Layman\'s Guide to the OIl & Gas Industry

A Layman’s Guide to the Oil and Gas Industry Logan Yeo Lune Gene
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November 2010
International Asset Management Sdn. Bhd.
A LAYMAN’S GUIDE TO
THE OIL AND GAS
INDUSTRY
Disclaimer: Petroleum, hydrocarbons, oil and gas are interchangeable terms referring to the same resource type in
mass media. This does not correspond to their actual physical definitions. This content is purely off the top of the
author’s head based on his experience, conversations and reading and as such, references to some of the
information presented may not be cited. The author’s views do not represent those of any companies or institutions.
This document is a casual guide to the oil and gas industry for the uninitiated and is not meant to be a technical or
academic document; and as such contains language native to an informal nature. Financial terms used are
explained in a glossary at the end of this document. For any other unfamiliar terms, Google is your best friend. All
images here are either the work of the author or taken off the internet (which is public property and hence not subject
to copyright). The author welcomes all comments.

A Layman’s Guide to the Oil and Gas Industry
November 2010
The oil and gas industry is essentially a
resources, known as petroleum (oil and gas)
civilization. To truly understand the whole tale,
The Big Idea
Millions of years ago, tiny plants and animals
these organisms died, their corpses accumulated on
layers of rock and soil before them, other sediments get deposited on top of these even as life
died out in the area, seas dry and continents move.
kilometers in depth) gets deposited
illustrates this process.
Layers of rock rich with organic material are known as source rocks.
“raw material” for the formation of petroleum/hydrocarbons.
Zoom out to the rest of the Earth.
(speculated) core of iron, hot semi
“floating” above that. The crust isn’t one single intact piece. It’s fragmented in many parts.
it? “Seabed” of iron, sea of magma and fragmented lay
gets hotter as you go deeper, towards the core.
Figure 1: Source rock formation
The oil and gas industry is essentially a global hunt for resources from Mother Nature
(oil and gas), help fuel the workings of modern day human
To truly understand the whole tale, let us go back to the very beginning
, tiny plants and animals inhabited seas and lakes, much like today.
these organisms died, their corpses accumulated on the sea beds and lake bottoms.
died out in the area, seas dry and continents move. As more and more sediment (meters to
kilometers in depth) gets deposited, the sediments below get compacted to form rocks.
Layers of rock rich with organic material are known as source rocks. These are essentially the
of petroleum/hydrocarbons.
out to the rest of the Earth. The Earth itself is a multilayered ball (see Figure
semi-liquid rock (mantle) above that and solid rock (crust)
The crust isn’t one single intact piece. It’s fragmented in many parts.
of iron, sea of magma and fragmented layers of rock floating on the sea
er as you go deeper, towards the core.
Logan Yeo Lune Gene
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from Mother Nature. These
modern day human
go back to the very beginning.
, much like today. When
beds and lake bottoms. Like the
As more and more sediment (meters to
e sediments below get compacted to form rocks. Figure 1
These are essentially the
(see Figure 2) with a
liquid rock (mantle) above that and solid rock (crust)
The crust isn’t one single intact piece. It’s fragmented in many parts. Got
ers of rock floating on the sea. And it

November 2010
The ground on which we stand (continental crust) and the sea bottom (oceanic crust) constitute
layers of rock fragments (tectonic
these tectonic plates stretch out 100s of kilometers.
one sometimes gets dragged under another
And in the process, rocks that were in shallower depths get buried deeper and thus get exposed
to higher temperatures beneath.
rifting) subsequently filled in by younger rocks and sediments are known as “basins”.
shows how a basin forms via rifting:
Remember our source rocks (rocks laden with the organic goodness of dead bodies
these get buried to the depths at certain temperature ranges
to form hydrocarbons (compounds of hydrogen and carbon atoms
case equals petroleum!
more porous rocks (reservoir rocks) or
Figure 4: Hydrocarbon generation (“cooking”)
tectonic plates) which float on the mantle. A little reminder of the scale:
these tectonic plates stretch out 100s of kilometers. As these plates interact with each other,
one sometimes gets dragged under another (subduction) or gets ripped in the middle (rifting)
ere in shallower depths get buried deeper and thus get exposed
Depressions in the Earth (which result from subduction or
subsequently filled in by younger rocks and sediments are known as “basins”.
w a basin forms via rifting:
Remember our source rocks (rocks laden with the organic goodness of dead bodies
at certain temperature ranges, the organic material gets
hydrocarbons (compounds of hydrogen and carbon atoms, see Figure 4
The products of this “cooking” are diverse: liquids
(oil) and gases (natural gas and other gases like
carbon dioxide). Sulfur rich oils are known as “sour
oil” whereas non-sulfur rich oils are known as “sweet
oil”. The type of hydrocarbon formed also depends
on the nature of the raw material (look up “kerogen”
types). There are other distinctions to be made
chemically, but I shall not go into this here.
But wait. The story does not end here. For after the
hydrocarbons form, they tend to migrate through
(reservoir rocks) or cracks in Earth’s rock crust (faults). Their final
Figure 2: Layers of the Earth
(Source: American Museum of
Natural History)
: Hydrocarbon generation (“cooking”)
Figure 3: Rift basin formation (Source: Logan Yeo
2010)
Logan Yeo Lune Gene
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A little reminder of the scale:
As these plates interact with each other,
or gets ripped in the middle (rifting).
ere in shallower depths get buried deeper and thus get exposed
(which result from subduction or
subsequently filled in by younger rocks and sediments are known as “basins”. Figure 3
Remember our source rocks (rocks laden with the organic goodness of dead bodies ☺)? As
, the organic material gets “cooked”
, see Figure 4), which in this
The products of this “cooking” are diverse: liquids
and other gases like
carbon dioxide). Sulfur rich oils are known as “sour
sulfur rich oils are known as “sweet
The type of hydrocarbon formed also depends
on the nature of the raw material (look up “kerogen”
are other distinctions to be made
chemically, but I shall not go into this here.
But wait. The story does not end here. For after the
hydrocarbons form, they tend to migrate through
Their final
Figure 3: Rift basin formation (Source: Logan Yeo

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November 2010
destinations are “traps” – blockades formed in the Earth out of less porous rock types (seals)
which trap the migrating hydrocarbons in place (Figure 5).
This theory of how hydrocarbons form is known as the Big Idea.
Fast forward millions of years into the future, a fossil fuel hungry human civilization taps into this
resource via groups united in economic purpose we call “oil companies”. Cue in Figure 6.
Within these oil companies, a class of human
specialists known as “geoscientists” (geologists
and geophysicists) leads the technical search for
hydrocarbons. To achieve this, they utilize existing
knowledge and theories about a prospective area,
rock samples, observations made at rock outcrops
at Earth’s surface and “seismic data”. The
geoscientists interpret and map the areas of
interest at selected depths by integrating all
available data. The maps are updated and often remapped as new information comes in at
different stages of the business.
The life cycle of the oil and gas mining process is a long one – which I divide into the bidding,
exploration, appraisal, development and production stages. The timeline involved for each stage
depends on a variety of factors: politics, regulation, technical progress amongst others. This
goes up to years and sometimes even decades.
In the larger firms, there are often separate subsidiaries of a firm for each stage: stages often
overlap each other in the process though: exploration and appraisal can be one single
exploration project, (re-)appraisal and development constitutes a single field development
program; and production naturally follows a development well being drilled (if all goes good).
Figure 5: Hydrocarbons trapped
Figure 6: Oil & gas companies drill for hydrocarbons

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November 2010
Stage: Bidding
To mine for something, one must first acquire the rights to the area first. Oil companies select
areas to bid for based on pre-existing data (if any), and weighing the chance of success in the
area versus the estimated capital required – just like any other investment. Pre-existing data
may include “seismic data” from survey companies, data from open sources (e.g.: North Sea
Millennium Atlas and BP Wytch Farm dataset), “well log data” from any pre-existing wells in the
area, and/or pre-existing interpretations.
Once the prospective area(s) have been selected, the bidding starts. Blocks, which are like
property boundaries, are put up for bidding for rights to oil and gas exploration (see Figure 7 for
examples of this). In an open bidding process, such as in US Gulf of Mexico and in Nigeria
(since 2005), it basically functions like an auction (a bidding company can also partner with
others in the bidding). Highest offer wins. In some countries, however, a negotiated bidding
process (such as with Petronas of Malaysia) functions due to government regulations – this are
essentially negotiations with the state-owned oil company, Petronas, for stakes in operating oil
and gas fields in Malaysia.
So who stands to gain from this? Survey companies may gain future contracts to gather data for
the winners of the bid(s). The local government gets royalties and fees from the bidding (varies
with local laws). And let us not forget the future wells to be drilled on the newly acquired
acreage. Offshore structure, marine and machinery construction companies and drilling related
services get in on the action too. For the types of structures and vessels used in the next stage,
see Drilling under Stage: Exploration.
Potential gainers:
- survey (services) companies like Western Geco of Schlumberger
- the local government (royalties)
- future or pre-negotiated contracts for service companies (Halliburton, Baker-Hughes)
and rig/platform/marine/equipment construction companies (Atwood, Vicksburg,
Figure 7: Blocks on Gulf of Mexico, US
side (Source: GOMData.com 2010)

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November 2010
MMHE, Kencana Petroleum, Ezra Holdings) to explore and (possibly) develop the
area
- Drilling fluid (mud) production companies (Scomi Oilfield Services) and mud logging
services (International Logging Orogenic Sdn. Bhd.)
- Software companies for basin modeling (Beicip-Franlab, Petromod software by
Schlumberger)
Big players
So who are the big boys in the picture? During the turn of the 20th
century, a significant firm to
thoroughly dominate the global oil industry was Standard Oil (which controlled 91% of oil
production in the United States in 1904, then the leading oil producing country in the world).
In 1911, the U.S. Supreme Court dissolved Standard Oil and broke it up into 34 different firms.
Jim Fink, a future and options trader, estimates that Standard Oil would be worth over USD 1
trillion in 2007 if it had not been dissolved.
Standard Oil’s “children” includes some of the leading names in the oil and gas industry today:
ExxonMobil and Chevron. These “children” are part of the Seven Sisters of the oil industry,
which controlled 85% of the oil reserves in 1973. The Seven Sisters are international oil
companies (IOCs) many of which are household names even today.
Seven Sisters:
- Standard Oil of New Jersey (Exxon)*
- Standard Oil Company of New York (Mobil)*
*Exxon and Mobil merged in 1999 to become Exxonmobil, currently the largest IOC in
the world.
- Standard Oil of California (Chevron)
- Gulf Oil (merged with Chevron in 1985)
- Texaco (now part of Chevron)
- Royal Dutch Shell
- Anglo-Persian Oil Company (now BP)
In recent decades, however, the dominance of the Seven Sisters has been eroded by states
gaining more control over their own national oil and gas assets; and thus the global oil and gas
power map is much more complicated today. As of April 2009, the global oil production is comes
from (by percentage)
- [30%] Organization of Petroleum Exporting Companies (OPEC): Algeria, Angola,
Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, U.A.E, Venezuela
- [23.8%] Organization for Economic Cooperation and Development (OECD): 33
member countries including the US, EU members, Japan and Australia.
- [14.8%] Former Soviet Union: 15 members

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November 2010
The most influential oil and gas firms outside the OECD were named the “New Seven Sisters”
by Financial Times in 2007:
- China National Petroleum Corporation (China)
- Gazprom (Russia)
- National Iranian Oil Company (Iran)
- Petrobras (Brazil)
- PDVSA (Venezuela)
- Petronas (Malaysia)
- Saudi Aramco (Saudi Arabia)
Saudi Aramco is arguably the “big sister” of the group, holding 25% of the world’s oil reserves
and triples the capacity of any other group. Out of the New Seven Sisters, only Saudi Aramco,
Petrobras and Petronas have been able to turn themselves into international players able to
compete with the “old” Seven Sisters (now only four remaining: ExxonMobil, Shell, Chevron and
BP). The biggest bump in the road for the New Seven Sisters is their state ownership, which
subjects much of their earnings to the political use of their native countries.
In more recent news (2010):
Petronas (state oil company of Malaysia), after this year’s departure of its former CEO, Tan Sri
Hassan Merican, has adopted a new policy of stopping its international ventures and “going
home deep” (i.e.: focusing on deep water activities in Sabah). In October 2010, it sold off its
assets in Ethiopia to SouthWest Energy (H.K.) Ltd, an Ethiopian-owned company registered in
Hong Kong. Petronas offered its petrochemicals division, Petronas Chemicals, in the largest
IPO in Southeast Asia yet, with potentially USD4 billion raised.
Petrobras, which operates in 28 countries on five continents, is the world’s second-largest oil
company by market capitalization after carrying out a massive share offering in September
(USD 70.1 billion – largest offering in the world).
Saudi Aramco raised its official November premium for crude (Arab Super Light) to Asia from
USD0.90 to USD1.90 (Bloomberg Nov 1, 2010).
What is seismic data?
The basic method is to shoot sound waves (seismic waves) onto the surface of the rocks of
interest, and record the time at which they take to reflect of the individual layers, thereby
deriving the individual depths of these layers. The velocity at which the waves pass through rock
layers with different properties also varies. This concept was developed by the military during
World War 2, and later found its way to industry, like the internet.

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November 2010
Stage: Exploration
After exhausting pre-existing knowledge about a certain area, a 2D seismic survey would be
shot along the area of interest. 2D seismic sections are single slices across the map – cross
sections to view the depths along a certain line on the map. Humps on these cross sections (if
hydrocarbons are deemed present in the vicinity) are generally considered good prospects for
the next step: drilling.
Drilling
A hole is drilled into the ground to prove the existence of hydrocarbons once and for all. The
geoscientists work together with drilling engineers to figure out a feasible well path – a practical
path for the hole to be drilled to hit the target (where the hydrocarbons are supposed to be).
This hole is called an “exploration well”: drilled solely for gathering information about the
subsurface. An exploration borehole/well is typically vertical in nature. Exploration wells can be
drilled from drillships (shallow or deepwater offshore), jackup rigs (shallow offshore <400 feet),
onshore drilling rigs and semi-submersibles (deepwater offshore 200-10000 feet). See Figure
12 under Stage: Development (page 14) for depictions of such offshore structures.
During drilling, “mud” (a usually water or oil based synthetic drilling fluid) is used to lubricate the
drill bit as it drills into the Earth. Mud is also used to maintain pressure in the borehole and to
transport rock shavings (from the drilling) up to the surface; where it will be analyzed by a mud
logger to help predict the rock type and possibly the presence of hydrocarbons at various
depths.
From the borehole, fluid samples are taken at target depths and survey tools are lowered down
the borehole to measure certain properties of the rock (such as resistivity and radioactivity).
These properties tell us whether the rock layer at a certain depth is a reservoir rock, source rock
or seal rock. They also tell us what type a fluids/gas a reservoir rock holds. The measurements
of these properties are known as “well log data”. Core samples of the rock may also be taken
from the borehole. In-depth and more fanciful interpretations of well log data and core samples
are done by a group of specialists known as “petrophysicists”. See borehole sketch (Figure 8):
Figure 8: Sketch of a (straight) borehole
(Source: www.oil-gas.state.co.us)

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November 2010
Wait…..a what-rock now? A reservoir
rock is a relatively porous rock that can
contain hydrocarbons (or just water). A
source rock is an organic rich rock in
which hydrocarbons are formed (see
The Big Idea above). A seal rock is a
relatively impermeable rock, which
blocks the movement of fluids and gas.
These elements form part of a
Petroleum System as illustrated by
Figure 9.
In some places, regulations require a company to announce its results as the drilling occurs,
leading to certain ups and downs in its share price. Sterling Energy PLC announced its drilling
results on 20th
September 2010 – two of its prospective reservoirs in Iraq produced copious
amounts of water after an initial production of gas. Its equity price plunged from £1.28 to £0.78
on that very day.
At the exploration stage, oil companies (especially smaller ones) have high capital expenditure
to earnings ratio as everything is an investment at this point and there are no returns yet. Thus,
exploration stage companies will tend to have lower liquidity.
Again, at this point, with the exploratory drilling, drilling, offshore and marine related firms get
their revenue (and future or extended contracts if there are asset development opportunities).
Core samples of the rock from the borehole may be taken at this point to analyze the
permeability and other properties of the rock layers.
Potential gainers:
- Well survey service companies (Halliburton, Baker-Hughes)
- Rig/platform/marine/equipment construction companies (Atwood, Vicksburg, MMHE,
Kencana Petroleum, Ezra Holdings)
- Drilling companies (Tioman Drilling Co. Sdn Bhd, Transocean, Maersk Drilling)
- Core analysis labs (Core Laboratories (M) Sdn. Bhd.)
- Software companies for basin modeling (Beicip-Franlab, Petromod software by
Schlumberger) and (possibly) field level modeling (Petrel by Schlumberger) and
seismic software
Figure 9: Petroleum System
Seal rock

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November 2010
Stage: Appraisal
Reserves
If hydrocarbons (oil and/or gas) are proven in the hole, the next step would be to quantify them
as accurately as possible (volumetrics). The collective amount of hydrocarbons in the ground is
known as resources, while the resources that are recoverable (assuming no prior production
has taken place) are known as reserves. Reserves are generally taken to be a measure of the
worth of an oil company.
The classification of reserves varies across different organizations; but the reserves are
generally divided into proven, probable and possible reserves. Proven reserves are defined by
fluid samples collected from a specific depth, definitive log data and production tests. Proven
reserves are also known as 1P or P90 (90% chance of being producible)
Probable reserves have less certainty attached to them. An example of this would be say
everything above a certain depth is proven oil (say, 1200m below the sea bed) and everything
below 1400m is proven water. The fluid content between 1200 to 1400m is uncertain. If we take
the contact between oil and water to be halfway through at 1300m, the probable oil reserves are
situated at 1200 to 1300m depth. Probable reserves are also known as 2P or P50 (50% chance
of being producible). Many oil companies state the sum of their proved plus probable reserves
(P+P) on their public statements.
Possible reserves have the least certainty of being produced (10% chance of being producible)
and are known as P10 or 3P. This is usually due to high uncertainty in the geological analysis or
being unrecoverable due to technology or cost constraints.
Figure 10 illustrates a reserve classification system used by some prominent organizations. This
classification method is very much alike for metal mining companies.
Figure 10: SPE/WPC/AAPG Reserve
Classification (Source: PetroBras 2010)

November 2010
After a geoscientist finishes with his/her/its maps of the prospective areas, a
model may be made of the prospects by a specialist known as a “geological modeler”
sufficient data to make one. The reserve volumes can then be
model.
One can take a deterministic approach to quantifying reserves
each parameter in a volumetric equation
Hydrocarbon volume = (gross rock volume x net
saturation)/formation volume factor
Another approach is a stochastic (probabilistic) one where the answer is
distribution curve (Monte Carlo Simulation)
The resultant volume of reserves estimated
(prior to production).
Marking territory
The smallest unit at which appraisal is done is by individual reservoirs
individual layers of relatively porous rock which (potentially) contain hydrocarbons.
A field may contain several reservoirs within its depths.
(licensed) block. And a basin can contain several blocks.
crust infilled with younger sediments and rocks (see The Big I
article, let’s just refer to them collectively as “assets”
After a geoscientist finishes with his/her/its maps of the prospective areas, a static (
model may be made of the prospects by a specialist known as a “geological modeler”
he reserve volumes can then be estimated from the maps or the
One can take a deterministic approach to quantifying reserves, which uses single values for
equation:
ross rock volume x net-to-gross ratio x porosity x hydrocarbon
)/formation volume factor
Another approach is a stochastic (probabilistic) one where the answer is from a statistical
Carlo Simulation).
of reserves estimated is the “static volume” or the volume initially in place
appraisal is done is by individual reservoirs – again, these are
ld may contain several reservoirs within its depths. There are typically several fields within a
And a basin can contain several blocks. A basin is a depression in the Earth’s
crust infilled with younger sediments and rocks (see The Big Idea, page 3). For the rest of this
article, let’s just refer to them collectively as “assets” (Figure 11).
Figure 11: Different “asset” levels in the Malay Basin
(Source: modified from Deliwali Engineering Sdn. Bhd. 2010
Logan Yeo Lune Gene
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static (geological)
model may be made of the prospects by a specialist known as a “geological modeler”, if there is
from the maps or the
, which uses single values for
hydrocarbon
a statistical
he volume initially in place
again, these are
typically several fields within a
is a depression in the Earth’s
For the rest of this
2010)

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November 2010
Counted my chickens – so what’s next?
Cue in the reservoir engineers. After an estimate of static volumes of reserves is made, the
reservoir engineer will engineer recovery factors for the individual reservoirs, and calculate the
final volumes which can be recovered from the ground. The final volumes are known as
“Estimated Ultimate Reserves (EUR)”.
If a static model was created, this can be used to generate a dynamic model. A dynamic model
is essentially a static model that can move through time. It can churn out EUR estimates as well
as predict fluid flow throughout time. An oil or gas production chart can then be drawn, showing
the production throughout time for a particular reservoir, field or any bigger denominations.
This gives the lifetime of an asset – as long as there is production at an economically viable
level, the asset has tangible value. Intangible value after the field has been depleted will consist
of geological knowledge gleaned from the field which can be applied to neighboring assets or be
used as an analogue for similar assets worldwide.
Appraisal is the defining stage for any oil company as reserves are generally taken to be
a measure of an oil firm’s worth, which has obvious implications for its equity price. Now
it’s time to develop the assets and give out contracts.
Potential gainers:
- Software companies for field level modeling (Petrel by Schlumberger) and seismic
software

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November 2010
Stage: Development
Ah, now that we know how much we can produce, let’s find out where we can suck it out. After
conducting studies on our assets and finding the sweet spots (areas and depths with the highest
concentration of trapped hydrocarbons with the highest certainty), geoscientists work with
drilling engineers to determine a suitable well path trajectory to reach those spots (see Stage:
Exploration, page 8).
More Drilling
This time, however, things are not quite the same. While exploration wells are typically straight
vertical holes in the ground, with the purpose purely being reconnaissance, development wells
are aimed at producing hydrocarbons. Wells have to be set at an angle so that the natural
pressure difference needed to push the hydrocarbons to the surface is reduced. Gas wells are
set slightly deviated, but oil wells are highly deviated (Figure 13).
Structures are now built near the sweet spots to allow multiple wells to be drilled into the
prospects. These include fixed platforms (for water depths up to 1700 feet), compliant towers
(designed to sustain significant lateral deflections, used in water depths from 1,500 to 3,000
feet), tension-leg platforms (for water depths from 1000 to 4900 feet; use has also been
proposed for wind turbines) and spars (for deepwater, up to 10000 feet).
Floating Production Storage and Offloading (FPSO) units are also used, particularly in
deepwater locations. Wells are not actually drilled from FPSOs, which are used for processing
and storage. Figure 12 shows the different structures offshore where oil and gas wells can be
drilled from.

November 2010
The holes are then cased: metal sleeves (casing) is
(the holes are perforated at depth intervals where production of hydrocarbons is to take place).
In the case of a horizontal well, a slotted liner is slid onto the end of
well (think of it as a giant metal condom with holes).
For traps with gas, oil and water phases, one strategy would be to put in horizontal wells
13) to produce at the oil interval.
level rises and gas cap comes down post
After the initial development wells are
planned and drilled to capture additional targets in between the existing wells. These wells,
which fill in the spaces in between
Deviated well
Figure 12: Different types of offshore oil and gas structures (
The holes are then cased: metal sleeves (casing) is set in place; and subsequently completed
In the case of a horizontal well, a slotted liner is slid onto the end of the horizontal part of the
(think of it as a giant metal condom with holes).
traps with gas, oil and water phases, one strategy would be to put in horizontal wells
This is to optimize the amount of oil produced before the water
level rises and gas cap comes down post-production.
After the initial development wells are drilled and (hopefully) producing, additional wells may be
which fill in the spaces in between existing wells, are known as “infill wells”. The acts of
Figure 13: Deviated and horizontal wells
(Source: U.S. Geological Survey)
Different types of offshore oil and gas structures (source: 2005 US National Ocean and Atmospheric
Logan Yeo Lune Gene
14
set in place; and subsequently completed
the horizontal part of the
traps with gas, oil and water phases, one strategy would be to put in horizontal wells (Figure
This is to optimize the amount of oil produced before the water
additional wells may be
The acts of
source: 2005 US National Ocean and Atmospheric

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November 2010
repairing a well or stimulating it to enhance production (e.g.: fracturing the rock around the
borehole) are known as “workovers”.
Apart from the usual suspects involved with drilling; plants to refine crude and natural gas,
pipelines to transport hydrocarbons to the plants and transportation for the hydrocarbons to their
markets will need to be in place.
Potential gainers:
- Software companies for field level modeling (Petrel by Schlumberger), seismic
software and reservoir simulation modeling (Petrel)
- Contracts for plant construction? Offshore Marine Services Alliance (OMSA) bidding
for Gorgon Projects Phase 2 (client: Chevron)
- Pipeline and petroleum transport and distribution firms (Malaysia Gas)

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November 2010
Stage: Production
Oil or gas is then hopefully produced out of the ground. At this point geoscientists will be
relegated to a supporting role, and reservoir engineers take over monitoring pressure and
production.
Not all of the oil or gas can be produced in the first run, though. Primary production consists of
utilizing the natural pressure difference between the reservoir subsurface depths and the
surface. Secondary production typically involves water being injected into the producing well to
displace the remaining hydrocarbons in order to gain extra production. Tertiary production goes
one level further (with gas, polymer injections etc.).
After the asset has been produced to an economically acceptable level for big firms, the scraps
left (remaining reserves too small for big firms) may be sold off to a smaller firm.
Barrels of oil is measured and traded in bbl (blue barrels as oil was historically stored in blue
coloured barrels) while natural gas is measured in scf (standard cubic feet). Gas, however, is
traded in MMBTU (million British thermal units) – a measure of how much energy it produces,
rather than its volume. 1 scf of natural gas produces around 1030 BTU.
Oil and Gas Trading
The Brent Crude classification is used to price two-thirds of internationally traded crude oil
supplies. Brent Crude itself is sourced from the North Sea (UK, Norway). It is light, sweet crude
(~0.37% sulfur content). The symbol for Brent crude is LCO. Other famous benchmarks for oil
prices are the West Texas Intermediate (WTI), the OPEC Basket and Dubai Crude.
WTI is produced in North America and is sweeter and lighter than Brent Crude. It is typically $1
more expensive than Brent, and $2 more than the OPEC Basket.
The OPEC Basket is a weighted average of prices for petroleum blends produced by OPEC
countries (see Big Players under The Big Idea). OPEC attempts to keep the price of the OPEC
Basket between upper and lower limits, by increasing and decreasing production. This makes
the measure important for market analysts. The OPEC Basket, including a mix of light and
heavy crudes, is heavier than both Brent crude oil, and WTI.
Dubai Crude is a light sour crude oil (2% sulfur) extracted from Dubai. Dubai Crude is generally
used for pricing Persian Gulf crude oil exports to Asia. The Dubai benchmark is also known as
Fateh in the United Arab Emirates. Forward trade of Dubai Crude is limited to one or two
months.
Tapis Crude is a Malaysian crude oil (ostensibly from Tapis field the Malay Basin offshore
Peninsular Malaysia, currently jointly operated by Exxonmobil and Petronas) used as a pricing
benchmark in Singapore. It is not traded, but is often used as an oil marker for Asia. It is lovely
sweet crude at 44º API. American Petroleum Institute (API) gravity, by the way, is used to
compare the relative densities of petroleum liquids.

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November 2010
Crude oil is classified as light, medium or heavy, according to its measured API gravity.
• Light crude oil is defined as having an API gravity higher than 31.1 °API. (less than 870
kg/m3
)
• Medium oil is defined as having an API gravity between 22.3 °API and 31.1 °API. (870 to
920 kg/m3
)
• Heavy oil is defined as having an API gravity below 22.3 °API. (920 to 1000 kg/m3
)
• Extra heavy oil is defined with API gravity below 10.0 °API. (greater than 1000 kg/m3
)
The oil market is exceptionally sensitive to politics of volatile regions as compared to other
commodity markets. As with any other commodity, this varies with demand and supply (from
both OPEC and non-OPEC countries – see Big Players under Stage: Bidding, page 6). Figure
14 shows some major events post WW2 to 2009 and how they influence the price of crude (in
USD).
Natural gas prices are more subject to supply and demand fundamentals, although major gas
suppliers in continental Europe do peg natural gas prices to oil prices. Apart from economic
growth, weather also has a major effect on natural gas demand as it is widely used for heating.
Widely traded oil futures, and related natural gas futures, include:
• Petroleum:
o Nymex Crude Future
o Dated Brent Spot
o WTI Cushing Spot
o Nymex Heating Oil Future
Figure 14: Historical prices for
crude oil for the past half century

18
November 2010
o Nymex RBOB Gasoline Future
• Natural gas:
o Nymex Henry Hub Future
o Henry Hub Spot
o New York City Gate Spot
Most of the above oil futures have delivery dates in all 12 months of the year. NYMEX Division
light sweet crude oil futures contract is the world's most liquid form for crude oil trading, as well
as the world's largest-volume futures contract trading on a physical commodity.
Oil and gas markets
So, who are the big customers? Big and growing economies with giant appetites, mostly. The
United States of America. China. India. Europe is a big market for gas (largest of which is the
UK). See Figure 15 for global oil consumption in 2007.
Statement on the Malaysian Industrial Development Authority (MIDA) website (dated 2008):
“Malaysia has the world's 14th largest natural gas reserves and 23rd largest crude oil reserves. In 2008,
Malaysia produced 5,891 million standard cubic feet per day of natural gas and 691,600 barrels of oil
equivalent per day of crude oil. Malaysia also has the world's largest production facility at a single
location of liquefied natural gas with production capacity of 23 million metric tonnes per year.
The existence of a trans-peninsular gas transmission pipeline system and six gas processing plants has
resulted in a ready supply of gas to the industry.
To complement the existing gas reserves and to ensure further security of gas supply, Malaysia has
forged partnerships with other ASEAN members for the supply of gas such as Vietnam, Indonesia and the
Malaysia-Thailand Joint Development Area (JDA).”
Figure 15: Global oil consumption
Source: http://www.oceanchampions.org, 2007

19
November 2010
Application
So far we have gone at length and detail at how oil and gas is formed naturally, how they are
found and produced. But what are these hydrocarbons used for, anyway? Figure 16 gives a
clue.
Most of petroleum is processed to become fuel. Crude oil is distilled fractionally (separated into
different chemical compounds by their boiling point via heating them to different temperatures)
to form (by boiling point ascending order) gasoline (petrol), kerosene, diesel and fuel oil.
Sour crude oil contains >0.5% total sulfur content, and this sulfur needs to be removed before
the crude can be refined into gasoline. Sweet crude oil, on the other hand, contains <0.5%
sulfur, and thus has higher demand. Sweet crude is produced in Malaysia.
Petroleum gas, which is a by product of the distillation process, is a mixture of ethane, propane
and butane. This gas is liquefied under pressure to form Liquefied Petroleum Gas (LPG) –
which is mainly propane or butane or both. Figure 17 hints at the demands for crude oil
derivatives in the US domestic and export markets. Meanwhile, natural gas is cooled to
cryogenic temperatures to be liquefied to form Liquid Natural Gas (LNG), which consists
mainly of methane.
Figure 17: Petroleum products made
from a typical barrel of US oil (Source:
2007 Energy Information Administration)
Figure 16: Petroleum refining processes and its products (Source: 2010
Logan Yeo, compiled from various reading materials)

November 2010
Fuel
The bulk of petroleum volume goes into fossil fuel which makes upmost of the world’s energy
supply at present (see Figure 18).
Gasoline is mainly used for internal combustion engines (basically most forms of motorized
vehicles – cars, vans, motorcycles, airpl
engines. Diesel is used by larger vehicles and ships. Tar and asphalt (bitumen) is used in
(tarred) road construction. Fuel oil is industrial fuel for ships.
LPG is used for cooking (butane) and transpo
primarily as fuel and as feedstock for producing fertilizers.
The costs for the transportation industry
planes need fuel to run!). Figure 19
budgets) taking a dip which coincides with the
2008 was also the start of the current global economic depression beginning in the US and EU.
This hit the aviation and travel industries on both the cost side (higher oil price) and revenue
side (individuals and groups cutting back on flights).
Figure 18
energy supply in 2007. (Source:
International Energy Agency)
bulk of petroleum volume goes into fossil fuel which makes upmost of the world’s energy
).
cars, vans, motorcycles, airplanes etc.). Kerosene is mainly used as fuel for jet
(tarred) road construction. Fuel oil is industrial fuel for ships.
PG is used for cooking (butane) and transport fuel for some vehicles (propane).
primarily as fuel and as feedstock for producing fertilizers.
The costs for the transportation industry are highly dependent on oil prices (after all trucks and
Figure 19 below shows the stock price of 3 airlines: 1 major, 2
taking a dip which coincides with the 2008 huge oil price spike. It should be noted that
ing back on flights).
Figure 18: A breakdown of the world
energy supply in 2007. (Source:
International Energy Agency)
Figure 19
versus prices of 3 different
airlines
Bloomberg, extracted
2010)
Logan Yeo Lune Gene
20
bulk of petroleum volume goes into fossil fuel which makes upmost of the world’s energy
anes etc.). Kerosene is mainly used as fuel for jet
rt fuel for some vehicles (propane). LNG is used
highly dependent on oil prices (after all trucks and
: 1 major, 2
It should be noted that
Figure 19: Price of oil
versus prices of 3 different
(Source:
Bloomberg, extracted

21
November 2010
Petrochemicals
So what happens to petroleum products which are not burnt as fuel? Petrochemicals are
chemical products derived from petroleum. Petrochemicals are divided into three classes:
1) Olefins: The most important products in crude distillation are gasoline, kerosene and
diesel. Conversely, the higher-boiling fractions are of lesser use. Hence, cracking is
performed on these higher boiling fractions to increase the yield of low boiling fractions
(gasoline, kerosene and diesel). The by-products arising from the cracking process are
low boiling alkenes known as olefins.
2) Aromatics: Reforming or aromatization converts aliphatic hydrocarbons (sweet crude
and natural gas) into aromatic hydrocarbons (benzene, toluene, xylenes).
3) Synthesis gas: Produced from reformation (which converts natural gas to hydrogen)
One could deduce that the costs of petrochemicals correlate directly with the price of crude and
gas (being the raw materials for their production) and the costs of setting up and maintaining the
plants necessary for their production. Finding out the market prices of upstream petrochemical
products (at ethylene level) just requires typing “PTCH” in Bloomberg.
As depicted on the right hand side of Figure 16, petrochemical derivatives has such wide usage
in manufacturing (plastics alone are used in automobile, computer, furniture, packaging and
many other manufacturing industries).
Petronas Chemicals derives 75% of its revenue from olefins and most of the other quarter from
synthesis gas (ammonia, urea and methanol). All of its feedstock (namely gas) is provided by its
mother company, Petronas on long-term contracts from Peninsular Malaysia and Sabah.
Methane (34% of feedstock) is used to produce ammonia, urea and methanol. Naturally,
ammonia and urea is used for fertilizers and thus finds its main consumers in agriculture.
Ethane (23% of feedstock), used to create olefins and aromatics, is one of the lowest priced
globally. All products (except for ethylene, a derivative of ethane) are sold at market price.
Statement on the Malaysian Industrial Development Authority (MIDA) website (dated 2008):
“With the full implementation of AFTA, petrochemical manufacturers in Malaysia will benefit from a
single market. Manufacturers based in Malaysia will also benefit from the access to a much larger Asia
Pacific market. With China being a net importer of petrochemicals, Malaysia's 'early harvest' Free Trade
Agreement with China will open up new business opportunities for petrochemicals manufacturers in
Malaysia.
The presence of world renowned petrochemical companies, such as Dow Chemical, BP, Shell, BASF,
Eastman Chemicals, Toray, Mitsubishi, Idemitsu, Polyplastics, Kaneka, Dairen and West Lake Chemical
speaks clearly of Malaysia's potential as an investment location for petrochemical industries. Most of
these companies are working in collaboration with Malaysia's national petroleum company, PETRONAS.
Three major petrochemical zones have been established in Kerteh, Terengganu; Gebeng, Pahang; and
Pasir Gudang/Tanjung Langsat, Johor. Each zone is an integrated complex with crackers, syngas and
aromatics facilities to produce feedstocks for downstream products.

22
November 2010
There are also other petrochemical plants in Malaysia such as the ammonia and urea plants in Bintulu,
Sarawak and Gurun, Kedah; acrylonitrile butadiene styrene plant in Pulau Pinang; methanol plant in
Labuan and the nitrile-butadiene rubber plant in Kluang, Johor.
From being an importer of petrochemicals, Malaysia is today an exporter of major petrochemical
products. A wide range of petrochemicals are produced in Malaysia such as olefins, polyolefins,
aromatics, ethylene oxides, glycols, oxo-alcohols, exthoxylates, acrylic acids, phthalic anhydride, acetic
acid, styrene monomer, high impact polystyrene, ethyl benzene, vinyl chloride monomer and polyvinyl
chloride and polybutylene terephthalate.
These factors have led the plastic products industry to become one of the most dynamic industries in
Malaysia's manufacturing sector. The plastic industry can be divided into four sub-sectors, namely
packaging sub-sector, electrical & electronics and automotive components sub-sector, consumer and
industrial products sub-sector and others. The packaging sub-sector, both flexible and rigid (including
bags, films, bottles and containers), remains the largest market for the plastic industry. The main
production processes involved in the plastic producers industry are injection moulding, pipes and profiles
extrusion and foam moulding.
There are more than 1,550 companies in operation, producing products ranging from common
household items, packaging materials and conveyance articles to parts and components for the
electrical and electronics, automotive, office automation, computer and telecommunications industries.
Malaysia is currently a net exporter of plastic products. The total export of plastic products amounted to
RM9.34 billion in 2008, an increased of 11.5 per cent compared with 2007. The main products exported
were containers of plastics, plates, films, sheets, foils, strips and other articles of plastics. The main
export destinations included the EU, China, Hong Kong, Singapore, Japan and Thailand.”

23
November 2010
To infinity and beyond….
The primary source of global energy today is still fossil fuel from oil, gas and coal (Figure 17).
The world’s oil reserves are not only constrained to conventional oil. In fact, most of the world’s
oil reserves are composed of unconventional oil.
The Association for the Study of Peak Oil and Gas (ASPO) is a good source for published peak
oil studies. A quick online check reveals that most scenarios project peak oil to be reached this
year (2010) and later. Peak gas may be reached between 2030 to 2035. Gas, being a clean(er)
fossil fuel compared to oil and coal, which is economic at the same time, is a natural successor
to crude oil. Figure 18 shows the peak oil scenarios projected by various studies at ASPO.
Fossil fuels being used as the primary fuel for industry are a fact that is unlikely to change
dramatically unless oil and gas production declines to a rate which makes alternatives
(renewable energy like solar, wind, hydro, biofuels) more price attractive.
This may very likely happen late within our lifetimes, which makes the developments in the
highly technologically driven alternative fuel industry worth monitoring.
Figure 17: Global oil reserves by type
(Source: Alboudwarej et al. (2006),
Highlighting Heavy Oil, Oilfield Review)
Figure 18: Global peak oil (Source:
ASPO, accessed 2010)

24
November 2010
Oil Sands & Oil Shales
Two major unconventional oil types are produced from oil sands and oil shales. Oil sands and
shales basically go through the same geological processes as conventional oil and gas source
rock formation, but stop before getting “cooked” (see The Big Idea, page 2).
Oil sands (also known as tar sands or bituminous sands) are naturally occurring bitumen
deposits. Naturally occurring bitumen is the stuff that is produced in source rocks apart from
kerogen (which can later on form petroleum when “cooked”). Oil sands make up the same
percentage of the world’s oil reserves as crude oil in 2006 (see Figure 17).
Extra-heavy oil and bitumen is produced from oil sands via strip mining or injection techniques,
rather than by drilling wells. These are then pre-processed via a procedure known as
“upgrading”, which prepares it for processing at conventional refineries; or processed directly at
special refineries. Natural gas is used to “cook” the bitumen during processing (The Christian
Science Monitor, May 12, 2006).
The world’s largest deposits of oil sands are the Athabasca Oil Sands in Canada and the
Orinoco Oil Sands in Venezuela. At the Athabasca Oil Sands, there are three large oil sands
mining operations in the area run by Syncrude Canada Limited, Suncor Energy and Albian
Sands owned by Shell Canada, Chevron, and Marathon Oil Corp (Alberta Oil Sands Discovery
Centre, accessed 2010).
The Orinoco Oil Sands is operated on by PDVSA (Venezuela’s state oil company) with
partnerships with several other firms under the Oil Sowing Plan (PDVSA’s website, accessed
2010). In all these partnerships, PDVSA holds 60% interest (Reuters, Feb 12, 2010).
Other locations of known oil sand activity are Eastern Utah, Russia, Congo and Madagascar.
The additional processing required and the difficulty of transporting the produce (extra heavy oil
and bitumen is very viscous and does not easily flow at normal oil pipeline temperatures),
incurring extra costs, does not deter the large scale mining of oils sands due to the conventional
oil reserve situation.
Oil shales are basically “uncooked” source rocks (rocks which contain kerogen). Oil shales are
mined using open pit or strip mining methods. Pyrolysis then converts the kerogen in the oil
shales to shale oil. Shale oil serves best for producing middle-distillates such as kerosene, jet
fuel, and diesel fuel. Worldwide demand for these middle distillates, particularly for diesel fuels,
increased rapidly in the 1990s and 2000s (Andrews, 2006, Oil Shale: History, Incentives, and
Policy, Congressional Research Service). Estonia accounts for 70% of the world’s shale oil
production (Non-Nuclear Energy Research in Europe – A comparative study, Country Reports A
– I. Volume 2, European Commission, Directorate-General for Research, 2005)
Environmental concerns have been expressed over the extraction of oil sands and shale oil,
which has environmental effects that eclipse even that of conventional oil.

25
November 2010
Reputation
“Big Oil”, a term which collectively refers to all major oil firms, is the reviled arch-enemy of the
environmentalists; the Dark Lord that will ravage the Earth’s oceans. Oh yes, from Piper Alpha
(oil platform explosion), Valdez (oil tanker spill due to drunk driver, er, captain) to this year’s Gulf
of Mexico epic screw-up by BP (the world’s largest oil spill to date – The New York Times
August 2, 2010); it is little wonder that Big Oil has a horrid reputation in the green department.
So much so that many large environmental NGOs (like WWF) refuse to work with Big Oil firms
on their “social responsibility” community projects.
Such accidents come with a big price. Apart from the obvious legal, financial and reputation
costs to the firm involved and the scar left on Mother Earth, it affects other industries attached to
the oil and gas industry and the area affected geographically.
Following BP’s Gulf of Mexico incident, President Barack Obama of the United States
announced tightened regulations on offshore drilling in the US, which set new standards for
cementing, blowout preventers and well design for offshore oil and gas projects (Reuters
November 3, 2010). It also hurts the industry as a whole: according to BP, any offshore drilling
in Gulf of Mexico will only resume in 2011. This affects the whole chain in the business and
those dependent on them.
Further Reading
• Yergin, Daniel (2008), The prize: the epic quest for oil, money and power, Free Press
• American Association of Petroleum Geologists (AAPG) and Society of Petroleum
Engineers (SPE) articles
• http://www.wikinvest.com/industry/Oil_%26_Gas_Drilling_%26_Exploration

26
November 2010
Glossary
Equity price – share price
Capital Expenditure (Capex) – the amount of money spent on fixed assets
Liquidity – the ability of a firm to raise cash
NGO – non-governmental organizations
Bloomberg – in the context of this document, software to monitor news and financial data
Initial Public Offering (IPO) - the first sale of stock by a private company to the public

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