Sergey N Khrunkov Contacts : 603950, Russia, Nizhny Novgorod, Minin str., 24,

+7 902 786 81 18

Fundamentals of Petroleum Engineering

of oil & gas


Very few wells produced more

Spindeltop was discovered in 1901, Texas, and produced gigantic amount of crude oil – over 100 000 barrels per day.

Although whiskey and wine barrels were only briefly used to store and transport oil, the barrel remained the default volume measure in oil markets. In the early years of the industry a person could buy a barrel of oil and not be sure exactly how much oil the barrel would contain. Standard Oil company standardized the volume of a barrel to be a Standard Oil Blue Barrel, or bbl (used to this day), which is 42 US gallons.

of oil & gas


The Standard Oil Blue

Since oil expands and contracts with temperature changes and evaporates easily, volume operational tolerance of 1% to 5% are often permitted even today in large transactions.

1 Oil Barrel = 42 US Gallons  159 liters
1 US Gallons  3,8 liters

of oil & gas


Spindeltop was the first large gusher where

of oil & gas


Spindeltop was a very rich field, with

of oil & gas


In addition to large US discoveries such

This discoveries created the needed cheap and ubiquitous supply of fuel to launch the automotive age. Kerosene for lamp fuel had until then been sold to end users in small cans from grocery and general supply stores. The advent of die mass produced automobile, led by Henry Ford’s Model T in 1908, created demand for crude oil distillates other than kerosene. The quantity needed ultimately changed the principal marketing mechanism to dedicated oil service stations.

Production in die Middle East commenced in Persia when the UK government-controlled Anglo-Persian Oil Company, as BP was then known, struck oil in 1908. Royal Dutch discovered oil in the 1890s on the island of Sumatra, nowadays part of Indonesia.

of oil & gas


Up until die First World War, although

This became a conclusive factor in the outcome of the war. Ocean-going commercial and military ships continue to use residual fuel oil as their primary fuel to this day. Residual fuel oil is also called fuel oil, resid, or bunker fuel, a vestige of the days when ships had coal storage bunkers. Resid is one of the more inexpensive heavy oil products produced from crude.

The high energy density and rapid energy release of oil was essential to the development of powered flight. Gasoline continued to be the only fuel choice for powered aircraft until the 1940s. Today, kerosene is used in aviation. It is because an jet engine, or gas turbine. Jet turbines rely on burning fuel to create a pressure differential resulting in air moving to spin a turbine.

of oil & gas


These types of engines generate a very

A gas turbine engine can in theory be configured to burn a wide range of oil products, such as gasoline, diesel and kerosene. Kerosene was chosen for use as jet fuel because gasoline and diesel were desperately needed for existing WWII military machinery and kerosene was plentiful since it was no longer used for lighting following the widespread adoption of the electric light bulb in time early 20th century.

By 1950, crude oil had completely transitioned from a source of lamp oil to a transportation fuel, with gasoline, diesel, residual fuel oil and jet fuel/kerosene accounting for about two thirds of crude oil consumption. Thus, in the 20th century, the main consumers of oil were vehicles: ships, planes, cars.

of oil & gas


Global oil use

of oil & gas


Prior to the 1920s, the natural gas

Global energy production by source

of oil & gas


At the time, the use of alternative

Global electricity generation by fuel

of oil & gas


The new industry was gradually consolidated and

Start of 20th century: Rockefeller monopoly

Rockefeller purchased his first refinery in Cleveland in 1865. He formed the Standard Oil Company in 1870 and by 1890 controlled 90% of the US oil market. If Rockefeller couldn’t buy a competitor, he simply drove it out of business by dropping prices or undercutting railroad oil transportation costs in that competitor’s sales region.

The Supreme Court in 1911 Standard Oil was split into 34 competing firms such as ExxonMobil, Chevron Corporation, and others. The split companies became far more valuable than die original Standard Oil and added further to Rockefeller’s wealth.

of oil & gas


The success of the oil industry in

Mid to late 20th century: managing excess capacity

At this time there was a surplus of oil, while the demand for oil was constantly increasing. In 1928, English and American oil companies became worried that the world was once again moving into a dangerously oversupplied situation. To address the glut, the heads of the most powerful oil companies in the world attended a meeting at Achnacarry Castle in Scotland. The meeting was attended by Henri Deterding of Royal Dutch Shell and John Cadman of Anglo-Persian Oil, now BP, Walter Teagle of Standard Oil of New Jersey, now ExxonMobil, William Mellon of Gulf Oil, now part of Chevron and BP, and Robert Stewart of Standard Oil of Indiana, now part of BP.
The result was the As-Is Agreement, or Achnacarry Agreement. Under the Agreement the oilmen agreed that they would not compete against each other outside of the US and instead would act to ensure price and profit stability for each of them.

of oil & gas


Part of the reason was the Great

Mid to late 20th century: managing excess capacity

Moreover, Dad Joiner discovered a massive oil field in East Texas. Since its discovery on October 5, 1930, some 30,340 wells have been drilled to yield nearly 5.2 billion barrels of oil. And oil prices have decreased 10 times!!! It was a real collapse in the oil and gas industry. This collapse was caused by too much success...

However, the Achnacarry Agreement was a failure.

of oil & gas


Mid to late 20th century: managing excess

The need to stabilize prices at profitable levels was satisfied by the US federal government.
The government required the Texas Railroad Commission (TRC) to impose production restrictions to crude oil produced.
This was expressed in numbers of calendar days of permitted production per month.

Depth of well is 1 100 meters.

of oil & gas


Mid to late 20th century: managing excess

TRC control of East Texas production extra capacity made it the arbiter of global prices from 1931 through 1971.
Until the 1970s, worldwide exploration and production was dominated by a group of large oil producers known as the Seven Sisters.

of oil & gas


Mid to late 20th century: managing excess

The Seven Sisters, through mergers and acquisitions, are now four: ExxonMobil, Chevron, BP, and Royal Dutch Shell.

The Seven Sisters were:
Standard Oil Company of New Jersey, now ExxonMobil.
Standard Oil Company of New York became Mobil, which is now part of ExxonMobil.
Standard Oil of California became Chevron.
Texas Company was renamed Texaco, which is now part of Chevron.
Royal Dutch Shell, the Anglo-Dutch company which continues to have the same name.
Anglo-Persian Oil Company. It is now simply named BP.
Gulf Oil, most of which has now become part of Chevron and BP.

of oil & gas


Mid to late 20th century: managing excess

The four remaining Sisters have been joined by two other large international oil corporations, ConocoPhillips and TOTAL, to form a group known today as the six Majors.

Today, the Majors have lost their market dominance. Together, they control only 14% of global crude oil production, although they still own 24% of global refinery capacity.

ExxonMobil Chevron BP Royal Dutch Shell ConocoPhillips Total

The six Majors

of oil & gas


Mid to late 20th century: managing excess

Much of the worldwide oil produced in the twentieth century until the 1970s was carried out on the basis of concessions.

A concession is a particular type of legal agreement between an oil company, most often a Major, and the government of the country in which the oil was being produced.
Saudi Arabian oil, for example, which was first discovered in 1938, was developed on a concession basis by a consortium of western oil companies led by Chevron.
Concessions negotiated by the Majors were as a rule on a 50/50 profit sharing basis. The Major would set what is known as the posted price. The Major would buy crude at this posted price and split net revenue after costs 50/50 with the country. The posted price in each country took into account the freight charge from wherever the crude oil was located globally to the US gulf coast, even if the crude was never actually going to the US. This is a form of netback pricing.

of oil & gas


Mid to late 20th century: managing excess

Since the TRC controlled all US spare capacity, it effectively controlled crude oil posted prices. So the TRC controlled global crude prices.

However, the TRC had no control over the retail price of refined products. The governments of oil producing nations often felt that this posted price for crude oil was set at a level too low relative to retail market prices of refined finished products, such as gasoline and diesel. The producing nation governments also were unhappy as the posted prices were set only by the Majors. Additionally, some producing country governments felt that a 50% share of revenue was insufficient.
Cracks in the 50/50 concession arrangements began to emerge in 1951 as Mohammed Mossadegh, the democratically elected prime minister of Iran, nationalized his country's oil industry. Mossadegh took possession of the British owned production and refining facilities on behalf of the Iranian state in what became known as the Abadan Crisis.

of oil & gas


Mid to late 20th century: managing excess

The British government immediately imposed a trade embargo on Iranian oil. The embargo ended in 1953 when a coup reinstalled the Shah of Iran.

The Shah, Mohammed Reza Pahlavi, permitted Iranian oil to be divided among British, American, and French oil companies on the usual 50/50 concession basis. However, this crisis pushed western oil companies to enter into new concession agreements, under which national governments received more than 50% of revenues.
Meanwhile, OPEC (the Organization of Petroleum Exporting Countries) was formed in 1960 in Baghdad. The organization was based in Vienna and modeled after the TRC. Five founding member countries: Saudi Arabia, Kuwait, Iran, Iraq, and Venezuela, were joined in later years by a further nine nations, the United Arab Emirates, Qatar, Libya, Algeria, Indonesia, Nigeria, Angola, Ecuador and Gabon. Gabon and Indonesia subsequently left OPEC. There are currently twelve remaining OPEC countries.

of oil & gas


Mid to late 20th century: managing excess

During the 1960s, OPEC didn’t really have any power: firstly, because western oil Majors controlled production in OPEC countries via concessions, and secondly, but more importantly, the TRC still controlled global pricing.

The global pricing ability of the TRC disappeared in 1970 when US oil production peaked and began to steadily decline. In 1971, facing declining US production, the TRC gave producers in Texas, previously the only global production area with excess capacity, free reign to produce as much oil as they could.
The US no longer had any spare production capacity. The world’s spare capacity, and with it the balance of international oil pricing power was now in the hands of OPEC nations alone.

of oil & gas


Mid to late 20th century: managing excess

The production capacities of the OPEC member countries since 1970 ensure their dominant position in the world.
However, frequent political conflicts affect oil prices as much as production capacity. For example, the Arab oil embargo due to the war with Israel in 1973-1974, or the Iranian Islamic revolution in 1979.

US

WORLD

of oil & gas


Mid to late 20th century: managing excess

Oil prices are always determined by the ratio of oil demand and production. But who controls this ratio?

of oil & gas


Mid to late 20th century: managing excess

Worldwide crude oil prices
(real and adjusted for inflation),
$ per bbl

Oil prices are always determined by the ratio of oil demand and production.
Humanity needs more and more oil. The demand for oil is increasing. We find new and new oil fields. Production is also growing. Recently, the growth of demand is greater than the growth of production.
And we cannot control it: the technical complexity of oil production in our time matters more than political conflicts.

Arab oil embargo

Iranian Islamic revolution

Kuwait war

of oil & gas


Mid to late 20th century: managing excess

The decline in discoveries has been put by veteran oil analyst Charley Maxwell:

«In 1930, we found 10 billion new barrels of oil in the world, and we used 1.5 billion. We reached a peak in 1964, when we found 48 billion barrels and used approximately 12 billion. In 1988, we found 23 billion barrels and used 23 billion barrels, that was the crossover when we started finding less than we were using. In 2007, we found perhaps 6-7 billion, and we used 31 billion. These numbers are just overwhelming.»

str., 24, of.1358.
phone: +7 902 786 81 18

Fundamentals
of Petroleum Engineering