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The diagram that appears here is what we're going to call
the energy commodities logistics path from the point
of production all the way to the point of distribution or
retail consumption.
It's also known as the value chain because we will start
looking at costs and revenue opportunities for the energy
commodity that's been produced.
After all, this is how we intend to make our profits.
So as with almost any type of product, there is the point of
production.
As you became familiar with the upstream, we will deal
with the midstream and downstream portion of getting
the energy commodities to market.
After production, in the case of natural gas, it will have
to be processed.
In the case of crude oil, it will have to be refined into
the multiple products that are derived
from a barrel of crude.
All commodities eventually get transported to the marketplace
by different methods.
They can all be stored.
In the case of crude oil, above ground.
In the case of natural gas, below ground.
And then finally, they're distributed to the ultimate
end users, whether those are commercial, industrial, or
retail, residential, et cetera.
The subgroups here under production and gathering,
there's going to be a wellhead cost.
What does it cost us to produce a barrel of oil?
What does it cost us to produce, let's say, 1,000
cubic feet of natural gas?
If we gather these to a single point, what are the fees
involved for the midstream company that gathers them?
And then in terms of that gathering process, are we
utilizing some natural gas to run the compressors that are
necessary to perform that, or the pump jacks that push the
crude oil to that central point as well?
In terms of processing and refining, we'll deal with
processing fees, refinery fees, and talk about the
inputs and outputs for both the natural gas processing
plants and crude oil refineries.
Transportation, the transportation via pipelines
will have set levels of service tariffs or the actual
approved rates that they're allowed to charge for the
services, and there's also going to be potentially some
consumption of natural gas to fuel the compressors that will
transport the gas along the pipelines.
Storage, again, this is a business whereby we will have
various levels of services.
There will be a tariff or officially filed and approved
rates of service and charges for those services.
Again, we will also deal with potentially some fuel
consumption.
And then finally, under distribution, we'll talk about
the various types of end users, whether they're
utilities, actual end users, households, or retail outlets,
such as gasoline stations.
We will now basically walk through the logistical path
for crude oil from the wellhead pump jack to the
retail gasoline pumps.
This is a picture of an oil field in Pennsylvania going
back a few hundred years.
You can notice the old wooden derricks.
I believe this would have been about the same field that the
first oil well in Titusville, Pennsylvania was discovered
and produced.
The first type of crude oil that we will deal with is
what's known as West Texas Intermediate
crude oil, or WTI.
This is the global standard.
It is domestically produced, for the most part, in the
United States.
It's what we refer to as low-sulfur crude oil, which
also makes it sweet.
Sour crude oil has a high sulfur content to it.
So it's the WTI sweet crude.
It is traded internationally in US dollars and cents and is
priced on what we call Free On Board, or FOB, at a large
terminal, both storage and pipeline
terminal, in Cushing, Oklahoma.
And it is traded on the New York Mercantile Exchange,
which we'll address in future lessons.
And because of that, there are financial derivatives that are
traded on the New York Mercantile Exchange.
And these can be used to hedge price and supply risk.
Again, another topic that we will address in lesson seven.
Brent crude is the other global standard, mostly
attributed to Europe.
It represents the grade of crude oil that's produced
offshore in the North Sea.
It's traded on the International Petroleum
Exchange, or the IPE, in London.
As a result, there are financial derivatives, that
is, financial contracts, that are similar in nature to the
New York Mercantile Exchange crude oil contracts.
In fact, some traders will actually arbitrage, or try to
trade price differences, between the London Exchange
and the New York City Exchange.
Currently, there are some supply bottlenecks in North
America whereby a lot of the domestically produced crude
oil in North America is unable to get to the large refinery
corridor in the Gulf of Mexico.
As a result, they have to increase the amount of
imports, and those imports are generally priced off of the
Brent crude pricing.
So currently, our refineries along the Gulf of Mexico are
having to pay a little more than the WTI price for
domestically produced crude oil.
As you can see, this is a simplified map of the pipeline
infrastructure in the United States.
It is critical to balance the energy supply and demand.
Crude oil and petroleum products are supplied to major
demand centers in the United States by over 200,000 miles
of pipelines, representing approximately a $31 billion
investment.
Pipelines transport over 38 million barrels of crude oil,
feed stocks, and petroleum products each day.
17% of the nation's freight is transported via pipelines for
only about 2% of the nation's cost for such freight.
Oil pipeline infrastructure.
In crude oil, you transport the crude oil from major
producing basins and ports to various refining centers
and/or supply hubs.
The refined products are transported, mostly by
pipeline, and these include gasoline, diesel, jet fuel,
and what is known as Liquefied Petroleum Gases, or LPGs, from
the refineries and ports to end user markets.
Other liquids, other energy-related petrochemical
feed stocks are transported between the major
supply chain points.
Here's a schematic of the major
refined product pipelines.
And when we talk about refined products, were talking about
those products that are refined from a crude oil
barrel, such as gasoline, jet fuel, heating oil, diesel
fuel, Liquefied Petroleum Gases, and so on.
The methods here in terms of transporting crude oil the
first and, the largest, is actually crude oil pipelines.
They can move the crude oil from the wellhead to the
transmission pipelines to refineries.
They have large pump systems.
They can batch process.
That is, they can actually send different products
through the pipeline, different grades of crude oil,
by having a separator in the pipeline.
The interstate grid transports 2/3 of all the oil produced in
the United States.
It's subject to the Federal Energy Regulatory Commission,
and is also known as a common carrier under the old
Interstate Commerce Commission.
The US's network of crude oil pipelines is the
largest in the world.
It's also the cheapest transport cost per
barrel of crude oil.
Another method where there is not access or immediate access
to pipelines is to use trucks.
At the crude oil well site, if you ever see one, you'll see
large tanks on the site.
Those are holding the crude as it's pumped up from the ground
until a truck can come and offload those tanks and
deliver that crude oil to a pipeline or
directly to a refinery.
It is the most costly method, and it also has the least
volume capacity.
Each truck has approximately a capacity of 200 barrels per
load, or 8,400 gallons, as each barrel of crude oil
represents 42 gallons.
Another methodology to deliver crude is by rail,
that is tank cars.
They have a very large capacity.
Each tank car could handle 2,000 barrels of crude oil.
It is a very cheap cost.
The problem is limited access.
The railroads aren't anywhere.
This is part of the problem right now in the new Bakken
shale in North Dakota.
There is not a pipeline infrastructure, so they
currently have to truck the crude oil to the nearest
railroads and have it transported by tank from there
to refineries.
Another methodology, one that we are all pretty much
familiar with, are the large ocean-going tankers.
This is where we get our imported crude supplies.
They have very large capacity.
These days, there are even some super tankers.
They are strictly water bound.
One other method, obviously smaller than tankers, would be
the barge method.
These are largely intra-country.
They do hold a large capacity, but again too
they are water bound.
The Gulf of Mexico is the largest petrochemical refining
corridor in the United States.
This is a snapshot of one part of the Houston Ship Channel,
which is a huge crude oil refining and
petrochemical corridor.
Here you see the tanks coming in basically providing the
imported crude oil to these above ground storage tanks.
That crude will later be piped to refineries, and then the
refined products will be piped out to some of the
petrochemical plants in the area.
Back during World War II, the United States was concerned
about the supply of crude oil, in large part because the
amount of crude oil that was refined into products that
were being used to fight World War II, and then also the
rationing of the domestic supplies of crude oil to
industrials, commercials, and households.
So they formed what are known as the Petroleum
Administrative Defense Districts, or PADDs.
These are still in existence today, are still used to
quantify the supply and demand in the various regions, and
prices are reported by PADD districts.
PADD one encompasses the East Coast, as you can see, from
Maine to Florida.
It has the highest petroleum consumption rates in the
United States.
Again, considering the major metropolitan areas along this
corridor, that makes a high degree of sense.
They are highly dependent on imports for both crude oil and
refined products.
They import 100% of their crude oil, 24% of their
refined products, and they are the largest recipient of
supplies from other regions within the United States.
The South Atlantic region is experiencing higher population
growth rates in the last few decades, whereas New England
has been in a slower growth mode.
And it's the largest concentration
of oil-heated homes.
Still, a very large percentage of homes in the Northeast rely
on heating oil not only for hot water but for space
heating itself.
The Northeastern part of the United States is the world's
largest consumer of heating oil, which is a product that
is refined from crude oil.
PADD two encompasses the upper Midwest and central states.
They are dependent on crude oil which
mostly comes from Canada.
Not many people realize that we do import a lot of crude
oil from Canada.
But the primary source of our imports is Canada.
They are the largest supplier of crude oil
to the United States.
This region has the second highest crude oil demand in
the United States, and they're chronically short the market
due to the combination of demand growth
and refinery closures.
PADD three encompasses the Gulf Coast states.
It's the origin of 90% of the crude oil and 80% of the
refined products shipped between US regions, the
largest crude oil and refined products supply region in the
United States.
Only two OPEC nations, Saudi Arabia and Iran, have higher
crude oil production than PADD three.
No foreign nation has higher refined product output than
PADD three.
Pipeline terminal capacity in the Houston refining center is
constrained.
So this is part of the problem as to why we might see
gasoline prices fairly high.
We can't move the crude around enough right now to get to the
refineries.
We also do have refineries that have been shut down, and
new refineries haven't been built in
probably 30 years or more.
PADD four comprises most of the Rocky Mountain region.
PADD two and three have historically supplied the
market to augment local production.
In other words, PADDs two and three are sending refined
products to these regions because of the lack of
refining capacity in PADD four.
It's a small but growing market.
There's minimal demand for specialty products.
The infrastructure's not well developed due to the long
distances, limited markets, and high costs.
When we talk about infrastructure, we're mostly
talking about pipelines and refineries.
You can kind of imagine in this area with the Rocky
Mountains, it would be very tough to build pipelines.
Finally, PADD five encompasses the West Coast and Alaska.
The West Coast is traditionally isolated from
other US supply regions, again, by the Rocky Mountains.
The growing population continues to increase demand
for various refined products.
The Alaska North Slope crude oil is an important source of
supply for West Coast refining.
Alaska pipeline brings the crude oil down to
the lower 48 states.
The California emissions rules isolate that market.
It is a very unique market.
So it limits their supply options for refined products.
The refined products, especially gasoline and diesel
fuel, have to meet very stringent standards in the
state of California.
And here's just a supply and demand overview of US crude.
Over 50% of all US crude oil demand exists in the Gulf
Coast region.
Again, that's because it's the largest petrochemical refining
corridor in the United States.
And then production from the Gulf Coast region supplies the
majority of the Midwest and East Coast
refined products deficits.
The New England region is becoming increasingly
dependent on foreign imports as the South Atlantic region
continues to grow.
Because the South Atlantic region continues to grow, a
lot of refined products end up being consumed there and don't
make it all the way to New England.
And then the deficit in the Midwest is expected to grow as
the regional refineries struggle to
keep up with demand.
So we have that growth in the Midwest and no
new refining capacity.
West Coast and Rocky regions are fairly well balanced
between regional refined products in terms of supply
and demand.
There is crude oil produced in California.
It has been produced there for decades.
And they do refine a lot of their own
gasoline and diesel products.
Here's basically the consumption of crude oil and
petroleum products by the various sectors.
You could see transportation remains the highest.
Because transportation encompasses not only gasoline,
but diesel fuel, Jet A, and other types of refined
products that can be used in the transportation industry.
The next category being industrial, the next,
residential and commercial.
And you can see there's a very tiny sector of electric power.
There still are power plants, mostly in the Northeast and
upper Midwest, that run off of fuel oil or diesel oil.
These are very, very old power plants, and chances are they
will either be mothballed or converted to run on natural
gas given the current market where natural gas is a whole
lot cheaper than it has been in quite some time.
Here's a comparison of our domestic
production and the imports.
And you can see the net imports in domestic petroleum
vs. the US demand in 2010.
US petroleum, we finally produced slightly more than
half of our own demand in terms of crude oil.
Net imports, about 49%.
That number is expected to shrink.
These new shale plays in North America have become very
prolific and are producing vast amounts of crude oil.
That, and an increase in imports from Canada should
shrink the overall imports from non-Canadian sources.
In the second chart there, you can see 49% of the imports--
that would be mostly Canada, although we
import some from Mexico--
comes from the Western hemisphere.
23% comes from Africa, 18% from the Persian Gulf, and the
remaining 10% from varied other countries.
Crude oil and the product import/export.
You can see here that we've finally--
the red line, we've taken a dip in crude oil imports over
the last few years.
Again, directly attributed to the shale plays in North
America that have found new sources of oil.
Petroleum products just supplied by type.
You can see, again, motor gasoline being the highest.
The distilled fuel oil, followed by things like jet
fuel and residual fuel oil.
Retail motor gasoline and diesel fuel prices, again, you
can see here there have been spikes back in 2008.
Prices have retraced since then and are slowly moving up
in the current marketplace.
This particular chart is interesting because it shows
the global crude oil demand forecast going up
into the year 2030.
As mentioned previously in some of the lessons, we are
truly a global economy.
The things that affect one economy these days seem to
affect almost all economies.
China and India have experienced the largest growth
in terms of their overall economies and manufacturing,
largely due to the exports of various products there.
And they use a considerable amount of fuel oil, diesel
oil, in their production.
However, because of the newfound prosperity, they've
also increased the number of automobiles that are on the
road, thereby increasing their demand for gasoline.
You can see the US will continue to rise in
consumption, but the hope is, and the expectation is, that
the percentage of imports will decline as well as the
consumption goes up.
And just kind of on a final note, we talk about OPEC, the
Organization of Petroleum Exporting Countries but we
also refer to the Persian Gulf.
Not all of those countries are the same.
The Organization of Petroleum Exporting Countries, or OPEC,
was organized in 1960 for the purpose of negotiating with
oil companies on matters of oil production, prices, and
future concession rights.
Of the twelve countries currently in OPEC, only six of
them are in what we know as the Persian Gulf region.