The Crude Oil Industry or the Oil Patch
The petroleum industry is also referred to as the oil industry or the oil patch. It includes the global processes of exploration for crude oil, extraction of crude oil, refining crude oil, transporting crude oil (often by oil tankers and pipelines), and marketing of crude oil products. The largest volume products of the petroleum industry are fuel oil and gasoline. Petroleum (crude oil) is also the raw material for many chemical products, including pharmaceuticals, solvents, fertilizers, pesticides, synthetic fragrances, and plastics.
Petroleum or crude oil is vital to many industries and is of the utmost importance to providing energy to power the global industrial civilization that we currently live in. Crude oil accounts for a large percentage of the world’s energy consumption, ranging from a low of 32% for Europe and Asia, to a high of 53% for the Middle East.
Other geographic regions’ consumption patterns are as follows: South and Central America (44%), Africa (41%), and North America (40%). The world consumes 30 billion barrels (4.8 km³) of oil per year, with developed nations being the largest consumers. The United States consumed 25% of the oil produced in 2007. The production, distribution, refining, and retailing of petroleum taken as a whole, represents the world’s largest industry in terms of dollar value.
The United States government provides a heavy public subsidy to petroleum companies, with major tax breaks at virtually every stage of crude oil exploration and extraction, including the costs of crude oil field leases and drilling equipment.
The terminology that one encounters when looking into a crude oil investment opportunity can be confusing to those that are new to the crude oil and natural gas scene or have limited exposure to it. Like any field of endeavor, it is good to understand the terminology that is being used in a particular field.
The overall concept of extracting crude oil (hydrocarbons) from the earth is pretty simple. You drill a hole (well) in the ground the depth of which can be hundreds or thousands of feet in order to reach a target geologic formation that contains crude oil and then lift the crude oil up to the earth’s surface with an electrical/mechanical pumping unit, which can sit on top of the ground in the case of a pump jack or it can be located down in the hole in the case of a submersible pump. Of course when you get into the technical aspects around all of this and the associated terminology, it can become quite confusing.
Commonly Used Terms in the Petroleum Industry
Barrel – The basic unit for measuring crude oil. A barrel is equal to 42 U.S. gallons.
Bit – A drilling tool that cuts the hole. Bits are designed on two basic and different principles. The cable tool bit moves up and down to pulverize. The rotary bit revolves to grind.
Blow-Out Preventer – A heavy casing head control that is filled with special gates or rams, which can be closed around the drill pipe or ca completely close the top of the casing.
Boyle’s Law – A law of physics stating that when gas is subject to compression and kept at a constant temperature, the product of the pressure and volume is a constant quantity, i.e., the volume is inversely proportional to the pressure.
BTU – British Thermal Unit is a generalized measure of heating value, also used to compare energy potential in different types of fuels.
Casing – Heavy steel pipe used to seal off fluids from the hole or to keep the hole from caving in.
Casing Head Gas – Natural gas produced along with crude oil in a well. The natural gas is taken from the well through the casing head at the top of the well.
Catalytic Cracking – A refining process for breaking down large, complex hydrocarbon molecules into smaller ones. A catalyst is used to accelerate the chemical reactions in the cracking process.
Christmas Tree – The assembly of valves, pipes and fittings used to control the flow of crude oil and natural gas from the casing head.
Condensate – Liquid hydrocarbons recovered by surface separators from natural gas. It is also referred to as natural gasoline and distillate.
Correlative Rights Theory – The theory adopted by the courts in several states that all landowners whose tracts overlay a producing formation have correlative rights in the formation. This theory is termed the “qualified ownership” theory.
Crude Oil – Liquid petroleum as it comes out of the ground. Crude oil varies radically in its properties, such as specific gravity and viscosity.
Derrick – A tapering tower, usually of open steel framework, used in the drilling of crude oil and natural gas wells as support for the equipment lowered into the well.
Distillate Fuel Oils – Fuel oils which are products of distillation. They include fuels used for diesel fuel and space heating.
Directional Drilling – The drilling of a well that departs materially from the vertical direction.
Downstream – Those activities in the crude oil and gas industry which take place away from the source of the supply. Downstream operations commonly include refining and marketing endeavors.
Drilling Fluids – Special chemical fluids, usually called mud, introduced into the hole to lubricate the action of a rotary bit, to remove the cuttings and to prevent blowouts.
Dry Gas – Natural gas which does not contain dissolved liquid hydrocarbons.
Dry Hole – A completed well which is not productive of crude oil and/or natural gas or which is not productive of crude oil or natural gas in paying quantities.
Enhanced Recovery – The increased recovery from a crude oil pool achieved by artificial means or by the application of outside energy sources to the pool.
Equivalent Barrels – Quantities of natural gas and natural gas liquids translated into barrels of crude oil based on equal energy content. The energy content of six thousand cubic feet of gas (6 MCF) is the rough equivalent of one barrel of crude oil.
Exploration – The search for crude oil and gas. Exploration operations include aerial surveys, geophysical surveys, geological studies, core testing and the drilling of test (wildcat) wells.
Fault Trap – A structural trap in the earth, favorable for the retention of petroleum, formed by the cracking and breaking of a rock plane.
Gusher – A crude oil well that comes in with such great pressure that crude oil flows out of the well head into the air. Such wells used to be commonplace, but with improved drilling methods, primarily the use of drilling mud, gushers are a rarity today.
Horizontal Drilling – A method of drilling where the drill bit is turned in a horizontal direction in an effort to produce hydrocarbons from a number of areas located at the same approximate depth.
Independent – A company involved only in the exploration and production of crude oil and gas and possibly in the transportation. An independent will not be involved in the refining of crude oil.
Injection Well – A well employed for the introduction into an underground stratum of water or gas under pressure. Injection wells are employed for the disposal of produced water from crude oil and gas wells.
Integrated Company – A company involved in virtually all aspects of the crude oil and natural gas industry including exploration, production, transportation, refining and marketing. These companies are also referred to as major oil companies.
Lease – The instrument by which a leaseholder or working interest is created in minerals.
LNG – Liquefied natural gas. Natural gas becomes a liquid at a temperature of minus 258 degrees F and may be stored and transported in the liquid state.
MCF – Thousand Cubic Feet. The standard unit for measuring the volume of natural gas.
Natural Gas – Hydrocarbons, which at atmospheric conditions of temperatures and pressure, are in a gaseous phase.
Natural Gas Liquids – Hydrocarbons found in natural gas which may be extracted or isolated as liquefied petroleum gas and natural gasoline.
OCS – The Outer Continental Shelf. Generally the area outside the territorial boundaries of the coastal state over which the federal government exercises control.
Oil Field – An area under which there are area one or more reservoirs containing crude oil.
Oil Pool – An underground reservoir or trap containing crude oil.
Overboard Water – Another name for produced water or brine produced from crude oil and gas wells.
Platform – Structure used in offshore drilling on which the drilling rig, crew quarters and other related items are located.
Plugging of Well – The sealing off of the fluids in the stratum penetrated by a well so that the fluid from one stratum will not escape into another or to the surface.
Probable Reserves – An estimate of reserves taking into consideration known geology, previous experience with similar types of reservoirs and seismic data, if available.
Processing Plant – A plant to remove liquefiable hydrocarbons from wet gas or casing head gas. This process yields the propanes, butanes and other products taken from natural gas.
Produced Water – Water that comes up a well with the crude oil and gas. Produced water is usually high in salinity. It is often the force that drives the crude oil and gas to the surface. After leaving the well, the produced water is separated from the crude oil and gas. Also referred to as overboard water, formation water, saltwater and crude oilfield brine.
Proration – The restriction of production by a state regulatory commission, usually on the basis of market demand.
Proven Reserves – Crude oil which is still in the ground, but which has been located and determined to be recoverable.
Quad – A quadrillion of BTU’s. This unit of measurement is used in connection with energy consumption. A barrel of crude oil contains 5.8 million BTU’s. Natural gas contains about one million BTU’s per MCF.
Recomplete – To move the primary completion from one zone to another. May involve reperforating, running other tubulars or setting a new packer.
Redrill footage – Occasionally, a hole is lost or junked and a second hole may be drilled from the surface in close proximity to the first. Footage drilled for the second hole is defined as “redrill footage.” Under these circumstances, the first hole is reported as a dry hole (explanatory or developmental) and the total footage is reported as dry hole footage. The second hole is reported as an oil well, gas well, or dry hole according to the result. The redrill footage is included in the appropriate classification of total footage, but is not reported as a separate classification.
Refinery – The facility where the characteristics of petroleum or petroleum products are changed.
Reservoir – A porous and permeable sedimentary rock containing commercial quantities of crude oil and gas. Three types of reservoirs are encountered including structural traps, stratigraphic traps and combination traps.
Rig – The structures and equipment used in drilling a crude oil and gas well including the derrick, engine, engine house and other equipment.
Roughneck – A driller’s helper and general worker on a drilling rig.
Roustabout – A common laborer around a drilling or a producing well.
Royalty – The landowner’s share of production, before the expenses of production are deducted.
Severance Tax – A tax on the removal of minerals from the ground. The tax can be levied either as a tax on volume or a tax on value.
Shut In – To close down a producing well temporarily for repairs, cleaning out, building up reservoir pressure, lack of market, etc.
Sour Gas – Natural gas contaminated with chemical impurities, notably hydrogen sulfide or other sulfur compounds, which cause a foul odor.
Specific Gravity – In the case of liquids, the ratio between the weight of equal volumes of water and another substance, measured at standard temperature and where the weight of the water is assigned a value of 1. However, the specific gravity of crude oil is normally expressed in the industry in degrees of API gravity.
Spudding In – The first boring of the hole in the drilling of an oil well.
Stripper Production – The final stage of production in the life of an oil well or oil field. This stage is characterized by low rates of production, sometimes no more than a barrel of crude oil per day.
Tension Leg Platform – A type of platform generally used in deep waters. Instead of a stationary platform attached to the ocean floor, the surface platform is tethered to a templet on the ocean floor by flexible steel tendons.
Upstream – Activities in the crude oil and natural gas industry which take place close to the supply. This normally includes exploration and production activities.
Well – A hole drilled in the earth for the purpose of finding or producing crude oil or natural gas or providing services related to the production of crude oil or natural gas.
Wellhead – A term usually defined as being at the Christmas Tree but, which under exceptional circumstances, may be defined as located at some other place.
Wellhead Revenues – The total dollar value of crude oil and natural gas at the wellhead. Wellhead revenues are calculated, based on the production volumes of crude oil and natural gas, multiplied by their respective average wellhead price.
Wet Gas – Natural gas containing liquid hydrocarbons in solution, which may be removed by a reduction of temperature and pressure or by a relatively simple extraction process.
Wildcat Well – An exploratory well being drilled in unproven territory, that is, in a horizon from which there is no production in the general area.
Work Overs – Operations on a producing well to restore or increase production. A typical work over is cleaning out a well that has sanded up.
Exploration & Production Terms
Borehole – Also referred to as a ‘wellbore’, a borehole is a hole in the earth made by a drilling rig.
Casing – A casing is a thick-walled steel pipe the drillers place in wells in order to isolate the fluids that form during drilling and to prevent the borehole from collapsing in on itself.
Completion – Completion denotes the process of rendering a crude oil or gas well ready to begin production. During this time, operators install permanent equipment, including the wellhead. Hydraulic fracturing may also be considered part of the completion process.
Development Well – Development wells are wells drilled within an area of proven crude oil or natural gas. These wells are drilled to productive depth.
Drilling Rig – The machine used to drill a wellbore.
Dry Hole – Dry holes are wells that cannot economically produce commercially viable volumes of crude oil or natural gas.
Exploratory Well – A well drilled to find a new field or to find a new reservoir in a field previously found to be productive of crude oil or gas in another reservoir.
Flaring – The burning of natural gas for safety reasons or when there is no way to transport the gas to market or use the gas for other beneficial purposes (such as FOR or reservoir pressure maintenance). The practice of flaring is being steadily reduced as pipelines are completed and in response to environmental concerns.
Hydraulic Fracturing Fluids – Mixture of water and proppants along with minor amounts of chemical additives used to hydraulically fracture low permeability formations. sufficient quantities to justify commercial exploitation.
Productive Well – A well that is capable of producing hydrocarbons in sufficient quantities to justify commercial exploitation.
Proppant – Sand or man-made, sand-sized particles pumped into a formation during a hydraulic fracturing treatment to keep fractures open so that crude oil and natural gas can flow through the fractures to the wellbore.
Recompletion – The process of entering an existing wellbore and performing work designed to establish production from a new zone.
Spacing – The distance between wells producing from the same reservoir; which is generally expressed in terms of acres.
Units of Measurement
BBL – Barrel of crude oil; approximately 42 US gallons.
BBL/D (also BPD, BD, B/D) – Barrels per day; to measure daily production and consumption.
BOE – Barrel of crude oil equivalent; a unit of energy based on burning one barrel (or 42 gallons US) of crude oil. For gas companies, this combines all reserves and production into one unit of measurement.
BOEPD or BOE/D – Barrels of crude oil equivalent per day; with one barrel equally 6,000 cubic feet of natural gas.
BCF – One billion cubic feet of natural gas
BTU – British thermal unit, a unit of energy used to determine the quality of the resource when burned; the heat required to raise the temperature of a one-pound mass of water by one degree Fahrenheit.
MBBL – One thousand barrels of crude oil, bitumen, condensate or natural gas liquids
MBD – One thousand barrels per day
MBO – One thousand barrels of crude oil
MBOE – One thousand barrels of crude oil equivalent
MCF – One thousand standard cubic feet of natural gas
MMBBL – One million barrels of crude oil, bitumen, condensate or natural gas liquids
MMBO – One million barrels of crude oil
MMBOE – One million barrels of crude oil equivalent
MMBTU – One million British thermal units
MMCF – One million standard cubic feet of natural gas
MTPA – Millions of tons per annum TCF = One trillion cubic feet of natural gas
TOE – Ton of crude oil equivalent (approximately 6,841 BBOE)