Operational Principles of Oil and Gas Industry

The oil and gas sector is one of the largest industries in the world in terms of dollar terms. Annually, this industry brings in about 3.4 trillion dollars. Among other things, for beginners, understanding the specific industry jargon and the principles of formation of indicators and prices is a certain difficulty. Anyone aspiring to work in the oil and gas industry needs to understand these fundamentals, the key concepts and measurement standards. In particular, among general operational principles of oil and gas industry it is worth getting properly acquainted with the three segments that make up the segment as a whole.

Oil exploration and production

For the global economic environment, oil is critical, especially for the biggest players in this field, notably Saudi Arabia, Canada, the US, Russia and China. Investors interested in interacting with the oil and gas sector should be prepared for a real flurry of information that will fall upon them. Enterprises carried out by companies, the main activity is the exploration and production of raw materials – gas and oil. Such companies around the world are looking for deposits of raw materials, after which they carry out drilling operations and then extract the material.

Production and exploration in the oil and gas sector is characterized by a high degree of risk, considerable investment capital and sufficient duration, since these operations require a long time spent on exploration and drilling, and are also very intensive in terms of the use of technological resources. Most of the cash flows, profit and loss reports of companies that are engaged in exploration and production are related to oil and gas.

Processing, storage and transportation of oil

This segment is focused on the transportation of raw materials to processing plants. Companies operating in this sector are engaged in trucking, storage of raw materials, laying pipelines and others. The industry of processing, transportation and storage of oil and gas raw materials is characterized by low capital risks and a high level of regulation, especially when it comes to pipeline transportation.

Refining, distribution and marketing of petroleum products

The enterprises in this segment are processing companies, related plants and industrial complexes. They are responsible for removing impurities and converting gas and oil into a product that can be supplied to the public, in particular, fuel, asphalt, etc.

Interpretation and meaning of oil production indicators

The other important thing talking about operational principles of oil and gas industry, is general indicators. Enterprises that operate in the production and exploration segment measure oil in barrels. One barrel corresponds to 42 US gallons of oil. Often, production is described in terms of barrels per day or quarter.

In the oil sector, the prefix “M” is used to denote a million. A thousand barrels is usually referred to as Mbbl, and a million as MMbbl.

Significance of gas production indicators

Gas production is measured in cubic feet. Among other designations, Mmcf is 1 million cubic feet, Bcf is a billion cubic feet, and Tcf is 1 trillion cubic feet. Note that natural gas futures are not measured in cubic feet on the futures exchange. Instead of the generally accepted system, a million British thermal units are used – MMBtu, which is equal to about 970 kb. ft.

Exploration and production companies in many cases describe the extracted material in terms of barrels of oil equivalent – BOE. For settlement purposes, companies convert gas production into oil equivalent production, where one equivalent is about 6040 kb. feet of gas.

E&P companies report their reserves of natural gas and oil in thousands of cubic feet, or barrels, of raw materials still in the ground. Stocks are often a yardstick for businesses and are used to make projections about their future returns. Large oil and gas corporations are required to disclose data on confirmed volumes of gas and oil reserves, however, not as part of their financial statements, but in additional information.

Drilling companies. Service providers

Paying attention to principles of oil and gas industry, we should mention service providers. Enterprises operating in the exploration and production sector, as a rule, do not own drilling equipment and do not independently recruit personnel for drilling operations. Alternatively, companies enter into a contract with a well drilling service provider who charge a fee for their services. The cost of services depends on the amount of time spent on work processes directly. It is worth noting that drillers do not directly receive income from the extracted raw material itself.

After the well is drilled and ready for operation, it requires work to maintain its proper condition. These types of jobs may include cementing, perforating, logging, hydraulic fracturing, casing and maintenance, among others. Thus, drilling wells and their further maintenance are two completely different areas in the oil and gas industry.

The number of drilling rigs involved and their utilization rates are some criteria for the activity that a particular region of the United States shows at a certain point in time.

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