Oil and Gas Fast Facts and How the Oil Supply Chain Works

Worried about rising oil and gas prices? Go behind the scenes and see how the oil supply chain works

Today, as oil prices have become precipitously high, consumers dread heading to gas stations and seem less interested in climate change concerns. Unlike oil price increases which are temporarily inflated due to natural disasters or issues like the cyber hacking of the Colonial Pipeline, recent issues forebode potential long-term changes.

We are at a crossroads. While the world tries to reduce its dependence on fossil fuels such as crude oil and natural gas, mass usage of renewable energy resources seems, at present unlikely to dramatically increase to meet energy demand and the Ukraine Russia War is pushing the world into a corner. Fuel prices continue to rise. The supply chain remains disrupted and the ensuing winter cold and war makes consumers shiver and shake with worry and fear.

Information is power. As costs increase and concern over fuel supplies change, many consumers want to better understand the oil supply chain. Just as it happened during the COVID-19 pandemic when toilet paper was no longer on the shelves, consumers have been asking questions about how the nation’s fuel gets to market as well as how the fuel supply chain works.

In this blog, we will endeavor to explain how the oil supply chain works from fuel production to distributing gas products to gas stations in the United States.

Oil Supply Chain

What is Crude Oil?

Hydrocarbons and crude oil exist in either gaseous or liquid form underground in reservoirs or pools. Found in very small spaces within sedimentary rocks and close to the earth’s surface, crude oil exists in tar or oil sands. This requires additional processing, more than simply being blended mechanically to become finished petroleum products.

Oil Supply Chain Stages: Identification

What are Petroleum Products?

Fuels which are made from hydrocarbons and crude oil contained in natural gas are considered to be petroleum products. They can also be made from biomass, natural gas, or coal.

United States Oil Production

Today, the United States is one of the world’s largest oil producers. According to the U.S. Energy Information Administration, a government entity, the United States became a net annual petroleum exporter in 2020.

Over the past 10 years or so, American oil output has risen dramatically, doubling as oil producers drilled in shale fields as well as in the deep waters of the Gulf of Mexico. With the global COVID-19 pandemic in 2020, Americans were limited in their mobility, with millions working from home. Because driving activity decreased, oil producers throttled back oil production.

In a market in which 100 million barrels of oil are produced in a single day, it takes time to build up noticeable increases in oil production. Oil companies need to hire more workers and invest more in equipment and resources needed for production. All this takes time.

Finding Oil and Gas

Oil and Gas Exploration

Geologists study rock structure as well as the history of the layers of rock under the earth’s surface to find areas that are most likely to contain deposits of oil and gas. This may involve conducting seismic surveys on both land and in the ocean.

When a site is found to be a promising source of oil or gas, an exploratory well, also known as a deep test well is drilled either onshore or offshore. Today, most exploration is conducted offshore, and this effort is hugely expensive to the point of being cost prohibitive.

If oil and gas are discovered, the next step is to drill a development well to extract the oil. In the United States, approximately 2,500 exploratory wells were drilled in the 1980s. By 2016, this number had dropped to 430. This is due to two factors: the collapse in oil and gas prices in 2014 and the adoption of unconventional resources including U.S. shale oil and gas.

Modern oil and gas exploration has reaped the benefits of new technologies used in drilling and production. Rather than drilling only one vertical well, now numerous horizontal or directional wells can be drilled from a single location to provide increased access to larger areas of oil and natural gas bearing rock.

Hydraulic fracturing, commonly referred to as “fracking” is now also used. This practice involves injecting liquid at high pressure into subterranean rocks. This serves to force open existing fissures, displacing oil, or gas for extraction.

The oil and gas industry is partitioned into three primary sectors: upstream, midstream and downstream operations.

First Step in Oil Supply Chain: UPSTREAM OPERATIONS

Upstream denotes oil exploration and production efforts. The upstream sector of the oil and gas industry has historically experienced the most merger and acquisition activity.

Oil Production

What is Oil Production?

Once oil or gas has been located, it needs to be produced. This process includes drilling for oil, extracting it from the source as well as recovering oil from underground.

In this phase, crude oil is produced both at sea as well as on land.

Over the years, advanced crude oil production technologies have evolved significantly, becoming more effective. Gone are the days when companies drilled into the earth for oil only to have it come spouting out freely when not under the earth’s pressure. Today, technology has advanced to enable oil companies to obtain oil from within shale and other tight formations.

Short Term Storage

The purpose of short-term storage is to serve as the staging area for crude distribution across the entire supply chain. Utilization of short-term storage facilities provides the ability to adjust to changing supply and demand.

Midstream Operations

The transportation of crude or refined petroleum products via pipeline, oil tanker, barge, pipeline, or rail as well as the storage and wholesale marketing of these products constitutes the midstream sector. Some elements of both upstream and downstream are often incorporated into midstream operations.

Complex supply chains are relied on by refiners and petrochemical manufacturers to transport oil, natural gas, and feedstocks to their facilities to produce finished products for consumers. What are feedstocks? In the oil and gas industry, this term refers to raw materials necessary for the processing or manufacture of other products.

Typical feedstocks are:

Shipping and Ports of Call

The major entrance and exit points of crude oil before the point of short-term storage and later in the refining stage are ports of call. Ports act as the central gathering facilities for entrance of product into the United States.

The most well-traveled and commonly used source used to move foreign oil to domestic refineries is shipping channels. Thousands of barrels of crude oil are housed in huge tankers until they are refined into fuel and associated by products.

Pipeline

The primary transportation modes for moving crude oil into short term storage is “gathering pipelines”. Gathering pipelines are used to transport liquids and gases from the source of the commodity, such as rock formations situated well below the drilling site such as to a processing facility, refinery, transmission line, etc.

Compared to long haul pipelines, gathering pipelines vary in size, flow levels and frequency and travel shorter distances. Delivery lines, smaller in diameter travel shorter distances than gathering lines and act as a major transportation module of crude oil to the refinery process.

Downstream Operation

The refining of crude oil and processing and purification of raw natural gas constitute downstream operations. This also includes the marketing and distribution of the products which are derived from natural gas and crude oil. Following refinement, consumers have access to products such as: gasoline, jet fuel, kerosene, diesel oil, fuel oils, heating oils, lubricants, waxes, natural gas, asphalt, liquified petroleum gas, naphtha, and a wide variety of petrochemicals.

Refinery

The major point of transformation of all crude oil into the form of consumable products is refineries. Primarily located in the United States, refineries receive oil from storage facilities then use a variety of chemical separation and reaction processes to transform crude oil into numerous usable products. This includes numerous essential manufacturing feedstocks, diesel oil, fuel oil, and jet fuel.

Terminals

Once it is ready, refined fuel is transported to terminals which are situated closer to transportation hubs. This is the final staging point for refined fuel before the point of sale. Ethanols and additives are added to the final refined product after it enters the terminal and before the fuel is transported.

Owned by individual petroleum marketers, common carrier pipeline/terminal companies or integrated oil companies, terminals are essential to the oil supply chain. When available fuel supplies exceed what is needed to fulfill contractual obligations, the fuel is considered to be surplus. It is then sold at a discount. In times of shortage, contracts are fulfilled first, eliminating, or at least reducing fuel surplus. This means that vendors relying on the spot market may not be able to fulfill orders of critical needs customers during periods of shortage.

Point of Sale

From the terminal, the refined fuel is transported to the final point of sale. This includes airports and fuel stations. The final finished product is transported via trucking, shipping, and delivery lines across the country.

Most branded fuel stations are owned and operated by independent retailers licensed to represent a specific brand. Across America, there are more than 150,000 retail service stations, 120,000 of which have convenience stores.

Oil and Gas Fast Facts

PETROLEUM AND OIL

Top petroleum liquids producer in the world:

Top producer of crude oil and lease condensate worldwide:

Top 5 oil producing nations in the world:

World’s largest petroleum importer:

Largest crude exporter in the world:

United States

United States, Saudi Arabia, Russia, Canada, China

China

Saudi Arabia

NATURAL GAS

Top 10 natural gas producing countries in the world:

Top 10 nations with highest rate of natural gas consumption:

United States, Russia, Iran, Canada, Qatar, China, Australia, Norway, EU, Saudi Arabia, Algeria

United States, Russia, China, Iran, Japan, Canada, Saudi Arabia, Germany, Mexico, United Arab Emirates

Conclusion

If you are waiting for oil pricing to drop precipitously, it is time to develop realistic expectations. Across the social media channels, consumers are voicing their displeasure, fear and even anger at higher gas prices and at countries across the Middle East that refuse to increase capacity and put more oil on the market. Crude oil and natural gas are hot commodities, especially now with the Ukraine Russia War. Mass consumer use of renewable energy simply cannot come fast enough!

Global markets have continually assessed the impact of the war and kept a watchful eye on oil and gas operations and global energy needs to help avert supply chain disruptions. While the Middle East at large remains intransigent, reluctant to go against OPEC to increase oil production in order to provide adequate supply and reduce oil and gas prices.