The birth of today’s oil and gas industry can be traced back to a Persian city named Baku, in what is now called Azerbaijan, where crude oil seeped from the ground and shallow pits of up to 35m were dug by hand as early as the mid 1590s, to collect oil for commercial distribution.
It was Russia that drilled the first wells there in 1848 and installed the first pipelines, to transport crude oil from the Caspian to the black sea and also from Chechnya to the Caspian. At the turn of the 20th century, Russia dominated the world’s markets with half the total production.
In the US, oil recovery began in Pennsylvania at a place aptly named Oil Creek in the early 1800s, by constructing dams to float it to the surface. Drilling for oil was first successful in 1859 at Titusville in Pennsylvania and by 1925 the US had overtaken Russia’s oil production.
By this time oil fields had been established in many other countries including Canada, Poland, Sweden, the Ukraine and Venezuela.
As something of an introduction to this industry, let’s see how it can be defined. A report published on 20th November 2008, on IbisWorld.com gives the following definition of the Oil & Gas Industry:
“This industry consists of firms that operate and/or develop oil and gas fields and firms that extract liquid hydrocarbons from oil and gas field gases. The activities firms engage in may include: exploration for crude petroleum and natural gas; drilling, completing, and equipping wells; operating separators, emulsion breakers, de-silting equipment, and field gathering lines for crude petroleum; and all other activities required for the preparation of oil and gas up to the point of shipment from the producing property. In addition to the recovery of crude petroleum, this industry engages in the mining and extraction of oil from oil shale and oil sands, the production of natural gas and the recovery of hydrocarbon liquids from oil and gas field gases. Firms may operate oil and gas wells on their own account or for others on a contract or fee basis.”
Status & structure
According to Deloitte Petroleum Services Group, over the past 24 months, the oil and gas industry has experienced the best macro-environment in more than 20 years. Global demand for crude oil and natural gas is strong; interest rates and cost inflation are low; and, hydrocarbon prices are said to be at historic highs.
As a result the group adds, large integrated oil companies and those operating in related sectors are experiencing record profitability and cash flows. After years of cautious investment to find new oil and gas reserves, companies finally are increasing their efforts in exploration and development.
Despite this outline of positive conditions, the fact remains that the oil & gas business has reached its declining phase with fewer new reserves reported, in difficult and expensive to exploit locations and increasingly ‘sour’ crude oil being produced. Since the market price for oil dipped below $50 recently, the heydays of the past five year long surge peaking at almost $150 per barrel appear to be over, for now at least.
This level of extreme volatility wreaks havoc in an industry that depends heavily on exploration and investment to maintain output capacity in line with demand trends.
In terms of structure, the American Petroleum Institute divides the industry into the following five sectors:
1. Upstream activities including exploration, development and production of crude oil or natural gas.
2. Downstream activities that include processing, storage, refining, transport (excluding tankers and pipelines), marketing, retailing and consumption of products derived from crude oil, including natural gas and natural gas liquids, liquefied petroleum gas (LPG) petroleum coke. The downstream industry touches consumers through thousands of products such as petrol, diesel, jet fuel, heating oil, asphalt, lubricants, synthetic rubber, plastics, fertilisers, antifreeze, pesticides and pharmaceuticals.
3. Pipeline operations transport crude oil from wells on land and platforms in the oceans to refineries, and then to terminals where fuels are released to retail outlets.
4. Marine operations involve all aspects of transporting petroleum and petroleum products by water, including port operations, maritime fire-fighting and oil spill response. Oil tankers make up a major portion of this segment.
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