1.

Overview

There are many ways to look at the oil and gas industry.
From a personal perspective, oil and gas provide the world's 6.4 billion people with 60 percent of their
daily energy needs. The other 40 percent comes from coal, nuclear and hydroelectric power,
"renewables" like wind, solar and tidal power, and biomass products such as firewood.
As fuels, they keep us warm in cold weather and cool in hot weather; they cook our food and heat our
water; they generate our electricity and power our appliances; and they take us by car, bus, train, ship
or plane to places near and distant. We all feel the economic pinch when the prices of gasoline (Figure
1), home heating fuel or electricity increase sharply, even though in many developed countries, they
still cost less than some brands of bottled water!

Figure 1: The rising fuel prices affect us all.

As petrochemical feedstocks, oil and gas are the raw materials used to manufacture fertilizers, fabrics,
synthetic rubber and the plastics that go into almost everything we use these days (Figure 2), from toys
to personal and household items to heavy-duty industrial goods.
 Figure 2: Plastics and many other products are derived from petrochemical feedstocks.
From a business perspective, oil and gas represent global commerce on a massive scale (Figure 3).
World energy markets are continually expanding, and companies spend billions of dollars annually to
maintain and increase their oil and gas production. Over 200 countries have invited companies to
negotiate for the right to explore their lands or territorial waters, hoping that they will find and produce
oil and gas, create local jobs and provide billions of dollars in national revenues.

Figure 3: The oil and gas industry influences virtually every aspect of the global economy.
From a geopolitical perspective, large quantities of oil and gas flow daily from "exporting" regions
such as the Middle East, Africa and Latin America to "importing" regions such as North America,
Europe and the Far East. This creates political, trade, economic and even national security concerns
on both sides (Figure 4). Oil and gas exporters want to maximize their revenues and improve their
trade balances while maintaining control and sovereignty over their natural resources. At the same
time, importing nations want to minimize trade deficits and ensure a steady, reliable oil supply. China,
for example, has recognized that it must obtain access to oil in order to continue its long-term sustained
growth and is actively seeking new sources of supply in the major producing companies.

Figure 4: Maintaining a steady supply of oil and gas is vital to a country's long-term economic growth
(Houston Port).
From an internal policy perspective, producing countries continually wrestle with questions of how
best to develop their resources and attain long-term sustainable benefits for their people. At the same
time, consuming countries are always considering how to reduce their dependence on imported oil,
either by imposing higher energy taxes to spur conservation, tapping into domestic resources such as
coal (less costly but more polluting than imported oil) or developing alternative energy sources such as
nuclear power (Figure 5).
These issues have major long-term impacts, both within individual countries and on the world at large,
even affecting such fundamental issues as war and peace.
 Figure 5: Both exporting and importing countries face major policy decisions related to oil, gas and
other energy resources.
Finally, from a health, safety and environmental (HSE) perspective, there is a continuous concern
for safety in oil and gas operations, the impact that new projects have on surface environments, the
possibility of oil spills and the effect of pollutants such as CO2 (carbon dioxide, a product of
hydrocarbon combustion) on global climate change and air quality (Figure 6).

Figure 6: Air pollution ("smog") over the city of Los Angeles, California impacts the health of local
society.
The oil and gas business is clearly a multifaceted, global industry that impacts all aspects of our lives.
And yet it is one that we tend to take for granted until a crisis emerges-a tanker runs aground, a
hurricane damages a refinery, a country changes political leaders or revises its energy policies. Then
we blame "big oil" or OPEC or the politicians or the local service station attendant before things quiet
down again.
In this module, we will learn about the nature of oil and gas, define some basic industry terms and list
common units of measurement and conversion factors. We will introduce the concept of the Oil and
Gas Value Chain, and examine its structure and functional relationships. We will then look at sources
of oil and gas supply, major areas of demand, pricing fundamentals, drivers of demand and future
trends. Finally, we will identify some of the key players who make up this dynamic and vibrant industry.
2. Crude Oil and Natural Gas: From Source to Final
Products
Crude oil and natural gas are mixtures of hydrocarbons-chemical molecules that contain only
hydrogen and carbon. Crude oil is a liquid both underground and at normal surface conditions. Natural
gas is a vapor at normal surface conditions; underground, it can exist either as a vapor or something
like a bottle of carbonated soda-"in solution" with crude oil until the pressure is reduced.
The term "petroleum" collectively refers to crude oil, natural gas and solid hydrocarbon mixtures like
tar and asphalt. In addition to hydrocarbons, petroleum may contain impurities such as water, sulfur
compounds, oxygen, nitrogen, carbon dioxide and traces of metals.

Chemistry of Hydrocarbons
The smallest unit of a hydrocarbon compound is a molecule consisting of hydrogen and carbon
atoms. The physical properties of a hydrocarbon mixture - whether it exists as a solid, liquid or gas
under a given set of conditions, how much energy it contains, what products can be derived from it
and so on - are determined by the numbers and configurations of atoms contained within each of its
molecules, and how much these molecules weigh.
The simplest hydrocarbon molecule is methane. It is the essential ingredient of natural gas, and the
source of the "blue flame" that we see when we turn on a gas stove or furnace (Figure 7). Methane
consists of one carbon (C) atom and four hydrogen (H) atoms. Thus, its chemical formula is CH4 or, in
abbreviated form, C1.

Figure 7: The familiar blue flame that characterizes the combustion of methane, the key component of
natural gas.
The molecular weight of a molecule is equal to the total weight of its constituent atoms. Hydrogen, the
smallest atom, has an atomic weight of 1 by definition. Carbon has an atomic weight of 12. Thus, we
can determine the molecular weight of methane as follows:
Total atomic weight of carbon atoms: 1 x 12 = 12
Total atomic weight of hydrogen atoms: 4 x 1 = 4
Total molecular weight = 12 + 4 = 16
Figure 8 shows the names, chemical formulas, molecular weights, structures and key physical
properties of the "lighter" hydrocarbons C1 through C4. Note that:
 The more atoms a molecule contains, the heavier it is. The molecular weight of ethane
(C2) is 30, while that of propane (C3) is 44 and that of butane (C4) is 58.
 The heavier a molecule, the more likely it is to exist as a liquid at normal surface
conditions. This is based on its higher boiling point (i.e., the temperature above which it
changes from a liquid to a gas at atmospheric pressure). It is also more likely to have a
higher energy content or heating value per unit volume.
  Methane, ethane and propane each have a single molecular configuration. Butane
(C4H10), however, shows two possible arrangements (normal butane and iso-butane),
and each arrangement has unique physical properties. Because a simple, heavy
hydrocarbon molecule can contain as many as 66 or more carbon atoms, the variety of
molecular arrangements that can be present in a mixture and therefore, the range of
physical characteristics is immense.

Figure 8: Atomic structure, chemical name and potential uses of the hydrocarbon molecules methane
(C1) through normal and iso-butane (n-C4 and i-C4).
Natural gas mixtures fall into two general categories: dry or lean natural gas has high
concentrations of methane and ethane (typically 95 percent or more), while wet, or rich, gases have
higher concentrations of propane, butane and the intermediate-weight hydrocarbons pentane (C 5)
through heptane (C7). As the proportions of heavier molecules in a hydrocarbon mixture increase, it
is more likely to exist as a liquid at atmospheric conditions.

Origins of Crude Oil and Natural Gas

Naturally occurring hydrocarbons come from the decomposed remains of ancient plants and
animals. Through a sequence of geologic events that occurred over millions of years, organic
material was deposited on the Earth's surface and then transported to depressions or basins, where
it accumulated and gradually became buried at great depths under layers and layers of sediments.
 There, in what geologists refer to as source rocks, it was subjected to much higher pressures and
temperatures. Over time, and through a series of intermediate chemical reactions, some of this
material eventually turned into petroleum.
In general, the deeper a rock formation is located in the Earth's crust, the higher its temperature will
be. Thus, the type of petroleum that formed through these processes depended largely on the depth
of the source rocks.
 In relatively shallow source rocks, where temperatures ranged from about 60 to 80°C
[140 -176°F], the organic matter was converted into heavy oil.
 At lower depths and higher temperatures, from about 80°C to 175°C [176°F to 347°F],
the heavier, long-chain organic molecules began to break up into shorter molecules
and form medium and light oil.

 Where temperatures exceeded 175°C [347°F], the molecules became even shorter and
lighter, with more and more matter transformed to rich gas until, by the time it had
reached 600°F [315°C], all of it had been transformed to dry gas (methane).

Figure 9 shows the wide diversity that exists among petroleum fluids discovered worldwide.

Figure 9: Selection of petroleum samples ranging from a heavy black oil on the right to a light
condensate on the left.

Petroleum Migration and Accumulation

The source rocks in which petroleum formed millions of years ago are not the same rocks in which it is
found today. Rather, oil and gas, being lighter than the water normally contained in rock formations,
moved upward by gravity forces from the source beds along permeable migration paths. Eventually, it
accumulated in reservoirs contained within geologic traps, surrounded by impermeable cap rocks or
seals that keep it from traveling any farther (Figure 10).
 Figure 10: Cross section showing source rocks, migration paths and reservoirs in a sedimentary basin
similar to the North Sea basin. After oil and gas form in the source rocks, gravity causes them to migrate
upward until they are trapped in a reservoir waiting for discovery.

Petroleum Reservoirs
The term "reservoir" brings to mind the image of a large pond or lake, so it is natural to hear the term
petroleum reservoir and picture a huge underground "pool" of oil. In reality, a petroleum reservoir is a
porous, permeable rock formation, in which oil and gas are contained in the empty spaces between the
rock grains. These spaces are interconnected, thereby forming channels or conduits through which
fluids can flow to a well, and from there to the surface.

Separation and Treatment of Produced Oil and Gas

The fluid that comes out of a typical oil well is actually a combination of crude oil and natural gas, often
mixed with water, non-hydrocarbon gases and other impurities. That is the reason why the volume of
crude oil and natural gas is so different from the reservoir conditions and surface conditions, as shown
in Figure 11.

Figure 11: Hydrocarbon fluids change state as they travel from the reservoir to the surface.
The first step in processing this fluid is to route it to centralized surface handling facilities, where
carefully designed vessels are used to separate the oil, water and gas into individual streams. The
water is pumped back into the reservoir or otherwise disposed of in an environmentally friendly
manner. The oil is metered and stored in tanks to await pipeline or tanker transport to the point of
sale, and the gas is treated or conditioned to remove water vapor and other impurities and
processed to recover gas liquids before being metered and sold.
Figure 12 shows the representative compositions of various produced fluids after separation at the
surface, including a crude oil with associated gas, a wet (rich) gas and a dry (lean) gas.
 Figure 12: Representative compositions of various produced fluids after separation at the surface.
Note that C7+ refers to the composition of C7 plus all the heavier hydrocarbons.

Gas Handling and Processing

If the treated gas is dry or lean (i.e., contains mostly methane), it may either be compressed and sent
directly to its point of sale through high-pressure pipelines, or it may be turned into liquefied natural
gas (LNG) by cooling it to temperatures as low as -160ºC [-258ºF]. LNG occupies only about 1/625 of
the volume of dry gas, allowing it to be transported to distant markets in specially designed ships.
If the gas is wet or rich (i.e., has substantial amounts of ethane or heavier hydrocarbons), one post-
treatment option might be to send it to a gas processing plant. There, it may be cooled to around
-150ºF [-101ºC], causing these hydrocarbons to condense to NGL (natural gas liquids). The NGL is
then sold to a refinery or petrochemical plant.
If sufficient NGL is available, it may be economical to separate it further into its constituent
hydrocarbons. This involves a process called fractionation in a series of columns, where the NGL is
sequentially warmed to higher temperatures, causing the individual hydrocarbons-ethane first, then
propane, then butanes-to boil off and then condense. Propane, butanes and their mixtures are referred
to as liquefied petroleum gases (LPGs).This leaves a residual, Natural Gasoline, which can be
stored at atmospheric conditions (Figure 13).
Natural gas, LNG, NGL, LPGs and the hydrocarbons that come from them all have individual markets,
and all of them are in their final form to be used as fuels or for manufacturing petrochemicals.
 Figure 13: Rich gas is separated by gas processing into dry gas and NGLs. The NGLs may be sold to
a refinery or petrochemical complex, or separated by fractionation into individual hydrocarbon liquids.

Crude Oil Refining

Except for a few special power generation applications, most crude oils are not suitable for use as
finished products. In nearly all cases, they must be refined to satisfy specific markets.
Figure 14 illustrates, from left to right, the basic processes involved in refining crude oil. Initially,
products may range from light gasoline vapors and LPG to heavy residuals ("residuum"). Depending
on market demand, these first "cuts" will proceed to more complex processing into final product blends
(e.g., seasonal transportation fuels, heating fuels and special products like lubricating oils and asphalt).
The refiner's ultimate goal is to maximize the crack spread-the per-unit difference between the product
revenue and the cost of the crude oil. If the products sell for $52 per barrel, for example, and the cost of
crude is $47 per barrel, then the crack spread is ($52-$47), or $5 per barrel.
Figure 14: Simplified schematic of a refinery showing how a crude oil turned into an initial "cut" of refined
products.

Petrochemicals
Natural gas, natural gas liquids (including LPG) and the various refinery cuts may also be used as raw
materials or feedstocks for manufacturing petrochemicals. For example, methane can be used to
make ammonia for fertilizer, and ethane can be used to make ethylene, the first step in making plastics.
Table 1 lists some of the major categories of products that come from petrochemicals. Consider which
of these products you use daily, and what would you do or what would be your alternatives if these
products did not exist.

Some Major Categories of Petrochemical Products

Plastics Lubricants Process Chemicals

Carpeting Pharmaceuticals Rubber Goods

Adhesives Cosmetics Footwear

 Some Major Categories of Petrochemical Products

Paints Detergents

Inks Sealants Fragrances

Solvents Caulking Compounds Fertilizers

Apparel Fibers Transparent Sheets

Tires    

1. Measurement Units and Conversion Factors

Depending on the purpose of the measurement-and on regional or national preferences - oil, gas, gas
liquids and their products may be measured in terms of volume, weight or thermal energy. For
example:
 Petroleum engineers, particularly those working in the Western Hemisphere, measure
oil and gas volumes to answer questions like, "How much oil or gas do I have in my
reservoir? How much can be produced during the life of the field? What is the daily
production rate?"
 In contrast, ship owners would want oil shipments to be measured in weight to avoid
overloading their tankers.

 Marketers, on the other hand, are interested in the value of the products to their
customers. When they sell oil and gas products for fuel, they charge on the basis of
thermal energy units rather than volume or weight.

Crude Oil Measurement

Crude oil, as shown in Figure 15, is measured in units of volume, weight and thermal energy.
The standard volume unit for crude oil measurement, the 42-gallon barrel ("bbl"), dates back to the
1860s, when Pennsylvania producers actually stored and transported petroleum in wooden barrels. To
this day you may hear a petroleum engineer say, "This field has reserves of 100 million barrels and we
expect to produce it for 20 years at a design rate of 150,000 bbl/day." In countries that use the SI or
"metric" system, oil volumes may be measured in metric tonnes.
In Europe and especially the former Soviet Union, crude oil is measured in terms of weight and
expressed in metric tonnes ("mt"), where one mt equals 2204 lb. Although crude oils vary in density, a
good "average" volume-to-weight conversion is 7.33 bbls/mt. Based on this conversion factor, a
Russian engineer would refer to production not as 150,000 bbl/day but as 20,464 mt/day.
The thermal energy content or heating value of crude oil depends on its composition, but generally
averages about 6 million BTU per barrel, where a BTU (British Thermal Unit) is the amount of energy
required to increase the temperature of one pound of water by 1°F. Thus, a barrel of oil that sells for $48
would provide energy at an equivalent cost of:
 ($48/bbl) ÷ (6 million BTU) = $8/million BTU (per barrel of oil).
(For those familiar with the SI unit of energy, the Kilojoule (kJ),1 BTU =
1.055 kJ.)

Figure 15: A barrel of crude oil and its measurement units in volume, weight and thermal energy units.

Oil Quality: API Gravity

A crude oil's density is an important measure of its overall quality. This is because lighter oils are
generally easier to produce and refine than heavy oils, and therefore tend to have higher value.
Oil density is sometimes expressed in terms of its specific gravity, but more often is given as API
gravity.
 The specific gravity (S.G.) of a liquid is defined as the density of that liquid divided by the
density of fresh water. Fresh water has a density of 62.4 pounds per cubic foot. An oil
with a density of 53 pounds per cubic foot, therefore, would have a specific gravity of
(53/62.4), or 0.85. Fresh water, by definition, has a specific gravity of 1.0.
 The American Petroleum Institute (API) has developed a special measure that expresses
oil density in terms of API gravity, or ºAPI. It is related to the specific gravity as follows:

S.G. = 141.5/(131.5+ºAPI)
or
ºAPI = (141.5/S.G.) - 131.5
From these relationships, we can determine that fresh water, with a specific gravity of 1.0, has an
API gravity of 10 degrees, while our 0.85 S.G. oil above has an API gravity of 35 degrees; almost all
crude oils are lighter than water and so they will have higher API gravities. Figure 16 shows the
correlation between specific gravity and API gravity for various crude oil and condensate samples.
Figure 16: Correlation between specific gravity and°API gravity. Note the the API gravities of crude oils
from different fields, including Lagunillas (Venezuela), Prudhoe Bay, (Alaska), Ghawar (Saudi Arabia),
Ninian (offshore UK), and the very light condensate produced from the Arun Field (Indonesia).

Natural Gas Measurement

Natural gas is typically measured in terms of its volume at surface conditions and in thermal energy
units. It is measured by weight only when it is in the liquid state (LNG).
Because gas is compressible, its volume varies significantly with changes in temperature and pressure.
In order for gas volume measurements to have any meaning, they have to have some standard frame of
reference. For this reason, the industry has established standard conditions for referring to all gas
volumes (Table 2).

Unit of Gas Volume

Standard Conditions Area of Common Usage
Measurement

Standard Cubic Foot 14.73 psi (one atmosphere), US, Latin America, Africa, Middle
(SCF) 60°F East.

Normal Cubic Meter

One atmosphere, 0°C Europe, Canada, Russia.
(Nm3)

Conversions: 1 m3 = 35.31 ft3; 1 ft3 = 0.0283 m3

Table 2: Standard units and conditions for measuring gas volumes.

The standard cubic foot and the normal cubic meter are the most widely used, 1 Nm 3=35.31SCF. Figure
17 demonstrates the compressibility of natural gas. The gas has a volume of 1 unit (ft 3 or m3) in the
reservoir at 4000 psia pressure. When it is produced to surface conditions of temperature and pressure
it expands to 248 units, and when it is compressed into a high-pressure pipeline at 1000 psia pressure it
becomes 3 units. In all three conditions the engineer will refer to the gas volume as 248 standard units
(ft3 or m3 ).

Figure 17: Compressibility of natural gas. This Figure shows the effect of pressure and temperature
on natural gas volumes in the reservoir, pipeline and at surface conditions.
Because the cubic foot and cubic meter are too small for practical use, the industry uses larger
standard quantities with appropriate symbols (Table 3). Thus, rather than saying that a gas well
produces at a rate of 10,000,000 SCF/day, we say that the well produces at 10 MMCF/day.

Units Quantity Symbol ft3 Symbol m3 Application

Thousand 1000 MCF Mm3 Basic unit of sale

Million 1,000,000 MMCF MMm3 Daily well production

Annual field
Billion 1,000,000,000 BCF bm3
production

Trillion 1,000,000,000,000 TCF tm3 Field reserves

If gas volume is measured in m3, simply replace CF with m3 within the above symbols. Some companies use K, M°, Giga
("G") and Tera ("T") in place of thousand, million, billion and trillion.

Table 3:
Common practical units of gas measurement.
The heating value of natural gas depends upon its composition. Pure methane has a heating value of
1010 BTU/SCF [35,663 BTU/m3], while propane has a heating value of 2516 BTU/SCF. A gas that
contains 50% methane and 50% propane will have a heating value that is midway between 1010 and
2516 BTU/SCF.
Gas Liquids and Petroleum Product Measurement
LNG (liquefied natural gas) is typically measured in metric tonnes or cubic meters. The normal
conversion to volume units in the liquid state is that 1 mt equals 2.12 m3 or 79.5 ft3. When 1 tonne of
LNG is vaporized to become natural gas it expands about 625 times to equal 1380 m3 or 48,700 ft3 at
atmospheric conditions.
LPG and petroleum products are generally measured in gallons in the United States and certain
other Western Hemisphere countries, and kiloliters or metric tonnes in Canada, and in Europe and
other Eastern Hemisphere countries. Their conversion from volume to weight will depend on the density
of the product. Thus, one metric tonne of propane is equal to 521 gallons or 1.97 kiloliters, while one
metric tonne of fuel oil is equal to 281 gallons or 1.064 kiloliters.
LPG must be stored at an elevated pressure or be refrigerated in order to remain in the liquid state, and
so it is measured at these high-pressure and/or low-temperature conditions rather than at "atmospheric"
conditions (Figure 18).
As is true for oil and natural gas, the heating value of a petroleum product depends upon its
composition. For example, the heating value of propane is 91,500 BTU/gal, while that of heavy fuel oil is
150,000 BTU/gal. However, because each product has a standard, relatively narrow industrial
specification, their individual heating values will not vary significantly and so they are usually traded on
the basis of weight (e.g., $/mt) or volume (e.g., $/gallon).

Figure 18: Propane must be stored at a pressure of 200 psi or be cooled to -44°F (-42°C) in order to
remain in the liquid state. This photo shows an outdoor grill with a storage tank in which liquid propane is
maintained at 200 psia pressure and may be exposed to a temperature up to 100°F (38°C) and still
remain a liquid.

Energy Content and Equivalency

 From the standpoint of meeting heating requirements, is it better to have a tonne of crude oil or a
tonne of coal or a tonne of LNG?
To answer this question, we can look at the heating values of crude, gas and products as
shown in Table 4:

Fuel Quantity BTU Equivalent (approximate)

Crude Oil 1 bbl 6 million BTUs

Crude Oil 1 tonne 44 million BTUs

Natural Gas (LNG) 1 tonne 49.2 million BTUs (48,700 ft3 x 1010 BTU/ft3)

Coal 1 tonne 24 million BTUs

Table 4: BTU equivalents of hydrocarbon fuels.

Thermal Energy Equivalency:

Using the thermal energy relationships from Table 4, we can relate the value of any hydrocarbon to a
common measure based on thermal energy equivalency. The normal unit is either the barrel of oil
equivalent (BOE) or tonnes of oil equivalent (TOE).
Example: Last year, Colombia produced 551,000 bbls/day of crude oil, 619 million ft 3 /day of natural
gas and 65.6 million tonnes of coal. Express their annual production in barrels of oil equivalent and
tonnes of oil equivalent.
Solution: Barrels of Oil Equivalent
Annual oil production:
551,000 bbl/day x 365 days
= 201.1 million barrels of oil equivalent
Annual gas production:
619,000 MCF x 365 days x (1 million BTU/MCF) / (6 million BTU/bbl)
= 37.7 million barrels of oil equivalent
Annual coal production:
65.6 million tonnes x (24 million BTU/tonne) / (6 million BTU/bbl)
= 262.3 million barrels of oil equivalent
BOE = 201.1 + 37.7 + 262.3 = 501.1 million
Solution: In terms of Tonnes of Oil Equivalent
We use the relationship that 1 tonne = 7.33 bbls.
Tonnes of oil equivalent = (501.1)/7.33 = 68.4 million TOE

Hydrocarbon Price Equivalency:

We can also relate the price of the various hydrocarbons on the basis of their thermal energy
equivalency.
Example: If the price of oil is $48/bbl what are the equivalent unit volume prices of natural gas and
coal?
Solution
Oil price = ($48/barrel) / (6 million BTU / bbl) = $8/million BTUs
Natural Gas thermal sales unit = 1 MCF = 1000 ft3 x 1000 BTU/ft3 = 1 million BTUs /MCF
 Natural Gas price equivalent to the oil price= 1 million BTUs/MCF x $8/million BTUs = $8/MCF
Coal thermal sales unit = 1 metric tonne = 24 million BTUs
Coal equivalent price = (24 million BTU/tonne) x ($8/million BTUs) = $192/tonne
In reality, as shown in Figure 19a and 19b, each of these hydrocarbons has its own regional or
international market prices. In the major consuming countries, gas approaches oil equivalent
prices, but in countries like Qatar, which have large isolated gas reserves, gas prices are much
lower relative to oil. Because of a large oversupply, coal prices have been much lower than the
oil equivalency price shown above-on the order of $35/tonne for many years-but has increased
in recent years, especially on the spot markets. Industrial companies can easily switch the
burner tips of their boilers back and forth to burn natural gas or fuel oil to take advantage of
regional price differences. The residential, commercial and power generating customers do not
normally have that flexibility.
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Figure 19a: This figure shows historical data of daily crude oil consumption rate and average
annual crude wholesale price for the two major marker crudes: Brent and West Texas Intermediate.

Interactive Chart:
Mouse over the graphic to see individual values. Turn lines On or Off by clicking on the labels below the graphic.
Click and drag to zoom in the chart.
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Figure 19b. This figure shows the average annual natural gas prices in three regions (LNG
delivered into Japan, UK Heren Index, and Henry Hub price in the USA) and BTU equivalent price for
crude oil (Brent crude price divided by 6).

Interactive Chart:
Mouse over the graphic to see individual values. Turn lines On or Off by clicking on the labels below the graphic.
Click and drag to zoom in the chart.

Conversion Table and Electronic Calculator

Table 5 below lists some of the more widely used factors for converting crude oil, petroleum products
and natural gas into their various equivalents. To do your own quick unit conversions, you may use the
IHRDC Oil & Gas Unit converter.
 Table 5: Conversion Table for crude oil, natural gas and gas liquids. (Source from BP report 2005).
Oil & Gas Unit Converter: Conversion Table for crude oil, natural gas and gas liquids. (Source
from BP report 2005).
Interactive App:
Click on the categories on the left, type in the value you want to convert, and last click on the From and
To labels to change your conversion units.
2. Oil and Gas Value Chain
The Oil and Gas Value Chain represents the sequence of functions that occur from Upstream
sources of supply, to Midstream transportation and refining or processing, to Downstream retail
markets (Figure 20). It reflects the "flow" of hydrocarbons as they move like a river from Upstream
to Downstream. It is also a way of expressing the increase in commercial value that is created as
crude oil and gas are sold Upstream at wholesale prices, transported and processed or refined at
Midstream for fees or margins, and eventually sold Downstream at retail prices.

Figure 20: Traditional sectors comprising the oil and gas industry value chain from Upstream to
Downstream, from wholesale to retail markets and from crude to refined products.

Upstream Sector
The Upstream sector is where oil and gas is discovered, developed, produced and sold to the wholesale
market. It represents the source of oil and gas supply and encompasses the functions shown in Figure
21.

Figure 21: Major stages of the Upstream sector.

Negotiation of Upstream Agreements
Before a company can commence exploration, it must negotiate an agreement with the owner of
the area's mineral rights. Individuals own mineral rights in certain parts of the US, Canada and the
UK but in most onshore and offshore locations, these rights are owned by a national or state
government, and so the negotiations are between the company and a designated government
agency.

Exploration
Once an agreement is in place, the company's exploration team begins gathering the subsurface
data that it will use to select locations for drilling one or more exploration or "wildcat" wells. If an
exploration well indicates that oil and/or gas are present in potentially commercial amounts, appraisal
wells are then drilled to determine the extent of the discovery. Technical specialists then estimate
how much oil and gas are present in the subsurface. If the resources are sufficiently large and the
economics appear to be attractive, the field becomes a candidate for development.
In many exploration areas several companies typically join together in a joint venture to share the
risks, technology and major capital investments required for full development. One company is
usually named to be the operator; however, all of the participating companies will have a "say" in
major decisions as specified in a Joint Operating Agreement.

Field Development
Once a promising discovery is made, teams of specialists prepare an optimal development plan that
integrates the field production schedule with market needs.
 A technical team analyzes the subsurface reservoir in detail and prepares several
development options by selecting the number and location of development wells and
specifying the surface facilities required to process production into marketable
products.
 A marketing team may enter into a Letter of Intent for the long-term sale of the produced
hydrocarbons, especially for natural gas, which is not yet an international commodity.

 Financial analysts incorporate the technical and marketing teams' work into financial
models and prepare a detailed report of the project economics for each proposed
development option.They include the fiscal terms of the Upstream Petroleum
Agreement so as to allocate the future cash flow to both the mineral owner and the
contractor or joint venture.

Ultimately, through an iterative process, the technical, marketing and financial specialists decide on
an optimal development plan and recommend it for funding. Once approved it is submitted to the
appropriate governmental agency for final review and approval.
After all approvals are received, engineering design and construction can begin. Development wells
are drilled and connected to centralized surface facilities, and one or more pipelines (and, if
necessary, port facilities) are constructed to deliver oil and gas to a sales or transfer point, and from
there to wholesale markets.
If the discovery is made offshore the development decision is more complicated. Now the technical
team must decide whether to set a fixed platform on the sea floor that is high enough to sit above the
surface to contain the wells' surface facilities and living quarters. Alternatively, they may use various
forms of floating systems including a floating vessel that can serve as a "floating" production, storage
and operating (FPSO) facility with the wellheads on the FPSO or, in far deep water, on the sea floor.
Whatever the decision, offshore field development is much more expensive than onshore. A
deepwater FPSO system off the coast of Angola costs about $3 billion for a production rate of
250,000 B/D.
 Figure 22a: Various options for developing an offshore field.
Figure 22b shows the subsurface geology and proposed development plan, including 15 well locations,
and five platforms for an offshore gas field in Indonesia.
 Figure 22b: Map view of proposed development plan for a gas field in Indonesia. Shows 15 well
locations and five platforms.

Long-term Production
A newly developed field's oil and gas production often builds to a sustained plateau, which may continue
for many years before declining to a level where it is no longer economical. During this time,
engineering and operating personnel design, construct and manage the producing wells and maintain
surface facilities to meet daily production targets in a prudent and safe manner, while applying best
practices to maximize hydrocarbon recovery. Meanwhile, marketing personnel manage the sale of
produced hydrocarbons, and financial personnel report fiscal results and distribute payments to the host
government and project participants. A field's producing life may be as short as 15 years, as was the
case for some recent Gulf Coast fields, or more than 50 years, such is the case for the currently
producing Ghawar Field in Saudi Arabia.
Not all of the hydrocarbons that are identified as being present ("in-place") in a field can be
economically recovered with current technology. Those hydrocarbons that can be recovered are
referred to as reserves. A field's recovery factor is the ratio of its reserves to its hydrocarbons in place.
Typical recovery factors for oil reservoirs may range from around 15 to 70 percent. Because gas is
lighter and has much lower viscosity, recovery factors are usually higher, on the order of 60 to 85
percent.

Figure 23: Typical production stages for a producing field.

Wholesale Hydrocarbon Markets

Many oil and gas companies (E&P companies) restrict their activities to the Upstream business; they
sell their production exclusively to wholesale markets and do not venture into the Midstream or
Downstream sectors.

Crude Oil Markets

Crude oil is a worldwide commodity. This means that it can be sold into a global market, so long as a
producer can deliver oil from the field to a pipeline or a port that can accept crude oil tankers. It is
sold directly to customers or indirectly through brokers. The sale may be made at the loading port
(FOB, or freight on board) or discharge port (CIF, or cargo, insurance and freight), in which case the
seller is responsible for shipping.
 Figure 24: Crude oil may be sold in the physical market FOB a loading port or CIF a receiving port.
Crude oil prices are both volatile and transparent; therefore, the sale price of a cargo is usually
specified as a differential from one of three standard "marker" crude oils (Figure 25):
 West Texas Intermediate ("WTI") Cushing, Oklahoma
 Brent in Northwest Europe

 Dubai in the Arabian Gulf

(Note: Marker crude oils are blends of crude oils within a narrow range of gravity that are produced in
substantial qualities, of a geographical trading location, with a market that does not have a documented
buyer or seller.)
The differentials may be positive or negative depending upon the location of the sale, quality of the
crude, supply/demand for the grade, seasonal needs and market perception. For example, Nigeria's
Bonny Light may sell for up to a $1.00 premium to Brent, and Colombia's Cano Limon, a heavier crude,
up to a $5.00 discount to WTI. The prices of daily transactions in these and other crudes are reported
by such entities as Platt's (www.platts.com) and may be used as a basis for selling wholesale cargos.
 Figure 25: Sales locations of the three major "marker" crudes: WTI, Brent and Dubai.
For example, a spot cargo sale of 220,000 barrels of crude was sold by a Latin American producer. The
WTI price is referenced in the agreement as the daily price published by NYMEX (New York Mercantile
Exchange) for WTI in the next trading month ("prompt month"). ( www.nymex.com)
Crude oil may also be bought or sold on a fixed price basis in some future month using special financial
instruments called forward and future contracts (Table 5a). These contracts allow buyers and
sellers to enter into contracts in advance of a sale month at a fixed and known price, thus
avoiding price volatility and eliminating the volume risk.

Forward Contract

Standard contract for sale or purchase of commodity in some future month, traded over the
counter (no exchange) at fixed prices set by the oil trade. Participants are large International
Companies.

Futures Contract

Standard contracts for sale or purchase of specific quality, gravity and delivery point, on a
commodity exchange (NYMEX, IPE) traded for a number future months. Physical delivery is
made upon maturity. Many participants.

Table 5a: The two major forms of financial contracts used for oil and gas commodities.
 A forward contract is entered into by counter parties directly or through a broker,
without the involvement of an exchange or clearing mechanism. The Brent Forward
Contract is a standard contract for the purchase or sale of 600,000 bbls of Brent
crude in some future month. The contract may be traded a number of times before its
date of maturity among parties but the parties holding the buy and sell sides of the
agreement on its date of maturity must complete the transaction. Because of its size,
there are only 8-12 players in this market.
 A futures contract is offered through a commodities exchange, such as the New
York Mercantile Exchange (NYMEX -- www.nymex.com) and the International
 Petroleum Exchange in London (IPC -- www.theice.com). It allows for the purchase or
sale of a specific amount of a defined crude, to take place at a given location in some
future month.
The NYMEX, for example, has a standard futures contract with the following
stipulations:

o Purchase or sale of 1000 bbl of crude oil

o Oil is specified as light, sweet crude (West Texas Intermediate (WTI),

Low Sweet Mix, New Mexican Sweet, North Texas Sweet, Oklahoma
Sweet, South Texas Sweet)

o The date of the purchase/sale is 30 months from the date of the

contract.

o A contract may be bought and sold many times before its closing date,
which normally takes place three business days before the 25th day of
the month that precedes the delivery month--for example, if a futures
contract stipulated a delivery month of December, then the closing date
would be at least 3 days before November 25 (i.e., November 22).

o Once the closing date has passed, the holders of the contract are
obliged to buy or sell the 1000 bbls during the contract month, at the
specified place of delivery or some other arranged location.

You can appreciate that the crude oil market involves many different groups of oil companies,
traders and financial institutions that are involved in the physical and/or financial markets. Although
most of the major oil companies do not use financial instruments, many other organizations do:
E&P companies to manage price or volume risks, trading companies to hedge positions (Glencoe,
Vitol, Arcadia), financial institutions to arrange transactions (Morgan Stanley, Barclays Bank, Louis
Dreyfus) and investment banks and hedge funds for speculation (Merrill Lynch, Prudential Bache).
These entities use a number of different financial instruments and strategies to manage risk,
including hedges, options and swaps.

Midstream Sector

The Midstream Sector is where crude oil, natural gas and gas liquids are transported and
transformed into products for the retail market. Traditionally, produced fluids have been refined or
processed near the retail markets; however, the evolution of new oil and gas products and/or the
difficulty of locating new facilities in market areas has led to the more recent construction of
refinery and processing facilities near the producing facilities.

Midstream Crude Oil Value Chain

The midstream crude oil value chain, shown in Figure 26, involves the transportation, storage and
refining of crude oil into products that can be sold into the retail markets.
 Figure 26: Shows Midstream Crude Oil Value Chain. In this case crude is transported to refineries
located near retail markets. In some cases refineries are located near producing facilities and products
are transported to the markets.

Crude Transportation
Midstream Transportation of crude oil typically takes place by pipeline and/or crude oil tankers.

Crude Tankers
Crude oil tankers are typically large ships that carry cargoes to a single destination and then return to
the loading port with only seawater for ballast.
Crude oil tankers range from coastal vessels to the largest ships ever built. They are classified
according to their cargo-carrying capacity and suitability for particular trade routes, as shown in
Table 6.

Vessel Capacity, Deadweight Tonnes (DWT); Remarks

Classification 1 DWT = 2205 lb

60,000 - 80,000 DWT (approximately 440,000 - 586,000 barrels). Ship

Panamax dimensions based on the largest vessel size that can pass through the
Panama Canal.

80,000 -120,000 DWT (apx. 586,000 - 880,000 barrels). Represents

Standard American Freight Rate Association (AFRA) size. Commonly
Aframax used in Caribbean/Latin America/US East Coast trade, as well as within
Asia Pacific region. Can load and unload at most shallow water US East
Coast ports.

120,000 -160,000 DWT (apx. 880,000 - 1.2 million barrels). Ship

dimensions based on the largest vessel size that can pass through the
Suezmax
Suez Canal. Major trade routes include West Africa to US Gulf Coast and
East Coast.

160,000 -350,000 DWT (apx. 1.2 - 2.6 million barrels). Limited to

Very Large Crude deepwater ports; unable to transit Panama or Suez Canals. Most
Carrier (VLCC) economical for large-volume, long-haul transportation (e.g., Arabian Gulf
to Japan, US or Western Europe).
 Vessel Capacity, Deadweight Tonnes (DWT); Remarks
Classification 1 DWT = 2205 lb

Ultra-Large Crude Over 350,000 DWT (> 2.6 million barrels). Limitations and areas of
Carrier (ULCC) application similar to VLCCs.

Table 6: Crude oil tanker classifications.

As shown in Table 6, different types of crude tankers are suitable for different trade routes, and no one
vessel type is ideal for all routes. On average, however, tankers today travel about 5000 miles on a
single voyage. About 60 percent of the world's oil production is transported by sea and a majority of
these shipments are from the Middle East. At present, the world's crude oil tanker fleets total roughly
3500 vessels (Figure 27).

Figure 27: The MT Four Sun, a Suezmax Tanker, carrying 1 million barrels of crude oil to the US Gulf
Coast (Courtesy of Hansa Hamburg Shipping)

Tanker Charter Rates

About 80 percent of the world's tanker capacity today is provided by independent ship owners (e.g.,
Frontline Ltd., Knightsbridge Tankers Ltd., Nordic American Shipping, General Maritime and Tsakos
Energy), who charter their vessels to major oil companies and other clients. The other 20 percent is
provided by private and national oil companies.
The tanker market is highly competitive with charter rates responding to supply/demand. One measure
of the competitiveness of tanker freight rates in the spot market is to refer to their deviation from
WorldScale 100 (WS 100). WS 100 is a nominal freight index, expressed in $/metric ton, published
annually by the WorldScale Association, for all potential trade routes for a standard 75,000 DWT tanker
operating under assumed conditions and earning a nominal daily hire of $12,000. It reflects a starting
point for charter negotiations. (www.worldscale.co.uk)
In times of surplus tanker capacity, as occurred during the oil industry downturns of the 1980s and
1990s, WS falls below 100. More recently, as oil demand has increased, WS has become very volatile.
For example, it moderated for the larger tankers at WS100 in the 2001-2004 periods as oil demand
grew. This spurred construction of new tankers and very few scrappings, which, in turn, caused an
excess of tanker capacity and a drop in WorldScale by 2005.
As an example of WorldScale calculations, consider a VLCC carrying about 300,000 DWT of crude and
required fuel between Ras Tanura (Saudi Arabia) and Houston (a metric tonne corresponds to about
7.33 barrels). The amount of crude oil in this cargo is 280,000 DWT, with the other 20,000 DWT being
fuel.
If the WS100 rate for this voyage is $22 per tonne, then we can determine the per-barrel transportation
cost for the oil as follows:
 Total cost of voyage at WS100 = $22 x 300,000 = $6.6 million
 Crude transported = 280,000 x 7.33 = 2,052,400 bbls

 Transportation cost = $6,600,000/2,052,400 = $3.22/bbl

Now consider that in August 2005, WS dropped to WS65, which meant that the shipping cost dropped
to $14.30/mt and the cost for the above spot charter dropped to $2.09/bbl (3.22 x.65). In the fall of 2004
the rate was as high as WS300 or $9.66/bbl. This reflects a volatile market.
Figure 28 shows the WorldScale Index for several trade routes for the past few years. Note the volatility
of the WS in recent years, especially for petroleum products, and the shorter Atlantic Coast crude route.
 Figure 28: WorldScale Index for several trade routes and cargo types. Note that the product rates
have been much higher than the crude rates.

Tanker Safety
There are a number of safety codes and pollution prevention/response initiatives that have been
imposed by governments or instituted voluntarily by the tanker industry. From a safety perspective, for
example, tankers serving the US and certain other countries are required by the US Oil Pollution Act
and, more recently, MARPOL (established by the International Maritime Organization), to phase-out the
industry's remaining single-hull tankers and replace them with double hull tankers (Figure 29) by 2010 at
the latest. This is a substantial undertaking by the industry.

Figure 29: A double hull configuration provides an extra layer of protection for the tanker's cargo in
case of an outer hull rupture.

Ship Transportation: LNG

A growing alternative for Midstream gas transportation is in the form of LNG ships. When gas is cooled
to very low temperatures, -258°F (-160°C), it shrinks by a factor of 625, becomes a liquid and can be
transported in LNG ships to distant markets where it is vaporized and delivered into pipelines for the
Downstream market.
LNG Ships (Figure 30) built in the 1990s typically carried a cargo of 138,000 m 3; in the early 2000s they
increased to 145,000 m3. In recent years orders have been placed for larger ships, in the range of
240,000 m3 to achieve economies of scale on longer voyages between Qatar and Europe and the
United States.
 Figure 30: There are two major LNG ship designs: the membrane design shown on the left and the
self-supporting Moss-Rosenberg spheres shown on the lower-right. Photo courtesy of
www.lngoneworld.com.

Crude Transportation by Pipeline

Pipelines (Figure 31) are also used to transport crude oil, natural gas and products over relatively long
distances. Crude pipelines carry supply from producing fields to shipping ports or refineries, product
pipelines carry refined products to regional distribution centers, and gas pipelines carry rich or dry gas
to retail markets. Storage facilities are an integral part of the pipeline system, whether for crude,
products, natural gas or gas liquids.
 Figure 31: Crude production from the Prudhoe Bay Field, Alaska is transported by pipeline to Valdez,
Alaska and then by tankers to California refineries or to Panama, where the cargo is transferred to smaller
ships to make the transit through the Panama Canal and thence to refineries in Houston.
There are thousands of miles of pipelines in this world and more being built every year. For 2006, for
example, a total of 11,750 miles of pipelines were built: 3,580 miles of crude oil lines, 1,524 miles of
product lines and 6,465 miles of gas pipelines (Oil and Gas Journal, Feb. 13, 2006).
Pipelines represent a major investment and are built to meet long-term market demand. Their designs
are based on the most economical way to meet the demand. Greater efficiencies are achieved at higher
throughput rates using larger diameters lines (Figure 32).
 Figure 32: Substantially higher throughput is achieved as the diameter of a pipeline is increased.
Fluids in a pipeline flow from points of high to low pressures. Along the way, the pressure drops
because of energy losses caused by friction and changes in elevation. To overcome these pressure
losses and keep the fluids flowing, pumps (for liquid pipelines) or compressors (for gas pipelines) have
to be installed at intervals along the line to increase the pressure and give the fluids an extra "boost" as
they move along.
Figure 33 shows the BTC (Baku-Tbilisi-Ceyhan) pipeline that carries crude from Baku, Azerbaijan to
Ceyhan, Turkey, a distance of 1100 miles (1760 km). It is 42-46 inches in diameter, has eight pump
stations and a capacity of 1 million barrels/day. (BTC pipeline)

Figure 33: The BTC (Baku-Tbilisi-Ceyhan) pipeline carries crude from Azerbaijan to Turkey.

Refining of Crude Oil

Crude oil is refined in the Midstream sector of the value chain, generally near the market, in such places
as the US Gulf Coast, Rotterdam and Singapore, where it can be integrated with gas processing and
petrochemical plants to achieve higher margins. When located near the market it is also possible to
optimize the daily "run" of a refinery to meet short-term product needs. However, there are a number of
refineries in the producing countries and others at points between the upstream and the market (Figure
34).

Figure 34: The HOVENSA refinery on the US Virgin Islands in the Caribbean which refines 500,000
bbls/day of crude oil, mainly from Venezuela, and delivers products to the US and Europe. It has about 11
million barrels of storage capacity for both crude and products. Note the refinery in the upper right side of
the picture (http://www.hess.com
/index2.aspx)
Refineries (see Figure 14) can be relatively simple in design or very complex and may vary widely in
their throughput capacities. The more complex refineries cost much more to build but are able to "crack"
the heavier hydrocarbon molecules into the lighter gasoline molecules. A simple hydroskimming
refinery, with a capacity of 50,000 bbl/day, may cost $130 million to build ($2600 per barrel/day of
capacity), while a more complex coking refinery, with a capacity of 200,000 b/d, may cost $2 billion
($10,000 per barrel/day of capacity). The more complex coking refineries can "crack" the longer chain,
heavier hydrocarbon molecules into shorter chain, lighter molecules that may be in greater demand and
realize a greater "margin" per barrel. US refineries tend to be quite complex because of the high market
demand for lighter molecules that can be made into gasoline blends. Europe, on the other hand, can
have less complex designs because their demand leans more toward the heaver molecules ("middle
distillates") used to make diesel fuel.
Figure 35 and Figure 36 show the daily demand for gasoline and middle distillate products, respectively,
in various regions of the world. Note the strong demand growth for all of these products is driven by the
transportation markets. Note also the proportionately higher use of gasoline in the US compared to
diesel in Europe and Asia Pacific. Where is the most rapid growth in the last few years? Where did the
consumption decline in 2008? Why?
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Figure 35: Daily demand for gasoline in various regions of the world. (BP Statistical Review of
World Energy, 2009).

Interactive Chart:
Mouse over the graphic to see individual values. Turn lines On or Off by clicking on the labels below the graphic.
Click and drag to zoom in the chart.
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Figure 36: Daily demand for middle distillate products in various regions of the world. (BP
Statistical Review of World Energy, 2009).

Interactive Chart:
Mouse over the graphic to see individual values. Turn lines On or Off by clicking on the labels below the graphic.
Click and drag to zoom in the chart.

Midstream Natural Gas Value Chain

The Midstream Natural Gas Value Chain, shown in Figure 37, begins at the point where gas has been
separated from other produced fluids and treated to remove impurities. The gas is now “dry” and meets
pipeline specifications for delivery to market or is “wet” or “rich” and requires processing to strip out the
natural gas liquids.
 Figure 37: Shows the Midstream Gas Value Chain from the point of gas supply to its delivery to the
Downstream Sector.

Gas Processing
Gas processing facilities may be built at the production facilities, typically at a centralized location
where gas may be gathered from a number of producing fields or near the market. Most centralized
plants are located at or near the Upstream sector, allowing the dry gas and liquid products to be
transported separately to their own markets.
In the De-Methanizer Column the gas stream is cooled to a temperature at which all of the
hydrocarbons, except methane, are transformed to liquid mixture. The methane gas comes off the
top of the column and enters the gas stream. The liquid mixture, referred to as NGLs, comes off the
bottom, where it may be sent to the refinery or petrochemical plants as feedstocks or separated into
individual hydrocarbon products by fractionation. Separate fractionation columns are needed to
separate ethane, propane, butanes, and natural gasolines into individual components. Ethane
becomes a petrochemical feedstock (eventually becoming plastic products), and the other liquid
products are used as fuels or sent to refineries/petrochemical complexes. If there is no local market
for ethane it is left in the gas.
Figure 38a shows the Alliance gas pipeline that delivers "rich" gas from Western Canada to the
Chicago area. The main pipeline is 1855 miles long, with 14 compressor stations spaced roughly 120
miles apart. It operates at a maximum pressure of about 1200 psi and delivers up to 2 BCF of natural
gas combining 80,000 gals of natural gas liquids daily to the Chicago regional market ( www.alliance-
pipeline.com).
Figure 38a: Alliance Gas pipeline.

Figure 38b: Alliance Pipeline Gas processing facility near Chicago.

Natural Gas Pipeline Transportation and Storage

The majority of natural gas in the Midstream sector is transported in high-pressure pipelines over
long distances to meet Downstream market demand. Underground gas storage, in the form of cavern
or pore storage facilities (see Figure 37), are found along the pipeline route to respond to daily and
seasonal market demand swings. Pipeline companies have protocols and electronic "bulletin boards"
 that allow their third party shippers to nominate and confirm their daily transportation and storage
movements along the pipeline. The management of the daily flows on one pipeline that may be
connected to many other pipelines requires careful planning and good IT systems. The North
American Standards Board (http://www.naesb.org/) sets out the standards used in the United States
and the Uniform Network Code provides the standards in the UK ( http://www.nationalgrid.com/uk/gas/).
Figure 39 shows the natural gas supply and pipeline system in Europe. Notice that the only major
domestic source of gas supply is in the North Sea. However, there is not enough supply in the North
Sea to meet all of Europe's demand, so all other gas is supplied by fields in Algeria and Russia.
Pipelines in green are under construction as of 2009 to meet increasing gas demands throughout the
continent.

Figure 39: Natural gas pipeline network in Europe. Gas flows into the system from Russia, Norway,
UK and Algeria. Pipelines in orange are currently in place while those in green are under construction as
of 2009.
Upstream pipelines, which deliver crude or petroleum products, for example, from producing fields or
refineries to a market sales point are often built, owned and operated by a consortium of producers.
Each producer owns rights to use the pipeline and pays annual fees in proportion to its share of
production. The Alyeska pipeline, which carries Prudhoe Bay crude to the port of Valdez, operates
under this type of arrangement (http://www.alyeska-pipe.com/).

Pipeline Regulation and Tariffs

Pipelines, especially for gas, are often considered to be "natural" monopolies because their owner can
control access to markets; if a second, competitive pipeline were to be built it would only increase the
price to the end consumers because then each pipeline would only be half full. For this reason,
pipelines are often regulated by government agencies that issue construction and operating permits, set
tariffs and issue "open access" regulations to ensure competitive opportunities for qualified shippers to
obtain pipeline access. The Federal Energy Regulatory Commission ("FERC") regulates the tariffs that
are charged as well as shipper access to US gas pipelines that transport gas in interstate commerce
(http://www.ferc.gov ). Similar regulatory agencies exist in other countries. Once gas buyers and sellers
have open access to pipelines to market and trade natural gas a set of procedural standards and
guidelines are developed by the industry to manage access (see, for example, www.naesb.org).

Downstream Sector
The Downstream sector of the oil value chain where petroleum products are distributed to retail markets
is shown in Figure 40.

Figure 40: Shows the downstream sector of the oil value chain.
Petroleum products include the major transportation fuels (LPG, gasoline, diesel and jet fuel),
heating products (LPG, light fuel oil and residual fuel oil), specialty products (lubricating oils, asphalt,
etc.) or feedstocks to the petrochemical plants. These products are transported from refineries by
pipeline, ship, barge, truck and rail to regional distributions centers where they are stored on a short-
 term basis in appropriate storage facilities. The products are then transported to their final wholesale
or retail outlets for sale to large and small customers.
Product tankers (Figure 41) are built to carry different types of refined products ("clean" cargos)
simultaneously to multiple destinations-thus, although they are not as large as the bigger crude oil
tankers, their designs are more complex. They are typically divided into three classes: Handy (25,000 to
50,000 deadweight tonnes), Large (50,000 to 100,000 deadweight tonnes), and Very Large Product
Carriers (VLPC -- 100,000+ deadweight tonnes).

Figure 41: Product tanker on the St. Lawrence River in Quebec, Canada.
LPG Carriers (Figure 42) are special types of product tankers. They are refrigerated to -50°F (-46°C) to
avoid vaporization of the liquid cargo. In this way the LPGs do not need to be pressurized during
transportation.
 Figure 42: This photo shows the refrigerated ship Berge Danuta 78,500 m 3 that is used to transport
LPGs.
Petroleum products, as shown in Figure 43, are transported by pipeline in the Colonial pipeline that runs
from the Houston refinery area to the US East Coast. Products are separated by transition fluids
("transmix"), where necessary, that are compatible with the products that they isolate. This pipeline is
5519 miles long and typically transports more than 2 million barrels per day of up to 62 grades of
products in minimum batches of 75,000 barrels. It has many pump stations and storage terminals along
the route. (http://www.naesb.org)

Figure 43: Different products are transported by pipeline from the US Gulf Coast refineries to the East
Coast as batches in pipelines as shown here for the colonial pipeline.

Downstream Natural Gas Value Chain

The Downstream Natural Gas Value Chain, as shown in Figure 44, shows how gas may be sold
directly from the Midstream pipeline or LNG receiving terminal, after vaporization, to a large customer
(typically an industrial or gas-fired power plant) or be delivered to a Local Distribution Company ("LDC").
The distribution company, in turn, meters and odorizes the gas and distributes it to its various classes of
customers: residential, commercial, industrial, power plants and, where the market has developed,
motor vehicles.
 Figure 44: Shows the Downstream sector of the gas value chain.

Traditionally, an LDC has a monopoly to sell gas in its territory. It buys the gas from the pipeline and
charges its customers for both the gas and its distribution. Where market liberalization has occurred at
the distribution level (for example, in the UK and certain US states), customers will buy their gas from
their selected retail marketers and pay the distribution company a fee only for distributing the gas.
LNG can also be delivered by truck directly to LDC's storage tanks of gas distribution companies where
it is vaporized as needed to meet short-term market swings (Figure 45).
 Figure 45: Specially designed trucks allow LNG to be distributed to regional tank storage to satisfy
peaking service.