Black gold: an insight into the oil process

We pump our cars (and our oceans) full of it, we fight wars over it and complain about the price of it.

It’s everyone’s nasty little addiction, although we can’t live without it. But how much do we really know about the oil process and where it comes from?

Oil is a hydrocarbon formed from the fossils of plant and animals which have been subjected to immense heat and pressure over millions of years.

In the form of liquid, gas or coal, oil deposits are often found alongside porous rock, non-porous rock and gas.

Generally, the industry is divided into three areas: ‘upstream’ and ‘midstream’ covering exploration, extraction and production; and ‘downstream’ covering retail (petrol stations) and consumer marketing.

Upstream activities generate most of the profit, although they also shoulder more of the risk.

Ownership

To understand how extraction works, it’s important to understand the two types of oil companies: national and privately-owned.

Most governments reserve the right to natural resources and have national (government-owned) oil companies – Petrobas in Brazil, or Saudi Aramco in Saudi Arabia for example.

These oil companies provide their governments with important revenue that goes into paying for government services, while also helping national objectives like employment and infrastructure.

Privately-owned companies on the other hand such as ExxonMobil or Royal Dutch Shell are motivated purely by shareholder profit.

Nevertheless, in order to extract oil from any given country, they still must comply with local environmental and ownership rules.

For instance in Nigeria, all oil production must be part of a joint venture with the Nigerian National Petroleum Corporation (NNPC).

Chevron’s operations in Nigeria are 60% owned by the NNPC and 40% owned by Chevron.

The US, however, is unique in that it has private ownership of resource rights. Exploration is a private agreement between a landowner (an individual or the government) and an oil company.

Landowners receive royalties from barrels produced on their land, with thousands of small independent or ‘stripper’ wells producing less than 10 barrels a day.

Upstream

Upstream work includes the oil exploration, well drilling, and well operation (oil extraction). A lot of this process is usually contracted out to specialist drilling or field service companies.

Firstly, geologists analyse land forms and seismic activity to decide if a test site should be drilled.

If extraction is given the go ahead, the porous rock is punctured to access the oil within. Because the oil is under high pressure, the well usually flows freely when tapped (as impressively shown in the Gulf of Mexico spill).

Midstream

Once the oil has been extracted from the ground, it is transported by pipeline or oil tanker to a refinery to be processed.

Hydrocarbons are separated into different elements by heating the oil to a vapour and passing it up through a tower.

As the oil cools, the different elements separate at different heights. An average barrel might contain gas, petrol, diesel, kerosene, gas oil, lubricating oils and asphalt.

From here it’s packaged and transported to market, either by a truck or smaller petroleum ship.

Aside from vehicle petrol, the oil products are also used in plastic, paint, detergents, fertilisers and medicines, just to name a few.

Downstream

The Organisation of the Petroleum Exporting Countries (OPEC) is a cartel of 12 of the world’s most oil-rich nations.

They include Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela.

Together they hold three quarters of the world’s oil reserves.

OPEC aims to secure a stable source of income for oil exporting countries and effectively controls global supply and price by setting strict production limits for member countries.

All OPEC nations have a national oil company and most allow international companies to operate within their borders – although usually with conditions attached.

The official price of oil is quoted on the New York Mercantile Exchange. Brent, West Texas and Dubai are the key benchmark prices that all producers sell at which is generally based on supply and demand.

However, as prices rose throughout the last decade, peaking at US$145 a barrel in July 2008, speculative trading has come under criticism.

This is when traders, who don’t actually want to use the oil, buy it betting that the oil price will continue to rise, and thereby push the price up artificially.

For the end consumer, transportation costs and government taxes also impact on the petrol price.

Politics can play a role in the buying and selling of oil as well. The US for example, prohibits importing oil from Libya and Iran, while Mexico also limits oil imports from the US.

As the world’s most traded commodity and the lifeblood of any economy, securing a source of oil will remain a critical concern in the years to come.

By Victoria Craw