Oil and Gas Industry Overview

1 OPERATIONS

1.1 OIL & GAS SOURCES

 Hydrocarbons—the basis of oil and gas products—are molecular chains of hydrogen and carbon
atoms.
o The source of hydrocarbons is microscopic marine organism—plankton, most abundant form
of life. When a large enough group dies in an uneven manner & accumulates on seafloor—
creates chance for oil source.
o Pressure and temperature can breakdown organism, releasing hydrocarbons. To form a
suitable and economic source, must be trapped & must accumulate in large volumes.
o Abundant marine life & high sedimentation rates are precursors to oil sources—sites near
major rivers, or fossil evidence serve as indicators.

1.2 THE HYDROCARBON SYSTEM

Can contain two to six elements and makes it economical for exploitation.

1. Source rock (purple rock in photo)—Organic rich layer of sedimentary rock. Necessary for any
hydrocarbon system.
 2. Thermal maturation—Baking of the source rock, releasing hydrocarbons. No Oil w/o TM.
a. Generally, occurs as source rock is buried deeper and deeper in earth’s surface.
b. Oil formation requires temperatures of at least 60° C and stops at about 160°. These
temperatures correspond to a depth of about 2km and 5km respectively.
c. This temperature range is known as the oil window. Only natural gas is formed below this
depth, as all organic matter & oil is cracked above these temperatures.
d. Gas will begin to form at the surface, but the area below the oil window maximizes gas
formation.
e. To maximize oil formation, source rock must stay inside the oil window long enough to
crack all organic matter, and then until oil can escape to a reservoir rock.
f. Oil directly from the source rock is known as shale oil. To get more economical oil, need
other elements.
3. Reservoir rock
a. Collects oil from source rock—like a sponge.
4. Migration Pathway
a. Allows oil to travel from source rock to reservoir rock.
b. Process is aided by water, which pushes oil up to surface.
5. Cap rock
a. Keeps hydrocarbons from reaching surface.
b. Overlies reservoir rock, preventing vertical loss of hydrocarbons.
6. Geologic traps
a. Keeps hydrocarbons from escaping laterally.
b. Examples include bowing or folds of strata, or varying rock types along the reservoir.

1.3 WHAT MAKES A GOOD RESERVOIR ROCK

A reservoir rock has a sedimentary rock, with some layers saturated with oil or gas.
1. Porosity determines how much oil/gas the rock can hold
a. Porosity is the fraction of open space in the rock.
2. Permeability determines the quality of the reservoir rock—as it determines how easy it is to
extract the hydrocarbons.
a. Permeability is a measure of the connectivity between the pore spaces.
Examples of good reservoir rocks:
1. Sandstone—made of sand grains
2. Limestone—made of shell material
3. Shale—made of slit, clay, and organic material
a. Shale is a fine grain sediment and has a lower permeability vis-à-vis sandstone or
limestone.
b. Hydrocarbons come from organic matter contained in the shale—meaning the shale
source rock doubles as a reservoir rock.

1.4 EXPLORATION TOOLS AND METHODS

1. Satellites are used to find gravity anomalies—indicative of possible sub-surface anomalies that
could contain oil.
a. Once an area of interest has been identified, geologists use energy or seismic waves to
investigate further. These energy waves reflect off rock interfaces. This creates a cross-
section, or profile of the sub-surface.
2. If there is an existing well in the profile, rock types and core samples can be used to clarify the
initial profile.
3. Analogous sedimentary systems that are on the surface can be used by geologists to supplement
the data.
a. These systems could be modern river and costal environments, to ancient rocks which
outcrop above ground.
1.5 ACQUIRING MINERAL RIGHTS
1. Mineral rights allow for the exploitation of minerals beneath the surface.
a. Definitions of minerals varies, but all include oil, gas, coal, uranium, silver, and gold.
Marketable minerals such as salt and sulfur can also be included.
b. Once an area of interest has been identified, geologists use energy or seismic waves to
investigate further. These energy waves reflect off rock interfaces. This creates a cross-
section, or profile of the sub-surface.
2. Surface rights cover ownership of the land, soil, and groundwater.
a. There are parts of the U.S. where a sale of land conveys both surface and mineral rights.
3. The mineral estate is dominant—meaning the mineral rights grants the ability to use as much of
the surface estate necessary to exploit the mineral rights (wells, roads, groundwater).
a. This could create conflict between the surface owner and a mineral company—and
makes forging a deal between a mineral company and a property owner very important.
4. Mineral right deals include five elements:
a. Bonus
i. Attractive, one-time payment to secure rights.
ii. $10 to $X,000 / acre are reasonable depending on how much drilling is being
done.
b. Royalty
i. Typically, 12-13% of oil and gas sales—not profits.
c. Primary term
i. How long lease is in effect.
d. Delay rentals
i. Payments made in lieu of royalties if drilling is delayed.
e. Secondary term
i. Period of time lease can be extended if producing wells are obtained.
ii. Ordinarily for the useful life of the well.
5. Each state has laws governing how far apart wells can be drilled. This can change how much
land is needed to pursue a drilling.
6. When mineral rights are owned by the state (or federal government), competitive bidding is used.
a. Generally, the highest bonus determines who wins the rights.
7. After securing the rights, permits must be acquired.
a. Permits—in addition to protecting the environment—usually require plans and a bond to
reclaim the land after drilling.

1.6 THE DRILLING PROCESS

1. There exist some variations between drilling offshore and on the surface, but the two processes
are generally the same.
a. Tower Structure—used to raise and lower the drilling pipe via a rigging system.
b. Mud system circulates mud through drill bit, and back out through the bore hole.
i. Mud serves three purposes:
1. Lubricates drill bit.
2. Sends rock fragments to the surface, clearing bore hole.
3. Acts as a weight barrier to prevent high pressure fluids blowing out the
top of the well.
2. Offshore drilling:
a. The complexity of the rig depends on water depth.
i. In shallow water, rig can be secured on a super structure that sits on sea floor.
ii. In deeper water, rigs require a tethering system to hold rig in place.
3. Surface drilling:
a. First, site is prepared by leaving area and sometimes digging mud “pond”.
b. Large wide pipe X0-X00’ long (conductor casing) is installed on drill site to prevent wall
caving in at surface and to conduct fluids from well.
c. Next drilling rig and infrastructure are installed on site.
 i. Crew must operate 24/7 for up to several months. Crew adds 30’ to 90’ lengths of
drill pipe to deepen well.
d. The first drilling operation is to drill below the local fresh water zone and seal off well.
i. This is done to prevent water contamination.
ii. This is done using surface casing—steel piping that is “telescoped” through the
conductor casing.
iii. The surface casing is fixed in place with cement, using a special attachment at
the end of the surface casing called a cement shoe.
iv. This fills the space between the casing and the bore hole wall—fixing it in place
and preventing oil/gas from escaping.
e. Blowout preventer is installed on top of the conductor and surface casing assembly.
i. The blowout preventer is a set of valves, and monitors, seals, and controls the
pressures in the well.
f. Drilling to the reservoir rock is done using a drill bit smaller than the surface casing.
i. Mud is circulated throughout the drilling process, and the rock cuttings brought to
the surface are examined to infer distance to reservoir.
ii. Directional drilling bits allows boreholes to be made in a thin reservoir layer, for a
mile or more.
g. After drilling target is achieved, a production casing is cemented into place along the
entire length of the borehole.
i. At this point, the end of the well is also sealed with concrete, and no fluids can
flow in or out.
h. A perforating gun is used to launch explosives through the production casing, concrete,
and into the reservoir rock.
i. This allows high pressure fluids/gasses in the reservoir rock to flow into the (now)
low pressure well.
ii. The perforating gun is retracted and used then in series, to maximize well
production.
i. At this point, if the rock has poor permeability, the reservoir can be hydraulically
fractured.
i. To hydraulically frack, a mixture of ~90% water, 9.5% sand, and 0.5% chemicals
is pressurized and sent through the bore hole, going through the holes in the
production casing.
ii. Pressure is increased until hydraulic fracturing occurs.
iii. Pressure is then reduced, allowing the mixture to flow back to the well, leaving
only sand grains stuck in the reservoir rock to maintain the new higher
permeability pathways.
iv. Fracturing occurs in sections, with each successive section being sealed off.
j. Directional drilling and fracking means that new reservoir rocks such as shale can now be
exploited at much greater efficiencies. Now, a single well can exploit a reservoir area
equivalent to 30 vertical wells.
4. Operating an already drilled well is much simpler.
a. Offshore, two options exist
i. A large production platform can be used; these can usually drill additional wells.
ii. Subsea facilities can also be used; these can operate during major storms.
b. On land, configuration depends on what is being produced:
i. For gas, a set of valves known as a Christmas tree is used to control the flow.
ii. For oil, a pump jack is used, when the pressure on the reservoir is not enough.
c. Production from the well is first directed into a heating unit, to separate liquids & gas.
i. Liquids are then separated into water & hydrocarbons.
ii. Depending on state regulations, water is either pumped back, or treated and
released on the surface.
d. Extracted hydrocarbons are then sent for processing.
i. Liquids to a refinery.
ii. Gas to a NG processing plant.
5. After well is tapped, site is plugged, and abandoned—in accordance with earlier plan (hopefully).
1.7 PROSPECT TO PLAY
Terms:
1. Frontier region—little to no prior exploration.
a. Geologists must use geophysical data.
2. Prospect—area in a region that has high(er) potential for oil/gas.
3. Wildcat—first well in a frontier region.
4. Development wells—additional wells dug after a successful wildcat well.
5. Play—region with oil/gas wells will a similar set of geological characteristics.

1.8 PRODUCTION OVER TIME

1. As pressure in the well is reduced, less oil and gas can be produced.
a. This occurs exponentially, with oil and gas sharply declining after the initial stages.
b. Oil and gas from the well is eventually replaced with water, with water levels increasing
exponentially as the well matures.
2. Production graphs can also be assembled for an oil field.
a. This graph will generally show a sharp ramp-up, eventually plateauing, then falling until
production rates are no longer economically sustainable.
3. Generally, graphs of larger regions will look similar, with a general rise and fall trend.
a. New technology can—and has—revived oil production.

1.9 ENHANCED OIL AND GAS PRODUCTION

4. As pressure in the well is reduced, less oil and gas can be produced.
a. This occurs exponentially, with oil and gas sharply declining after the initial stages.
b. Oil and gas from the well is eventually replaced with water, with water levels increasing
exponentially as the well matures.
5. Production graphs can also be assembled for an oil field.
a. This graph will generally show a sharp ramp-up, eventually plateauing, then falling until
production rates are no longer economically sustainable.
6. Generally, graphs of larger regions will look similar, with a general rise and fall trend.
a. New technology can—and has—revived oil production.