The Oil and Gas Industry 101

By Jay R. Young
oil

America is the world’s leading producer of oil and natural gas. Most people use gasoline on a regular basis, but few of us really understand the oil and gas industry.

The Basics of Oil and Gas

How is oil formed?  It starts with ancient shallow oceans and the microscopic organic matter the ocean calls home — phytoplankton, zooplankton, and algae, in addition to the bacteria that thrived in those warm shallow waters.  As the organisms died, they floated to the bottom of the ocean and mixed with the clay-like material that made up the river and ocean beds of the era.

This organic-rich mud envelops the dead organic matter, preventing it from decomposing. As millions of years pass, this mud layer is compressed and becomes sedimentary rock. The organic material becomes what is known as organic shale.

If the shale is deep enough, between one and 2.5 miles below the surface of the earth, it starts to get warmer and experience additional pressure. The pressure turns the organic shale into oil shale, known as kerogen.  At temperatures between 90 and 160 degrees Celsius, the kerogen turns into oil and natural gas. At any temperatures higher than 160, only natural gas or graphite is formed.

Some of the resulting products from the refining process are gasoline, diesel fuel, jet fuel, heating oil, and kerosene. Sometimes diesel fuel costs less and sometimes costs more than gasoline. If there’s a shortage of diesel fuel, more is produced. But that also produces more gasoline, resulting in an excess of gasoline and a lower price.

Production and Reserves

The oil industry is divided up into different segments. One of those is termed ‘exploration and production’ or E&P. These companies find the oil, drill the wells, and sell the crude product to other companies that then refine the oil and sell the resulting products.  Hundreds of these companies are publicly owned.

Terminology

Terminology within the industry is important and many of these are widely seen in the news, online, and in print.

  1. Barrel is abbreviated ‘bbl’ and is actually 42 U.S. gallons. Most people believe a barrel is 55 gallons, but that’s not the case. Production is usually listed in barrels per day.
  2. The amount of production is often listed by thousands or millions of barrels per day. The prefix m=1,000 and mm=1,000,000. For example, if a company lists their production as 2 mmbbl per day, that’s 2 million barrels per day.
  3. Gas production is listed in cubic feet of gas at 60 degrees Fahrenheit at a pressure of 14.65 pounds per square inch. The prefix mmcf refers to 1 million cubic feet of gas. A billion cubic feet is Bcf, and a trillion cubic feet is Tcf.
  4. You might see production described as barrels of oil equivalence (BOE). This is a way of converting gas production into an equivalent amount of oil based on the amount of energy provided.
  5. Oil reserves are also reported. This is the amount of gas and oil that the company owns, but it’s still in the ground. The reserves are often used by investors to calculate future revenue and earnings. These values are not included in financial statements reported by the company.
  6. It’s all about exploration. E&P companies spend a great deal of time and money on finding new reserves. These companies can only maintain and grow revenue through the discovery of additional resources.

Drilling and Service

Very few E&P companies own their own drilling equipment or employ the personnel that do the drilling. They actually contract out the work to drilling and service companies.  Drilling companies perform the actual drilling and pump the oil out of the ground. This is considered to be a highly skilled field. The high demand for these skilled workers and specialty equipment has made these services very expensive. In fact, these services are too expensive to keep on the payroll full-time.

Oilfield service companies assist the drilling companies with well setup. They also manufacture and maintain the equipment that’s used for drilling and extraction.

Refining

Refining oil is a less fragmented industry. These are the companies you’re probably familiar with when discussing gas and oil. The industry is very stable and incredibly expensive to enter. That’s why most of the same companies have dominated the industry for so long.  Did you know that oil companies frequently sell each other’s gasoline?  As an example, your local Shell station might be selling gasoline from Chevron today.

 

The oil and gas industry has multiple moving parts. It supports millions of American jobs, provides lower energy costs for consumers, and ensures our energy security.