An Introduction to Petroleum

Technology, Economics, and Politics

 Scrivener Publishing
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Salem, MA 01970
Scrivener Publishing Collections Editors

James E. R. Couper Ken Dragoon

Richard Erdlac Rafiq Islam
Pradip Khaladkar Vitthal Kulkarni
Norman Lieberman Peter Martin
W. Kent Muhlbauer Andrew Y. C. Nee
S. A. Sherif James G. Speight

Publishers at Scrivener
Martin Scrivener (martin@scrivenerpublishing.com)
Phillip Carmical (pcarmical@scrivenerpublishing.com)
 An Introduction to
Petroleum Technology,
Economics, and
Politics

James G. Speight

Scrivener

WILEY
Copyright © 2011 by Scrivener Publishing LLC. All rights reserved.

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Library of Congress Cataloging-in-Publication Data:

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10 9 8 7 6 5 4 3 2 1
Contents

Preface ix

1 History and Terminology of Crude Oil 1

1.1 Historical Perspectives 3
1.2 Modern Perspectives 14
1.3 Oil Companies 15
1.4 Definitions and Terminology 17
1.4.1 Petroleum 21
1.4.2 Natural Gas 23
1.4.3 Heavy Oil 25
1.4.4 Tar Sand Bitumen 26
1.5 References 28

2 Origin and Occurrence of Oil 31

2.1 The Formation of Oil 35
2.2 Reservoirs 36
2.2.1 Reservoir Structure 36
2.2.2 Accumulation in Reservoirs 38
2.2.3 Distribution of Fluids in the Reservoir 39
2.2.4 Migration of Reservoir Fluids 41
2.2.5 Transformation of Petroleum in the Reservoir 42
2.2.6 Relationship of Petroleum Composition and
Properties 44
2.3 Reservoir Classification 45
2.4 Reservoir Evaluation 49
2.4.1 Depletable and Renewable Resources 49
2.4.2 Development of Resources 50
2.4.3 New Evaluation Technology 51
2.5 Estimation of Reserves in Place 52
2.6 Reserves 55
2.6.1 Conventional Petroleum 56

v
vi CONTENTS

2.6.2 Natural Gas 57

2.6.3 Heavy Oil 58
2.6.4 Tar Sand Bitumen 59
2.7 References 62

3 Exploration, Recovery, and Transportation 65

3.1 Exploration 66
3.2 Drilling 70
3.2.1 Preparing to Drill 70
3.2.2 The Drilling Rig 71
3.2.3 Drilling 72
3.2.4 Well Completion 73
3.3 Recovery 75
3.3.1 Primary Recovery (Natural Methods) 77
3.3.2 Secondary Recovery 79
3.3.3 Enhanced Oil Recovery 82
3.4 Bitumen Recovery 86
3.4.1 Mining Methods 86
3.4.2 Non-Mining Methods 88
3.5 Transportation 91
3.6 Products and Product Quality 97
3.7 References 100

4 Crude Oil Classification and Benchmarks 103

4.1 Crude Oil Classification 105
4.1.1 Classification as a Hydrocarbon Resource 107
4.1.2 Classification by Chemical Composition 107
4.1.3 Density and API Gravity 109
4.1.4 Viscosity 109
4.1.5 UOP Characterization Factor 110
4.1.6 Pour Point 110
4.1.7 Recovery Method 111
4.2 Classification of Reserves 111
4.2.1 SPE Standards 114
4.2.2 SEC Standards 119
4.2.3 Russian Standards 122
4.2.4 Miscellaneous Standards 125
 CONTENTS vii

4.3 Benchmark Crude Oils 126

4.4 References 132

5 The Petroleum Culture 135

5.1 The Petroleum Culture 138
5.2 Oil in Perspective 138
5.2.1 History 138
5.2.2 The Middle East Emerges 140
5.2.3 Recent History 144
5.3 The Seven Sisters 145
5.4 Reserve Estimates 148
5.4.1 Historical Variation of Reserve
Estimates 149
5.4.2 Patterns of Use 151
5.4.3 Energy and the Political Costs of Oil 154
5.4.4 Price Swings 155
5.5 References 156

6 Oil Prices 159

6.1 Oil Price History 161
6.2 Pricing Strategies 164
6.3 Oil Price and Analysis 168
6.4 The Anatomy of Crude Oil Prices 172
6.5 The Anatomy of Gasoline Prices 175
6.6 Effect of Refining Capacity 178
6.6.1 Refinery Types and Crude Slate 179
6.6.2 U.S. Refining Capacity 182
6.6.3 World Refining Capacity 182
6.6.4 Refining and Refinery Economics 184
6.7 Outlook 187
6.8 References 191

7 The Crude Oil Market 193

7.1 The Crude Oil Market 195
7.2 Global Oil Consumption 199
viii CONTENTS

7.3 Refining and The Markets 205

7.4 Profitability 211
7.5 References 212

8 Oil Supply 215

8.1 Physical Factors 216
8.2 Technological Factors 220
8.3 Economic Factors 223
8.4 Geopolitical Factors 228
8.5 Peak Oil 231
8.5.1 Peak Oil Theory 231
8.5.2 Effects and Consequences of Peak Oil 235
8.6 The Impact of Heavy Oil and Tar Sand Bitumen 237
8.7 References 242

9 The Future 245

9.1 Undiscovered Oil 249
9.2 Coal 252
9.3 Oil Shale 255
9.4 Liquids from Biomass 260
9.5 Energy Independence 264
9.6 Energy Security 270
9.7 References 275

Conversion Factors 281

Glossary 283
Index 311
Preface

Crude oil is the major source of fuel used in the modern world. It is
generally in a liquid state and is recovered by drilling and pump-
ing, after which it is transported in tankers and pipelines.
The crude oil sector is the largest and most dominant economic
sector of business in the United States. It is increasingly apparent
that responsibility for the long-term consequences of economic and
technological development decisions is extremely important and
the logic of looking after the short term and letting the future take
care of itself seems harder and harder to justify or sustain. Solving
the supply problem requires innovative approaches, economic
attractiveness, environmental appeal, and social responsibility.
Such a course of action calls for background knowledge of the char-
acter of crude oil and the various factors that contribute to the price.
In fact, the market price on which contractual arrangements are
settled is full of unknowns, concealing everything about trends in
the costs of production. In the surplus, represented by the differ-
ence between the sale price obtained and the costs incurred, there is
the shareholders' expected return on their investment (ROI), which
determines whether, when, and on what terms petroleum-pricing
influences the market.
The economics of crude oil pricing is one of the most complex
and variable mechanisms in the commodities market. It is affected
by a host of different factors, and it can be extremely difficult to
determine which factors have the greatest impact on the actual
spot price at any given point in time. In the past year, the crude oil
markets have been extremely volatile; there have been claims that
they have been subject to manipulation but the evidence is sorely
lacking. On the other hand, if manipulation does not drive the oil
markets, there is no evidence either that it does not take place.
The whole issue is so debatable that the true drivers of the market
may never be known with any degree of certainty.
One way for scientists, engineers, and people of lesser techni-
cal backgrounds to remove themselves from the dark shadow of
economic guesswork is to understand, to some extent, the techno-
logical and political factors that are involved in crude oil economics.

IX
x PREFACE

Crude oil prices behave much as any other commodity, with

wide price swings in times of shortage or oversupply. The crude oil
price cycle may extend over several years, responding to changes
in demand as well as supply. Indeed, the economics of oil must take
into account that it is a depleting non-renewable resource and the
cost of extraction of a non-renewable resource depends not only
on the current rate of production but also the amount of cumula-
tive production. The poignant question that always remains relates
to the lifetime of current crude oil reserves and whether there are
years or decades of reserves remaining.
Many pundits believe that the projections of running out of oil
are based on geology, not price. Every existing oil reservoir has
more than half of the original oil in place — many with more.
These are resources that we know exist; we know where they are
and what the oil looks like. Much of the crude oil that is left is
trapped in tiny pores and cannot be recovered by simple pump-
ing, and more advanced, expensive procedures are necessary to
recover the crude oil.
Another aspect of crude oil economics is the cost of refining.
Refining high-sulfur crude oil also requires greater expenditures
for energy. In fact, energy accounts for approximately half of the
refinery cost. Refinery location is yet another variable. The closer
a refinery is to the crude oil source and the demand, the lower the
transportation costs. Otherwise, the refinery must factor in the
added cost of getting the products to market. The ultimate vari-
able in crude oil economics is the price of crude oil, along with
crude oil quality. High viscosity, high-sulfur crude oil can cost up
to one-third less than low viscosity, low-sulfur crude oil. However,
because high-sulfur crude oil requires more processing, refineries
that buy primarily cheap crude oil incur more fixed expenses for
equipment and labor.
After decades of stable — even cheap — crude oil during the first
three-quarters of the 20th century, the geopolitical upsets of the 1970s
led to rapid surges in crude oil prices. In the past five years, these
surges have been magnified with crude oil process topping $147 per
barrel in the summer of 2008, after which prices seemed to stabilize
at approximately $80 per barrel. However, instability within the oil
producing nations has, at the time of writing (March 2011), caused a
surge in crude oil price to a figure in excess of $100 per barrel. There
are opinions that such prices surges are merely bubbles that will
burst and oil prices will return to lower levels.
 PREFACE xi

However, many economists are unable to explain the economics

of crude oil pricing without recourse to higher mathematics. The
result is the development of complex equations that are not only
difficult to understand but also bear little relationship to reality. In
fact, when oil prices flip-flop, explanations are invoked and justi-
fied, using the remarkable facet of 20/20 hindsight with very little
foresight or even knowledge of the workings of the industry.
This book will introduce the reader to the factors that influence
the price of crude oil insofar as crude oil economics involves a com-
bination of several factors, not the least of which are:

1. Crude oil availability from the reservoir

2. Crude oil quality
3. Crude oil extraction
4. Crude oil quality
5. Geopolitics.

The book also includes the reader to oil classification, recovery,

and properties, which are not usually included in works related to
politics and economics but are an essential part of for understand-
ing oil pricing and politics.

Dr. James G. Speight

Laramie, Wyoming
March 2011