tag:blogger.com,1999:blog-14303021899876829332024-03-20T05:00:05.936-04:00Inside the PatchFrom where I sit, the oil industry looks monolithic - but it isn't. If you want the real story instead of the Fox News story on the "awl bidness," maybe I can help.Steven Mrakhttp://www.blogger.com/profile/06895351856452438924noreply@blogger.comBlogger16125tag:blogger.com,1999:blog-1430302189987682933.post-1517296074123094362009-10-30T13:11:00.000-04:002016-11-27T13:16:36.108-05:00Why Does Gasoline Cost So Much, Daddy?<div dir="ltr" style="text-align: left;" trbidi="on">
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<b>Basics of the Petroleum Industry VI: <i>The Economics of Big Oil (and Your Local Gas Station)</i></b><br />
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For most of us, our chief exposure to the economics of the oil industry comes in the form of two-foot-high letters displayed somewhere along the streets we travel to work or play. Though we may not know the current price of a barrel of crude oil¹ - may not even know how big a barrel of oil is² - we are usually aware of the price of gasoline in our neighborhood. What most of us don't know, as a rule, is why gasoline costs what it does. The answer is simple on the surface, and devilishly complex below that simple answer. <br />
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<td>One simple fact is that oil companies, no matter how large or small, do not set the price of their product. Crude oil and refined products are commodities, like corn and pork bellies; and the price of commodities are by commodity traders who broker deals between sellers and buyers. Traders perform a balancing act between the least a seller will accept for the product and the most a buyer will pay for it. According to the law of supply and demand, buyers will pay more for a commodity when supply decreases. That's why whenever there is a restriction in the supply of oil production within or imports to the USA, the price rises. Even more, whenever there is fear of a reduced supply - due to weather, natural disaster, or political instability - the price also rises. In fall of 2008, the price of oil fell dramatically because of the belief that that economic upheaval would reduce demand for petroleum in large markets like Southeast Asia. The same supply and demand cycle affects beef and milk (mad cow disease, anyone?) and corn and soy beans: like farmers who are paid less for crops after a good growing season, oil companies get less for their product when the supply exceeds the demand.</td>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh-4zK8ZSWzmFj-8U-cks2Dm1JnV_vmSI_SPSCcMXp9uOk-s5UceHmOqPb5WgJZCd9LhziyBDJO6lslu3MWfemvQoq1s7rlpMexTLBt51VGTorII8US2-lPsSEQNeJ-HZr-APCrFR2Lplc/s1600/gas-pump.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="132" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh-4zK8ZSWzmFj-8U-cks2Dm1JnV_vmSI_SPSCcMXp9uOk-s5UceHmOqPb5WgJZCd9LhziyBDJO6lslu3MWfemvQoq1s7rlpMexTLBt51VGTorII8US2-lPsSEQNeJ-HZr-APCrFR2Lplc/s200/gas-pump.jpg" width="200" /></a>Remember, too, that the cost of the raw materials (crude oil) is only about 65% of the price of your gasoline: there are also the costs of transporting the crude oil to a refinery, refining it, and transporting the refined product to your local station; not to mention the cost of the additives, most of which are also petroleum products. Besides the cost of producing, transporting, and refining the gasoline you bought on the way to work today, the station that sold you that gasoline also has to pay for the property and building (a small station can easily cost more than a million dollars to build and equip), employees, and the rights to sell that particular brand - very few stations that sell Exxon gasoline, for instance, are owned by the company. Most are owned by local business-men and -women. Oh, and one more cost: taxes. On top of a federal tax of 18.4 cents per gallon, every state (and some large cities) also charges "road-use" taxes. Depending on where you live, taxes range from a total of 26.4 cents/gallon (Alaska) to 65.8 cents/gallon in California (see a list of US state tax burdens <a href="http://www.api.org/statistics/fueltaxes/%20">here</a>). Internationally, except for a few petroleum-exporting countries such that subsidize the price of gasoline (<i>e.g.</i>, Venezuela and Saudi Arabia), taxes can be even higher; though the proceeds are frequently used to pay for public transportation.<br />
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Remember the twenty gallons of gasoline that cost you fifty bucks this morning? The station probably made less than a dollar of net profit - that's why they want you to come inside and buy snacks in their convenience store. Back in the mid-nineties, when oil was at nine dollars per barrel, the company I worked for made most of its profit off "The four Cs"- cigarettes, coke, chicken, and condoms - in their chain of convenience stores, and actually lost money selling gasoline. If you really want to make a gas station owner happy, come inside and pay $1.59 for a bottle of water after you're done pumping - you may double his profit on your visit.<br />
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<td>What should you take away from this? First, oil companies don't set the price of their product -- they're at the mercy of the law of supply and demand. Sure, when prices are set high they can rack up substantial profits, but when prices fall, they'll take it in the shorts. Second, the guy in the local gas station doesn't arbitrarily jack up the price to try to fleece you: the station owner has plenty of costs to cover, not just the price of the raw material - and it's fairly likely that the station isn't making a great deal of money off the sale of gasoline in the first place.</td>
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<td><a href="https://www.amazon.com/dp/B00DBYBNEE/ref=as_li_ss_il?ie=UTF8&linkCode=li2&tag=scmrak-blgr-20&linkId=90e1d4d3f582ff50473a17ae61f6aeb6" target="_blank"><img border="0" src="//ws-na.amazon-adsystem.com/widgets/q?_encoding=UTF8&ASIN=B00DBYBNEE&Format=_SL160_&ID=AsinImage&MarketPlace=US&ServiceVersion=20070822&WS=1&tag=scmrak-blgr-20" /></a><img alt="" border="0" height="1" src="//ir-na.amazon-adsystem.com/e/ir?t=scmrak-blgr-20&l=li2&o=1&a=B00DBYBNEE" style="border: none !important; margin: 0px !important;" width="1" />
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This is number six in a series of minilectures on the oil industry:<br />
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1) <a href="http://insidethepatch.blogspot.com/2009/09/where-does-oil-come-from-basic.html">Where Does Oil Come From?</a><br />
2) <a href="http://insidethepatch.blogspot.com/2009/09/where-do-oil-companies-find-oil.html">Where Do Oil Companies Find Oil?</a> <br />
3) <a href="http://insidethepatch.blogspot.com/2009/09/how-do-oil-companies-find-oil-basic.html">How Do Oil Companies Find Oil?</a><br />
4) <a href="http://insidethepatch.blogspot.com/2009/09/economics-of-oil-industry.html">The Economics of Petroleum Exploration and Production </a><br />
5) <a href="http://insidethepatch.blogspot.com/2009/10/oil-industry-basics-refineries-and.html">Refining </a><br />
6) <i><b>The Economics of Big Oil </b></i><== You are here. The next installments is:<br />
7) The Future of Oil <br />
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¹ If you're curious, it's displayed to the right of this blog entry (assuming the gadget is working today)<br />
² A barrel is 42 US gallons, a smidgen less than 159 liters, or just under 35 imperial gallons. It's a unit of measurement, however, not a physical container: petroleum and petroleum products aren't poured into 42-gallon drums and shipped; it's pumped into large tank trucks, rail cars, and tanker ships; or they're pumped in a continuous stream through a pipeline.</div>
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Steven Mrakhttp://www.blogger.com/profile/06895351856452438924noreply@blogger.com0tag:blogger.com,1999:blog-1430302189987682933.post-6882440748137914262010-06-02T08:49:00.000-04:002016-09-19T08:10:30.551-04:00Boycott BP! Boycott BP! Boycott BP! (and hurt small businesses instead)<div dir="ltr" style="text-align: left;" trbidi="on">
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The execs at Goldman-Sachs must be the only people in America hoping that oil will keep pouring from the <b>BP Macondo </b>well off Louisiana indefinitely. After all, up until April 2010, the billionaires on Wall Street were the most detested people in the country for the lavish bonuses they gave themselves just a year after contributing heavily to the destruction of the US economy, not to mention unemployment approaching 10%.<br />
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All that’s changed now: the most hated company in the USA is now BP. <b>Big Oil </b>(or as they call it in Texas, “the awl bidness”) has never been a public favorite. Maybe it’s because few (if any) other industries post the price of their products on every street corner; a product that most people buy as regularly as any heroin addict buys that nickel bag. Maybe it’s that so many people are just a little ashamed of their gasoline addiction… Or maybe it’s just that so many people don’t really understand the oil business. <br />
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That last is probably why almost every time an oil company incurs public ire, somebody decides it’s time to boycott their brand of gasoline. The cries of “<b>Boycott</b>!” rang out in 1989 after the Exxon Valdez ran aground in Prince WIlliam Sound, Alaska. When gasoline prices topped $4.00 per gallon in 2008, the same folks suggested that we all “boycott big oil." Presumably everyone would buy gas from “little oil” – whoever that is - instead.<br />
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<td>The concept of a boycott – refusing to buy gasoline from service stations and convenience stores that sell BP’s brands (BP, Amoco, and AM-PM among them) – seems simple and direct. If enough people take their business elsewhere, BP’s sales will dry up and the company will pay for their various sins.<br />
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That would work – if BP made their money off of selling gasoline. The central problem with the idea of punishing BP by buying gasoline from the Shell station across the street is that BP isn’t a gasoline company. It’s an OIL company: they make those “obscene” amounts of money by selling crude oil. <br />
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A barrel of crude oil sells (today, at least) for somewhere around seventy dollars. BP – just like ExxonMobil, Shell, Total, ConocoPhillips, even Mom 'n' Pop Oil and Gas R Us – sells crude oil on the open market. The oil that BP sells arrives at a refinery in a pipe (not in a metal barrel) mixed with oil that’s of similar quality produced by other companies. That refinery might belong to BP – it also might belong to Marathon, Sun, or a local refiner like Lassus Brothers.</td>
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Once refined into gasoline; diesel; heating oil; and feedstocks for a host of other products like plastics, pharmaceuticals, and makeup; the product made from BP’s oil go into tanker trucks and pipelines. Gasoline goes into pipelines that run from refineries to terminals scattered around the country. At those terminals, tank trucks from various companies fill up from huge storage tanks. The difference between companies is not where the oil that made the gasoline comes from, it’s in the chemical additives that are added to the gasoline after it leaves the terminal. That’s when Chevron adds “techroline” or Exxon adds a few drops of tiger. <br />
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It is impossible to track a gallon of gasoline back through the terminal and up the pipeline to the refinery and thence to the well from which the crude oil was pumped. A gallon of gas bought at your local RoadRunner or Chevron is exactly as likely to have come from a BP well as one bought at a BP-branded station.<br />
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BP’s largest cashflow from stations and C Stores bearing one of their brand names is franchise and liccensing fees: only about one in thirty stations is owned by the company's retail division. Those fees will stay the same whether a station is boycotted or not. <b><i>BP’s real cash flow comes from selling crude oil</i></b>, so as long as the demand for crude that’s been refined into gasoline remains the same, BP’s profits will be unaffected – because when you pull into a different station, you’re still buying gasoline refined from oil sold by BP!<br />
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<td>A boycott of all BP stations (and it’s a safe bet that most would-be boycotters don’t even know which brands BP licenses) will have a minimal effect on BP at best. A boycott would have a far greater effect on local small businesses. The vast majority of gas stations and convenience stores are franchises owned by a local businessman. The stations’ employees are locals, too: punishing these little guys just because their uniform shirt says “BP” is just ignorance of how the oil business works.</td>
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Steven Mrakhttp://www.blogger.com/profile/06895351856452438924noreply@blogger.com0tag:blogger.com,1999:blog-1430302189987682933.post-26564564811202249062009-09-05T12:32:00.000-04:002015-12-16T06:34:42.556-05:00Where Do Oil Companies Find Oil? Basic Petroleum Geology, Part II<div dir="ltr" style="text-align: left;" trbidi="on">
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<b>The Essentials for an Oil Field: Source, Reservoir, Trap, and Seal</b><br />
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<a href="http://insidethepatch.blogspot.com/2009/09/where-does-oil-come-from-basic.html">Last time</a>, we learned how oil (petroleum) forms: it’s a slow process by which an oil <i><b>source </b></i>– a rock full of ancient plant and animal life - transforms deep underground, over hundreds of thousands or millions of years. The long time this takes explains why, on a human scale anyway, oil is a non-renewable resource. Geologists call this “cooking,” and even call the deeply-buried area a “kitchen” or a cooking pot. To extend that metaphor, after we cook dinner, it has to be brought to the dining table so we can eat. In the world of oil and gas, our dining table is what is called a reservoir.<br />
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Remember that one of the four things needed to turn organic matter into oil is pressure? Well, you can imagine that with thousands of feet of rock on top of it, our source layer has been subjected to a lot of pressure. At about the same temperature, pressure, and time that our oil finishes cooking; water trapped in the buried layers starts moving, pushing the newly-generated oil ahead of it. That happens because oil and water don’t mix, just like an oil and vinegar salad dressing never quite mixes. The water and oil move from the source bed into adjacent rock layers with tiny cracks, or tiny spaces between the grains. From there, all that oil and water has one purpose: to move to the surface, a movement called migration (did you know that petroleum migrates, just like birds and butterflies?). This step, like the cooking process, is very long and slow.<br />
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At this point, we need to talk about rocks for a minute. Oil-bearing rocks are almost always the kind of rocks called sedimentary, which form huge layers like some Texas-sized wedding cake. To our moving oil and water, each layer is one of two kinds of rock: it’s a reservoir or a seal. The difference is that a seal is impermeable to fluids like oil and water, meaning that it won’t allow them to move through it, forming a barrier. A <i><b>reservoir </b></i>is permeable, however, and fluids can move through it, either when migrating out of the kitchen or someday moving into a well. Our big slug of oil and water starts out in the deep parts of sedimentary basins, which are shaped much like what they’re called: gigantic shallow bowls. All those layers of rock are slightly tilted, following the curve of that bowl’s sides from rim to bottom. This allows our oil and water to keep moving toward the surface even when it can’t go straight up. Sometimes it makes it all the way to sunlight, forming an oil seep like the world-famous La Brea Tar Pits near Los Angeles in the USA. <br />
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Most of the time, however, our mix of oil and water runs into some sort of physical barrier. That barrier brings the migration to a stop. The permeable rock through which the oil and water have been migrating might run into a geological wall, in the form of a fault such as the San Andreas Fault (also near Los Angeles). This is quite literally a dead end, and those fluids get trapped because they can’t reverse course and go back downhill. The rock layer through which our fluids are migrating might end for other geological reasons, one of which is that the conditions for the layer’s creation or deposition did not exist everywhere. Again, the moving fluids become trapped because they can’t go backwards. A common occurrence is that all those sedimentary layers become crumpled or folded near the edges of our basin, forming sort of a three-dimensional roller coaster shape. The fluids migrate uphill into high spots, but then they can’t move down. All of these situations are common forms of <i><b>traps </b></i>– the third component needed for an oil field. If you think about it, though, the oil could just move sideways or across whatever is in the way – that is, it could move, unless there are layers of impermeable rocks or <i><b>seals</b></i>, surrounding it. <br />
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So to recap, to make petroleum you need a source of organic carbon that can be cooked in a huge geological pressure cooker. Once our dry bits of organic carbon are transformed by heat, pressure, and time into liquid petroleum; it (along with a lot of water) starts searching for a route to the surface. This is migration, when fluids move out of the source layer and into a layer that lets natural uphill movement happen. This rock layer, which is permeable to oil and water, is reservoir rock. If that reservoir rock ends or gets bent back downhill at some point, then the moving fluids are caught in a trap. They can only stay trapped, though, if there are non-reservoir rocks surrounding the trap that prevent them from moving straight up or going out the sides of the trap. These are the seals. Those are the four essential parts of an oil deposit: reservoir, source, trap and seal.<br />
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One more point to consider: sometimes people think of oilfields as underground lakes and rivers, but this is not the case. Oil is found in reservoir rocks, not in puddles and pools. A reservoir rock looks just as solid as any other rock, but under a microscope you’d see that it’s really made of tiny grains, and between those grains are even tinier empty spaces. You can make a model of a reservoir rock by dumping a handful of marbles into a water glass – there are lots of odd-shaped spaces left over because the marbles are spheres and don’t fit together like puzzle pieces. If you pour water into that marble-filled glass it can fill those void spaces, which geologists call pores. In good reservoirs, pores occupy 25% or more of the rock’s total volume; all filled with oil and water. That might not seem like much when you hold a single rock in your hand, but an oil field is a lot bigger than your hand. A good-sized oil field is miles across and the reservoir layers can be hundreds of feet thick. If you don’t think that’s a lot, let’s do the math: 25% of the volume of a cylinder one mile in diameter and 100 feet thick is still almost 180 million cubic feet! So zillions of spaces so tiny you can’t see them still add up to a whole lot of volume – and that’s where oil fields come from.<br />
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Now that we know how an oil reservoir is found, next time we’ll look at how oil companies find reservoirs.<br />
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This is the second of a series of minilectures on the petroleum industry from the ground up<br />
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1) <a href="http://insidethepatch.blogspot.com/2009/09/where-does-oil-come-from-basic.html">Where does Oil Come From?</a><br />
2) Where do Oil Companies Find Oil? <== You are here. Future installments include:<br />
3) <a href="http://insidethepatch.blogspot.com/2009/09/how-do-oil-companies-find-oil-basic.html">How do Oil Companies Find Oil?</a><br />
4) <a href="http://insidethepatch.blogspot.com/2009/09/economics-of-oil-industry.html">The Economics of Petroleum Exploration and Production</a><br />
5) <a href="http://insidethepatch.blogspot.com/2009/10/oil-industry-basics-refineries-and.html">Refining</a><br />
6) <a href="http://insidethepatch.blogspot.com/2009/10/why-does-gasoline-cost-so-much-daddy.html">The Economics of Big Oil</a><br />
7) The Future of Oil</div>
Steven Mrakhttp://www.blogger.com/profile/06895351856452438924noreply@blogger.com0tag:blogger.com,1999:blog-1430302189987682933.post-67499083205011176932009-09-10T19:13:00.000-04:002015-11-17T15:13:30.336-05:00How Do Oil Companies Find Oil? Basic Petroleum Geology, Part III<div dir="ltr" style="text-align: left;" trbidi="on">
<b>The Hunt for Hydrocarbons</b><br />
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Last time, we learned that four things are necessary to create and capture oil. Those four are, an organic carbon-rich <i><b>source </b></i>that gets “cooked” deep underground; a <i><b>reservoir </b></i>rock layer with bazillions of tiny empty spaces to hold liquid petroleum and water; a shape to the underground rocks that will <i><b>trap </b></i>the fluids in a confined space; and non-reservoir (impermeable) rocks to <i><b>seal </b></i>the hydrocarbons inside the trap. Now that we know which puzzle pieces have to join to create an oil field, to find oil we have to look for places where all four pieces are present. <br />
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Scientists who work for oil companies will tell you, “There is no direct hydrocarbon indicator.” That’s a fancy way of saying that there is nothing we can see or measure that lets us just point to a spot and say, “Drill here!” and know that we’ll strike oil. Instead, we have to study blurry images of the rocks deep beneath the surface and use training and experience to interpret them. That’s how we hunt for places where source, reservoir, trap, and seal all come together in the right relationships.<br />
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<b>The first people to use oil found puddles where it had leaked out on the ground’s surface</b>, like at La Brea Tar Pits in California, USA. Oil found at the surface, however, is usually gummy and thick because it’s been exposed to air and water; so early use was often as salves and medicines (not a good idea, really, since petroleum is an organic poison). Not only that, but the amount available in these leaks, or "seeps," is small. Early entrepreneurs dug wells by hand near seeps looking for larger deposits and, when they were successful, also noticed that the oil was higher quality – it was lighter and thinner, and could be burned in a lamp, for instance. The first successful drilled oil well in North America, the Drake #1 in Pennsylvania, was located near a surface seep. The presence of a seep is the closest thing there is to a direct hydrocarbon indicator, but we still have to figure out which direction to go if we want to find the good stuff!<br />
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As we entered the age of oil, demand grew faster than wells drilled or dug near a few surface seeps could supply it. Short supply means higher prices, and this bigger payback for the work ushered in an era of surface mapping to hunt for oil. By studying the shapes and order of rocks exposed at the surface, early oil-company <i>geologists </i>(scientists who study the earth) could identify possible traps in the crumpled layers around basin edges. Drilling holes in geological structures – bent or broken sedimentary rocks - caused a boom in oil exploration in the early twentieth century. This method also introduced the oil-seekers to risk: even though a trap is visible, that doesn’t mean that the other three pieces of the puzzle are present. If there’s no reservoir rock, there can be no oil accumulation. If there’s no source, there is nothing to put in a reservoir. And if there is no seal, anything that does enter a trap simply leaks out. Early “wildcatters,” as oil-drillers were called, either learned how to identify which structures had the best chance of all four components being present, or they went broke drilling “dry holes.”<br />
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</td><td><b>Where there’s money to be made, technology soon comes along to make it easier </b>(or not as hard) to earn it. This has happened in the “oil patch” many times. The first big leap in exploration came soon after World War I began, when French scientists developed a way to record the order and thickness of rock layers encountered in a well, and well logging was born. Well log measurements were soon invented that helped scientists figure out which deeply buried rocks are sources, reservoirs, or seals. Almost a century later, well logs are still used to help geologists understand the rocks in the subsurface, though the sorts of information collected today are much more complex than the first logs.</td></tr>
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Just before World War II, there was second forward leap in exploration. Research scientists devised a way to bounce sound waves off underground layers, and record the waves that return to the surface. By carefully measuring the time it takes for that sound to return, scientists can create a sort of “sound image” similar to the layering of the rocks underground. This method, called seismic exploration, created a new field for scientists who called themselves <i>geophysicists</i>. The new tool came along just in time: geologists doing surface mapping had found most of the fields visible on the ground. With seismic tools, the two groups of scientists – geologists and geophysicists – could work as a team to identify traps that aren’t visible from the surface. <br />
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<b>Today, geologists and geophysicists work together </b>exploring for oil fields using powerful computers and special software. Exploration geologists and geophysicists are like detectives: they spend their days following subtle clues, putting together complex puzzles for which there are never enough pieces – and when they’re done, the ultimate test of their puzzle-solving skill is an exploration well. As a famous geologist said more than fifty years ago, “All the easy oil has been found.” These days, the hunt for oil involves months and years of painstaking work by highly-trained professionals using state-of-the-art technology. Even with all that power brought to bear on the problem, only about one of every eight exploration wells drilled finds enough oil to pay the cost of the well. <br />
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And here you thought all they had to do was stick a pipe in the ground…<br />
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This is the third of a series of minilectures on the petroleum industry from the ground up<br />
<br />
1) <a href="http://insidethepatch.blogspot.com/2009/09/where-does-oil-come-from-basic.html">Where Does Oil Come From?</a><br />
2) <a href="http://insidethepatch.blogspot.com/2009/09/where-do-oil-companies-find-oil.html">Where Do Oil Companies Find Oil?</a> <br />
3) How Do Oil Companies Find Oil? <== You are here. Future installments include:<br />
4) The Economics of Petroleum Exploration and Production<br />
5) Refining<br />
6) The Economics of Big Oil<br />
7) The Future of Oil<br />
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Steven Mrakhttp://www.blogger.com/profile/06895351856452438924noreply@blogger.com0tag:blogger.com,1999:blog-1430302189987682933.post-17847065877485078302014-01-21T10:14:00.000-05:002014-01-21T10:25:17.567-05:00Peak Oil Theory: The "When" Keeps Shifting<div dir="ltr" style="text-align: left;" trbidi="on">
For some reason petroleum geologists keep working, even though they know they're working their entire profession out of a job. It’s a simple equation, really: petroleum geologists spend their entire careers hoping to find more oil. The problem is that the amount of oil in the world is finite. That means that each new discovery is one more step on the path to depletion of that resource and to unemployment for the profession as a whole.<br />
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Back in the fifties, a geologist for Shell Oil named M. King Hubbert wondered how long it would be until that day happened, so he scribbled down some rough calculations. The answer was surprising enough that he decided to share his thoughts, so in 1956 Hubbert published the theory we now call "Peak Oil."<br />
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You've probably heard that <b>Peak Oil Theory</b> predicts when the world will run out of oil, but that’s not correct. Peak Oil doesn't predict the end, it predicts the beginning of the end. Since the very first barrel ever produced, the rate at which it's pumped from the ground has been constantly rising. The theory says that this continuous increase must eventually level off, then start to decline. That day's the “peak” in the theory's name. Since Hubbert was more familiar with the "awl bidness" in North America than worldwide, he put together a curve predicting a peak in U.S. oil production in the period 1965 to 1970. What worries some people is that the curve was right: U.S. oil production reached an all-time high in 1970 and, except for a brief resurgence in the late '70s, steadily declined -- until just recently.<br />
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The theory says that a similar pattern in world production must also occur some day, because the supply of oil is finite (adherents of those cockamamie abiotic oil theories can stop reading now). The question is not <u>if </u>that peak will be reached, it is <u>when</u>. That’s the most important question, because once world production starts to decline, supply and demand will be out of balance and the price of hydrocarbons will begin to rise. Some economists think it won't stop rising. That leaves us with an important question: how to determine the "when."<br />
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You need to evaluate a multitude of variables to generate a Hubbert curve for the entire world. To predict a peak in worldwide production, someone must calculate the existing petroleum reserves. estimate future consumption and guess at reserve replacement. Consumption is the easiest to predict, and even it's controlled by many factors. We were reminded of that most recently when the world economy took a nose dive in 2008, at which time oil prices dropped by seventy-five percent in a matter of weeks. The difficulty of predicting consumption is trivial, however, when we compare it to the problem of assessing current reserves.<br />
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“Reserves” means the volume of unproduced oil under company’s (or a country's) control that can be extracted with current technology. Reserve values are always an estimate, and the numbers change as technology improves or the boundaries of reservoirs are redrawn. Most countries with large reserves, such as Saudi Arabia or Iran, consider their estimates a state secret. Even in more open societies, companies keep the numbers close to their vests. Because of all the secrecy, estimates of worldwide “proven” reserves are precisely that: estimates.<br />
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The toughest of the three variables to predict is reserve replacement, which means finding as much new oil as you pump. The United States by itself has consumed about twenty million barrels of crude oil every day over the last decade. To replace what Americans use means that the world needs to find more than seven billion barrels every year. Reserve replacement predictions are based on statistics. Economists ask how many fields of what sizes have to be discovered in a year to maintain production levels, and compare the answer to known trends.<br />
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What makes it even dicier is that, as petroleum consumption increases in emerging economies, the rate of reserve replacement has to increase just to stay even. This means that predicting the point at which the peak might occur requires assumptions, estimates, and just plain guesses. As is usually the case, the people who claim to understand Peak Oil theory divide into two camps.<br />
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<b>One group predicts a “peak” they said would occur as early as 2012.</b> The other side predicts a peak perhaps a century in the future. Almost everyone now admits the first group was wrong, mainly because of the surge in "unconventional" oil production in the past few years. By unconventional, the industry mainly means the production of petroleum from shale reservoirs, which has helped propel the U. S. industry; and from "tar sands," which drives the industry in Canada. Since these new sources have been developed, and are developing worldwide, old estimates of reserves are now out of date.<br />
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Does this mean that there will not be a peak, or that there won't be one soon? That question isn't easy to answer because of the peculiar economics of commodities in general and oil in specific. While the principles of supply and demand control short-term prices of all commodities, in the oil industry the price also exerts control on the long-term supply.<br />
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Reserve estimates are based, in part, on whether a company or country can make a profit by producing the oil they find. Ultimately, then, the quantity of oil available to the market is in part a function of price. It takes a lot of money to find oil, get it to the surface, and move it to market. If the predicted cost of producing and transporting a newly-found barrel of oil is lower than its predicted market price, whoever found it will leave it in the ground, at least until the price rises.<br />
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Here's an example: a discovery made when the oil is selling for $50/bbl may sit idle until the price levels out above $70/bbl. Until that point, the discovery is deemed “uneconomic.” That's why there was a slight production "blip" in the late 1970s. Exploration and production were driven by price, and when the price dropped in the early 1980s, production dropped as well.<br />
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Those who assert that the peak oil is far in the future point to huge uneconomic accumulations have already been found, accumulations that are being added to world reserves as price and technology combine to make their production attractive.<br />
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Although shale oil such as is produced in North Dakota's Bakken Formation and the Eagleford Shale in Texas get most of the press, they may not be the panacea assumed by some. Shale wells are expensive to drill and, more importantly, wells in these trends generally produce a lot of oil for a few months before demonstrating rapid decline. More important are are vast heavy oil deposits in Venezuela, tar sand fields in Canada, and “oil shale” of the western USA. Both Venezuela and Canada can realize profits from their deposits while oil prices are above $85-90, though production in both countries levels off if oil drops as low as $70/bbl.<br />
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As for "oil shale" - a misnomer, because there is no oil and the deposits aren't shale - U.S. oil shale deposits have seen only a few pilot projects, and the process of extracting oil from these reservoirs remained uneconomic even when oil approached $150/bbl in mid-2008.<br />
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The shifting economics of oil clearly make of the coming peak a moving target. Even when oil prices are high enough to support development of unconventional reservoirs, they are also high enough to support the development of alternative energy sources. This is a calculation often omitted by those who predict the development of oil shale.<br />
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In any case, peak oil is a reality. The question – and therefore the argument – remains "How soon?"<br />
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<i>Some people think the peak is imminent:</i><br />
<br />
http://www.wolfatthedoor.org.uk/<br />
http://www.energybulletin.net/<br />
http://www.theguardian.com/environment/earth-insight/2014/jan/17/peak-oil-oilandgascompanies<br />
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<i>Some think it’s a long way off:</i><br />
<br />
http://www.energytomorrow.org/ (the American Petroleum Institute, or API<br />
http://www.iea.org/aboutus/faqs/oil/<br />
http://mises.org/story/1717<br />
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<i>And some are just plain paranoid:</i><br />
<br />
http://www.prisonplanet.com/archives/peak_oil/index.htm<br />
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Careful reading proves, once again, that – like most issues today – where most people stand on Peak Oil is determined by their politics.<br />
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Steven Mrakhttp://www.blogger.com/profile/06895351856452438924noreply@blogger.com0tag:blogger.com,1999:blog-1430302189987682933.post-6600878780694726862010-03-25T12:50:00.000-04:002013-06-23T12:12:10.037-04:00Shale Gas Exploration and Groundwater Contamination: Hype, Extremism, or ?In the United States, most experts believe that the fuel of the twenty-first century will be natural gas. U. S. oil production has dropped steadily for decades, and clean coal is less reality than a promise. Huge natural gas reserves have been identified, however, leading to increased visibility of a clean-burning, easily-transported fuel. Many of the new gas reserves are, however, termed “unconventional.” This means that companies must use new technology, apply old technology in new ways, or both to locate and produce the gas.<br />
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Oil and gas companies have produced natural gas for decades. In conventional reservoirs, gas is trapped deep underground in rock layers that are both porous and permeable. Porous means there are spaces within the rock to store natural gas or oil. Permeable means those spaces are connected so that oil and gas can flow. Another layer, a seal, acts like a bottle's stopper to keep gas and oil trapped in place. Many seals are shale, a rock that isn’t very permeable. In conventional reservoirs, companies drill through seals to the more permeable layers beneath them and produce oil or gas.<br />
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Geologists have long known that shale often has lots of pores filled with gas, but ignored them because their low permeability kept that gas from flowing into wells. In the 1990s, companies began using the technique of horizontal drilling. A well drilled horizontally starts as a vertical well, but begins curving high above the reservoir and keeps bending until it ends up going sideways. The horizontal portion of a well often reaches thousands of feet from where it enters the reservoir. It wasn’t long until someone realized that drilling sideways in a gas-rich shale layer would allow more gas to enter the well than poking a vertical hole straight from top to bottom. Horizontal drilling is the “new technology” part.<br />
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Even a horizontal well thousands of feet long can’t produce much gas unless shale's permeability can be increased by stimulation. To do this, companies use an existing technology called hydraulic fracturing, or fracking for short. Hydraulic fracturing is fairly simple: huge volumes of water and dissolved chemicals are pumped into the well under high pressure. Water can’t shrink, so the pressure cracks, or fractures, the rock around the well. Fracking also injects sand grains to prop the cracks open even when pressure is released. A frack job increases the permeability in a reservoir, allowing a well to empty pore spaces over a large area. This is a "new application of old technology."<br />
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Experts predict that three-quarters of gas wells drilled in the next decade will use horizontal drilling fracturing. Many frack jobs inject several million gallons of fluids. Once the well begins to produce gas, these fluids flow to the surface and must then be disposed of – often by re-injecting into a different subsurface layer.<br />
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Widespread use of this combination of technologies is allowing development of shale gas reservoirs across the U. S. Well-known gas reservoirs include the Marcellus (New York), New Albany (Ohio River Valley), Barnett (north Texas), Bakken (North Dakota), and Woodford (Oklahoma) Shales. The Marcellus and Barnett plays are especially active because both are relatively shallow and are found near large potential markets.<br />
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These two plays, however, are also under investigation by environmental agencies because of complaints by residents that their drinking water is being contaminated. Operators in both areas have been sued by homeowners and water companies who claim that fracturing fluids are leaking into shallow groundwater aquifers. Since federal law exempts hydraulic fracturing fluids from EPA (Environmental Protection Agency) regulation, plaintiffs claim that the companies do not reveal what chemicals are present in them.<br />
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What chemicals are used varies from well to well and from company to company (two of the biggest players in the fracturing business are Baker-Hughes and Halliburton). Though the chemicals are known to regulatory agencies, the "recipes" are trade secrets. Substances like toluene and methanol – both of which are carcinogenic – are used in very low concentrations in most fracking jobs. If a job calls for one million gallons of fluid, however; even a concentration of less than two per cent (a number cited by the industry) would leave 20,000 gallons of chemicals in the subsurface.<br />
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The oil and gas industry has mounted a campaign to fend off lawsuits, which begins by assuring the public that fracture technology has been in use for decades without such problems. This is, in fact, true: fracture technology has been used for decades without ill effects. Remember, however, that in the past fracturing was most common in reservoirs miles below the surface. Development of shale gas is most active in shallower deposits, where drilling is cheaper. Shale gas fracturing jobs thus take place closer to the surface; plus fracturing often extends along thousands of feet of horizontal well instead of around the twelve-inch diameter of a vertical well. The biggest difference may be that in conventional exploration, a reservoir is fractured and its seal remains intact. In a shale gas play, the seal is what is being fractured. Under these very different conditions, prior experience may not be a valid predictor.<br />
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Industry arguments are, in general, defensive: fracking has been safe in the past, chemically-treated water is carefully disposed of, and the chemicals are judged safe by local environmental agencies (even if the U. S. EPA does not regulate them). Still, independent laboratory tests have shown groundwater contamination near some shale gas developments. In these cases, contamination and drilling appear to be linked in time and space; so studies by regulatory agencies are ongoing.<br />
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The industry also campaigns on the basis of what they call “energy independence” as well as “homeland security,” because some estimates of the volume of shale gas in the U. S. place it at a ninety-year supply. Although the industry’s chauvinism may remind cynics of Samuel Johnson’s musings that “patriotism is the last refuge of a scoundrel,” the need to develop this valuable resource cannot be denied. Even with that need in mind, it is vital that regulators do not lose sight of the fact that clean water is even more essential. A balance must be reached, and the first step in reaching balance is careful study of the effects of hydraulic fracturing in shale gas development. If that study shows that fracking can, and has, contaminated groundwater supplies; then the next reasonable step would be to develop chemical mixtures to reduce harmful effects of contamination. No doubt, Halliburton and Baker-Hughes are already working on such new recipes.<br />
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For more information:<br />
<a href="http://www.infobarrel.com/Does_Fracking_Cause_Earthquakes">Does Fracking Cause Earthquakes?</a><br />
<a href="http://www.api.org/policy/exploration/hydraulicfracturing/index.cfm">American Petroleum Institute</a><br />
<a href="http://www.epa.gov/ogwdw000/uic/wells_hydrofrac.html">U. S. Environmental Protection Agency</a><br />
<a href="http://www.nytimes.com/gwire/2009/11/04/04greenwire-more-oversight-sought-for-hydraulic-fracturing-35961.html">New York Times</a>Steven Mrakhttp://www.blogger.com/profile/06895351856452438924noreply@blogger.com0tag:blogger.com,1999:blog-1430302189987682933.post-25263296834429551592010-05-19T21:54:00.000-04:002013-01-11T10:39:23.820-05:00The Care and Feeding of Blowout Preventers<div dir="ltr" style="text-align: left;" trbidi="on">
Since the end of April, 2010, news stories have been filled with unfamiliar words and phrases about drilling for oil in deep water. We've heard about risers, drilling mud, semi-submersible drill ships, and blowout preventers. One phrase that was already familiar is “oil spill,” but how the mess that is the giant ecological disaster in the Gulf of Mexico happen? There was a blowout, and the blowout preventer didn’t work.<br />
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What is a blowout preventer? It’s a machine that exploration companies hope will never be used, a machine with only one task: to stop oil and gas from gushing unchecked from a well. To understand the job of the preventer requires that you know what a blowout is. We’ll start there:<br />
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Oil reservoirs are under huge pressure, mostly because they are deeply buried. For every foot a well penetrates into the earth, the pressure increases by about 0.43 pounds per square inch (psi). At the bottom of a 10,000-foot well, the expected pressure is more than two tons per square inch. Compare that to the pressure in the tires on a car, which are usually inflated to about 35 psi – and a 10,000-foot well is just an average depth.<br />
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To combat that immense pressure, a well that is being drilled is filled with a dense liquid called drilling mud. The weight of the column of mud that fills the well is kept high enough to offset the pressure on any fluids discovered by the well, and keep them in the ground until they can be safely extracted. <br />
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Some zones deep underground are under higher pressure than their depth would predict, a condition petroleum geologists call “overpressured.” When a well penetrates one of these zones unexpectedly, the pressure underground forces the drilling mud back up the well, often emptying the well in just seconds: a blowout. Blowouts can be so powerful that they also force the drillstring – thousands of feet of steel pipe – out of the well with the mud. Needless to say, a blowout is not just dangerous; it can be disastrous.<br />
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Blowout preventers (BOPs) are a component of the pipe that makes up a wellbore. They sit below the drilling rig on the ground surface or the seafloor. They are bolted to the top of the pipe, or casing, which forms the wall of the well at depth. Another length of pipe, the riser, is bolted to the top of the BOP and extends to the drilling rig above it, a distance of a few to several thousand feet. The casing contains the drillstring, which is considerably smaller. Drilling mud fills the space between the casing and the drillstring, or the annulus.<br />
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BOPs are designed to close the wellbore in case of a blowout, and to keep the fluids deep underground where they belong. There are two kinds of BOPs, which are usually stacked together: the first is a thick rubber donut that is supposed to clamp down on the drill string and seal off the annulus. The annular BOP sits on top of the blowout stack. <br />
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If the annular BOP fails to seal the well, the second type of blowout preventer is used. This design has hydraulic rams that drive hardened steel plates into the wellbore. The steel plates are designed to act like giant shears, cutting through the drillstring and creating a seal inside the BOP itself. When a blowout is detected on the rig floor – the mud begins to boil out of the casing or the gas detectors sound an alarm – rig personnel are trained to hit one of the many panic buttons all around the drill rig. That is supposed to activate first the annular blowout preventer and, if that fails, the hydraulic rams. At the BP Macondo well, the blowout preventer is presumed to have failed.<br />
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Some facts about blowout preventers, regardless of what newspaper stories have claimed:<br />
<ul>
<li>They’re not necessarily the size of a small house: a blowout preventer’s size is a function of the depth of the well and the diameter of the pipe. Some stacks are only four or five feet tall.</li>
<li>Not all blowout preventers sit “on the sea bottom”: wells drilled on land can also hit overpressured zones that mandate use of BOPs.</li>
<li>Not all drilling wells have blowout preventers; in fact, most don’t. Overpressured zones that can cause major blowouts occur only in a limited and fairly predictable set of areas and subsurface environments. </li>
</ul>
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Major manufacturers of BOPS include <a href="http://hydrilpressurecontrol.com/pressureControl/BOP/BOP.php">Hydril </a>and <a href="http://www.c-a-m.com/content/products/product_detail.cfm?pid=2888&bunit=dps">Cameron </a>(maker of the BOP that failed at the BP spill).<br />
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Steven Mrakhttp://www.blogger.com/profile/06895351856452438924noreply@blogger.com0tag:blogger.com,1999:blog-1430302189987682933.post-68879753543639171842012-02-06T19:47:00.000-05:002012-02-06T19:47:23.194-05:00Pick the Right Units of Measure to Massage Your Statistics<div dir="ltr" style="text-align: left;" trbidi="on"><br />
<div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">It shouldn’t come as any surprise that a task force appointed by Texas Railroad Commissioner David Porter has ruled that the aquifer in <st1:place w:st="on">South Texas</st1:place> is sufficient to support hydraulic fracturing operations in the area’s sizzling Eagle Ford Shale play. It was a foregone conclusion, after all. But that’s not why I decided to scribble this down. No, it’s because when I read the rather small notice in the <i><a href="http://www.chron.com/news/article/Aquifer-called-sufficient-for-Eagle-Ford-drilling-2736990.php">Houston Chronicle</a></i>, I saw something rather interesting. <o:p></o:p></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">According to the article, Porter boasted that the oil and gas industry “has reduced the amount of water it uses to hydraulically fracture wells to about 11 acre-feet of water to complete each well, down from about 15 acre-feet.” [the article originally said 14, but was edited to 15 later]<o:p></o:p></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">It struck me as interesting because, just the day before, I’d seen a sign on the side of a garbage truck announcing that the waste company had reclaimed “17,000 acres” of parks and wetlands. At the time I wondered how many of the folks in <st1:city w:st="on"><st1:place w:st="on">Houston</st1:place></st1:city> who saw that had even the slightest concept of the size of an acre, much less 17,000 of them. For the record, there are 640 acres per square mile, so 17,000 acres is 26.5 square miles, or a square a little over five miles on a side. Not such a big whoop when you put it in recognizable units, eh…<o:p></o:p></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">But getting back to acre-feet… an acre-foot of water is one acre of water one foot deep. Since you don’t know what an acre is, let’s put that in terms of square feet: an acre is 43,560 square feet, so an acre-foot of water is 43,560 cubic feet. Still not clear? How about gallons? A cubic foot is 7.48 gallons – about half a tank of gasoline. So that measly eleven acre-feet becomes 11 times 43,560 times 7.48 gallons. That’s 3,584,116.8 gallons, if you forgot your calculator.<o:p></o:p></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">Considering that during the Macondo blowout the <i>Chronicle</i> decided they had to talk about amounts of oil in terms of gallons instead of (42-gallon) barrels – presumably because people don’t know how big a barrel is – it seems kind of odd that they didn’t convert acre-feet to the same units.<o:p></o:p></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">I’m gonna file this in the “<b>Statistics Never Lie but Liars Use Statistics</b>” area, under the “<b>Unpleasant Things Always Seem More Benign when You Use Small Numbers to Describe Them</b>” subcategory…<o:p></o:p></span></div></div>Steven Mrakhttp://www.blogger.com/profile/06895351856452438924noreply@blogger.com0tag:blogger.com,1999:blog-1430302189987682933.post-45132548465128952582010-08-19T10:54:00.000-04:002010-08-19T10:55:56.515-04:00How do I Stop Offshore Drilling? How, Indeed...<div style="text-align: left;"></div>The question recently popped up among available titles for eHow writers at DemandStudio (an assemblage of the most tight-assed control freaks I've ever encountered in my life, but that's a different story): "How Do I Stop Offshore Oil Drilling?"<br />
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And it got me thinking: how does the average Joe or Jane stop offshore drilling, presuming of course that's what he or she wants? It's not as if marching around with picket signs in front of that BP office complex on West Memorial in Houston will have any effect - besides, I drive past it twice a day, and I have yet to see an enraged picketer. Is there a way to stop? It's a tough nut to crack, but the way I see it, there are three ways to stop offshore oil drilling and none of them is likely to happen...<br />
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<b>First option</b>: Someone - the Federal government or the states - has to prohibit or severely restrict offshore drilling. California has done this for years, spurred into action by a Unocal blowout off Santa Barbara in 1969. The Federal government has likewise prohibited drilling in the easternmost Gulf of Mexico and in Atlantic Coastal waters for more than twenty years, a policy the Obama administration announced would be relaxed only days before the BP Macondo blowout (see image) on April 20, 2010. The rescission of that policy is, as one might expect, now on hold.<br />
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: right;"><tbody>
<tr><td style="text-align: center;"><a href="http://www.csmonitor.com/var/ezflow_site/storage/images/media/images/0519-macondo-well-leak.jpg/7925586-1-eng-US/0519-Macondo-well-leak.jpg_full_600.jpg" imageanchor="1" style="clear: right; margin-bottom: 1em; margin-left: auto; margin-right: auto;"><img border="0" height="213" src="http://www.csmonitor.com/var/ezflow_site/storage/images/media/images/0519-macondo-well-leak.jpg/7925586-1-eng-US/0519-Macondo-well-leak.jpg_full_600.jpg" width="320" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Photo from the <i>Christian Science Monitor</i></td></tr>
</tbody></table>Given the "energy independence" talking point loudly bandied about by certain segments of the political spectrum (who seem perfectly content to repeat the lie that the US gets most of its oil from "unfriendly" nations¹), it is highly unlikely that the Federal government has the political will to ban offshore drilling. Some "blue states" in the northeast and northwest may enact new bans on drilling in state waters, but it's highly unlikely that a "red state" would even consider doing so. So the answer to "How do <i>I [emphasis on the "I"] </i>Stop Offshore Drilling?" could well be, "Elect a government that will ban it."<br />
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<b>Second option</b>: Enact legislation that makes offshore drilling so expensive that it's no longer a profitable enterprise. Increase the cost of drilling permits or require an indemnity bond so massive that no corporate entity can afford it. Realize, of course, that it already costs several hundred million dollars to drill one of these wells...<br />
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The political will question arises again for this option, so see the "Elect a government..." answer again. Unless there are two or three more Macondo blowouts in the next decade, rest assured that this will not happen.<br />
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<b>Third option</b>: Make drilling for oil unprofitable by reducing the demand. This is easier said than done, for several reasons. One reason is that, although the US still consumes approximately 25% of the world's oil production, the demand in expanding economies, such as China, is on the rise. Already China has surpassed Japan as the world's second largest economy (after the US) and it shows no signs of slowing. Reducing US consumption may no longer have the desired effect of reducing world output.<br />
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Currently, the US imports roughly two-thirds of the 20 million barrels of petroleum and finished petroleum products its citizenry consumes every day (in the neighborhood of 12-13 million barrels). In the US, petroleum products are mainly used for transportation. About two-thirds of all domestically-produced and imported crude oil is refined into gasoline, diesel, and jet fuel. The US transportation sector uses approximately forty-five per cent of its total petroleum consumption in the form of gasoline². What does this mean for so-called "energy independence" that offshore drilling will theoretically create? Well, one thing it means is that switching from incandescent bulbs to compact fluorescents does zip for reducing imported oil, because trifling few US power plants run on oil. Much of that imported oil (or oil produced by offshore drilling) goes straight into the fuel tanks of cars, trucks, trains, buses, and airliners. <br />
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It's a long way around to this, I know, but if you want to stop offshore drilling without government intervention (which ain't gonna happen as long as there are lobbyists and corporations can buy all the free speech they can afford), then you have to work to reduce the market value of oil. If you want to reduce the market value of oil, you have to reduce demand. If you want to reduce demand, you have to stop using so damned much of it - all those "yous" out there.<br />
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¹ per the US <a href="http://www.eia.gov/dnav/pet/pet_move_impcus_a2_nus_ep00_im0_mbbl_m.htm%20">Department of Energy records</a>, the two countries from whom the US imports the most oil are Canada and Mexico, neither of which is on any list of "unfriendly" nations. <br />
² per the US <a href="http://www.eia.doe.gov/pub/oil_gas/petroleum/analysis_publications/oil_market_basics/dem_image_us_cons_sector.htm">Department of Energy </a>againSteven Mrakhttp://www.blogger.com/profile/06895351856452438924noreply@blogger.com0tag:blogger.com,1999:blog-1430302189987682933.post-48378934960343834002010-05-02T14:54:00.000-04:002010-05-02T14:54:00.076-04:00The Anatomy of a BlowoutTo comprehend a catastrophic oil well blowout, we first need basic understanding of how petroleum collects in underground reservoirs and how exploration for those reservoirs works. For starters; oil, natural gas, and water collect in underground layers when their path to shallower layers is blocked by an impenetrable zone. Instead of collecting in “lakes” or “rivers” of oil, however, hydrocarbons accumulate in tiny pores within huge volumes of rock.<br />
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Being buried under miles of solid rock means that hydrocarbon reservoirs are under enormous pressure. The pressure increases, on average, by a factor of 0.433 psi/foot or 9.792 kPa/meter. This regular pressure gradient means that pressure at the bottom of a ten-thousand-foot well is more than 4300 pounds per square inch; compared to a pressure of about 30-35 psi for a car tire. Since liquids cannot be compressed, deeply-buried reservoir fluids seek any possible pressure relief.<br />
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Drilling a hole ten or fifteen inches in diameter from the surface to a deep reservoir provides just such relief. To keep oil and water from spurting out of a wellbore, drillers fill the hole with fluid of their own. Called “mud” or “drilling mud,” this fluid is carefully designed to carry out several different functions, one of which is to match the pressure in the underground layers and prevent the crude oil from rushing to the surface. Maintaining balance is relatively simple in areas of normal pressure, where pressure at depth can be predicted from the standard pressure gradient (above).<br />
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There are, however, subsurface layers in which the pressure is much higher than that predicted by the pressure gradient. Unexpected penetration of such an overpressured zone can result in a blowout, as can improper drilling practices or poor well design.<br />
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When a blowout occurs liquids in the reservoir stream into the wellbore, forcing tons of drilling mud and thousands of feet of steel pipe from the mouth of the well at the surface. The rising column of oil, water, and natural gas are under such vast pressure that they can reach supersonic speeds; more than 1100 feet per second. Crude oil and natural gas are both flammable, and are often ignited by the heat of friction in the moving column or by sparks as metal and chunks of rock smash against one another. In the early days of exploration, drill rigs often “burned to the ground” after a blowout; though such gushers were looked on favorably before scientists understood the environmental havoc wreaked by such a disaster.<br />
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A blowout is both an environmental and an economic disaster, for not only are large quantities of a valuable resource wasted, the infrastructure at the surface is destroyed. In the April, 2010, blowout in the Gulf of Mexico, the semi-submersible drillship Deepwater Horizon burned and sank at a cost of $600 million and eleven lives. Five thousand barrels of oil per day, valued at some $400,000, poured out of the breached drill pipe. Because of such costs, exploration companies take expensive measures to prevent blowouts.<br />
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The first line of defense against blowouts is the drilling mud, described above. Before drilling into potential overpressured zones, mud engineers “mud up” to increase the density of the fluid in the well. The second line of defense is casing, heavy-weight large-diameter pipe that is cemented in place to line the hole and isolate zones of different pressure. The final line of defense is a massive mechanical device called a blowout preventer or BOP.<br />
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Blowout preventers come in several designs depending on the manufacturer (leading makers include FMC, Hydrill, and Cameron). A BOP is placed at the ground surface or, for offshore work, at the seafloor; between the drill rig and the well head. BOPs are designed to trigger automatically upon detection of rapid uphole flow, or trigger remotely on command. Blowout preventers come in two types: the first is basically a giant rubber doughnut that can be activated to seal off the annulus – the space between the drill pipe and the casing. The second type consists of massive hydraulic rams that force hardened, edged surfaces inward to cut the drill string and seal the well with a thick metal wedge. <br />
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The worst-case scenario of a blowout is one in which reservoir fluids breach the cement holding the casing in place and reach the surface around the outside of the pipe – in this instance, even BOPs are of no use. There has been speculation that this is what happened at British Petroleum’s Macondo well off the Mississippi Delta (April, 2010).<br />
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If the BOPs fail and a blowout occurs, options for recovery of the well are few. One option is to collapse the wellhead with shaped charges (compare to John Wayne’s portrayal of Red Adair in the movie “Hellfighters”). A more likely scenario is to drill a relief well that intersects the blown well – a technological challenge, to be certain, but doable. The relief well is used to dump high density “kill fluids” – super-weight drilling mud – into the wellbore of the flowing well and, eventually, bring it under control. Drilling a relief well takes weeks or months, while the blowout continues to spew crude oil, and can cost tens of millions of dollars.<br />
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In spite of all the technology and wellfield expertise, blowouts still occur. The April 2010 is one of the largest ever, a list that includes the Pemex IXTOC I blowout, which poured 10,000 barrels of oil per day into the Gulf of Mexico in 1979-80; and the 1969 blowout of a Unocal well in the Santa Barbara Channel off southern California. The environmental damage caused by the Unocal blowout is responsible for California’s strict regulation of offshore drilling.<br />
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Glossary: http://www.glossary.oilfield.slb.com/search.cfm<br />
more information: http://www.chron.com/disp/story.mpl/business/deepwaterhorizon/6973912.htmlSteven Mrakhttp://www.blogger.com/profile/06895351856452438924noreply@blogger.com0tag:blogger.com,1999:blog-1430302189987682933.post-54751379317732568702009-09-18T15:57:00.000-04:002009-10-30T13:23:43.353-04:00The Economics of The Oil Industry<b>Basics of the Petroleum Industry IV: It costs a <i>lot </i>to produce oil</b><br />
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OK, so far, we’ve talked about how oil forms, how it accumulates in fields, and how scientists look for new oil fields. Everything we’ve looked at so far has been about science or technology, and how the nerdy guys and gals who work for oil companies use their high-tech toys to help find new fields. At one time, oil companies were the world’s leading users of technology; and they’re still close to the top. We’re talking about more than numbers of computers and amounts of memory and data storage; we’re also talking about software. One high-end software program widely used by large oil companies has a list price of a quarter of a <i>million </i>dollars – for every one-seat license – and the big multinationals have paid for hundreds of licenses and training so their staff can run these highly complex programs. And computers, software, and training are just a tiny part of the cost of finding new oil…<br />
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This time, let’s take a look at the economics of the petroleum industry. That gallon of gasoline you burned on your way to work this morning has had a long journey. Let’s ignore for now the minor miracle that had to happen for oil to accumulate in the first place and concentrate on what it costs along the way to get that stuff out of the ground and into your gas tank.<br />
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<b>Step 1: Finding the oil</b><br />
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The business calls this “finding costs,” the expense of searching for oil fields. It might seem simpler to just take a drill and go out and stick a new hole in the ground every couple of miles, but the cost of doing that would be astronomical – not to mention that you might miss the good stuff (and you’d never be certain that you hadn’t stopped drilling a foot or two too soon). So companies work hard to reduce risk so they only have to drill one – or maybe two or three – exploration wells to find out if a prospective site has oil or not. To do this, highly-trained geoscientists make educated guesses about the area using data from nearby wells; and they also use seismic surveys. Now we’re talking about money: a seismic survey of an area will cost hundreds of thousands to several million dollars depending on the size of the survey and the difficulty of getting the data. Those billions of digital records must be processed and reprocessed with highly technical software, and then they’re loaded into high-end computers running expensive software. All that to just look for a prospective location… <br />
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We’ll skip the details and cut to the chase: an oil company has determined that there is a sufficient probability of a sufficient amount of oil that they’re willing to take the risk and drill. Before they can do that, however, they have to get permission to drill in the form of a lease. Companies pay for the right to lease land, either from individuals or governments, and also promise to pay part of the profits from any oil that’s produced from that property. Those payments are called royalties, and range from 10% of the sale price of oil up to more than half the proceeds in some foreign countries. The company must also pay to prepare the site if it’s on land, and usually pay for a permit to drill. The up-front investment to drill a well – including salaries for the exploration department – can be, shall we say, “substantial.” Exploration budgets for large companies are typically on the order of hundreds of millions to billions of dollars. Companies spend millions of dollars just picking a place to drill – and then the real money comes into play. Drilling a shallow well on land, perhaps 2500 feet deep, costs on the order of $75-100,000. Offshore exploration costs are far higher, and increase rapidly as the well gets deeper. A recent discovery in 4000 feet of water in the Gulf of Mexico is estimated to have cost a quarter of a billion dollars to drill!<br />
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Obviously, if oil sells for $50 per barrel and it costs $55 per barrel just to find it, the company is not going to make any money – that’s one reason why company projections of changing oil prices have to be taken into account just like company guesses at the size of the oilfield. <br />
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<b>Step 2: Producing the oil</b><br />
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Let’s say you drilled yourself a gusher. Whoopee! But except for what returned to the surface from that one well, everything else is still deep underground. The physics of fluids like oil and water just don’t allow you to pump all the oil out of one hole, so you need to drill more wells to produce what’s down there. If you’re on land, you could just drive the drill rig to another spot and poke another hole, but if you’re in water, you will have to build an offshore platform and drill several wells to out at an angle. Each of those wells also costs a bundle, and the offshore platform could easily cost hundreds of millions of dollars. That’s all before you pump a single drop of oil into a tanker. If you’re on land, you still need to move the oil from all the individual wells (sometimes hundreds or even thousands of them) to central collection points so that the oil can be piped or trucked to market. There is a lot of money tied up in all the infrastructure, maintaining it, and the personnel needed to keep it operating. That’s a big part of “producing” or “lifting costs.”<br />
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But wait, there’s more: there’s also water produced along with the oil, more and more of it as the field ages. The water has to be separated from the oil and disposed of – usually by pumping it back into the reservoir, since it can’t just be poured out on the ground or dumped in a river because it’s salty. More expense… <br />
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Remember that we learned some time ago that oil doesn’t collect in underground streams and lakes, but is stored in the tiny pore spaces between grains of rock? That has an important side effect: most of the oil would rather stay clinging to its grains of sand than flow to a well. Companies use all sort of tricks to break that hold: pumping in lots of water, pumping in natural gas, even pumping in carbon dioxide in an effort to”re-energize” the oil and get it moving. Guess what: more expense! and there’s one truth that every oil company scientist and engineer knows: you can never get all the oil out of a field – you’re lucky when you can get half of it.<br />
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<b>Step 3: Moving the oil</b> <b>to market</b><br />
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Though it’s not as expensive as finding or producing the oil, getting it to market also has its associated costs. You can’t drive a couple of tank trucks up to a field that produced hundreds of thousands of barrels of oil per day; that would eat up all your profits. So when a company finds a new field, transportation costs are another factor. Building a pipeline big enough to transport that volume of product costs hundreds of thousands of dollars for every mile of pipe. If you can’t get the oil to a refinery or a terminal to sell it, then producing it does you no good!<br />
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<b>The bottom line:</b><br />
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Every drop of oil that a company like Shell or Conoco-Phillips sells has all of those costs, and more, associated with it. Just finding oil can cost a bundle, and that’s only the beginning: getting it out of the ground costs even more, and a company is still not done paying to produce oil until it finally reaches a buyer. It is possible – in fact happens frequently – to strike oil but determine that there isn’t enough in the reservoir or it’s not of good enough quality to pay for pumping it out of the ground. When this happens, the find is called “uneconomic.” Obviously, if prices increase faster than producing costs and transportation costs, a find can become economic sometime later.<br />
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A company will not drill a well unless they believe that there is enough oil at the site to pay back every one of the costs and have some left over for profit – without profit, they can’t drill the next well. This explains the so-called “obscene profits” that oil companies rake in when the price of oil hits $140 per barrel. Their experts forecast that they would make a reasonable profit at a price of $50 or $70 per barrel, and when the market started paying more, the extra dollars become pure profit. This is no different from a farmer who plants soybeans expecting to make $7 per bushel; except that if he gets $10 instead, no one talks about his “obscene profits.” Oil companies and farmers have the same downside as every commodity producer, because they don’t control the prices – their buyers do. So if our hypothetical farmer got paid $6 per bushel instead of the $7 he was expecting, he has a bad year, and the same with oil companies: if they’ve forecast $50 oil and the price drops to $35 (as it did in December, 2008) then they’re losing money. <br />
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So there you have it. That gallon of gasoline you bought today did not simply run out of the ground into a handy gas pump, it’s had a arduous journey from the reservoir to the pump – a journey that had costs at every step along the way. <br />
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This is the fourth of a series of minilectures on the petroleum industry from the ground up<br />
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1) <a href="http://insidethepatch.blogspot.com/2009/09/where-does-oil-come-from-basic.html">Where Does Oil Come From?</a><br />
2) <a href="http://insidethepatch.blogspot.com/2009/09/where-do-oil-companies-find-oil.html">Where Do Oil Companies Find Oil?</a> <br />
3) <a href="http://insidethepatch.blogspot.com/2009/09/how-do-oil-companies-find-oil-basic.html">How Do Oil Companies Find Oil?</a><br />
4) <i><b>The Economics of Petroleum Exploration and Production </b></i><== You are here. Future installments include:<br />
5) <a href="http://insidethepatch.blogspot.com/2009/10/oil-industry-basics-refineries-and.html">Refining</a><br />
6) <a href="http://insidethepatch.blogspot.com/2009/10/why-does-gasoline-cost-so-much-daddy.html">The Economics of Big Oil</a><br />
7) The Future of OilSteven Mrakhttp://www.blogger.com/profile/06895351856452438924noreply@blogger.com0tag:blogger.com,1999:blog-1430302189987682933.post-53230879130113562022009-10-04T17:10:00.000-04:002009-10-30T13:23:11.278-04:00Oil Industry Basics: Refineries and Refining<i><b>Basics of the Petroleum Industry V: A Simple Look at Refineries and Refining Costs...</b></i><br />
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If you’ve been following along, you’ve learned some basics about where oil comes from, how large accumulations of oil form, and how oil companies find those accumulations. Last time out, we looked at the economic realities of the oil business; how companies need to factor in not only the costs of finding new oil (<i>finding costs</i>), but also of getting it out of the ground (<i>producing costs</i>), and getting it to market (<i>transportation costs</i>). That’s only part one of the process, though, because there is almost no use for oil in its raw state. Crude oil, oil that’s just as it comes out of the ground, is highly variable in both chemistry and composition; but almost every use for petroleum products requires that the product fall within a narrow range of compositions. You think “Oil is just oil”? Well, no: oil is composed of lots of things, which is one reason why it’s proven so versatile over the last century or so. <br />
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<i><b>Crude oil is made up mostly of two elements</b></i>: hydrogen and carbon, which is why we call oil a hydrocarbon. Those two elements can combine in a great many different physical arrangements, and each of those arrangements forms a different kind of hydrocarbon molecule. You may be familiar with some of these molecules already; molecules with names like methane, propane, butane, and octane. Hydrocarbons have unusual physical properties that allow complex molecules to join with other complex molecules to form even more complex hydrocarbons. There are hundreds of different molecules in nature, and even more among the vast number of man-made molecules that we lump together under the term "plastics." Crude oil also contains other elements in different amounts; among them oxygen, nitrogen, sulphur, and trace amounts of many metals.<br />
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Produced crudes are composed of many slightly different hydrocarbons, mixed together in different proportions. How much of which hydrocarbons are present in a given crude oil is a result of many variables. Among them are things like the original source material that was “cooked” into crude oil, the length of time the oil spent in the cooking pot, how high the temperature was, and the chemistry of the water with which the crude oil was mixed in its reservoir. If the field from which the crude comes is fairly shallow, bacteria can also have consumed some of the lighter hydrocarbon molecules over the millennia, leaving behind oil made heavier by the process of biodegredation. <br />
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<i><b>Hydrocarbons are usually separated into light and heavy classes</b></i>. The higher the ratio of hydrogen atoms to carbon atoms gets in a given molecule, the lighter the hydrocarbon. Methane (a gas), is the simplest and lightest hydrocarbon: it has four hydrogen atoms and one carbon atom. Heavy hydrocarbons are those with a low ratio of hydrogen to carbon atoms. Heavy hydrocarbons include the asphaltenes, which have only about 1.2 hydrogen atoms for every carbon atom. Crude oils are also classified as light or heavy, depending in part on which hydrocarbon molecules are most common. When we hear reports about the price per barrel of oil, the price quoted is usually for the best-quality oils: so-called light, sweet crude. Light hydrocarbon molecules tend to produce more energy than heavy hydrocarbons when they’re burned, and since the majority of crude oil is turned into jet fuel, gasoline, diesel, and heating oil; light crude tends to be in high demand. “Sweet,” by the way, means that the crude contains less than 0.5% sulfur – sour oil, which has more sulfur (usually in the form of hydrogen sulfide) needs more processing steps to make fuel.<br />
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The process of turning crude oil into the many different petroleum products used in our society is called refining. Refineries are industrial sites where many different processes are used to separate out individual hydrocarbons or groups of hydrocarbons. The world’s largest refinery, Paranaguá, is operated by the Venezuelan national oil company Petreleos de Venezuala, S. A. (Pedevesa). Actually a complex of three refineries, Paraguaná can process almost a million (940 thousand) barrels of crude per day (a barrel is 42 US gallons, about 1.6 cubic meters). The largest refinery in the USA is ExxonMobil’s complex in Baytown, Texas, which has a maximum capacity of 570 thousand barrels/day. Refineries usually cover large land areas, often several square miles. Most refineries are in or near areas where oil is produced, although many near the Gulf Coast of the United States process crude oil shipped in tankers from overseas. Refinery complexes are notable for their enormous, tangled masses of pipes of many sizes that come together to create towers and other strange arrays; for having few buildings for their large footprint; and for often having an open flame, or “flare,” atop one or several towers. In addition to separating out the various hydrocarbons, refineries also remove other impurities from the oil.<br />
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<b><i>Many processes are used to separate the different hydrocarbon molecules from each other</i></b>. An atmospheric distillation unit simply allows molecules of gas (methane, for instance) to bubble out of the oil; the gaseous portions are siphoned off at this point. Some of the gas may be flared (burned), but this product is commonly piped elsewhere in the refinery complex to be used as fuel for later steps. The liquid portion continues into giant furnaces, where batches of crude are heated. Different liquid hydrocarbons boil at different temperatures, which allows them to be separated from one another by fractional distillation: the boiling crude feeds into tall distillation columns, and light hydrocarbons like butane and propane reach the very top of the column and leave by piping there. The hydrocarbons in gasoline leave the tower lower down; followed by kerosene (principal component of aviation fuel), diesel, and heating oil. The processing is much more complex than this, of course, and even the simplest refining will involve multiple stages of fractional distillation. <br />
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Leftover heavy hydrocarbons are also processed further. The lightest remaining fraction can be turned into lubricating oil, such as that in your car’s crankcase, but most of the remaining portion of the crude oil consists of heavy molecules – those with small amounts of hydrogen, which burn poorly and aren’t suitable for fuel. Some of what remains is only suitable for making asphalt and paraffin, but a modern refinery is like a meat-packing plant that “uses everything but the squeal.” Better living through chemistry means that refineries employ several different techniques to “crack” a single heavy hydrocarbon molecule into two or more lighter molecules. These processes require more time and more energy than the first, simple distillation process, and most also require the use of catalysts – substances that speed up chemical reactions. The cracking process can turn heavy hydrocarbons into gasoline or kerosene, even propane. For those crude oils that don’t have large amounts of the lighter hydrocarbons, hydrocracking and catalytic cracking are important in producing the light fractions that can be used to make fuels. Cracking heavy hydrocarbons to make gasoline requires more time and energy than distillation, and also requires the introduction of catalysts. All three factors add to the expense of refining heavy crudes, which explains why light crude has a higher price on the commodities market.<br />
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In addition to passing through multiple separation processes and perhaps cracking as well, every drop of crude that enters a refinery also passes through several steps intended to remove metallic and non-metallic impurities. These may be as simple as salt, which comes from water mixed in with the produced oil. Sulfur is a common contaminant, one that must be removed for clean-burning fuels – US refineries generate tens of thousands of tons of sulfur every day. Metal impurities such as nickel, iron, and copper are also removed, though in much smaller quantities than sulfur. <br />
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<i><b>In what seems like a violation of the law of conservation of mass</b></i>, a forty-two-gallon barrel of oil usually yields fuels, lubricants, and other hydrocarbons that add up to a little less than forty-three gallons of product. The “excess” is a result of the cracking process, which transforms dense molecules into light, less dense hydrocarbons. Even though refineries seem to put out more than they take in, in truth efining crude oil into gasoline is an expensive process, in part because of the large capital investment needed to build a refinery. Energy costs are also substantial, though at least a portion of the energy is generated through combustion of “waste” gases at most sites. Additives such as catalysts are also part of the costs, as is labor and maintenance of tens of thousands of pipes, vessels, towers, and other containers that must be carefully monitored. All told, crude oil’s visit to a refinery adds anywhere from twenty to thirty cents to the price of a gallon of gasoline in the US, <a href="http://www.eia.doe.gov/bookshelf/brochures/gasolinepricesprimer/%20">according </a>to the United States Energy Information Agency. <br />
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This is number five of a series of minilectures on the oil industry:<br />
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1) <a href="http://insidethepatch.blogspot.com/2009/09/where-does-oil-come-from-basic.html">Where Does Oil Come From?</a><br />
2) <a href="http://insidethepatch.blogspot.com/2009/09/where-do-oil-companies-find-oil.html">Where Do Oil Companies Find Oil?</a> <br />
3) <a href="http://insidethepatch.blogspot.com/2009/09/how-do-oil-companies-find-oil-basic.html">How Do Oil Companies Find Oil?</a><br />
4) <a href="http://insidethepatch.blogspot.com/2009/09/economics-of-oil-industry.html">The Economics of Petroleum Exploration and Production </a><br />
5) <i><b>Refining </b></i><== You are here. Future installments include:<br />
6) <a href="http://insidethepatch.blogspot.com/2009/10/why-does-gasoline-cost-so-much-daddy.html">The Economics of Big Oil</a><br />
7) The Future of OilSteven Mrakhttp://www.blogger.com/profile/06895351856452438924noreply@blogger.com0tag:blogger.com,1999:blog-1430302189987682933.post-50417564993720775892009-09-02T18:30:00.000-04:002009-10-30T13:21:17.041-04:00Where Does Oil Come From? Basic Petroleum Geology, Part I<script type="text/javascript">
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It's tough to wrap your head around the oil industry without a basic understanding of just what oil (petroleum) is and how it gets to consumers. When we see headlines like "ExxonMobil and Shell Post Record Quarterly Profits" on the same day we've paid almost $5.00 per gallon to fill our tanks, anger and disgust are natural reactions - as is suspicion that the companies making all that money are ripping us off; big time. The huge profits oil companies, large and small, make when oil prices rise into the stratosphere don't however, come (as some might believe) from manipulating prices at the pump. Those profits are, instead, the result of a series of happy accidents and calculated risks, just as are the profits from opening a body shop or buying a fast-food restaurant. The big difference between the oil companies and Wendy’s or Joe's Collision Service is that almost everyone knows where beef patties come from and how fenders get dented. Many people, on the other hand, haven't given much thought to how gasoline gets to the pump or even where it comes from in the first place. You want to know a little more? Let's begin at the beginning...<br />
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If you ask a third-grader, “<b>Where does oil come from?</b>” he'll probably say, "From dinosaurs!" Ask him again when he's a college senior, and he'll probably give the same answer. He's wrong: though they're among the biggest animals ever to walk the Earth, dinosaurs are way, way, <i>way </i>down the list of sources of oil. The biggest sources are at the other end of the size scale: microscopic plants and animals like algae; most of which were plankton floating in oceans and large lakes. When uncounted billions of those animals and plants died, their bodies settled to the bottom along with fine sediment, and the whole shebang ended up buried. That's a key to turning that dead organic matter into petroleum: burial. One of the reasons why dead dinosaurs - most land animals for that matter - didn't get turned into oil is that they were exposed to the air and oxidized, just like a hunk of iron left sitting behind the garage rusts away to nothing with enough time. <br />
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Now we have an underwater layer of sediment chock full of dead stuff - <b>organic matter </b>or complex carbohydrates (compounds of carbon, hydrogen, and oxygen). What's it gonna take to make petroleum out of that stuff? It takes four things:<br />
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First, it takes a high enough concentration of that organic matter: a "rich" layer can contain fifteen, twenty, or even <i>fifty </i>per cent organic carbon. As a general rule, concentrations of less than four to five per cent organic carbon are too lean to produce much oil. Just like it is with parents, richer is better.<br />
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Second, it takes <b>pressure</b>. <br />
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Third is <b>heat</b>: things don't even start until the temperature is somewhere between 120° and 190°F.<br />
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Fourth is <b>time</b>: lots of time.<br />
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The amounts of pressure, heat, and time necessary to "cook" organic carbon into the oil we humans crave are a complex system. Lower temperatures for long periods can generate as successfully as higher temperatures for shorter periods. Two of the three variables, though, require that the carbon-bearing layer be buried; and the deeper the better; though not <i>too</i> deep - if things get too hot, the oil "overcooks." Complicating matters is that different kinds of organic carbon generate different hydrocarbons at different pressure-temperature levels. An entire branch of geology (organic geochemistry) is devoted to the study of this process, which scientists call "thermal maturation." <br />
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This is the first step in the lifecycle of oil; creation of a petroleum source and its conversion from tiny bits of dry organic matter into the liquid we know as crude oil. Remember, there are four things, all of which must be present in the right amounts to generate oil: organic matter, heat, pressure, and time. And when we say time, we don't mean on the order of days, weeks, months, or even years. We're talking tens or hundreds of thousands of years; even millions of years. That last explains why fossil fuels such as petroleum are called "non-renewable" resources: the rate of replacement is so slow that, for all practical purposes, no new petroleum is being created.<br />
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<b>Where Does Oil Come From?</b> is the first in a series of posts on oil and the oil industry.<br />
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Stay tuned. Future installments will cover:<br />
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<a href="http://insidethepatch.blogspot.com/2009/09/where-do-oil-companies-find-oil.html">Where do Oil Companies Find Oil</a>?<br />
<a href="http://insidethepatch.blogspot.com/2009/09/how-do-oil-companies-find-oil-basic.html">How do Oil Companies Find Oil?</a><br />
<a href="http://insidethepatch.blogspot.com/2009/09/economics-of-oil-industry.html">The Economics of Petroleum Exploration and Production</a><br />
<a href="http://insidethepatch.blogspot.com/2009/10/oil-industry-basics-refineries-and.html">Refining: It's not all Gasoline</a><br />
<a href="http://insidethepatch.blogspot.com/2009/10/why-does-gasoline-cost-so-much-daddy.html">The Economics of Big Oil</a><br />
The Future of OilSteven Mrakhttp://www.blogger.com/profile/06895351856452438924noreply@blogger.com0tag:blogger.com,1999:blog-1430302189987682933.post-9877322121436729102009-10-11T17:39:00.000-04:002009-10-12T09:34:45.617-04:00Statistics Never Lie - but Liars Use Statistics<b>If you’ve visited your local Valero </b>gas station lately, you might have noticed a little political theater right there at the pumps. Not content with spending their money on K Street lobbyists in hopes of influencing the government in their favor, the Texas-based oil and gas company has instituted a “grass-roots” campaign in hopes of quashing climate legislation. Like most, although not all, other fossil-fuel companies, Valero’s management (led by CEO William R. Klesse) is staunchly – almost virulently – opposed to climate legislation. This may in part reflect the extreme rightward political leanings of former Oklahoma congressman Don Nickles, a board member, but is a position that is in no way unusual at the top of the industry. Rank-and-file employees, especially scientists (of which there are few on boards of directors) are less hard-line, by the way.<br />
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<div class="separator" style="clear: both; text-align: center;"><a href="http://ex.democracydata.com/Valero/sites/voicesforenergy/Topper-Small-No_Footer.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="96" src="http://ex.democracydata.com/Valero/sites/voicesforenergy/Topper-Small-No_Footer.png" width="200" /></a><br />
</div>All that means, however, that Valero has begun displaying posters at company stations (many former Diamond Shamrock sites) flatly stating that the Waxman-Markey climate legislation passed by the House of Representatives this past summer is, in the words of Klesse, “a hidden tax.” Klesse further <a href="http://www.fool.com/investing/general/2009/07/29/valero-would-like-to-cap-and-trade-its-losses.aspx%20">claims </a>that “more than a million high-paying jobs will disappear from our already weakened economy, with no measurable improvement in global climate change.” Perhaps Klesse is concerned that one of them will be his, for which he was compensated to the tune of $10.5 million in 2008 (per <a href="http://people.forbes.com/profile/william-r-klesse/83609">Forbes</a>). Valero’s poster, attributed to an organization called Voices for Energy (apparently another name for “Valero”) repeats Klesse’s statements, and states flatly that the Waxman-Markey bill will raise the price of a gallon of gasoline by seventy-seven cents - <b><i>or more!!!</i></b> democracydata.com, the domain hosting Voices for Energy, is a Virginia-based political consulting organization that terms itself specialists “in database management and zip to district matching supporting virtually any sort of grassroots lobbying activity.” Grassroots my ass: it’s just astroturf.<br />
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So anyway, let’s get to the claim of “77 cents per gallon.”<br />
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The impression left by the wild-eyed Uncle Sam is that, if Waxman-Markey passes, your gasoline will cost at least 77 cents more per gallon the next day. However, the 77-cent estimate comes from a compilation of studies performed by the American Petroleum Institute (<a href="http://en.wikipedia.org/wiki/American_Petroleum_Institute">API</a>), an industry trade association and advocacy group, and represents their estimate of the increase ten years out in 2019 (ignoring inflation, if any). API didn’t crunch the numbers themselves, however; they used numbers from a <a href="http://www.eia.doe.gov/oiaf/servicerpt/hr2454/pdf/sroiaf%282009%2905.pdf%20">study </a>published by EIA, the Energy Information Administration (the statistical agency of the U. S. Department of Energy, nominally independent). To sum up that study: EIA estimates that if energy markets were to continue unchanged, the average price of a gallon of gasoline in 2019 would be $3.62/gallon. With Waxman-Markey in place (unchanged from its current form), EIA estimates a best-case scenario of $3.74/gallon and a worst-case scenario of $4.29/gallon – the 65-cent difference is due at least in part to variable estimates of the effectiveness of carbon offsets in reducing costs. The API’s, and Valero’s, 77-cent “estimate” is that worst-case scenario, in which no refiner or producer reduces costs by a single penny – perhaps out of distaste for the practice of using carbon offsets…<br />
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The EIA figures are used by the Congressional Budget Office (CBO, the non-partisan agency that provides economic data to the legislature), which has <a href="http://www.cbo.gov/ftpdocs/102xx/doc10262/hr2454.pdf">estimated </a>that the use of all available carbon offsets would cut the cost of the cap-and-trade legislation by 70%, or about 54 cents of that worst-case scenario. CBO, by the way, calls the API figures “extreme” and <a href="http://cboblog.cbo.gov/?p=306%20">protests </a>that the use of the EIA’s 77-cent figure misrepresents the non-partisan group’s calculations.<br />
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Undeterred by the protests of non-partisan statistical organizations, however, the API not only continues to quote that 77-cent figure, but has also allied itself with that paragon of non-partisanship, the Heritage Foundation, to figure out on a state-by-state basis how much the cap-and-trade will “<a href="http://www.api.org/ehs/climate/regulation/waxman-markey-impact.cfm">cost</a>” people. <br />
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Both EIA and CBO have stated that the effects of using carbon offsets, details of which are still vague, on the ultimate costs can't be reliably calculated - which is part of the reason for the sixty-five cent spread in their estimates. For the API to use only the estimate that best supports their cause is, however, to be expected. It's akin to a Celtics fan shouting that <i>The Sporting News</i> says his team will will 80 games this year when the article says "between 60 and 80." And, of course, the Nets fans will sneer that the <i>News</i> said the Celtics would only win 60...<br />
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As always, the best policy is to take the Heritage Foundation’s numbers, add them to Ralph Nader’s, and divide by two… To recap: statistics never lie, but liars use statistics - only they don't use <i>all</i> of them. The API is cherry-picking...Steven Mrakhttp://www.blogger.com/profile/06895351856452438924noreply@blogger.com0tag:blogger.com,1999:blog-1430302189987682933.post-58023776837183083182009-09-24T21:09:00.000-04:002009-09-24T21:09:32.941-04:00Calculating Gas Mileage in Miles per Gallon (MPG)<span style="font-family: Arial,Helvetica,sans-serif;">Are you convinced that the EPA window sticker lied to you about your car's estimated mileage? Well, they might be wrong (it wouldn't be the first time); then again, you may not be calculating yours correctly. Don't panic: it's totally easy to do! All you'll need are a pencil and paper, or a calculator if you've forgotten how to do long division by hand.</span><div style="font-family: Arial,Helvetica,sans-serif;"><br />
<i><b>Step 1</b></i>: Fill your gas tank. Let the pump run until it shuts off by itself. Don't top off the tank, this adds to air pollution and wastes a little gas.<br />
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<i><b>Step 2: </b></i>If you have a trip odometer, zero it before you leave the pump. If you don't have one, record the odometer reading - I often write the number on the receipt.<br />
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<i><b>Step 3</b></i>: Drive until you need to refuel.<br />
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<i><b>Step 4: </b></i>Fill the tank again; remember to not overfill. Record the number of gallons from the pump readout; the number usually appears on the receipt as well (example: 12.45 gallons). This is the NUMBER OF GALLONS CONSUMED<br />
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<i><b>Step 5: </b></i>If you have a trip odometer, record the miles driven since the last fillup (writing it on the receipt works fine). If you don't have a trip odometer, record the odometer reading just as in step 2, and subtract the mileage at your last fillup from this new number (example: 109234 - 108891 = 343). This is the NUMBER OF MILES DRIVEN.<br />
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<i><b>Step 6: </b></i>To calculate gas mileage, the formula (eeek!!!) is<br />
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</div><div style="font-family: Arial,Helvetica,sans-serif; text-align: center;">NUMBER OF MILES DRIVEN<br />
</div><div style="font-family: Arial,Helvetica,sans-serif; text-align: center;">----------------------------------------------<br />
</div><div style="font-family: Arial,Helvetica,sans-serif; text-align: center;">NUMBER OF GALLONS CONSUMED<br />
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You can do this with a calculator, by long division on paper, or in your head...<br />
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In our example, the gas mileage is<br />
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</div><div style="font-family: Arial,Helvetica,sans-serif; text-align: center;"><b>343 / 12.45 = 27.55 MPG</b><br />
</div><br style="font-family: Arial,Helvetica,sans-serif;" /><span style="font-family: Arial,Helvetica,sans-serif;">And that's all there is to it!</span><br style="font-family: Arial,Helvetica,sans-serif;" />Steven Mrakhttp://www.blogger.com/profile/06895351856452438924noreply@blogger.com0tag:blogger.com,1999:blog-1430302189987682933.post-23231510033176730752009-09-03T09:39:00.000-04:002009-09-03T09:40:18.120-04:00Will BP's Tiber Discovery End Oil Imports? Nope.It’s all over the papers this morning: <b>BP </b>(formerly BP-Amoco, formerly British Petroleum) has officially announced what’s been a poorly-kept secret in the halls of Houston for weeks; a potential three-billion-barrel oil field in the waters of the Gulf of Mexico, 250 miles southeast of the Bayou City. The conservative pundits on AM Radio and FOX will be howling with glee this afternoon; and I can already hear Sarah Palin sitting on that porch with a view of Russia chortling, “I told you to let ‘em ‘Drill, baby, drill!’” A couple more of these, and America won’t have to kowtow to them Ay-rabs or that commie Chavez any more! Energy Independence is upon us!<br />
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But before you trade in that Escape hybrid on a new Unimog, maybe you’d better take a deep breath and consider some facts.<br />
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<i>Fact 1</i>: BP’s discovery, called <b>Tiber</b>, was drilled in the area known as Keathley Canyon, in some 4132 feet of water. The well penetrated another 35,055 feet of rock to reach its target (Lower Tertiary rocks, if you care). That means the discovery well has a total depth of 39,187 feet – deeper than any current oil production in the world. For reference, the 35,055 feet of rock between the sea bottom and the reservoir is a mile more than the total height of Mt. Everest.<br />
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<i>Fact 2</i>: This is the sixth discovery in this “trend” since 2000, including Shell’s <b>Perdido </b>discovery (in 10,000 feet of water) and Chevron’s <b>Jack </b>discovery in 2006. So far, there’s been no production. None, whatsoever – Shell predicts that <b>Perdido </b>development will begin in 2010.<br />
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<i>Fact 3</i>: Oil doesn’t just pour into tankers after it’s discovered like cows coming back to the barn at night. It will take billions of dollars of equipment and human talent to produce oil from a discovery this deep. In the case of <b>Tiber</b>, current technology very likely is insufficient to produce hydrocarbons from this depth; necessitating millions of dollars in research to develop this technology. Unless BP and its partners believe they can expect to turn a profit on oil produced from this field and others in the trend, the oil will stay in the ground. Most industry experts predict that the technology for production under these conditions will not be in place for a decade. The industry is well-funded and some of the brightest minds around are at work on solving the logistical problems involved in production at this depth – but until oil prices reach a level where the sale price exceeds the cost to produce a barrel of oil, it’s staying right where it is. Speaking of money, the “street” estimate of the cost to drill <b>Tiber </b>is over $250 million. And here you wondered where those "obscene" profits Big Oil made last year were going...<br />
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<i>Fact 4</i>: Energy independence it’s not. The USA imports between ten and eleven million barrels of crude oil every day. At 3 billion barrels and an estimated thirty-year lifespan, <b>Tiber </b>would produce an average of less than 300,000 barrels per day (although that would be front-loaded to an extent). Or, looking at it another way, US total consumption of crude oil averages between 19-20 million barrels/day. At that rate, three billion barrels is slightly less than a six-month supply.<br />
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Go forth and listen to your pundits, left or right – and remember that all of them are leaving out facts that don’t support their arguments.Steven Mrakhttp://www.blogger.com/profile/06895351856452438924noreply@blogger.com0