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How the Oil & Gas Industry Works

The oil and gas sector is considered to be the biggest in the world in terms of dollar value. The largest producers in no specific order are, the United States, Saudi Arabia, Russia, Canada, and China. This global powerhouse uses hundreds of thousands of workers worldwide and generates hundreds of billions of dollars each year. The complex jargon and unique metrics used within the industry can quickly overwhelm a new investor. This blog is designed to help anyone understand the fundamentals involved in the oil and gas industry.

The Different Oil and Gas sectors

Upstream – This involves the search for natural gas fields or crude oil fields both underwater and underground. Additionally, it includes the drilling of exploration wells and established wells to recover oil and gas.

Midstream – This sector entails the transportation and storage of oil and gas. Once resources are recovered, it needs to be transported to a refinery. Refineries are often in a completely different region compared to the reserves where the oil and gas are stored. Modes of transportation can include anything from pipelines to tanker ships.

Downstream – This refers to the refining of crude oil and purifying of natural gas. The end product that is distributed to consumers comes in a number of forms including natural gas, gasoline, kerosene, jet fuel, lubricants and more.

Extracting Hydrocarbons

Crude oil and natural gas are made up of mainly hydrocarbons, which naturally occur in rock, in the earth’s crust. These organic materials are created when the remnants of plants and animals are compressed between layers of sedimentary rock and exposed to high temperatures. The sedimentary rock itself forms as layers of sediment get deposited on the ocean floor.

After being subjected to high pressure and temperatures, the organic material transforms into oil and gas deep within the earth’s crust. The newly formed oil and gas are less dense than water, causing them to migrate through the porous sedimentary rock towards the surface. When the hydrocarbons reach less-porous cap rock, they become trapped and form an oil and gas reservoir.

Hydrocarbons can be extracted by drilling through the cap rock and into the reservoir. If the drilling activity doesn’t find viable quantities of hydrocarbons, the well is labeled as a dry hole.  

Drilling and Service Companies

E&P companies usually don’t own their own equipment or employ drilling rig staff. Instead, they hire drilling companies to drill wells for them. Drillers generally charge for their services based on the amount of time they work for the E&P company–they don’t generate revenue that’s tied directly to oil and gas production.

Once a well is drilled, various activities are involved in maintaining its production–these activities are called well servicing. As is the case for drilling, many public companies are involved in well service activities. The revenue of the service companies is tied to the activity level in the industry–higher rig counts and utilization rates equal more activity and more revenue.

Gas production numbers explained

Natural gas production is described in terms of cubic feet. The term Mcf means 1 thousand cubic feet of gas, Bcf means 1 billion cubic feet and Tcf represents 1 trillion cubic feet.

It’s important to note that the futures contract is based on 1 million British Thermal Units, or MMBtu. 1 MMBtu is roughly equivalent to 970 cubic feet of gas–for this reason investors think of an Mcf of gas as being one MMBtu.

E&P companies describe their production in units of barrels of oil equivalent or BOE. One BOE has the energy equivalent of 6,040 cubic feet of gas. Oil quantity can be converted into gas quantity in a similar fashion and gas producers often refer to production using the term Mcfe.

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We hope that you enjoyed reading our blog and learning about the industry fundamentals.

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