Downstream Industry
This downstream oil and gas overview discusses what we talk about in our popular ‘What is Downstream’ course which also covers the Oil and Gas downstream Industry.
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There is an upstream, new hire orientation sponsored by the The Society of Petroleum Engineers. It’s held twice a year when crude prices are high and once a year when crude prices are low.
I’ve been doing that training, helping with the training on the industry perspective for about the last 7 or 8 years. If you’re interested in learning more about the upstream, it is really drinking from 3 fire hoses in one day, everything from drilling, production, completions, facilities.
READ MORE ABOUT THE DIFFERENCE BETWEEN UPSTREAM AND DOWNSTREAM
When I did my last presentation, I was trying to figure out to get a series of what was going on in the world into what I call human readable form.
I came up with what I call the rule of thirds.
You’ll recognize this from your art institute stuff. I’m going to talk about the rule of thirds. Let’s talk about the recent crude price collapse, and it literally was a collapse. We went from $110 a barrel to $26.
Terrible impact on the industry.
There is a brand new oil game in the United States.
The importance of shale oil, and we’ll talk a little bit about the difference. I’m only going to go into the successive 3 of the shale oil plays. We continue to find efficient ways to produce even more shale oil.
I’ll give you a word about natural gas
What is this rule of thirds?
What’s the rule of thirds in graphics?
It’s the focal points of pictures, cutting a page into threes.
Right, here it is. You go thirds this way and this way. Never put the prime person in the middle. Here’s the most important thing, your eye automatically goes to the thirds.
I spent 4 years in Saudi Arabia, there was nothing to do but go diving in the Red Sea, which sounds really like, “Wow.” That’s where Jacques Cousteau actually did his first series of dives.
There’s a rule of thirds in scuba.
You always save one third of your air for your return trip. You never go out with 7/8 of your air. Use two thirds and save one third. There’s another rule of thirds.
Turns out in the military, one third of our force is getting ready to go, one third of our force is in action, and the other third of our force is recovering.
I say, “Hey, this rule of thirds is really good stuff.”
I looked at the oil and gas industry.
Here’s the active rig count starting in January 2013, 2014 on the left hand scale. We peaked out at almost 1750 rigs. Actually, we peaked out at 1950. The right hand scale is the crude oil spot price in dollars per barrel. You can see that was bumping along around $100 a barrel in the right hand scale.
Then all of a sudden, down we went!
As of Friday, and the yellow sticky on your book is one week out of date, but as of Friday the 19th, crude price is 4852, and the rig count is 491. We’ve gone from 1900 rigs to 400 rigs.
There’s about 120 employees per rig.
A lot of what you started to see was the rig hands being laid off, then the geologists, then the reservoir engineers, etc, which is what’s going on right now.
What I saw was that was a two-thirds decline. There was one piece of the rule of thirds.
Why did the crude oil price drop?
Some people said it was too much supply, and they were true. Some people said there was not enough demand, that was also true.
Third, they said it’s OPEC. OPEC is the organization of petroleum exporting countries, these are the folks you see meeting in all the great hotels in Europe, coming out of the limos in their outfits.
It’s OPEC and the Saudis.
I dug a little deeper.
I was trying to find out, “Okay, what’s the impact on the downstream”.
We have to have that perspective because, again, over 50% of our gasoline price is related to crude.
Let me turn to a little bit of a movie that Michael has put together for us. That’s a year and half old. Where do we stand today on what’s happening with low oil prices?
What are you seeing in the newspaper?
Speaker 4: See more people on the bearish side for pricing between now and the end of the year on crude then off of upside. That’s what I’m reading anyway.
Marty Stetzer: When’s the last time we saw $2 gasoline? Can anybody remember?
Speaker 5: 2009?
Marty Stetzer: 2008, 2009. That’s right, the last downturn.
Speaker 5: I think it’s less than 2. the cheapest I’ve seen was $1.38 or $1.40 something.
Marty Stetzer: Is that right?
Speaker 5: Yeah, back in Cleveland, Ohio.
Marty Stetzer: In 2008?
Speaker 5: Yeah, 2009
Speaker 6: My view might be a little different than y’all, I’m a little bit older than most. I would personally rather pay $3.50 a gallon, call it subsidize the oil industry, if I could get back to making the kind of living I was making at one time.
That would be a cheap price for me to pay in my family. It’s a couple hundred dollars a month, when you’re making x dollars, cost benefit. That’s just the way I look at it. It’s hard to get your cake and eat it too.
What about the countries?
We mentioned Nigeria. What are reading about Venezuela, for example, in the paper? It’s in terrible, terrible shape. I hate to say it, except for the lack of bombing, it looks like Ramalah.
People waiting in line, they’re leaving the country to buy food. It’s just really rough.
The geopolitical impact of this is really also enormous in what’s been going on.
Let’s look at some of the numbers behind the picture.
This slide is from Argus media, they have an annual crude oil summit that I’ve been invited to for the last, couple, three years. This traces supply and demand from 2007 to 2013, 2014. The blue line is demand, and this is global demand for crude oil measured in MMBD, that’s going to be our standard for millions of barrel a day, MMBD on the left scale.
For those of you who are new to the industry, a barrel is 42 gallons, and we’ll talk more about that later.
This is the way the industry measures supply and demand.
You notice we were running between 86, 88 million barrels a day, climbing up to about 92, 93 million barrels a day on the demand side.
Global demand has been growing probably for 20 years. It’s between 1 and a half and 2% a year. The fuel economy side in the US with smaller cars has been offset by countries like China and India whose economies are still growing.
For quite a while, the crude supply, which is the red line, as you can see was lagging demand.
So, if we have a high demand and short supply, the price goes up.
However, in mid 2014, crude supply started increasing faster than demand. We had an oversupply of crude oil.
What’s interesting is when this slide was put together, I tried to pick the time when this started, because it’s been changing every month. I was trying to pick the time to explain it to y’all when this started. That’s when the industry really started reacting to what was going on.
When this slide was put together in mid 2014, there was about 1 and a half to 2 million barrel a day surplus.
1 and a half to 2 million barrels a day in 94 million barrels a day is only 1 or 2%.
Another thing about our industry, small swings in supply and demand, huge swings in price.
We still have an excess of crude versus demand. Demand has continued to increase, but there’s an excess of cruse versus demand. We’re in that $45, $50 a barrel crude oil range.
Until that gap closes, I don’t think you’re going to see much of an increase in crude price.
Any questions on that? Any questions on the supply/demand side?
Why A Global Perspective Is Important
The next piece that I want to talk about is why a global perspective is important.
I want to get back to my rule of thirds.
Year end 2013, the global oil production was about 91 and a half million barrels a day, call it 92, of which OPEC had one third.
There’s another rule of thirds.
OPEC is defined as the countries who are members of the organization of petroleum exporting countries.
You can see them here; Algeria, Angola, Ecuador, all the way down, here’s Saudi Arabia, Venezuela.
Notice 2 things:
- Number one, Russia is not a member of OPEC.
- Number two, the United States is not a member of OPEC.
The small OPEC producers; Qatar, Libya, and Ecuador, have very little say in what goes on in the OPEC consortium.
As you’ll see in a second, Saudi Arabia is one third of OPEC. Here’s another rule of thirds.
They seem to be the driver of price. I mentioned I do this series of slides for the SPE. Over the years, whatever Saudi Arabia needed for crude price, the crude price seemed to appear to be what they needed.
I was in Saudi Arabia for 4 years, as I mentioned.
The main revenue of the county is crude oil exports.
That’s how they fund their roads, their highways systems, free education, free housing, all their social programs.
If Saudi Arabia needed $85 a barrel, over the years, 85 was the number. If Saudi Arabia needed $100 a barrel, over the years, it got to 100.
They had the ability to move their production up and down. In this last run which you heard in the movie. They decided to let it go.
“We’re going to produce as much as we can because we don’t the other countries taking our crude oil market.”
Crude oil moves just like any other commodity. You’re Iran, and you’re Saudi Arabia, and I’m Venezuela, we’re all trying to sell our crude into the same market.
You may cut your price and then I have to cut my price, and I have a very heavy crude, which is not very good, so I’ve got to cut my price even more.
It’s a commodity just like copper or iron ore or gold or diamonds.
Our supply / demand is done by each of the producers has a little bit of a different way of looking at it.
This data, by the way, is another agency that has an excellent website, the International Energy Agency, which is kind of the global energy agency.
The EIA is US, IEA is global.
Their website is terrific, right down to monthly production / consumption by country, by producing area, etc. That’s where I picked up this data.
If you’re in 2013, OPEC was 31 and a half million barrels a day of which Saudi had almost 9 and a half to 10. Saudi Arabia is now producing over 10 and a half million barrels a day, the highest that they’ve ever done.
What about the US?
The US has become a big player. We’ve all heard about shale.
Here was our total production in June of 2015, 9.3 million barrels a day, a huge increase over our history.
Here’s the offshore stuff, Gulf of Mexico.
We have a thing in the US called stripper wells which are very very low volume wells, 1 and a half to 2 to 3 barrels a day, less than 10 barrels a day.
This is other production, conventional production.
You can see that shale was 60% of our total production.
Again, two thirds, one of my rules of thirds.
The major plays that you hear about are the Bakkan in North Dakota, the Eagle Ford and the Permian basin here in Texas.
The current data on producing in each of these areas back to the EIA will give you monthly statistics on how each of these producing areas are going.
What’s been surprising is even with the crude price drop, the volumes in these areas have not dropped off as fast as anybody thought. We’re still in the range of 8 to 9 million barrels a day.
One more thirds story.
The three top oil producers equal OPEC.
You remember OPEC was around 30 million barrels a day?
Here’s Saudi Arabia, here’s Russia, and here’s the United States. We don’t behave the way Saudi Arabia or Russia do.
They’re both national oil companies, so they can set the price. Who would set the price for all the US production?
There’s thousands of producers, it’s free market.
The other thing that’s important; Saudi Arabia exports almost two thirds of their volume to Europe or the US, big player on the global market. Russia exports about half of their volume to Northern Europe, again, a big player on the global market.
We hardly export anything. We consume most of our oil.
In fact, until a year ago, crude oil exports were not allowed under US legislation because of the problems we had in the mid 70s.
Here again, one third, one third, one third.
Saudi Arabia was hoping to drive out our shale supplies, because they were considered high cost, by dropping the cost. Saying, “Look, we can get our volumes up, this US production is really high cost, and we’re hoping their crude volumes drop off,”
But that hasn’t happened.
Our producers are now making money between $50 and $60 dollars a barrel, where it took $100 a barrel in the boom to make the kind of money they needed.
We’re a real powerhouse, but we’re not using it. We don’t how to use it. I shouldn’t say that. That sounds political, I didn’t mean to. How do you use this?
We’ve opened up the export markets, but look we’re less than a million barrels a day because we have such high demands in the US.
In the global stage, we’re influencing Saudi Arabia and Russia because of our ability to produce a lot of oil.
I know that was a lot. Any questions? Any comments?<
Mary: The comment I would make is about how the United States is continuing to make money at oil that’s priced at $50 and $60. Some of that comes from, yes, efficiencies that they were forced to innovate, but some of that comes from squeezing the service industry.
Marty Stetzer: Totally.
Speaker 6: I know all about that.
Marty Stetzer: Explain the service industry to some of the other folks, Mary.
Mary: That would be somebody like Halliburton or Schlumberger, and these are the people that go out, they actually have the rigs, they go out and actually bore the holes and create the well, do the drilling, all of that, it’s farmed out.
I say that, I don’t know about the very large oil companies. The companies that I worked for upstream, we didn’t own rigs, we paid someone else to come and do all that work in the actual field. Those people have crummy margins now. They were forced to drop their prices just to stay in business.
Marty Stetzer: Any other comments? Did you all know anything about this, or is this … ?
It was only when I started putting this at this level that I had a feel for it myself, as opposed to being down and dirty in the weeds. Any other comments on the side. Liz, you asked a question:
What’s the difference between shale oil and other oil?
A regular conventional reservoir has a seal, a trap, and a reservoir where the oil, gas and water is.
Over the years, this series of strata, oil comes from sedimentary layers that were laid down hundreds of millions of years ago.
Oil and gas tend to migrate.
This seal is a rock that can’t be penetrated. It moves up until it gets trapped in this reservoir.
In a conventional well, this is a drilling rig, honest, is going into that reservoir. That’s a conventional play.
This well can be deviated and turned around, etc.
Shale, I tend to think of shale since I come from Pennsylvania, as a gigantic coal bed.
It goes miles and miles and miles and miles and miles and miles.
Believe it or not, it is the old source rock which formed some of the original oil, but not all the oil get migrated up to the reservoir.
It’s stuck in source in extremely microscopic pores.
What we’ve doing here is drilling down and drilling horizontal, and fracturing along that horizontal to get those microscopic pores to flow.
Again, it’s very very successful.
This is an extremely high risk kind of a play.
You’ve got to find it.
You use seismic and all the technologies, etc. These fields, they go forever.
The Eagle Ford play is probably 80 miles long and 30, 40 miles wide.
You know it’s there. There hard part is getting it out.
This, you’re not sure it’s there, so you’re drilling a high risk well to a small target.
This is conventional. This is shale, or unconventional.
This, you have to be very efficient. A lot of wells, a lot of drilling rigs, thousands of wells. I think in one play in the Barnett Shale, there’s 14000 wells already drilled.
Where these, this is a 10 to 12 well kind of a development exercise.
That’s the oil play and the shale play.
I just want to give one word about natural gas.
This is all the shale gas plays in the US in red. We’ve been extremely lucky in the way we’ve found this stuff. One play, called the Marcellus Shale in Pennsylvania, is estimated to have 160 trillion cubic feet of natural gas.
Some people say it’s as high as 500 trillion cubic feet, which would be half as large as Russia.
Russia currently has the world’s largest reserves and they’re supplying it all to Europe. This is where the Pittsburgh Pirates play.
The Marcellus Shale has been a huge boon, bringing cheap natural gas not only to the refineries, but also to the petro-chemical plants.
There’s been something like 110 petro-chemical plant expansions in the gulf coast to take advantage of cheap gas.
What all this has meant for the upstream and the impact on the downstream is as follows.
With cheap shale gas available in the US, and you’ll hear later it’s very high quality, it’s light and sweet, which means it’s ideal for making gasoline and diesel. We’ve had really solid margins of profitability.
Here’s the shale gas used in the refinery as fuel as a competitive advantage. There’s currently a global glut of gasoline, which is depressing prices.
I’m not sure how long this $1.99 regular at the Exxon station around the corner is going to last.
You’ll hear later, with increasing regulations around not just carbon emissions, but other EPA regulations, the refining industry has been facing these kinds of regulations for over 30 years.
It’s not new. They know how to cope with it.
In summary, what about the rule of thirds?
Is that crazy or not?
Now you know, Russia, US, and Saudi are the 3 biggest players in the world. The rig count drop was the steepest in 30 years.
I guess the difference today is in the Houston economy, we’re more diverse around medical and education.
Small swings in supply/demand, huge swings in price.
Our shale plays are very important, some are still profitable at the $40 to $50 dollar a barrel range.
Most important thing is we don’t control the crude price.
Global factors drive the crude price.
Today, our refiners are at an advantage. Some now say the oil price is expected to stay low through 2017, but it keeps getting moved out.
First, it was the end of 2016, then it’s the end of 2017, and I just heard this morning, or did yesterday on CNN, it looks like now 2018, which means that nobody knows, just like the folks in the movie.
Any questions? Any comments?
Speaker 6: In all the research you do, do you ever come up with a, I guess it’d be called a target price for lack of better, that people would be happy … I haven’t met Joe yet, but I know you have finding costs in Midland from what I’ve read, it might be $30 to $50 of parceling.
A Bakken might be 80-ish because you’ve got regions that they vary geographically and the finding costs are different.
My question becomes, you got all the supply and demand, but would $65, just if you had to pull a number? Is there a number as we get supply and demand back to some parity that would be fairly comfortable, or stable is a better word?
Marty Stetzer: Joe, you want to introduce yourself and answer the question?
Speaker 7: My name is Joe Perino, and I’m senior associate with Marty. I knew Marty from my time at Schlumberger 12, 13 years ago now. I spent time at Schlumberger and 40 years in the process industry, upstream, downstream industry.
To answer your question, I think it depends on what kind of E and P company you are and where you are.
For onshore, I think the shale people would like to see it in the $60s.
That probably means that 80% of the people that are developing would all make money. Some of them are making money at 40 with the Permian the most attractive. If you bought in early, like a Concho, pioneer, OXY, they have good positions
If you’re offshore, they’d like 80.
If you’re in Canada with the bitmen in heavy oil, north of 80.
If you’re in Saudi Arabia, they make money at $12, $20 a barrel, but because they’ve got committed spending programs, they’d like $100 a barrel.
That’s why they’ve been all this up all this time.
As a consumer and someone who’s lost their job because the oil price went down, I think if it went back up into between 60 and 80, I’d pay a dollar more for gasoline and I’d have a pay check.
All of us would be a lot happier.
Total, who has big deep water reserves. Remember there’s a difference the total cost of development and the production cost once the steel is in the water. In Africa where Totale has big assets and the steel is in the water, they make money, you’ve got contracts locked in.
But to go and put new deep water stuff in, you’d sure like to see north of 80 to go spend 2, 3 billion dollars to go put a platform off of Angola or Nigeria or Gabon or wherever you may be operating over there.
Same thing here.
I think 60 to 80 for North America people would keep most people happy.
May not please the Canadians, but most conventional and unconventional people would probably be pretty happy and the consumer wouldn’t be paying too much at the pump.
Marty Stetzer:
If you get interested in the industry or already are part of the industry, I really recommend the oil and gas journal.
For the global perspective and they then have a refining coverage section. They have a pipeline transportation coverage section. They cover petrochemicals quite lightly.
You can tell by the crude price how think the magazine is. When the crude price is 100, this thing is double the size because of the advertising, and now it’s down to fewer pages.
The other thing they do is once a year, they do the top oil and gas firms. When I started in the industry, it was the top 300, then it dropped to the top 200, and I think it’s now the top 150 or something, 100, 150.
he industry has been at a huge consolidation mode over the last 30 years because the cheap oil that we found in the US is dried up.
Our oil is more expensive to develop than the other countries, as Joe explained. We’re at a bit of a disadvantage on the producing side
However, as you will see in a minute, we’re have a huge advantage on the transportation side, because our oil is now here.
We have 9 million barrels a day of production, where 10 years ago it was 4 and a half to 5.
Joe Perino: I would add we’re number 3 in oil, but we add all the NGLs.
We have about 3 million barrels of NGLs, which is, last figure I saw, we’re number 1 if you add both of them together, with us being number 1 and the Russians and Saudis back and forth.
hey produce a little more oil than we do, but we have a huge infrastructure of natural gas liquids capture and a big petrochemical complex which is sitting in the middle of Houston that captures a lot of that.
We make the most of that, we don’t burn it off and get rid of it whereas other places do.
Speaker 5: I think too that Penwell, I was always a visual learner, I wasn’t really a Rhodes scholar, but maps, they put out some really nice maps
If you could see a map of all the shale plays, you could get a better picture and have maps of all the refineries and pipelines. I always got a lot out of that kind of thing.
Marty Stetzer: Speaking of that, what we’ve done on the wall over here is some examples of what’s available. There’s other shale plays outside the US that you’re starting to hear about if you’re in the industry. Argentina, Poland, etc.
They have the shale, but they don’t have the Schlumbergers and the Halliburtons and the infrastructure.
Shale is going to be in the picture, probably for the next 50, 60 years in my opinion.
That’s what this map is about. Then as we get into refining, here are some other examples of the kind of visual displays that are available.
We’re finding the same thing is true in the upstream by the way Liz, I know you’re involved a lot with upstream customers. We’ve got the same kind of thing on oil reserves and field production and things like that.
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