Oil and Gas Accounting Midterm

How are non-drilling exploration costs treated under successful efforts accounting? What are 3 examples?

• Expensed

• Studies, Seismiz Programs

• Exploration staff and overhead

What does renewable mean?

Energy source is replenished by nature at the same rate as consumption

What is the difference between fossil fuels and renewables?

• Fossil fuels are a finite source of energy created by organic materials over millions of years, like coal, oil

• renewables are an energy source that is constantly replenished, like wind, solar

What is expected to happen to happen to oil and gas demand?

OG demand will remain strong as total energy demand will outpace renewable growth

How important are oil and gas? And how does it compare to renewables?

They are woven into everyday life, like heating and cooking, freight, roads, buildings. Sources of renewable energy cant substitute all uses of oil and gas

What are the names of the 4 main gases? and what are their attributes? Mice Eat Peanut Butter

• Methane - lightest, least BTU content/energy, lowest market value

• Ethane - 2nd lightest, 2nd least BUT content/energy, 2nd lowest market value

• Propane - 2nd heaviest gas, 2nd highest BUT content.energy, 2nd highest market value

• Butane - heaviest, most BTU content/energy, highest market value

• Mice, Eat, Peanut Butter

What can a produced gas stream contain?

• Methane

• Heavier gases

• Suspended hydrocarbon liquids

• Contaminents

What is condensate?

A portion of any suspended liquids that may condense out of the gas stream at the production site as teh gas cools and expands and passes through processing equipment. Condense → condensate

What type of gas must be processed before entering a long-haul pipeline?

Wet, rich, and/or contaminated gas must be processed before entering a long-haul pipeline

What are Natural Gas Liquids (NGLs)?

NGLs are the suspended liquid molecules and liquefied gas molecules removed from the natural gas stream during processing

What does NGL stand for?

Natural Gas Liquids

What does LNG stand for?

Liquefied Natural Gas

What is the difference between NGL and LNG?

• NGL: Natural Gas Liquids, which are removed from the gas stream during processing.

• LNG: Liquefied Natural Gas. It is not the same as NGL.

What is pipeline gas made up of?

Pipeline gas is almost pure methane, with small amounts of heavier hydrocarbons and some contaminants

What is the main component of pipeline gas?

Methane

Besides methane, what else may be present in pipeline gas?

Small amounts of heavier hydrocarbons and some contaminants

What is Liquefied Natural Gas (LNG) made up of?

LNG is almost pure methane

How is LNG created?

LNG is created by cooling almost-pure methane to its liquefaction temperature

Why is natural gas cooled to its liquefaction temperature?

Cooling the gas turns it into a liquid and shrinks its volume to make it easier and more economical to ship

How much does natural gas shrink in volume when converted to LNG?

Its volume shrinks to approximately 1/600th of its original volume

Why is LNG shipped by ocean carriers?

LNG takes up much less space than natural gas in its gaseous state, making it more economical to transport over long distances by ocean carriers

What is the current state of U.S. LNG export facilities?

The U.S. has several relatively new LNG export facilities, with more facilities under construction

Why does the U.S. export LNG to international markets?

The goal is to make a profit by selling relatively cheap U.S. natural gas in international LNG markets

What is one major advantage of LNG transportation?

LNG overcomes pipeline limitations by allowing natural gas to be transported by ocean carriers to international markets

What is one major disadvantage of LNG transportation?

Liquefaction is an expensive process, and shipping costs can also be substantial

Where are the biggest LNG markets located?

Asia and Europe

What are the main costs associated with transporting LNG internationally?

The main costs include liquefying the natural gas and shipping it by ocean carriers

What is crude oil made up of?

Crude oil is a diverse mix of liquid and solid molecules, with some entrapped gas molecules

What are the overall physical characteristics of crude oil?

Crude oil has liquid characteristics overall, even though it contains a mixture of liquid and solid molecules and some entrapped gas molecules

How can the composition of crude oil vary?

Crude oil can range from light and thin to heavy and viscous

What does it mean when crude oil is light and thin vs heavy and vicous?

• It means the crude oil flows more easily and has a lower viscosity

• It means crude oil is thicker and resists flowing

What does viscosity describe?

Viscosity describes how much a liquid resists flowing. Higher viscosity means a thicker liquid that flows less easily

What is crude oil gravity measured in?

Crude oil gravity is expressed in degrees using the API Gravity scale

What does API stand for in API Gravity?

American Petroleum Institute

How does API Gravity relate to the heaviness of crude oil?

The scale is counterintuitive. Heavier crude oil has a lower API Gravity value, while lighter crude oil has a higher API Gravity value

What API Gravity value indicates lighter vs heavier crude oil?

• A higher API Gravity value indicates lighter crude oil

• a lower API Gravity is heavier crude oil

What are the three crude oil categories shown on the API Gravity scale?

• Light crude: Approximately 31° to 50° API

• Medium crude: Approximately 22° to 31° API

• Heavy crude: Approximately 10° to 22° API

What is extra-light crude oil on the API Gravity scale?

Extra-light crude oil has a very high API Gravity value, approximately 50° to 55° or higher

What instrument is used to measure API Gravity?

A hydrometer, also called a gravity scale, is used to measure the gravity of the oil sample

Why must the temperature of an oil sample be considered when measuring API Gravity?

API Gravity readings are adjusted to a standard temperature of 60°F so measurements can be compared consistently

What is the API Gravity formula?

API Gravity = (141.5 / Specific Gravity) - 131.5

Specific gravity is measured relative to water at 60°F

Why do light crudes tend to sell for a higher price?

Light crudes tend to sell for a higher price because they contain more light-liquid molecules that can be used to make high-value products

What high-value products can be made from light crude oil?

Gasoline, jet fuel, and diesel

Why are the light-liquid molecules in crude oil valuable?

They can be refined into valuable fuels, such as gasoline, jet fuel, and diesel, which helps make light crude oil more valuable

How does high sulfur content affect the value of crude oil?

High sulfur content lowers the value of crude oil

Why does high sulfur content lower the value of crude oil?

Sulfur levels are tightly restricted in refined products, and removing sulfur adds to refining costs

Why is sulfur removal an additional cost for refineries?

Refineries must spend money and resources to remove sulfur to meet restrictions on sulfur levels in refined products

How does high sulfur content affect the value of natural gas?

High sulfur content lowers the value of natural gas because sulfur removal adds costs

Why is hydrogen sulfide (H₂S) gas especially dangerous?

Hydrogen sulfide (H₂S) is highly toxic

What is crude oil or natural gas with low and high sulfur content called?

Sweet - low

Sour - high

What process do gas plants primarily use to separate gas components?

Chilling

What process do refineries use to separate ranges of molecules?

Heat-driven distillation

What does the distillation process do in a refinery?

It uses heat to separate molecules into different groups based on their boiling points

What is the purpose of the cracking process in a refinery?

To break some of the heavier molecules into lighter, higher-value molecules

Why do refineries crack heavier molecules into lighter molecules?

Lighter molecules can be used to make higher-value products

What equipment do the most sophisticated refineries have in addition to distillation and cracking equipment?

Coking equipment

What is the purpose of the coking process?

To break up the heaviest molecules and remove some of their carbon

What is coke in the coking process?

A carbon-rich material formed when coking equipment breaks up the heaviest molecules and removes some of their carbon

What is the main difference between distillation, cracking, and coking?

• Distillation: Uses heat to separate ranges of molecules

• Cracking: Breaks heavier molecules into lighter, higher-value molecules

• Coking: Breaks up the heaviest molecules and removes some of their carbon, forming coke

How is oil measured and priced?

Oil is measured and priced in 42-gallon barrel units

How are natural gas volumes measured?

In multiples of cubic feet

What unit is used to price pipeline-quality natural gas?

Million British Thermal Units (BTUs)

Can oil and natural gas measurement and pricing units differ outside the U.S.?

Yes. Measurement and pricing units can differ outside the United States

How much natural gas is equivalent to one Barrel of Oil Equivalent (BOE)?

6 Mcf of natural gas equals one Barrel of Oil Equivalent (BOE)

What does Mcf mean when measuring natural gas?

Mcf means one thousand cubic feet of natural gas

What does BOE stand for?

Barrel of Oil Equivalent. It is a unit used to express the energy equivalent of natural gas or other hydrocarbons in terms of barrels of oil

What are the three main segments of the oil and natural gas industry?

Upstream, midstream, and downstream

What activities are included in the upstream segment?

Exploration and production of oil and natural gas

When does the midstream segment begin?

When oil and natural gas production leaves the production site

What does the midstream segment generally involve?

The transportation and handling of oil and natural gas after they leave the production site

When does the downstream segment begin?

With crude oil refining

Must all crude oil be refined?

Yes. All crude oil must be refined

What is the main difference between upstream, midstream, and downstream?

• Upstream: Exploration and production

• Midstream: Begins when production leaves the production site

• Downstream: Begins with crude oil refining

What is an integrated oil and gas company?

A company that operates in multiple segments of the oil and gas industry, such as upstream, midstream, and downstream. Produce oil and gas AND refine crude oil.

What is an independent oil and gas producer?

A company that primarily focuses on the upstream segment, exploring for and producing oil and natural gas. Produce oil and gas but do NOT refine crude oil

Do some companies specialize in midstream services? If so, what do they do?

Yes. They typically transport, store, and handle oil and natural gas after production leaves the production site

Who supports the oil and natural gas industry besides the companies that produce oil and gas?

A wide range of contractors and suppliers

What role do contractors and suppliers play in the oil and natural gas industry?

They provide services, equipment, technology, and supplies that help oil and gas companies operate

What are examples of contractors and suppliers in the oil and gas industry?

Schlumberger (now called SLB) and Halliburton

Who owns oil and natural gas resources in most producing nations?

The government claims ownership of the country's oil and natural gas resources

Who commonly controls mineral contracts with international oil and gas companies?

Government oil ministries commonly control these contracts

Does the United States have a National Oil Company (NOC)?

No

What is a National Oil Company (NOC)?

A company that is mostly or entirely owned by a country's government and operates in the oil and gas industry

Do most oil- and gas-producing nations have National Oil Companies (NOCs)?

Yes

Do all National Oil Companies (NOCs) have the same level of capability?

No. NOCs have varying degrees of capability, ranging from non-operators to international operators

What are the four levels of capability of National Oil Companies (NOCs)?

• Non-operators

• In-country operators

• Exclusive in-country operators

• International operators

What is a non-operator National Oil Company (NOC)?

An NOC that does not directly operate oil and gas projects

What is an in-country operator NOC?

An NOC that operates oil and gas projects within its own country

What is an exclusive in-country operator NOC?

An NOC that has exclusive operating rights for oil and gas activities within its own country

What is an international operator NOC?

An NOC that operates oil and gas projects beyond its own country's borders

What is OPEC?

OPEC stands for the Organization of the Petroleum Exporting Countries. It is a group of oil-producing countries that coordinates oil policies

Are all oil-exporting nations members of OPEC?

No. Many, but not all, oil-exporting nations are members of OPEC

What is OPEC considered in the oil industry?

An oil cartel, meaning a group of oil-producing countries that coordinates production policies to influence the oil market

What was the United States historically in terms of oil imports?

The United States used to be a large oil importer

Why is the United States now almost self-sufficient in oil?

Because of increased unconventional oil production using horizontal drilling and hydraulic fracturing

What are the two technologies used in unconventional oil production that helped increase U.S. oil production?

Horizontal drilling and hydraulic fracturing (fracking)

What is horizontal drilling?

A drilling technique that allows a well to extend sideways through an underground rock formation to access more oil

What is hydraulic fracturing?

A technique that injects fluid under high pressure to create cracks in underground rock, allowing trapped oil and natural gas to flow into a well

Which organizations establish rules that U.S.-based, publicly listed oil and gas companies must follow?

The Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC)

Which oil and gas companies must follow both FASB and SEC rules?

U.S.-based, publicly listed oil and gas companies