The oil and gas business is filled with complicated terminology that can overwhelm newcomers to the space. With a basic understanding of this terminology and the oil and gas business in general, the novice can understand the fundamentals of the oil and gas business.
Crude oil and natural gas are naturally occurring substances present in rock amidst the earth's crust. The origin of oil and gas is organic material - the remains of plants and animals - compressed in sedimentary rock such as sandstone, limestone and shale. Sedimentary rock is a product of sediment deposits in ancient oceans and other bodies of water. As layers of sediment were deposited on the ocean floor, decaying remains of plants and animals were integrated into the forming rock. This organic material eventually transformed into oil and gas after being exposed to a specific temperature and pressure range deep within the earth's crust.
Because oil and gas are less dense than water, which occurs in huge quantities in the earth's subsurface, oil and gas migrate through relatively porous sedimentary source rock toward the earth's surface. When the hydrocarbons are trapped beneath relatively less-porous cap rock, an oil and gas reservoir is formed. These reservoirs, which are simply layers of rock containing relatively large quantities of oil and gas, are our source for crude oil and gas.
To bring the hydrocarbons to the surface, a well must be drilled through the cap rock and into the reservoir. Drilling rigs work in a similar fashion as a hand drill; a drill bit is attached to a series of drill pipes, and the whole thing is rotated to make a well in the rock. Once the drill bit reaches the reservoir, a productive oil or gas well can be completed and the hydrocarbons can be pumped to the surface. When the drilling activity does not find commercially viable quantities of hydrocarbons, the well is classified as a "dry hole." Dry holes are typically plugged and abandoned.
Production and Reserves
Exploration and production (E&P) companies focus on finding hydrocarbon reservoirs, drilling oil and gas wells, and producing and selling these materials to be later refined into products such as gasoline. This activity is usually referred to as upstream oil and gas activity. Today, hundreds of public E&P companies are listed on U.S. stock exchanges. Virtually all cash flow and income statement line items of E&P companies are directly attached to oil and gas production, Therefore, an understanding of basic production terminology is necessary when assessing E&P projects.
E&P companies measure oil production in terms of barrels. A barrel, usually abbreviated as "bbl," is 42 U.S. gallons. Companies often describe production in terms of bbl per day or bbl per quarter. A common methodology in the oil patch is to use a prefix of "m" to indicate 1,000 and a prefix of "mm" to indicate 1 million. Therefore, 1,000 barrels is commonly denoted as "mbbl" and 1 million barrels is denoted as "mmbbl." For example, when an E&P company reports production of 7 mbbl per day, it is referring to 7,000 barrels of oil per day. The quality of the oil directly affects the oil and gas price and Krandee projects sell at the highest prices on the global markets.
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