ENRG Financial Modeling Midterm 1 (Oil and Gas and Commodity Intro)

What is dry gas?

Pure Methane.

What hydrocarbons are generally classified as NGLs?

Ethane, propane, and butane.

How are hydrocarbons formed?

Organic-rich material is buried and exposed to heat, pressure, and time.

What is porosity?

The percentage of a rock's volume made up of open pore space.

What is permeability?

The ease with which fluids can move through the pore spaces of a rock.

What is a hydrocarbon trap and seal?

A structure that prevents oil and gas from escaping vertically or horizontally.

What type of rock characteristics are desirable for conventional oil and gas development?

High porosity, high permeability, and an effective trap and seal.

How does hydraulic fracturing help unconventional production?

It increases the permeability of the rock.

What is a major difference between conventional and unconventional drilling?

Conventional drilling typically uses vertical wells, while unconventional drilling uses horizontal drilling and hydraulic fracturing.

Why can horizontal wells contact more hydrocarbon-bearing rock than vertical wells?

Horizontal laterals can extend thousands of feet through the reservoir.

What are the major stages in the operational life cycle of an oil or gas well?

Geological/geophysical work, leasing and permitting, drilling, completion/facilities/pipelines, production/marketing, and abandonment.

What are the three major segments of the oil and gas industry?

Upstream, midstream, and downstream.

What does upstream mean?

Exploration for and production of hydrocarbons.

What does midstream mean?

Transportation, processing, and storage of hydrocarbons and finished products.

What does downstream mean?

Refining hydrocarbons into products such as gasoline, diesel, and jet fuel.

What is the primary use of crude oil in the United States?

Transportation fuel.

What are some major end products made from crude oil?

Transportation fuels, plastics, and other chemical products.

Why is crude oil considered a global commodity?

It is widely used, easily transported and stored, and traded around the world.

Why is natural gas more of a regional commodity than crude oil?

It is more difficult to transport and store and generally requires pipelines or LNG infrastructure.

What is one key difference between crude oil and natural gas transportation?

Oil can move by truck, rail, pipeline, or ship, while natural gas generally requires pipelines on land.

What is one key difference between crude oil and natural gas storage?

Crude oil is relatively easy to store, while natural gas is more difficult to store.

Why is natural gas more seasonal than crude oil?

Natural gas demand is heavily affected by heating and electricity demand.

What is the largest natural gas-producing country in the slides?

The United States.

How long has the United States been the world's largest natural gas producer?

Since 2009.

Which regions are major natural gas importers?

Asia and Europe.

Which country is a major and rapidly growing natural gas exporter?

The United States.

Which countries are major pipeline gas exporters to Europe?

Russia and Norway.

Approximately how much more international natural gas moves by LNG than by pipeline according to the slides?

About 2.5 times as much.

What is LNG?

Liquefied natural gas.

Why is LNG important to global natural gas markets?

It allows natural gas to be transported by ship between regions that are not connected by pipeline.

Where can natural gas be stored for peak demand periods?

Typically in underground storage facilities.

During what season is stored natural gas especially important?

Winter.

What happens to natural gas prices during very cold winter weather?

They can spike because heating demand rises sharply.

How does natural gas storage relative to the five-year average affect prices?

Storage above the five-year average tends to pressure prices lower; storage below the average tends to support higher prices.

When does the EIA natural gas storage report come out according to the slides?

Thursday at 9:30 AM Central.

What is a Bbl?

One barrel of oil.

How many gallons are in one barrel of oil?

42 gallons.

What does Bbl/D mean?

Barrels per day.

What does MBbl mean?

One thousand barrels.

What does MCF mean?

One thousand cubic feet of natural gas.

What does BCF mean?

One billion cubic feet.

How many MCF are in one BCF?

1,000,000 MCF.

What does Mcf/D mean?

One thousand cubic feet per day.

What is a BTU?

A British Thermal Unit.

What does one BTU measure?

The heat required to raise one pound of water by one degree Fahrenheit.

Approximately how many BTUs are in one cubic foot of standard pipeline natural gas?

1,000 BTUs.

Approximately how many BTUs are in one MCF of standard natural gas?

1,000,000 BTUs.

Approximately how many MMBtu equal one MCF of standard natural gas?

1 MMBtu.

In what unit is NYMEX natural gas priced?

Dollars per MMBtu.

What is the industry energy-equivalency assumption between natural gas and oil?

Approximately 6 MCF of natural gas = 1 barrel of oil.

What is a BOE?

Barrel of Oil Equivalent.

How do you calculate BOE?

BOE = MCF ÷ 6 + barrels of liquids.

What is MCFE?

Thousand Cubic Feet Equivalent.

How do you calculate MCFE?

MCFE = barrels × 6 + MCF.

What does OPEC stand for?

Organization of Petroleum Exporting Countries.

What is one of OPEC's main tools for influencing the oil market?

Production quotas for member countries.

Which regions are major crude oil exporters according to the slides?

The Middle East and Russia.

Which regions are major crude oil importers?

China and Europe.

How would the slides characterize the United States' overall oil trade position?

Essentially net neutral when crude imports and refined-product exports are considered together.

What percentage of U.S. oil consumption was imported in 2005 according to the slides?

66%.

What was the U.S. oil trade position by 2022 according to the slides?

The U.S. was a net exporter.

What caused the major change in U.S. oil imports since 2005?

The growth of domestic production from the shale revolution.

What are the three largest U.S. unconventional oil fields listed in the slides?

Permian, Bakken, and Eagle Ford.

What are the two largest U.S. unconventional natural gas fields listed in the slides?

Marcellus and Haynesville.

What is the largest pure gas play in the Northeast?

Marcellus.

What is the major pure gas play in Louisiana?

Haynesville.

Why are energy prices particularly cyclical and volatile?

Supply responds slowly, shale wells decline rapidly, and energy demand is relatively inelastic.

What does the phrase "the cure for low prices is low prices" mean?

Low prices reduce investment and supply, eventually causing prices to recover.

Why do shale decline curves make energy cycles more severe?

Shale production can decline quickly when drilling and investment slow.

What is demand elasticity?

The change in demand caused by a change in price, income, or another economic factor.

What is inelastic demand?

Demand that changes very little when price changes.

Why is gasoline demand considered relatively inelastic?

People often continue driving even when gasoline prices increase.

Why is commodity pricing important in an energy financial model?

Commodity prices are major drivers of revenue and some expenses, such as production taxes.

What are the two main factors besides benchmark price that affect the price a producer actually receives?

Product quality and transportation costs.

What is a realized price?

The actual price a producer receives after quality and transportation adjustments.

How is crude oil normally priced?

Dollars per barrel.

How is gasoline normally priced?

Cents per gallon.

How is natural gas normally priced?

Dollars per MCF or dollars per MMBtu.

What is WTI?

West Texas Intermediate, the main U.S. crude oil benchmark.

What is Brent?

The major crude oil benchmark used in Europe and internationally.

What is Tapis?

A crude oil benchmark commonly associated with Asia.

Where is NYMEX WTI crude priced for delivery?

Cushing, Oklahoma.

What type of crude is WTI?

Light, sweet crude oil.

What type of crude is Brent?

Light, sweet crude oil.

What does "light" crude mean?

Crude with lower density and viscosity that flows more easily and is easier to refine.

What does "heavy" crude mean?

Thicker, more viscous crude that is harder and more expensive to refine.

Which generally receives a higher price: light or heavy crude?

Light crude.

What does "sweet" crude mean?

Crude oil with low sulfur content.

What does "sour" crude mean?

Crude oil with higher sulfur content.

Which generally receives a higher price: sweet or sour crude?

Sweet crude.

Which type of crude typically has the highest value?

Light, sweet crude.

Why does sour crude usually trade at a discount?

It requires additional processing to remove sulfur.

What is API gravity?

A measure used to describe the density of crude oil.

What does a higher API gravity generally indicate?

Lighter, less dense crude oil.

According to the slides, what API gravity generally defines light crude?

31 or higher.

According to the slides, what API gravity generally defines heavy crude?

Below 22.3.

What is backwardation?

A futures market in which future prices are lower than current or near-term prices.

What is contango?

A futures market in which future prices are higher than current or near-term prices.

Does crude oil have strong seasonality in its futures curve according to the slides?

No, the slides describe oil as having minimal seasonality.

Why do crude oil prices around the world generally move together?

Oil is a global market and prices are driven by global supply and demand.