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Petroleum and Natural Gas

Chapter 11

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Introduction

Oil and natural gas touch our lives in countless ways every day. Together, they supply more than 60 percent of energy. They fuel our cars, heat our homes and cook our food.

But did you know that oil and natural gas also help generate the electricity that powers our daily lives? Or that crude oil supplies the building blocks for everything from dent-resistant car fenders to soft drink bottles to camping equipment?

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Introduction

• Petroleum Industry is considered to be the back bone of an economy because this is the main source of energy till date. Any economy around the world would fail to proceed a single step in the absence of Petroleum Industry.

• Thus, before using this energy source, the crude petroleum is required to be refined in the petroleum refineries for extracting various fractions for energy generation namely, petrol, natural gas, kerosene, asphalt and many more.

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Introduction

• It is the most important commodity in international trade today.

• Major petroleum companies are the largest multinational firms.

• It is a truly global industry, prices are reported almost exclusively in international terms.

• Petroleum and natural supplies are very unevenly distributed across the world.

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Introduction

• They are in great demand.• Despite weak economies the developing

nations seek access to petroleum and gas.• Politics plays a huge role in the allocation

process of petroleum and gas.• The automobile industry created the increase

in demand for petroleum/gas, and changed the world economy.

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Introduction

• Price increases left many third world nations reeling.

• When demand stabilized and prices began to drop reducing revenue for many oil rich nations.

• USA and Soviet Union are major producers but the Middle East is the leader and has large reserves of oil.

• The Middle East has one half of the world’s reserves, Saudi Arabia alone has one fourth the reserves.

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Introduction

• Production of petroleum by the Petroleum Industry in USA has come up as a huge contributor to the total petroleum production in the world. It has been observed that it’s contribution amounts to almost 25 % of the total production of petroleum globally

• The most important part of the Petroleum Industry is the Petroleum Refining Industry which refines the crude oil to convert it to usable fuel. It also derives many derivative products out of the crude petroleum like natural gas, naphtha, etc which can be used in various ways.

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Introduction

• Petroleum is basically a non-renewable form of fuel which is subject to extinction from the world after a certain point of time.

• The price of petroleum is determined by the demand-supply mechanism around the globe. Petroleum is not a domestic product and any kind of shortage in the same has serious ramifications (implication/s)on all possible industries along with the economies all over the world.

• Petroleum Industry has to continuously explore and research for new petroleum sites all over the world.

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History of Petroleum

• Historians believe that petroleum was first found in Romania in 1857.

• 2000 barrels of petroleum was the output from oil wells near Bucharest.

• The oil was primarily used for home and street lighting purposes.

• An experimental well was struck near Pennsylvania in 1859 which yielded 500,000 barrels of oil.

• USA and Romania thus became the early producers of petroleum.

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History of Petroleum

• The demand for gasoline increased with the growth of the automobile industry in the 20th century.

• Europe continued to be a deficit region.• As market demand continued to accelerate many

new sources in both traditional oil producing countries and other countries too emerged.

• Ohio emerged as the new leading producer in USA.• Oklahoma, Texas and Louisiana also started

producing oil by the 1920’s.

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History of Petroleum

• In the early 20th century Russia emerged as the new leader producing more oil than the rest of the world put together. Most of it was exported to western European markets.

• However, this dominance was short lived because domestic political and economic turmoil curtailed production.

• Mexico was also a leader of in oil production. • However, that too was short lived.• Traditionally, the subsoil rights were vested to landowners in

Mexico.• Oil prospectors from California, Great Britain, and Netherlands

purchases these rights from the landowners.

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History of Petroleum

• In the early 20th century Russia emerged as the new leader producing more oil than the rest of the world put together. Most of it was exported to western European markets.

• However, this dominance was short lived because domestic political and economic turmoil curtailed production.

• Mexico was also a leader of in oil production. • However, that too was short lived.• Traditionally, the subsoil rights were vested to landowners in

Mexico.• Oil prospectors from California, Great Britain, and Netherlands

purchases these rights from the landowners.

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History of Petroleum

• The Queretaro Convention in 1921 reversed this policy and transferred the petroleum rights to national ownership.

• Litigations between the government and oil companies reduced operations in Mexico.

• The Mexican government expropriated (seized) the property and equipment of foreign oil companies and terminated their activities.

• This led to a steep decline in the output….from 157 million barrels to just 44 million barrels.

• It took several decades for them to recover from this setback.

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History of Petroleum

• Venezuela made its presence felt as a major producer of oil around 1920.

• The Venezuelan government realized that though they owned and controlled the production of the minerals in the nation that for a strong mining economy they needed not just natural resources but also skills and equipment to develop them.

• European companies provided this assistance and unlike the Mexican government the Venezuelan government did not obstruct this partnership.

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History of Petroleum

• In the Middle East too, a similar situation existed.

• The Middle East had a vast source of natural resources and the knowledge (exploration, drilling, production) to exploit it was provided by the Europeans.

• This oil/petroleum was exported to Europe for refining mostly through the Suez Canal.

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Post World War II

• Petroleum consumption rose to unprecedented levels by 1960.

• Rapid industrialization, the growth of the automobile industry, and conversion from coal to oil was instrumental for this increase in consumption.

• The output in petroleum in USA began to decline and they began to import oil for the first time.

• However the output grew steadily in the Middle East and it was second highest producer in 1960.

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Post World War II

• Iran, Iraq, Saudi Arabia supplemented the production. Kuwait very soon outpaced these countries because of its rich resources.

• Soviet Union had a petroleum boom in 1950.• Indonesia was another player.• Canada also experienced an oil boom in the

1960’s. The petroleum fields here are considerably further from the centre of the country’s population. This meant greater transportation investments.

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Political Involvement

• In 1960 the OPEC (Organization of Petroleum Exporting Countries)was formed at a conference held in Baghdad.

• It comprised of 5 nations Iran, Iraq, Kuwait, Saudi Arabia and Venezuela.

• OPEC sought to provide a mechanism to deal with the MNC’s that controlled oil production and distribution in their countries.

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Political Involvement

• MNC’s threatened the host countries that they would redirect oil purchases to other countries.

• These MNC were referred to as the “Seven Sisters” or “majors”. They managed 100% of the oil production and owned 80% of the output in the Middle East.

• These “seven sisters” were Exxon, Standard Oil, Mobil, Gulf, Texaco (all from USA) British Petroleum (BP) from Great Britain and Shell from Netherlands.

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Political Involvement

• With this complete control by the Seven Sisters the petroleum industry flourished like never before.

• Discovery of oil wells in Soviet Union and with other independent firms entering the market things changed rapidly increasing competition.

• Prices began to decline and the royalty income to the host country reduced.

• The pressure on the majors increased to give up a greater share of the oil revenues.

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Political Involvement

• Political and military tension in the Middle East created a difficult working environment for the MNC’s in the 1950’s and 1960’s.

• The Suez Canal was closed in 1956 by the President of Egypt. This interrupted oil flows to western Europe.

• This led to the deployment of supertankers to carry oil around Africa. It also encouraged the development of western Mediterranean supplies.

• Libya and Algeria became alternative sources for Europe.• Libya became the fourth largest exporter after Venezuela,

Iran and Saudi Arabia, ahead of Kuwait.

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Political Involvement

• During this time OPEC began availing more and more concessions from the MNC’s.

• The MNC’s finally agreed to financial concessions that did not cost them directly.

• They passed the increased costs as tax credit deductions. The profits continued but the margins reduced.

• Libya and Indonesia joined the OPEC along with Abu Dhabi, Algeria and Nigeria.

• The OPEC negotiated a three fourths of the price for themselves.

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Political Involvement

• Around the 1970’s the Middle Eastern countries began to nationalize oil operations.

• MNC’s continued to manage 70% of the production despite the nationalization.

• In 1973 the Gulf states met in Kuwait and the infamous Arab oil embargo began.

• They raised prices by 70% and cut back on production.

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Political Involvement• An embargo (ban)on sales to USA, Netherlands and Canada was

imposed in 1973. • Prices were increased by a 130%.• The power had shifted from the MNC’s to the OPEC!• The MNC’s tried to thwart (prevent) the impact of the embargo

by redirecting the flow of oil to those countries most affected with supplies from other areas under their control.

• This hastened the nationalization of production in the Middle East.

• Saudi Arabia did not nationalize the oil production and the MNC’s Exxon, Standard Oil, Mobil and Texaco continued to play an integral role in Saudi Arabian oil production.

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Political Involvement and Prices

• Middle East politics continued to influence prices of oil through out the 70’s.

• Oil prices in many countries were far higher in the 1980.

• Western Europe had the highest prices due to government taxation.

• In the USA the price of domestic crude oil was lower than world prices due ton controls by the government.

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Political Involvement and Prices

• In the early 1980’s prices were high due to inflation.

• By 1983 the inflation subsided in developed areas but continued in developing areas.

• Recession hit the US oil industry in early 1982, which led to oil firms going bankrupt, layoffs increased.

• But by 1983 the worst seemed to be over.

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World Oil Reserves (2009)

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Refinery Locations

• Unlike in other manufacturing processes, petroleum refining does not involve weight gain or loss.

• Almost all of the product can be used.• Refineries are traditionally located near the source

of raw material, at the market, or at an intermediate break-of-bulk location (near a port for example)

• Facilities are capital intensive and highly automated.

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Refinery Locations

• Refineries are often linked with other petrochemical operations to share technology and expertise.

• Refineries are therefore located very often close to resources.

• Locating refineries near oil fields is the short life expectancy of the well.

• However, because of high evaporation rates, refineries are often located near oil wells

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Refinery Locations

• In the USA refineries are often located near the market or break-of-bulk locations.

• In the Middle East refineries are typically located near the port.

• In Europe too they cluster around ports.• In Europe, industries (other than automobile)

are the largest consumers of oil, hence refineries are also centered around manufacturing units.

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Refinery Locations

• Market locations for petroleum refining have the advantage of allowing the refinery to provide the appropriate mix of products for local consumption and the ability to draw supplies from more than one field.

• Many refineries in the USA, are therefore, located near metropolitan areas.

• Refineries can have oil spills, fumes, explosion and other environmental hazards, because of which they are seldom located near densely populated areas. Sites are often encouraged to be situated near the outskirts of urban areas.

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Natural gas production by countries in cubic meters per year.

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Natural Gas

• Natural gas is a gas consisting primarily of methane. It is found associated with other fossil fuels, and in coal beds

• It is an important fuel source, a major feedstock for fertilizers, and a potent greenhouse gas.

• Before natural gas can be used as a fuel, it must undergo extensive processing to remove almost all materials other than methane. The by-products of that processing include ethane, propane, butanes, pentanes, and higher molecular weight hydrocarbons, elemental sulfur, carbon dioxide, water vapor, and sometimes helium and nitrogen.

• Natural gas is often informally referred to as simply gas, especially when compared to other energy sources such as oil or coal.

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Natural Gas

• Natural gas drilling rig in Texas

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Natural Gas

• The gas utility industry dates back to the 19th century.

• Mass marketing of its present form “natural gas” began post World War II. Until then only manufactured gas was used, which was produced by heating coal.

• Natural gas came of age with the deployment of a comprehensive pipeline network after World Was II, first in the USA.

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Natural Gas

• Natural Gas burns clean.• It is easy to use.• It is cheap.• It can be used for direct heating.• Does not require extensive refining.• But……storage and distribution is complex.

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Natural Gas

• Generally crude oil is found with natural gas.• Natural gas is also found separately.• Crude oil is easily trapped in wells and can

be transported via barrels, barges etc.• Gas escapes at the wells and whatever is

trapped can be transported by pipelines or converted to a liquid form under pressure and that is more difficult to transport.

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Natural Gas

• Most of the world’s natural gas is found in USA, Canada, Soviet Union and Western Europe.

• In the USA, government regulations control the prices of natural gas. But gas sold within the state did not fall under these regulations.

• Post World War II there was plentiful supply of natural gas, but exploration and drilling for it declined because of lack of incentives from the government.

• The demand for interstate gas continued as conversion to gas from coal and petroleum increased.

• Texas and Louisiana consume one third of the natural gas of USA, closely followed by California.

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Natural Gas

• The Soviet Union leads the world in Natural Gas output.

• LNG (liquefied natural gas) has increased in importance in recent years, although high prices have dampened the demand for it.

• Transportation of LNG is expensive because of the need to pressure it and containerize it in special containers.

• Natural Gas will perhaps continue to be in great demand because it is a cleaner burning fuel.

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Natural Gas Pipelines

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Questions

1.Trace the role of politics in the petroleum industry across the years.

2. Write a brief note on the history of the Petroleum industry.3. Is the location of a refinery an important

consideration? How? Why?4.Write a brief note on Natural Gas