Onshore Pipeline

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The History and Basics of Oil &

Gas, and the Oil Business

Phil Hopkins

Penspen Integrity

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SECTION 1. OIL AND GAS – BASICS AND

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OIL AND GAS – THE IMPORTANCE

Fossil fuels are the world’s most important energy source. Oil & gas constitute a significant 63% of the primary energy consumption in the world. The situation in Asia/ Australia is different with coal still remaining the primary source of energy.

However, the scenario is rapidly changing, for instance in the last decade, oil & gas consumption has grown at more than 70% in the Asia-Pacific region compared to 15% in the rest of the world (excluding the former Soviet Union, where the growth rate has been negative).

The Asia Pacific region is thus gaining importance in the oil & gas map, with India and China together accounting for 48% of the total demand in this region.

In the last decade, natural gas has taken the lead in growth and in the emerging energy scenario, it is seen as an environment-friendly substitute for relatively scarcer - oil. Consumption of natural gas has grown by more than 26%, compared to 15% in consumption of oil.

Considering the fact that oil & gas would be available in the foreseeable future without any constraint, oil & gas would continue to be the most widely traded energy source. World oil trade is estimated to be 38 million barrels a day. The inherent advantages of oil & gas in terms of versatility ease in handling & transport and adaptability to new environmental standards would make it the most preferred fuel. Though reserves by themselves are not a cause for worry, experts feel that as the reserves/ production ratio falls, the cost of exploration could rise with increased investment in development of resources leading to a surge in prices.

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UNDERSTANDING THE ROLE OF PIPELINES IN

THE OIL AND GAS BUSINESS

Pipelines play a key role in the oil and gas business – they are the main conduits of both energy sources, linking supply with demand.

If we want to appreciate their importance, we need to understand two things: i. Their place in the oil and gas ‘food chain’

ii. Their history, and that of the oil and gas business Their place in the oil and gas ‘food chain’ is simple to illustrate:

We can see from this Figure that we need to conduct extensive exploration and production before we build a pipeline, and all the early geoscience and petroleum engineering can take many years from deciding to explore for oil or gas, to producing the first batch from the well. The history of the oil and gas business is also about the development of the above figure. Therefore, this paper will cover all the above aspects to allow us to understand both the origins of, and importance of, pipelines.

P ip e lin e D e sig n F a c ilitie s E n g in e e r in g G e o p h y sic s E x p lo ra tio n G e o lo g y R e se rv o ir G e o lo g y D rillin g R e se rv o ir D e sc rip tio n R e se rv o ir S im u la tio n G e o sc ie n c e P e tr o le u m E n g in e e r in g E x p lo r a tio n a n d P r o d u c tio n P ip e lin e s M a n ifo ld s C o n tro ls P ro c e ss D e fin itio n R e se rv o ir M a n a g em en t H o st E n g in e e rin g P ro d u c tio n E n g in e e rin g W ell S y ste m D e fin itio n

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WHAT IS PETROLEUM?

‘Petroleum’ is from the Latin word for "rock oil". We usually find ‘petroleum’ in underground reservoirs, where we can pump them to the surface, or tap the reservoirs and let the high pressures in the reservoirs to bring the product to the surface.

A range of substances help define the word petroleum. All are mixtures of mostly hydrocarbon, or molecular compounds of hydrogen and carbon. They form a spectrum of materials from light gases through liquids to heavy, gummy near-solids. The differences derive from varying proportions of hydrogen and carbon making up the petroleum molecule. At the light end, natural gas contains a high ratio of hydrogen to carbon atoms. At the heavy end, tarry bitumen contains a much lower hydrogen to carbon ratio.

Hydrogen and carbon can combine in an enormous number of ways. A variety of combinations are usually mixed together in a single reservoir. These petroleum mixtures also usually contain sulphur and traces of other elements and compounds. As a result, there are almost endless numbers of petroleum types, without clear-cut distinctions between them. But going from lighter to heavier hydrocarbons, petroleum generally falls into five categories: natural gas, natural gas liquids, light and medium crude oil, heavy oil and bitumen.

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WHAT IS PETROLEUM OIL?

Petroleum was known to many ancient peoples through surface seepages. The first oil well was dug on the Greek island of Zante in 400BC and the fuel used to light lamps.

Excavations in Iran, Iraq, and elsewhere show that bitumen, or asphalt, was used to caulk ships, to build roads, and for other purposes. Europeans of the age of exploration found similar seepages of the black liquid in the Americas and the Dutch East Indies (now Indonesia). The first important modern use of crude oil was as an illuminating fuel to replace whale oil in lamps.

Oil as it comes from the Earth is called "crude oil" because it contains valuable hydrocarbons - natural chemical compounds based on hydrogen and carbon that contain stored energy - as well as oxygen and other impurities.

Actually, ‘crude oil’ is a general term for liquid fossil hydrocarbons, and a mixture of pentanes and heavier hydrocarbons. Lighter hydrocarbons, ethane, propane and butane, are commonly referred to as natural gas liquids.

Crude oil can be grouped into three basic chemical series: paraffins; naphthenes; and aromatics. Most crude oils are mixtures of these three series in various and seemingly endless proportions. No two crude oils from different sources are completely identical.

It will generally contain other materials: natural gas, carbon dioxide, sulphur, water and salts, in composition that varies greatly from field to field. .As crude oil is a mixture of chemical compounds, it must be refined into a variety of petroleum products to become useful.

A refinery takes the crude oil and processes it into a variety of hydrocarbon categories. Refining is the process of converting a raw material - crude oil - into finished products such as gasoline (petrol) and gasoil (heating oil), which are suitable for use by consumers. As stated above, the crude oil itself is actually an aggregate of various hydrocarbon molecules from the simple to the complex. We will deal with refining in a little more detail later.

The main products refined from crude oil are1_:

Major Category Sub-types

Liquefied Petroleum Gas

(LPG) Propane, Butane, Ethane, Iso-Butane, Natural Gasoline

Naphtha Naphtha

Gasoline Unleaded, Premium, Regular, Super-Premium Distillates Jet, Kerosene, Gas Oil, Diesel, No.2 Heating Oil Fuel Oil High or Low Sulphur Fuels, Straight Run, LSWR, _Bunkers

Petroleum oil is a fossil fuel. It is called a fossil fuel because it was formed from the remains of tiny sea plants and animals that died millions of years ago. When the plants and animals died, they sank to the bottom of the oceans. They were buried by thousands of feet of sand and silt.

1_{LPG - Liquefied Petroleum Gas includes Propane and Butane, the most common, as well as Ethane, Iso-Butane}

and Natural Gasoline (traded in the US).

Naphtha - Naphtha is typically used in a refinery process to produce or improve gasoline. It can also go into petrochemicals production.

Gasolene is also known as ‘Mogas’ - Mogas, is the industry term for "Motor Gasoline" an automotive fuel and is

also known as petrol in some areas.

Jet fuel, Kerosene and Jet-Kero (JET) - Jet fuel and Kerosene are nearly the same product. Jet-fuel is used to

power jet aircraft while kerosene is often used as a heating fuel.

Gasoil (GO), Heating Oil (HO) and Diesel (DL) - Gasoil, Diesel, No.2 oil, and Heating Oil are basically the same

product though each has particular specification requirements. Diesel is a motor fuel used by trucks and ships.

Fuel oil (FO), Residual Fuel (FO) and Bunker fuel (BK) - Fuel oil or Residual fuel is the bottom of the barrel after the initial distillation of crude oil. It is a heavy black oil used for many large scale burning needs. Fuel for ship engines is known as Bunker fuel.

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© Penspen Group Ltd, 2003 Rev 1 Page 8 of 51 Over time, this organic mixture was subjected to enormous pressure and heat as the layers increased. The mixture changed, breaking down into compounds made of hydrogen and carbon atoms-hydrocarbons. Finally, an oil-saturated rock-much like a wet household sponge-was formed.

All organic material does not turn into oil. Certain geological conditions must exist within the oil-rich rocks. There must be a trap of non-porous rock that prevents the oil from seeping out, and a seal (such as salt or clay) that keeps the oil from rising to the surface. Under these conditions, only two percent of the organic material is transformed into oil. A typical petroleum reservoir is mostly sandstone or limestone in which oil is trapped. The oil in it may be as thin as gasoline or as thick as tar.

Petroleum is called a non-renewable energy source because it takes millions of years to form. We cannot make new petroleum reserves; all petroleum deposits discovered today had their origins in the last 10% of the earth’s life (2 to 400 million years ago).

As a fuel, oil was originally used as kerosene for lighting, replacing animal, vegetable and coal oils. It also came to be used in furnaces. Its biggest use, however, came with the development of the automobile. Today almost all forms of locomotion -- cars, trucks, buses, trains, ships and airplanes -- are fuelled by oil, diesel or gasoline. Fuel oil has also been burned to produce electricity, although that has always been mostly coal's job.

Crude oil is transported by ships called "tankers" or by underground pipelines. Oil tankers are huge ships that can move as much as 1 million barrels of oil at a time. A "barrel" is a way of measuring oil. Each "barrel" holds 42 US gallons (see later).

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WHAT IS A BARREL OF OIL?

We measure quantities of oil by the ‘barrel’, as oil was originally transported in wooden barrels. One barrel contains 42 US gallons of crude oil. (=35 imperial gallons = 159 litres = 0.159 cubic metres). A barrel is often abbreviated to ‘bbl’ and a barrel/day is ‘bbl/d’.

This is what we can obtain from a (42 US gallon) barrel of crude oil, after we have ‘cooked’ it in an oil refinery:

Product Gallons per barrel

Gasoline (‘petrol;’) 19.5

distillate fuel oil

(Includes both home heating oil and diesel fuel)

9.2

(kerosene-type jet fuel 4.1 residual fuel oil

(Heavy oils used as fuels in industry, marine transportation and for electric power

generation)

2.3

liquefied refinery gasses 1.9

still gas 1.9

coke 1.8

asphalt and road oil 1.3

petrochemical feedstocks 1.2

lubricants 0.5

kerosene 0.2

other 0.3 The total volume of products made is 2.2 gallons greater than the original 42 gallons of crude oil. This represents "processing gain."

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WHAT IS NATURAL GAS?

The first discoveries of natural gas seeps were made in Iran between 6000 and 2000 BC. Natural gas comprises gases, occurring in underground deposits, whether liquefied or gaseous, consisting mainly of methane.The gas seeps, probably first ignited by lightning, provided the fuel for the "eternal fires" of the fire-worshiping religion of the ancient Persians. Many early writers described the natural petroleum seeps in the Middle East, especially in the Baku region of what is now Azerbaijan.

The use of natural gas was mentioned in China about 900 BC. It was in China in 211 BC that the first known well was drilled for natural gas to reported depths of 150 metres (500 feet). The Chinese drilled their wells with bamboo poles and primitive percussion bits for the express purpose of searching for gas in limestones (more than 208,000,000 years old) west of modern Chungking. The gas was burned to dry the rock salt found interbedded in the limestone. Eventually wells were drilled to depths approaching 1,000 metres, and more than 1,100 wells had been drilled into the anticline by 1900.

Natural gas was unknown in Europe until its discovery in England in 1659, and even then it did not come into wide use. Instead, gas obtained from carbonized coal (known as town gas) became the primary fuel for illuminating streets and houses throughout much of Europe from 1790 on.

In North America the first commercial application of a petroleum product was the utilization of natural gas from a shallow well in Fredonia, N.Y., in 1821. The gas was distributed through a small-bore lead pipe to consumers for lighting and cooking.

Natural gas is essentially methane (CH4), the simplest of hydrocarbons. Natural gas is closely

related to petroleum, or crude oil, which is composed of liquid hydrocarbons. In fact, all oil deposits contain natural gas, although natural gas is often found without oil.

Typical natural gas is: HYDROCARBONS: Methane 70-98% Ethane 1-10% Propane trace-5% Butane 2% Pentane trace-1% Hexane trace-0.5% Heptane+ none-trace NONHYDROCARBONS: Nitrogen trace-15% Carbon dioxide trace-1%

Hydrogen sulphide trace-occasionally

Helium trace-5%Natural gas is a non-renewable fossil fuel2. It was formed in the same way as oil (see above). Eventually, concentrations of natural gas became trapped in the rock layers much like a wet sponge traps water.

Natural gas is frequently produced along with petroleum, but some rocks produce gas without petroleum. Coal contains natural gas, although, frequently, not in quantities sufficient to justify commercial exploitation. Rocks too deep (and warm) for petroleum can contain gas; when heated to excessive temperatures, oil breaks down into smaller molecules such as methane. The deepest fossil fuel wells are gas, not oil, wells.

2

Another source of natural gas is the gas produced in landfills. Landfill gas is considered a renewable source of natural gas since it comes from decaying garbage. The gas from coalbeds and landfills accounts for six percent of the total gas supply today - that could double by the year 2010. The gas recovered from landfills is usually burned on the landfill site to generate electricity for the facility itself

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© Penspen Group Ltd, 2003 Rev 1 Page 11 of 51 Raw natural gas is a mixture of different gases3. Its main ingredient is methane, a natural compound that is formed whenever plant and animal matter decays. By itself, methane is odourless, colourless, and tasteless.

Natural gas is one of the most abundant fuels in nature. Although we do not have an absolute estimate about planetary reserves, we can safely assume that natural gas is more abundant than oil and, as an automotive fuel, is second only to hydrogen.

Deposits of natural gas are found in many places around the world. They have been most fully developed in the United States and Canada.

Large deposits are also found in the former Soviet Union, Algeria, Mexico and Venezuela, as well as under the North Sea in gas fields that are exploited by the Netherlands, Great Britain, Norway, and Germany. Gas is also produced in Romania, Indonesia, Iran, China, France, and Italy.

Natural gas is used in a variety of different ways in homes, businesses, electric plants, industrial factories, and even cars. In the USA, out of the approximately 19 Tcf4 of natural gas produced and sold annually, about 4.9 Tcf, or 26% is used in homes, about 3 Tcf, or 15% in commercial applications, about 8 Tcf, or 43% is used for industrial applications, and 2.9 Tcf, or 16% is used for generating electricity. That leaves a small percentage that is used for vehicle power, or other alternatives

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In the cold (4O_{C), high-pressure deep-ocean environment, methane unites with water to form a solid - gas hydrates.}

Brought to the surface, the substance quickly separates into methane gas and liquid water. Gas hydrates are now being found in many ocean-floor sediments. Will these provide us with a future energy source? Currently, no one has discovered a way to "mine" gas hydrates so as to produce more energy than is required to collect the methane. Research continues, however, because of the enormous potential profits if a way is found to exploit this resource. 4

‘mcf’ = one thousand cubic feet of gas. Mmcf = one million cubic feet. Tcf = one ‘trillion’ cubic feet. (a million million cubic feet).

A ‘trillion’ is a misleading term. In the USA and Canada it means 1,000,000,000,000 (1012_{), but in Europe it means}

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HOW DO I MEASURE ‘ENERGY’?

We measure the energy in our food by ‘calories’. We know that the more calories the more fattening! However, these ‘calories’ are actually measuring the energy content of the food. Our bodies need a certain amount of energy each day and food is our ‘fuel’.

The average American adult uses 3,500 kilocalories of energy per day, active and resting. This is roughly the thermal energy needed for one tub full of hot bath water.

Calories’ are defined as the amount of heat needed to raise one gram of water 1° C. Food Calories actually refer to kilocalories, or 1,000 calories. A more modern measure of energy is the ‘Joule’. 1 calorie = 4.19 Joules.

We measure the energy contained in our oil or gas in the same way – how much energy is there in it? An old, but still popular energy heat unit is the British Thermal Unit (Btu). One Btu is the amount of energy required to raise the heat in one pound of water by 1° F.

100,000 Btu is called a Therm. One Btu is equal to 252 calories or 1055 joules.

A barrel of oil has an energy content (depending on the type of oil) of 5,600.000 to 6,300,000 Btu.

Another energy measure is the ‘Watt’. We are familiar with electricity being measured in ‘kiloWatt’ (1000 watts). A large electric heater will be 3 kilowatts (3000 watts). If we leave this heater on for one hour, it will consume 3 kiloWatt-hours (kWh) of energy.

One kiloWatthour is equal to 3,412 Btus, 859,824 calories, or 3,599,660 joules. Here are some examples of energy:

Btu Calorie

A MATCH 1 252

RUNNING A TV FOR 100 hours 28,000 7,056,000

GALLON OF GASOLINE 125,000 31,500,000

HIROSHIMA ATOMIC BOMB 60,000.000.000 20,160,000,000,000

In the past we have measured the weight of an object in ‘tons’5_{. A ton is 2,240 pounds (lbs).}

We have now changed from the old units of pounds to the modern ‘metric units of ‘kilograms’ (1000 grams) to measure weight.

But we will often see our oil referred to as ‘tonnes’. Actually, a ‘tonne’ is a modern measurement of weight: a ‘tonne’ is 1000 kilograms, or 1,000,000 grams. It is sometimes called the ‘metric ton’ to distinguish it from the ‘old’ ton. Note that a tonne is a similar weight to the old UK ton (see footnote):1,000,000 grams is equal to 2205 pounds.

The number of barrels of crude oil per tonne for USA oil is 7.33. This means (assuming 5.8MBtu/barrel) that oil has 42.5 MBtu/tonne.

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The ton is the traditional measure of large weights. One ton = 20 hundredweight. In the USA there are 100 pounds (lb) in a hundredweight and in the UK there are 112 pounds in a hundredweight. But, a ton in the USA is 2000 pounds, but in the UK it is 2240 pounds; hence, the USA ton is called a ‘short’ ton and the UK ton is called a ‘long’ ton. A tonne = 1000 kilograms = 2205 pounds.

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THE ENVIRONMENT

All the fossil fuels (coal, petroleum, and natural gas) release pollutants into the atmosphere when burned. The good news is that natural gas is the most environmentally friendly fossil fuel. Burning natural gas produces less sulphur, carbon, and nitrogen than burning other fossil fuels. Natural gas also emits little ash particulate into the air when it is burned.

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WHERE IS ALL THE OIL AND GAS?

7here are over 1,000,000 tonnes of oil and 250,000,000 cu metres6 of gas consumed every hour around the world. Even at this high rate of consumption, we have over 40 years supplies of oil and gas.

CURRENT SUPPLIES

More than 60% of proven recoverable oil reserves are in the Middle East, with about 20% of these reserves in Saudi Arabia. The main oil producers are Saudi Arabia and the former USSR (CIS)

14 countries have oil supplies in excess of 10 billion barrels7 (note the dominance of the Middle East): •USA (22 billion); Mexico (27); Venezuela (48); Norway (10); Russia (54); Algeria (13); Libya (30); Nigeria (24) Iraq (115); Iran (96); Kuwait (99); UAE (63); Saudi

Arabia (265); China (31).

About 70% of proven gas reserves lie in two regions: Europe (mainly Russia, 35%); Middle

East (35%); Asia (11%); Africa (8%), North America (5%); South America (4%); Oceania

(1%). The largest consumers of gas is CIS. The USA and West Europe collectively consume the most, but they collectively only possess 11% of proven reserves. Clearly, supply and demand locations differ, therefore we will need pipelines for transportation, but economics and politics will play big roles.

THE WORLD ‘BALANCE’

All countries rely on energy. Some countries are net exporters of energy (e.g. Saudi Arabia) and others are net importers (e.g. Japan) of energy. The difference between the energy a country uses, and the energy it produces is the ‘deficit’. This deficit can be positive (i.e. a country can produce more energy than it needs, and hence can export this excess energy), or negative (the country must import energy to satisfy internal demand).

-20 -10 0 10 20 30 40 50 60 ATLANTIC BASIN ASIA PACIFIC MIDDLE EAST NIGERIA

USES PRODUCES DEFICIT

The above figure shows that the Middle East now produces relatively low amounts of oil for the world, but it has the largest ‘positive deficit’ and hence holds the balance of power. The ‘managers’ of the oil deficit have the world power.

6

6Mcf = 1 bbl

7_{1 barrel = 42 US gallons. This is equivalent (energy) to 156 cu metres of gas, or 1700 kWh.}

These ‘oil equivalent’ conversions are controversial, but are usually taken as 6000 cu ft = 1 barrel.

Million Barrels Per Day

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© Penspen Group Ltd, 2003 Rev 1 Page 15 of 51 The likes of Saudi Arabia - with spiralling government debt - want high prices. The likes of Venezuela are pushing for high prices: drilling in S America requires large investment, so high prices are needed. OPEC8 knows they must provide a balance - push prices too high and the West will look for alternative energy sources.

The price of a barrel of oil varies each year (see Figure above and Appendix B). The end of the last millennium saw a barrel of oil fall to the very low price of $10/barrel. The start of the new millennium saw oil prices go over $30/barrel.

Hence, the price of oil is a balancing act. Too cheap ($10) and the oil producing nations suffer. Too expensive ($25) and the oil consuming nations suffer. If the oil producers lose income, there will be unrest, as many are primarily dependent on oil.

The price of oil will also affect exploration and production, and a low price will make the more expensive oil and gas fields non-viable:

Region Cost of Producing a Barrel of Oil

Middle East $4/barrel (Easy E&P, good size fields)Deepwater9_(e.g.

Brazil) $8/barrel (Vast reservoirs in deep water)

UK North Sea $10-12/barrel (Shallow water fields are being depleted. Large E&P costs) In early 2000, when oil prices approached $40, the Western World started to react. Farmers, fishermen, etc., in France and England mounted disruptive campaigns to protest again the high price of their fuel (although most of the fuel cost in France and the UK is tax).

Oil dependence is not good, due to:

- the political dimension (the major powers do not have the long term reserves), - the ecological effect of burning fossil fuel is now universally recognised, so

burning more coal or gas is not an alternative, - the effect on the Western economy of price changes.

Therefore the oil majors are looking to alternatives. The drive for alternatives is not based on a future shortage of oil - we have 40 years supplies. It is political and ecological: as Saudi

8_{Venezuala, Algeria, Nigeria, Libya, Jordan, Iraq, Iran, UAE, Kuwait, Saudi Arabia, Indonesia,}

9_{‘deepwater’ has many definitions. A ‘mean’ depth is about 100 meters. Deepwatrer can currently be considered >}

300 metres 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 0 10 20 30 40 50 60 US Oil Price $/bbl

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© Penspen Group Ltd, 2003 Rev 1 Page 16 of 51 Arabia’s oil minister (Sheikh Yamani) said during the 1970’s ‘The Stone Age came to an end not for lack of stones. The oil age will end, but not for the lack of oil’.

Not surprisingly, BP have now renamed themselves ‘Beyond Petroleum’, with one aim of turning its solar power company into a $1billion business in 7 years, and Shell is spending $750 million over the next 5 years on renewable energy

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SECTION. 2

EXPLORATION AND

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HOW DO WE FIND OIL AND GAS?

Petroleum hydrocarbons are found in tiny gaps in sedimentary rocks formed hundreds of millions of years ago. They are typically in porous rocks under an impermeable layer of rock, which prevents them from dispersing and migrating to the surface. The ‘upstream’ industry (the part of the petroleum industry dedicated to exploration and production of petroleum) faces the distinct challenges of:

i. locating the underground formations that may contain hydrocarbons; ii. drilling wells to determine the presence of hydrocarbons;

iii. encouraging them to flow from the source rocks to the well; and iv. bringing them to the surface.

We will first of all deal with locating the oil and gas.

BASICS AND THE EARLY DAYS

When people first began to search for gas and petroleum, the only way they knew to find it was to look for surface evidence of a formation. This usually took the form of surface oil seeps in the ground.

The ancient peoples of Greece, Persia, and India discovered natural gas many centuries ago. The people were mystified by the burning springs created when natural gas seeping from cracks in the ground was ignited by lightning. They sometimes built temples around these eternal flames so they could worship the fire.

Of course, in the early days, these people had little idea of what the formations actually were, much less how or why they formed where they did. As we said above, it is generally recognised that petroleum products came from ancient plants and animals that have died and their bodies have decomposed The erosion process carried these biological remains down rivers and streams onto shorelines, where they were deposited along with mud and silt. Over time, they were covered by increasing amounts of this sediment, and gradually they were compressed by the weight of the sedimentary layers. With time, the material that originally contained the biological remains became sedimentary rock. Today, these sedimentary rocks10, sandstone, shale and dolomite are often where deposits of petroleum are found. I Eventually, the organic materials transform into petroleum products due to the intense pressure and heat present in the rock formations. The oil and gas migrate through the pores in the sedimentary rock, upwards to the earth's surface. If the gas reaches the surface, it is dispersed into the atmosphere. Light oils eventually evaporate also. However, most often, the petroleum products never make it as far as the surface. Many times they are trapped beneath the surface by layers of rock that have formed above the sedimentary rock layer that produced them.

If you could look down an oil well and see oil where Nature created it, you might be surprised. You wouldn't see a big underground lake, as a lot of people think. Oil doesn't exist in deep, black pools. In fact, an underground oil formation - called an "oil reservoir" - looks very much like any other rock formation, i.e. rock!

Oil exists underground as tiny droplets trapped inside the open spaces, called "pores," inside rocks11. The "pores" and the oil droplets can be seen only through a microscope. The droplets cling to the rock, like

10

The earth’s crust is made up of three rock types - igneous, metamorphic and sedimentary. All can contain oil and gas - but it is more closely associated with sedimentary.

11 _{The rock must also be ‘permeable’. The higher the ‘permeability’ the easier it is for the hydrocarbons to move from}

pore to pore: Sandstone can be 30% porous, Limestone as little as 5%

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Petroleum ‘migration’ occurs in two stages. First, hydrocarbons are lighter than water, so it will move up above any water in the rocks. It will continue to move upwards until it reaches a ‘trap’ - some kind of deformation in strata or layers of rock that are not porous.nWhen the hydrocarbon has migrated into a ‘trap’, it will displace any ancient sea water in the trap. Gas is lighter than oil, so it will be found above the oil.

In the late 1800's, prospectors noticed that oil seeps often occurred on anticlinal (see diagramme below) slopes, which was one of the first hints that geology could aid in the search for oil and gas. By the turn of the century, some domestic oil companies began forming geological departments that aided them in their efforts to find gas and oil formations. Since this time, geology has played an increasing role in helping gas companies find their mark. Gone are the days when wells were dug by intuition alone.

MODERN DAY

Today, geologists have given the industry much more information about petroleum formations and their history. This information, along with new technology that allows us to 'see' into the ground provides gas exploration companies with a much better chance of finding gas and other petroleum resources when they drill wells.

Scientists use many methods to find; they may look at surface rocks to find clues about underground formations. They may set off small explosions or drop heavy weights on the surface and record the sound waves as they bounce back from the rock layers underground. They also may measure the gravitational pull of rock masses deep within the earth.

The layers of rock that trap the deposits are impermeable layers that are usually shaped into domes by folding or faults. The layer that traps the gas and oil is called a cap rock, and the resulting formation is called a trap. As the gas and oil move upwards in through the permeable layers of rock, the oil and gas displace sea water that was also trapped in layers of sedimentary rock. When the oil and gas reach the trap and cease upward movement, they separate from one another. If you placed equal amounts of gas, oil and water into a glass, you would see that they

naturally separate themselves according to their varying densities. It's easy to see the same sort of thing by putting vegetable oil and water in a glass. Not all of the water is separated from the petroleum, however. Between ten and fifty percent of the oil and gas accumulation contains salt water, which must be removed before the gas or oil can be used by people.

There are two main categories

of gas and oil traps. They are structural traps and stratigraphic traps. Structural traps are caused by the folding or deformation of layers of rock. Two common varieties of structural traps are anticlines and faults. An anticline trap is an upward folding in the layers of rock, like an arch. Oil and gas migrate to the highest point in the anticline's dome, where they come to rest when they encounter a layer of cap rock. The second common variety of structural traps are fault traps. These form when faults fracture layers of rock, and layers containing natural gas and oil are enclosed by layers of cap rock that are adjacent to them.

The stratigraphic category of traps is characterized by a change in the reservoir layer itself trapping gas and oil. This may occur when a layer of sediment began with larger pores, which

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© Penspen Group Ltd, 2003 Rev 1 Page 20 of 51 allowed the petroleum to move through it, but then the grain of the sediment became smaller, or more tightly compacted, and this gradually forms an impermeable layer of rock.

The first step, locating the underground formations, involves assembling a great deal of geological and geophysical information. Some may be obtained through geologic mapping, and through gravity and geomagnetic surveys, although most of the information comes from seismic surveys. Seismic crews of between 35 to 200 workers place geophones or jugs in carefully surveyed lines or grids of several kilometres. The geophones pick up the low-frequency sound waves that are generated, normally by explosives buried in shotholes, and reflected from the underground strata.

Sophisticated computer programs process, interpret and digitally record the data collected in the survey. Because sound waves travel at different speeds through the different kinds of rock, detailed three dimensional maps can be produced, describing the rocks formations thousands of metres below the surface. When the same grid is used again to monitor changes to a field during production, it is known as four-dimensional (4D) seismic.

WELLS

The first well in an area is known as an 'exploration' well. If oil is discovered, further wells, known as 'appraisal' wells, are drilled to establish the limits of the field. If the field is developed, some of these appraisal wells may be used as 'production wells'.

The depth of an oil or gas well can range from a few hundred to more than 20,000 feet. A well is made by drilling a hole, called a "well bore", into the earth. Metal pipe, called "casing", is placed in the well bore and cement is pumped through it. When the cement reaches the bottom of the casing, it is forced out around the end, and pushed to the surface between the outside of the casing and the well bore. This critical layer of cement bonds the casing to the well bore. It protects oil, gas and underground water resources, keeping them from moving freely into and out of the well to mix with -- and contaminate -- each other.

The diameter of the hole decreases with depth, ranging from about 2 feet at the top to about 8 inches at the bottom. The casing is extended to the bottom of the gas pool. The drill is withdrawn, and the casing is pierced by an explosive lowered into the shaft.

ENVIRONMENT

Most of the waste that comes from producing oil and natural gas is actually water that is found underground with the oil and even helps drive it to the surface. When water rises through a well with the oil, it is collected in tanks and returned to the Earth from which it came.

Our industry protects the environment around the wells. For example, in Alaska's Prudhoe Bay, oil fields and the Central Arctic caribou herd have lived together for over 20 years. Now the herd is eight times larger than before the industry started looking for oil and gas.

Offshore drilling platforms like those in the Gulf of Mexico help the sea life that surrounds them. Because small organisms attach themselves to drilling platforms' underwater scaffolding, they attract fish that feed on those tiny organisms. The scaffolds attract far more fish than the surrounding natural environment. When we no longer need a platform, we tip the scaffold on its side, with permission from all the governments involved. The scaffold forms an artificial reef that will continue to attract fish and other forms of marine life to an area that needs it.

HOW SUCCESSFUL IS THIS EXPLORATION?

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© Penspen Group Ltd, 2003 Rev 1 Page 21 of 51 If test results are promising, the scientists may recommend drilling to find the natural gas deposits. Natural gas wells average 6,100 feet deep and can cost a hundred dollars per foot to drill, so it's important to choose sites carefully.

On average, 48 percent of the exploratory wells produce gas. The others come up dry. The odds are better for developmental wells - wells drilled on known gas fields. On average, 85 percent of the developmental wells yield gas. Natural gas can be found in pockets by itself or in petroleum deposits.

EXPLORATION AND PRODUCTION COSTS

The costs incurred for production of oil & gas can be grouped under three headings • Exploration/ finding Costs

• Development costs • Operating costs

Exploration/ finding costs include the cost of seismic surveys & exploratory drilling and varies between US$0.15/ bbl in Middle East to more than US$9/ bbl in Western Europe. The finding costs have reduced significantly over a period of time. In the last decade, it reduced from about US$10-12/ bbl to US$4-6/ bbl due to the following reasons.

• Developments of 3-D seismic surveys, which provide accurate geological and geophysical information thus, enable exact location of wells.

• Development of horizontal drilling and slimhole drilling techniques • Offshore production on floating platforms

• Development of sub-sea infrastructure systems

• Reduction in lead time for start-up from 4th year to 2nd year

Availability of consolidated seismic information and ability to analyze the increasing mass of data through interactive computer-based interpretation systems.

Development costs include the cost of production, processing & evacuation, infrastructure & R&D and varies from US$1.0/ bbl in Middle East to as high as US$20/ bbl in northern USA. Operating costs include the cost of maintaining the reservoir, revenue expenditure on production and evacuation of oil & gas. This varies from about US$0.50/ bbl in Middle East (onshore) to US$10.0/ bbl in Indonesia.

BUSINESS RISK

The uncertainties involved in finding commercial quantities of oil & gas and the intensive capital required for venturing into the business make E&P prone to great business risk. Tens of millions of dollars may well have been spent without discovering a viable oil & gas field. Given this inherent risk in business where inputs can be determined and outputs are probable, the successful ventures have to generate sufficient profits for the unsuccessful ones to keep the business going. An estimated US$50mn may have to be spent over a period of 3 to 6 years, before one can realistically conclude whether the field is fit to be fully developed for commercial exploitation.

In order to counter this business risk, E&P companies are spreading both horizontally and vertically. Horizontal risk spreading envisages acquisition of large acreage in varied geological environments consisting, various categories of sedimentary basins. Vertical risk spreading envisages farming-out participating interest to other oil companies in the oil fields owned by these companies and farming with such companies in the fields owned by the other companies. Risk is thus spread widely.

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DRILLING FOR OIL AND GAS, RECOVERY AND

REFINING

As early as 600 B. C. the Chinese were using percussion tools to dig wells through brine formations. These wells used bamboo shafts with a metal bit to pound through the layers of brine

Egyptians are credited with another first in drilling technology: they used rotary drilling mechanisms to drill into the Earth as early as 3000 B.C.. Much later, in 1500 Leonardo DaVinci developed a design for a drilling rig that is similar to many of today's rigs. Today, about 85% of the wells drilled use conventional rotary drilling rigs to dig their deep wells Seismic surveys can accurately locate the underground formations likely to contain hydrocarbons, but even in existing producing areas the presence of hydrocarbons can only be determined by drilling. In 1995 some 460 rigs drilled 11,000 wells, an average of 1,000 metres deep. This average well required about 8 days and cost about $400,000. Depths and costs vary of course: shallow wells on the prairies 400 metres deep can cost as little as $100,000; wells in the Rockies of the USA as deep as 3,000 metres can cost $4 to $10 million or more.

ONSHORE

Once an exploration team has determined a site for drilling, the location of the trap will determine, to a large extent, the equipment used on the surface for drilling the well. If the target is a relatively shallow formation, then a cable drilling rig might be used to dig the well. However, deeper formations require the use of rotary drilling rigs. The nature of the rock formations that must be drilled through will also be a factor in determining the kind of drilling equipment that is chosen for a certain well.

Percussion, or cable-tool drilling, is characterized by repeatedly raising and dropping a heavy metal bit into the Earth's surface- eventually pounding a hole downwards into the ground. This process is still widely used today for drilling water wells. Periodically, bailers, or containers that remove debris, must be lowered into the shaft to clear out loose soil and rock chips so that the bit will have a clear shot at the bottom of the well.

David and Joseph Ruffner are credited with an important development in well drilling: the first well that used a casing for the sides to prevent collapse. They were drilling through brine near Charleston, West Virginia where their holes kept collapsing in and ruining their well. To remedy the situation, they used hollow tree trunks to reinforce the sidewalls of the well. Today, steel pipe serves the same purpose.

OFFSHORE

One of the earliest offshore drilling rigs was owned by T.F. Rowland in 1869. It was used in shallow water, but its anchored, four legged tower was the grandfather of today's modern platforms. Offshore technology

surged shortly after World War II, when technology was sufficient to make such operations profitable.

O

Workers lower a new rotary bit into the wellbore. Notice the sharp teeth that will break up rock formations. Source: NGSA

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and offshore drilling is that the base where the rig is placed is man-made for offshore wells, while the land provides this base on land. The first step in drilling an offshore well is to establish a mechanism for attaching the floating drilling platform to the base of the ocean, but at the same time allow for pitching and rolling caused by the ocean's surface. In order to provide such a base, an underwater guided base is moved into precise position using LORAN and satellite technology. Next, a wide, relatively shallow hole (about 100ft deep) is drilled into the ocean floor.

This hole is filled with a casting, which serves as a permanent base for the drilling template. The drilling template looks a bit like a cookie cutter: a box with several large, round holes cut into it. This template will eventually serve as the guide for multiple wells. Several other pieces of equipment are also attached to the drilling template, including a blowout preventer, which

prevents oil or other pollutants from flowing out into open water

Work on rigs involves lifting and lowering pipe, rotating the drill bit, circulating fluid to remove the rock cuttings, and controlling the pressure in the hole. Drilling also requires services including: trucking, construction, catering and the supply of fuel, specialty chemicals, food, drill bits, safety equipment, water, lubricants, drilling mud, tools, and technological services. Many other specialized services are provided by contractors, including logging (measuring and recording rock types, and properties including natural and induced radioactive properties, electrical conductivity, or sound transmission characteristics), coring (using a cylindrical bit to remove a core of rock which can be intensively analysed by geologists to determine characteristics such as porosity and permeability), testing, cementing, pumping, and specialized trucking.

Completing a well involves installing production tubing to facilitate control and protect the production casing from corrosion. Wells can be completed by smaller servicing rigs, which also return to wells to maintain and replace equipment and to enhance production. Completion costs average about $100,000. With production tubing in place, the casing is perforated throughout the producing formation. Often the well is stimulated by hydraulic fracturing (pumping in a fluid at very high pressures) or acidizing (dissolving portions of the producing formation and cleaning out debris, such as drilling mud) to increase the flow from the reservoir rock.

If a well is not deemed commercial, the wellbore is plugged with cement and abandoned, and the site is restored as closely as possible to its previous condition.

Offshore rig workers lower a large drilling template into the ocean. It will guide the platform's drilling by providing an anchor to the ocean floor.

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RECOVERY

How does the oil and gas come to the surface? Imagine trying to force oil through a rock. This sounds difficult, but it can be done. Oil droplets can squeeze through the tiny pores of underground rock on their own, pushed by the tremendous pressures that exist deep beneath the surface. This is because oil in a reservoir acts something like the air in a balloon. The pressure comes from millions of tons of rock lying on the oil and from the earth's natural heat that builds up in an oil reservoir and expands any gases that may be in the rock. The result is that when an oil well strikes an underground oil reservoir, the natural pressure is released - like the air escaping from a balloon. The pressure forces the oil through the rock and up the well to the surface.

If there are fractures in the reservoir -- fractures are tiny cracks in the rock -- the oil squeezes into them. If the fractures run in the right direction toward the oil well, they can act as tiny underground "pipelines" through which oil flows to a well.

The newly discovered oil and gas may be recovered (brought to the surface) by: - the pressure created by natural gas or water within the reservoir,

- secondary or enhanced recovery involving injecting water/steam or natural gas, or in some cases CO2 to maintain or artificially raise reservoir pressure.

- by injecting such substances as carbon dioxide, polymers, and solvents to reduce oil viscosity and capillarity.

In light and medium crude oil fields recovery can be enhanced through miscible flooding of the reservoir with natural gas liquids, while in heavy oil fields enhanced recovery normally involves heat, through steam injection or in situ combustion as extraction is impeded by viscous resistance to flow at reservoir temperature.

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REFINING

Refining is the process of converting a raw material - crude oil - into finished products such as gasoline (petrol) and gasoil (heating oil), which are suitable for use by consumers.

A refinery is a factory that changes hydrocarbon molecules to make gasoline. Just as a paper mill turns lumber into legal pads or a glassworks turns silica into stemware, a refinery takes a raw material--crude oil--and transforms it into gasoline and hundreds of other useful products. A typical large refinery costs billions of dollars to build and millions more to maintain and upgrade. It runs every day of the year, every hour of each day. It employs between 1,000 and 2,000 people and occupies land the equivalent of several hundred football fields.

Essentially, refining breaks crude oil down into its various components, which then are selectively reconfigured into new products. This process takes place inside a maze of hardware. Employees regulate refinery operations from within highly automated control rooms.

The complexity of equipment varies from one refinery to the next. In general, the more sophisticated a refinery, the better its ability to upgrade crude oil into high-value products. Whether simple or complex, however, all refineries perform three basic steps: separation, conversion and treatment.

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GETTING MORE OUT OF THE WELL

A lot of oil can be left behind after "primary production." Often, it is clinging tightly to the underground rocks, and the natural reservoir pressure has dwindled to the point where it can't force the oil to the surface.

Imagine spilling a can of oil on the concrete floor of a garage. Some of it can be wiped up. But the thin film of oil that's left on the floor is much more difficult to remove. How would you clean up this oil?

The first thing you might do is get out a garden hose and spray the floor with water. That would wash away some of the oil. That's exactly what oil producers do in an oil reservoir. They drill wells called "injection wells" and use them like gigantic hoses to pump water into an oil reservoir. The water washes some of the remaining oil out of the rock pores and pushes it through the reservoir to production wells. The process is called "waterflooding.". How effective is waterflooding?

Let's assume that an oil reservoir had 10 barrels of oil in it at the start (an actual reservoir can have millions of barrels of oil). This is called "original oil in place." Of those original 10 barrels, primary production will produce about two and a half barrels (2½). "Waterflooding" will produce another one-half to one barrel.

That means that in our imaginary oil reservoir of 10 barrels, there will still be 6½ to 7 barrels of oil left behind after primary production and waterflooding are finished. In other words, for every barrel of oil we produce, we will leave around 2 barrels behind in the ground.

That is the situation faced by today's oil companies. In the history of the United States oil industry, more than 160 billion barrels of oil have been produced. But more than 330 billion barrels have been left in the ground. Unfortunately, we don't yet know how to produce most of this oil.

Petroleum scientists are working on ways to produce this huge amount of remaining oil. Several new methods look promising. Oil companies, in the future, might use a family of chemicals that act like soap to wash out some of the oil that's left behind. Or possibly, they might grow tiny living organisms in the reservoir, called microbes, that can help free more oil from reservoir rock. Sound interesting?

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SECTION 3. A BRIEF HISTORY OF OIL AND

GAS.

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A BRIEF HISTORY OF OIL AND GAS

12

_{IN OUR}

WORLD.

OIL AND GAS – THE VERY EARLY DAYS….

Oil

Oil has been known and used since the most ancient times and has been mentioned by most ancient historians since the time of Herodotus. It was used chiefly as a liniment or medicine, not as a fuel. The Bible refers to pitch being used for building purposes - cementing walls - in Babylon.

Oil flows from natural springs in many localities. It was obtained from such springs in what is now Western Pennsylvania by the Seneca Indians, who used it for medicinal purposes. As a fuel, oil was originally used as kerosene for lighting, replacing animal, vegetable and coal oils. It also came to be used in furnaces. Its biggest use, however, came with the development of the automobile. Today almost all forms of locomotion -- cars, trucks, buses, trains, ships and airplanes -- are fuelled by oil, diesel or gasoline. Fuel oil has also been burned to produce electricity, although that has always been mostly coal's job.

Gas

About 2,500 years ago, the Chinese recognized that natural gas could be put to work. The Chinese piped the gas from shallow wells and burned it under large pans to evaporate sea water for salt. The Chinese also had portable gaslights, which consisted of animal bladders filled with natural gas. A hole was made in the container, and the slowly escaping gas was ignited.

Gas from coal was also popular back in history. At the start of the industrial revolution natural gas was used mostly for lighting purposes. By the turn of the 19th century, the use of glowing mantles in gaslights greatly increased light output, mainly because of William Murdok, an engineer working for James Watt. Murdok demonstrated the practicality of public gas lighting in London in 1807. After becoming very popular, gas lighting was quickly replaced by electric light.

MORE RECENT TIMES….

Here is a quick history of oil and gas in our world, to bring us more up to date:

4000BC Inscriptions found by archaeologists indicate that oil and asphalt (a hard form of oil) were even used in. in this area. Asphalt was also used by the ancient Egyptians to embalm mummies

300C Alexander the Great supposedly used burning oil or "petroleum" to frighten the war elephants of his enemies

347AD Oil wells are drilled in China up to 800 feet deep using bits attached to bamboo poles. 1264 Mining of seep oil in medieval Persia witnessed by Marco Polo on his travels through

Baku.

1500s Seep oil collected in the Carpathian Mountains of Poland is used to light street lamps. 1542 In what is now the United States, petroleum was reported by Juan Rodriquez, a Spanish explorer, in 1542 near Santa Barbara, California. Oil residues from surface

12

Gas has been produced from coal for many years. This section will concentrate on ‘natural’ gas – gas that occurs naturally below ground and is drilled and collected. Appendix A gives an example of the history of ‘coal’ gas, using the UK company BG Group as an example.

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1594 Oil wells are hand dug at Baku, Persia up to 35 meters (115 feet) deep.

1735 Oil sands are mined and the oil extracted at Pechelbronn field in Alsace, France. 1815 Oil is produced in United States as an undesirable by-product from a brine well in

Pennsylvania.

1816 1848 First modern oil well is drilled in Asia, on the Aspheron Peninsula north-east of Baku, by Russian engineer F.N. Semyenov.

1816 Natural gas was first used in America to illuminate the streets of Baltimore in 1816 1849 Distillation of kerosene from oil by Canadian geologist Dr. Abraham Gesner.

Kerosene eventually replaces whale oil as the illuminant of choice and creates a new market for crude oil.

1850 Oil from hand-dug pits in California at Los Angeles is distilled to produce lamp oil by General Andreas Pico.

1854 First oil wells in Europe are drilled 30- to 50-meters deep at Bóbrka, Poland by Ignacy Lukasiewicz.

1854 Natural Gas from a water well in Stockton, California is used to light the Stockton courthouse.

1857 Michael Dietz invents a kerosene lamp that forces whale oil lamps off the market. 1858 First oil well in North America is drilled in Ontario, Canada.

1859 1859 First oil well in United States is drilled 69 feet deep at Titusville, Pennsylvania by Colonel Edwin Drake. Today's oil industry actually began almost 150 years ago -- in 1859. In those days, an oily fuel for lamps and lubricants was made by melting the fact of whales. But whale oil had become expensive. A company called the Pennsylvania Rock Oil Company became interested in digging for natural oil. Oily rocks had been

encountered in Pennsylvania by people drilling for salt. At first, this "rock oil" had been used as a medicine, but if enough of it could be found, perhaps it might be a cheaper substitute for whale oil.

Digging huge pits, however, was a time-consuming, expensive operation, so the Pennsylvania Rock Oil Company came up with the idea of drilling for oil. Not everyone was convinced, however. One banker who was asked to lend some of the money for the venture remarked, "Oil coming out of the ground, pumping oil out of the earth as you pump water? Nonsense!"

But the Pennsylvania Rock Oil Company was convinced that drilling for oil - rather than digging for it - was the way to go

Like the 1849 gold rush which saw multitudes of would-be miners arrive in the frontier regions of California, a similar phenomenon took place a decade later in 1859 in America's eastern wilderness, but that time the beacon was crude oil and the place was Oil Creek at Titusville in Northwest Pennsylvania. The allure of the fledgling oil industry, like that of gold, tapped one of mankind's greatest emotions, the thrill of discovery. For some, the quest for oil led to great riches. There were sudden jobs, excitement, new towns, new places, incredible inventions and ponderous machinery.

WHY WAS GAS SO SLOW TO BE HARNESSED?

The above list is dominated by oil. This is because the first natural gas was produced as a by-product of crude oil and was considered a waste by-product. While oil, a liquid, was easy to store and transport to markets, even in small quantities, there was no way economically to store natural gas during the early years of oil production. So, early oil drillers often considered natural gas to be a nuisance and vented or burned it off at the well site. This is significant;. though natural gas was discovered in the 1600s, transportation limitations prevented the fuel from being widely used for centuries.

During the majority of the 19th century, natural gas was used almost exclusively as a source of light. Unless a home was lucky enough to have a natural seepage in its back yard, there was no feasible mechanism to transport the gas into a home for heating or other uses. So,

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© Penspen Group Ltd, 2003 Rev 1 Page 30 of 51 natural gas was used primarily to light city streets. After the 1890's, however, electricity took over as the preferred source of light energy, and new uses of natural gas were needed. For a short time, gas companies tried to market small gas appliances: hair curlers, irons, and other assorted specialty items. These quickly passed out of style, however. Robert Bunsen's 1885 invention of the Bunsen burner, which mixed air with natural gas, along with the evolution of thermostatic controls, allowed customers to take advantage of natural gas's thermal properties. Gas producers quickly shifted their focus to the thermal properties of natural gas, promoting it as a fuel for space heating, water heating, and cooking. Industrial and electric utility markets for natural gas were comparatively small until after World War II, when natural gas became widely available. Before World War II, the interstate pipeline system was not fully implemented. Before this, gas was often vented when it was found with oil or coal, and left in place when found by itself.

When people first began to search out gas and petroleum, the only way they knew to find it was to look for surface evidence of a formation. This usually took the form of surface oil seeps in the ground. Of course, in the early days, these people had little idea of what the formations actually were, much less how or why they formed where they did. Today, geologists have given the industry much more information about petroleum formations and their history. This information, along with new technology that allows us to 'see' into the ground provides gas exploration companies with a much better chance of finding gas and other petroleum resources when they drill wells.

By the turn of the century, some domestic oil companies began forming geological departments that aided them in their efforts to find gas and oil formations. Since this time, geology has played an increasing role in helping gas companies find their mark. Gone are the days when wells were dug by intuition alone.

Later, the industry realized natural gas could be a valuable source of energy--but only where customers could access it economically. This led to construction of the first pipelines to deliver it to market. Not until the 1930s, however, were techniques developed for building and operating high-pressure natural gas pipelines such as we have today.

Natural gas was first used in America to illuminate the streets of Baltimore in 1816. Soon after, in 1821, William Hart dug the first successful American natural gas well in Fredonia, New York. His well was 27 feet deep, quite shallow compared to today's wells. The Fredonia Gas Light Company opened its doors in 1858 as the nation's first natural gas company.

We will cover later years and key events in the following sections. Also, if readers want a more in-depth listing of key events in the history of hydrocarbons, in particular the key technological advances, they should go to Appendix C.

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A BRIEF HISTORY OF OFFSHORE OIL & GAS

13

The above history of oil is very much land-based. We will now look at the move to oil and gas exploration and production offshore.

In the late 1800s, engineers in California erected wharfs to tap oil and gas reserves close to shore, but the first oil well structures to be built in open waters were in the Gulf of Mexico. They were in water depths of up to 100m and constructed of a piled jacket formation, in which a framed template has piles driven through it to pin the structure to the seabed. To this, a support frame was added the working parts of the rig such as the deck and accommodation. These structures were the forerunners for the massive platforms that now stand in very deep water and in many locations around the world, including the North Sea

Today there are more than 6,500 offshore oil and gas production installations world wide, located on the continental shelves of some 53 countries. Over 4,000 are situated in the US Gulf of Mexico, some 950 in Asia, some 700 in the Middle East and some 600 in the North Sea and North East Atlantic.

They range from ‘fixed’ structures to floating platforms storage offloading (FPSOs) structures.

13

National Ocean Industries Association, USA, and also the UKOOA website.

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THE START

In the late 1800's, the citizens of Summerland, California, began producing the numerous springs of crude oil and natural gas that dotted their landscape. After drilling a large number of wells, these early oilmen noticed that those nearest the ocean were the best producers. Eventually, they drilled several wells on the beach itself.

Then in 1887, one citizen, H.L. Williams came up with the idea of building a wharf and erecting the drilling rig on it. His first offshore well extended about 300 feet (90 meters) into the ocean. As expected, it was a good producer and before long the entrepreneurs built several more wharfs. The longest stretched over 1,200 feet (nearly 400 meters) in the Pacific. By 1910, America had quickly turned to oil as its primary resource. The invention of the internal combustion engine boosted the consumption of gasoline. At the same time, Americans were discovering new and faster ways to retrieve oil. The steel cable was used in place of rope for cable tool drilling and by 1919, the first diamond drill was used.

Almost every year for the next ten years, technology advanced to tap into this precious resource. The valves and controls which gauged the flow of oil - nicknamed the Christmas tree - was developed in 1922, followed by the creation of drilling control instrumentation in 1925. Scientists also became involved with the search for oil and in 1926, modern seismology was developed.

POST WAR

In the mid-1940s, significant changes in the oil industry were made as America was making its transition from a wartime to a peacetime economy. The petroleum industry witnessed the end of government controls on crude-oil prices, and the states began disputes over offshore water bottom ownership. There was an enormous public demand for oil and gas, and offshore exploration encountered challenges, such as underwater exploration, weather forecasting, tidal and current prediction, drilling location determination and offshore communications. Despite the difficulties, Kerr-McGee Corporation drilled the first well from a fixed platform offshore out-of-sight of land in 1947. Its barge and platform combination was a major breakthrough in drilling-unit design for offshore use. Kerr McGee contracted Brown & Root to lay the first offshore pipeline to a field off Louisiana

This event marked the beginning of the modern offshore industry as it is known today. By 1949, 11 fields were found in the Gulf of Mexico with 44 exploratory wells.

ELSEWHERE

Thousands of offshore structures have been built following the early days in the USA., For example, there are some 400 hundred structures extracting oil and gas from the UK's Continental Shelf (UKCS). These include subsea equipment fixed to the ocean floor as well as platforms ranging from the smaller structures in the Southern and Central North Sea to the enormous installations in the northern North Sea built to withstand very harsh weather conditions in deep waters.

Many of the structures were built in the 1970s and were hailed as technological feats when they were installed. The industry is now faced with the equally challenging task of decommissioning them.

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GOING DEEPER….14

90% of the world's offshore structures are in relatively shallow waters - less than 75 metres deep. However we are going deeper and deeper, as shown in the next slide of Gulf of Mexico plans and current operations.

Back in the 1960s and 1970s, Shell looked closely at deep water pipeline technology. The first application of this technology was in the Cognac field in the Gulf of Mexico – at 300m in 1979. The reel pipe ship, Apache, could install up to 16” pipe up to 600m depth, in 1978 and in 1980 it laid 10” and 12” lines in the Gulf of Mexico at the unheard of speeds (then) of 600m/hr, in 300m depths.

This is impressive, but not all technology was practical. In the1980s, deepwater pipeline repair methods were developed, but their cost was similar to relaying a typically short line in the Gulf of Mexico!

In the 1990s the Shell Auger and Bullwinkle pipelines were laid in 500-850m water depth in the Gulf of Mexico. These greater depths meant a change to conventional to ‘J-lay’ methods. This eventually lead – in 2001 – to Allseas’ Lorelay S lay vessel breaking the ‘record’ for deep water pipelay: it laid the Blue Stream 24” pipeline across the Black Sea at a depth up to 2160m. This project benefited from development work for the (cancelled) Oman-India 1,100km pipeline that was planned for a depth of 3,500m.

14_{There are various definitions of ‘deepwater’. The US Mineral Management Services considers ‘deep’ to be >400m}

(1312ft), as this depth requires deepwater technology and traditional fixed platforms begin to become economical. The largest fixed platform (Shell’s Bullwinkle) is in 1353ft of water in the Gulf of Mexico. ‘Ultradeep’ is now (2001) generally considered >5000ft of water.

Onshore Pipeline

The History and Basics of Oil &

Gas, and the Oil Business

Phil Hopkins

Penspen Integrity

CONTENTS

SECTION 1.

OIL AND GAS – BASICS AND

OIL AND GAS – THE IMPORTANCE

UNDERSTANDING THE ROLE OF PIPELINES IN

THE OIL AND GAS BUSINESS

WHAT IS PETROLEUM?

WHAT IS PETROLEUM OIL?

WHAT IS A BARREL OF OIL?

WHAT IS NATURAL GAS?

HOW DO I MEASURE ‘ENERGY’?

THE ENVIRONMENT

WHERE IS ALL THE OIL AND GAS?

SECTION. 2

EXPLORATION AND

HOW DO WE FIND OIL AND GAS?

DRILLING FOR OIL AND GAS, RECOVERY AND

REFINING

RECOVERY

REFINING

GETTING MORE OUT OF THE WELL

SECTION 3.

A BRIEF HISTORY OF OIL AND

GAS.

A BRIEF HISTORY OF OIL AND GAS

IN OUR

WORLD.

A BRIEF HISTORY OF OFFSHORE OIL & GAS

_{IN OUR}