of the world's crude oil supply is not made up of the light, sweet varieties, but consists of the so-called Sour, or higher Sulfur content crudes. Worldwide, about 60% of petroleum production and 80% of the economically recoverable oil reserves are sour.
  • Crude is the raw material which is refined into gasoline, heating oil, jet fuel, propane, petrochemicals and other products. The quality of the crude oil dictates the level of processing and re-processing necessary to achieve the optimal mix of product output. Hence, price and price differentials between crude oils also reflect the relative ease of refining. A premium crude oil like West Texas Intermediate, the U.S. benchmark, has a relatively high natural yield of desirable naphtha and straight-run gasoline. Another premium crude oil, Nigeria's Bonny Light, has a high natural yield of middle distillates. By contrast, almost half of the simple distillation yield from Saudi Arabia's Arabian Light, the historical benchmark crude, is a heavy residue ("residuum") that must be reprocessed or sold at a discount to crude oil.
  • In addition to gravity and sulfur content, the type of hydrocarbon molecules and other natural characteristics may affect the cost of processing or restrict a crude oil's suitability for specific uses. The presence of heavy metals, contaminants for the processing and for the finished product, is one example. The molecular structure of a crude oil also dictates whether a crude stream can be used for the manufacture of specialty products, such as lubricating oils or of petrochemical feedstocks.

  • Measurements

    Not every nation measures barrels per metric ton equally. The quick estimate for U.S. business is 7 barrels / 300 gallons per metric ton of oil. The actual number of barrels per metric ton will be different for different types of crude oil.

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    Upstream Operations

    Extraction of oil from a sub-surface reservoir is known as "upstream" operations.
  • The process usually begins with a surface inspection within a geographical area that has the preconditions for petroleum or natural gas to be located beneath the surface. The area is first surveyed by aerial and satellite photographs
  • Surface tests include Gravimetry (measures gravity, to give some idea of the nature and depth of strata depending on their density) and Magnetometry (generally performed from the air, measures variations in the magnetic field).
  • Offshore, compressed air is used to blast sound waves to the ocean floor, which are then picked up by under water microphones, whixh is then used to map the formations on the ocean floor.
  • A drilling rig then sinks (drills) a shaft / borehole to obtain sub-surface samples. Drilling rigs can be higly mobile equipment mounted on trucks, tracks or trailers, or more permanent land or marine-based structures (such as oil platforms, commonly referred to as offshore oil rigs). Offshore rig types include:
  • Fixed platform (up 1,400 ft. depth)
  • Compliant tower (1,800 ft. depth)
  • Drill barge
  • Drillship / FPSO / Floating Production, Storage and Offloading (4,500 to 8,500 ft. depth)
  • Inland barge
  • Jackup
  • Mini TLP / Mini Tension Leg Platform (3,300 to 4,300 ft. depth)
  • Semisubmersible (FPS / Floating Production System, 7,600 to 8,000 ft. depth)
  • Spar (5,600 to 8,000 ft. depth)
  • Subsea system
  • TLP / Tension Leg Platform (4,500 to 5,000 ft. depth).
  • The offshore contract drilling industry is a highly competitive and cyclical business, directly related to the demand and available supply of drilling rigs, and characterized by substantial capital and maintenance costs. Drilling contracts are traditionally awarded on a competitive bid basis. The offshore market utilizes jackup rigs, semisubmersible rigs, and the very large, ultra-deepwater semisubmersible rigs that can operate in deep water (10,000 feet to 12,000 feet), and extreme weather conditions. The deeper the water and the lower the depth of the well, the larger the rig has to be in order to handle the additional equipment, electricity generators, casings, pipes, drilling mud, machinery, fuel (diesel and/or gas), personnel, living quarters, and food and water.

    After a particular location is identified, a rig that is to provide exploratory and production services is towed to the location and then either moored to the seafloor by cables or it must be kept in place by platform thrusters connected to a GPS system.

    On the floating oil platfroms / rigs there are some unique problems related to the design and operation of the rig. First, the initial lowering of the drill bit and shaft from the ocean surface to the correct position on the ocean floor is very difficult. There have been substantial improvement in GPS positioning of the rig itself but currents on the bottom can move the bit around. Secondly, it is essential that the platform thrusters (located on each corner of the platform) work against the ocean currents to keep the platform positioned. If the platform moves too far off center from the drill shaft / drill string, then the shaft can actually bend or even break. It is not uncommon for a drill string to bend as much as 60° off vertical due to the depth and pressure.

    On the floating rig, there is a derrick located on the platform, which is used to assemble and lower the risers and the drill string.

  • If the rig is large enough, there may separate derricks for the casings and a separate derrick for the drilling.
  • The riser is the stell or aluminum pipe casing, which is connected from the rig to the wellhead and blowout preventer on the seabed, and is the counduit through which the drill string is directed toward the seabed. the individual aluminum pipe casings that make up the riser are connected by ball and slip joints so that they are flexible enough to bend with the movement of the rig.
  • The drill string is the interlocking 30 foot / 600 pound sections of steel pipe with the drill bit at the bottom, which descends through a drill floor on the platform.
  • The moon pool is an opening located below the drill floor (usually in the center of the rig), which allows the drill string to enter the riser.
  • There is a slip ring collar around the top of the riser exposed above the ocean surface and connected to the platform, which is attached to several shock absorbers. The rig tends to rise and fall with the wave motion, and the collar / shock absorbers keep the drill string taut during the descent and drilling.
  • The drill string turns clockwise, and a new 30 foot section is added every few minutes.
  • The driller's cabin on the floating rig is the location of the control and monitoring equipment of the drill string. It is not uncommon for a drill string to turn 24 hours a day, seven days a week, and is only halted in the event of mechanical problems or until the desired depth is reached.

    In order to allow the drill to begin to descend below the seabed:
  • A steel casing with a wellhead is installed in the seabed.
  • A blowout preventer is then connected to the wellhead, which combined with the wellhead is referred to as the seafloor assembly.
  • The riser is connected to the seafloor assembly.
  • The drill string is fed through the riser, the seafloor assembly, and the casing until it reaches the seabed.
  • As the drill bit turns and the drill string continues to descend, drilling mud (which is synthetic) is forced down the riser, the casing, and the bore holes in order to cool and lubricate the drill bit, and to flush rock cuttings from the drill bit to percolate back up to the surface through the mud.
  • Cutting samples are collected and catalogued and then examinied under a microscope and black light to determine the fluoresce (presence of petroleum).
  • A cleaning tool, known as a junk basket, is lowered into the drilling holes from time to time in order to remove drilling debris from the hole.
  • The drilling technology of "directional drilling" has improved substantially such that pipe that is curved just a few degrees can be added to together to eventually develop a horizontal bore hole, which provides greater access to oil-laden geographical zones.
  • Pressurized valves, referred to as Christmas Trees in the industry, are placed over producing wells. These pressurized valves control the flow of oil and natural gas coming from the well(s). Several wells are connected by pipe to a manifold, which is a collection point for oil and natural gas coming out of the various welll(s) connected to the manifold. The oil and natural gas is then pumped to a larger cassion located on the seabed, which is a holding tank that separates the oil and natural gas.

    On the seafloor, all work of installing equipment, connecting pipes, and opening and closing valves is completed by Remotely Operated Vehicles (ROV) from the ships and platforms on the oceans surface.

    When all of the pilot wells are drilled, the rig is then towed away and a spar (production platform) is towed to the location and moored to the seafloor. Production risers, for both oil and natural gas, from the cassions located on the seabed are connected to the spar on the ocean's surface, which functions as a preliminary location for impurities to separated out of oil and natural gas from the wells. The oil and natural gas are then pumped from the spar back down risers that are connected to pipelines that extend along the seabed to onshore processing plants.

    Downstream Operations

    Most of the oil fields are located in countries, and regions within those countries, where the largest consumers of the petroleum are not located or the capacity does not exist for product refinement. Thus, the oil must be transported over long distances. The most economical method of transporting oil is by pipeline. Petroleum pipelines are usually located under ground or run along the sea bed. In arctic regions the pipelines are laid above ground on stilts due to the permafrost.

    For instance, crude oil extracted within the Caspian Sea region is pumped through the Baku-Tbilisi-Ceyhan pipeline (approximately 1,100 miles in length; operated by BP) from Azerbijan to Turkey. A second pipeline, the Baku-Supsa (operated by BP) extends from Azerbijan to Georgia.

    Enbridge Pipelines Inc. (Canadian portion of the Enbridge crude oil mainline) and Enbridge Energy Partners, L.P.'s Lakehead System (United States portion of the mainline) is the longest petroleum pipeline in the world, the primary transporter of crude oil from Canada to the United States, and consists of approximately 8000 kilometres (5,000 miles) of mainline pipe in Canada, and 3,500 miles (5600 kilometres) of mainline pipe in the United States (the pipeline sections extends from Edmonton, Alberta in the northwest to Toronto, Ontario, and Montreal, Quebec in the east, and as far south across the border in Cushing, Oklahoma.

    Floating Production Systems (FPSs) and Floating Production, Storage and Offloading vessel (FPSO) are large, ocean going marine vessels that are either owned or leased and conduct exploration, production and servicing of deep water wells.

    Regulators normally keep a close watch over storage operators so that they accurately indicate the amount of crude oil held in storage tanks so that they do not manipulate the futures market. For instance, in the United States no single company is allowed to dominate ownership control of storage tanks in Cushing, Oklahoma, the delivery point for the NYMEX light sweet crude contract.

    U.S. Production

    The U.S. Department of Energy, Energy Information Administration (EIA), indicates U.S. crude petroleum output increased from 5.5 million barrels per day in 2010 to 9.2 million barrels per day as of December 31, 2015. Most recently, in response to increased U.S. production, and continued production by OPEC and non-OPEC producers alike, the benchmark Brent Crude Spot Price went from the most recent high of $115.19 per barrel in June 2014 to $36.61 per barrel at year-end 2015, and reaching a low of $26.01 during mid-January 2016.

    Canada is the largest crude exporter to the U.S., sending 3.2 million barrels a day this year to the United States, of the 3.8 million barrels a day it produces, according to the Canadian Association of Petroleum Producers. CAPP expects Canadian production to increase to 4.9 million barrels a day by 2030.

    In the United States lower 48 states, historically, oil was first extracted from the Pennsylvania and Ohio region and then moved to Permian Basin region, which is located in the West Texas and southeastern New Mexico area (which is still an active production area). The United States has quite a number of older oil wells from which stripper oil is produced: wells that are nearly exhausted and produce approximately 10 barrels per day.

    The most recent notable source of total discoveries of petroleum is in North Dakota in the Bakken shale and the underlying Three Forks formation. The U.S. Geological Survey (USGS) presently indicates that the Bakken formation may contain 4.3 billion barrels of recoverable oil. Oil industry analysts indicate that the USGS estimate may be low. Operators can produce oil from the Bakken using the same horizontal drilling and hydraulic fracturing techniques used so widely for natural gas shale production. Production is approximately 450,000 barrels per day (North Dakota is the 4th larest petroleum producing state in the U.S. after Texas, Alaska and California), and there is presently insufficient oil pipeline capacity and the bulk of the petroleum is moved by tanker truck and railroad. The Bakken Oil Express Rail Hub in Eland, North Dakota, became operational in October / November 2011. Correspondingly, there is a shortage of curde oil tank railroad cars and lease rates have increased substantially.

    The percentage of production from offshore wells in the Gulf of Mexico is also projected to continue to increase, however these wells will be located in ever deeper water (approximately 150 to 200 miles off the coast in water over 4,000 feet in depth with wells drilled as deep as 15,000 to 25,000 feet; the recently explored Tahiti Field and the Jack Field are even deeper, over 35,000 feet). The level of oil production within the Gulf has more than doubled over the past ten years (just under 2 million barrels per day), increasing to almost 30% of total domestic U.S. oil production. Leases on shallow water and deep water tracks are awarded to companies by a bidding process overseen by the U.S. government. The companies are responsible for any and all exploratory and drilling costs. The advantage of having a successfully producing well in the Gulf is its proximity to refining operations in Texas and Louisiana and the elimination of political risk. However, U.S. natural gas resources located in Federal offshore areas are subject to federal government access restrictions.

    Access to drilling in the U.S. territorial waters of the Gulf of Mexico (GOM) area is managed by the Minerals Management Service (MMS) of the U.S. Department of the Interior. The gulf is, administratively, divided into the Western Planning Area, the Central Planning Area, and the Eastern Planning Area and blocks are auctioned by the MMS on a periodic basis in a Federal Oil and Gas Lease Sale. Most of the development is in the Central and Western GOM regions (there is a moratorium on drilling along the western Florida coast). The Western and Central GOM are further subdivided into tracts known as the Lake Charles District, Lake Jackson District, Lafayette District, New Orleans District, Corpus Christi District, Houma District.

    Some of the unique problems related to operating in the Gulf of Mexico include:
  • Annual hurricane season, which can shut down operations with the length depending on anything from a simple evacuation of personnel to severe damage to platform structure.
  • Substantial currents, which can move a platform around regardless of the wire tethers and platform thrusters, can affect drilling schedules.
  • Expense related to the lease and operation of the floating platform.
  • The ocean floor of the Gulf has a substantial salt deposit sub-layer that affects seismic readings.
  • At a depth of 35,000 feet, the termperature of the oil can actually range between 300° to 400° F.

  • Refined Products

    Crude oil is made up of a mixture of hydrocarbons (CnHn), thus the first and basic refining process is aimed at separating the crude oil into its "fractions," the broad categories of its component hydrocarbons. Each of these categories boils at higher temperature ranges, until the oil will not boil without thermally decomposing. Crude oil is heated and put into a still (a distillation column) and different fractions (products) boil off and can be recovered at different temperatures.

  • The lighter products, liquid petroleum gases (LPG), naphtha, and so-called "straight run" gasoline, are recovered at the lowest temperatures.
  • Middle distillates, jet fuel, kerosene, distillates (such as home heating oil and diesel fuel) come next.
  • Finally, the heaviest products (the non-boiling frations are called residuum or residual fuel oil) are recovered, sometimes at temperatures over 1,000° F.
  • Most refineries in the United States reprocess the heavier fractions into lighter products to maximize the output of the most desirable products. A catalytic cracker, for instance, uses the gasoil (heavy distillate) output from crude distillation as its feedstock and produces additional finished distillates (heating oil and diesel) and gasoline. Sulfur removal is accomplished in a hydrotreater. A reforming unit produces higher octane components for gasoline from lower octane feedstock that was recovered in the distillation process. A coker uses the heaviest output of distillation, the residue or residuum, to produce a lighter feedstock for further processing, as well as petroleum coke.
  • Catalytic hydrocracking is the refining process that uses hydrogen and catalysts with relatively low temperatures and high pressures for converting middle boiling or residual material to high octane gasoline, reformer charge stock, jet fuel, and /or high grade fuel oil. The process uses one or more catalysts, depending on product output, and can handle high sulfur feedstocks without prior desulfurization.

  • A barrel of oil yields these refined products (percent of barrel):
  • 47% gasoline for use in automobiles
  • 23% heating oil and diesel fuel
  • 18% other products, which includes petrochemical feedstock?products derived from petroleum principally for the manufacturing of chemicals, synthetic rubber and plastics
  • 10% jet fuel
  • 4% propane
  • 3% asphalt
  • (Percentages equal more than 100 because of an approximately 5% processing gain from refining.)