CHAPTER 1 FROM EXTRACTION TO END USE: THE TECHNICAL BACKGROUND

• Jurisdiction: United States

PRIVATE OIL & GAS ROYALTIES
(Sept 2003)
CHAPTER 1
FROM EXTRACTION TO END USE: THE TECHNICAL BACKGROUND
By Kyle L. Pearson
Baker & O'Brien, Inc.
Dallas, Texas

I. Introduction

Crude oil, natural gas, and condensate may be produced separately or together, at a wide-range of temperatures, pressures, flow-rates, and qualities, requiring flexibly-designed equipment to produce, separate, transport, process, and distribute for commercial use. It is important to understand the technical bases for production and handling of crude oil and natural gas prior to addressing payment of crude oil and natural gas royalties.

A basic understanding of the production and handling of crude oil, natural gas, and condensate first requires an appreciation for the industry's customs and definitions. The diversity of hydrocarbon streams produced throughout the world, when combined with multiple techniques for handling the streams, results in a long and sometimes confusing list of "oil patch" terminology. Throughout this presentation, I will address many common questions that arise in a royalty analysis. Some examples are:

• Crude Oil or Condensate?

• What is Condensate, Anyway?

• Gas Well Gas or Casinghead Gas?

• Lean Gas or Rich Gas?

• Wet Gas or Dry Gas?

• Raw Gas or Processed Gas?

• Sweet Gas or Sour Gas?

• What is Pipeline Quality Gas?

Perhaps the best advice I can provide is to never accept a definition at face value. One should always investigate beyond the apparent simple definition, and learn about the physical and commercial characteristics of the hydrocarbon or equipment being described.

Crude oil is produced from underground reservoirs, typically with some production of water and natural gas. Depending on reservoir pressure, the crude oil may flow freely through production tubing to the surface, or may have to be assisted by subsurface pumping, gas lift, or water injection.

Natural gas may be produced in conjunction with crude oil (associated gas or "Casinghead Gas") or from gas reservoirs that do not produce crude oil (non-associated gas or "Gas Well Gas"). There are significant differences between associated and non-associated gas, including differences in gas composition, producing systems, daily average volumes, and commercial incentives for production.

Associated gas may be entirely gas held in solution with the crude oil by reservoir pressure or a combination of dissolved gas and free gas overlaying the oil inside the petroleum reservoir (gas cap). The dissolved gas is liberated when the

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pressure is reduced at the surface. Casinghead gas tends to contain significant amounts of liquefiable hydrocarbons.

Non-associated gas (gas well gas) is not in contact with crude oil in the reservoir. Non-associated gas tends to contain less liquefiable hydrocarbons than associated gas and is usually produced at higher pressure.

There is a third type of production - gas and liquids from condensate reservoirs. Some deeper fields with pressures above 4,000 pounds per square inch gauge (psig) and at temperatures above about 200°F contain single-phase fluids that are not distinctly oil or gas. As the fluid is produced to the surface, the pressure is decreased and two distinct phases are formed: a gas phase and a liquid condensate. This phenomenon is known as retrograde condensation, and fields exhibiting these characteristics are called condensate fields.

However, not all condensate, as the term is used by the industry, is produced at the lease from a condensate field. The word "condensate" literally means "a product of condensation,"¹ i.e. liquid formed from a vapor. As a result, the term is also commonly used to define the formation of pipeline condensate, drip condensate, compression liquids, and gas plant condensate from natural gas vapor produced and measured at the lease. Figure 1 illustrates the condensation of liquids in a pipeline as the natural gas vapor cools. Figure 2 illustrates the periodic collection of the pipeline condensate liquids by running a tool, called a "pig," through the pipeline. Condensate, whether produced at the lease or collected in a pipeline, is typically sold as a crude oil based on its specific gravity. Alternatively, some gas plant condensates may be blended with plant NGL products and sold as natural gasoline. The wide-ranging definition of condensate illustrates the importance of understanding the specific production and composition characteristics of each crude oil and natural gas stream.

Petroleum is a mixture of hydrocarbons and, occasionally, some inert materials. Some of the typical constituents found in various petroleum streams are shown in Figure 3. Methane is the lightest and most prevalent hydrocarbon component in natural gas streams. With a boiling point of-259°F, methane will be in the gaseous state in almost any field situation. The second most abundant hydrocarbon usually found in a natural gas stream is ethane, with a boiling point of-128°F. In most instances, ethane will also be produced in its gaseous form. Usually, the heavier compounds - propane, butanes, pentanes and hexanes, and heavier- are found in decreasing quantities, respectively, in a natural gas stream. Further, the heaviest compounds, generally decanes and heavier, generally are only produced as liquids in crude oil or condensate.

The explanation for this phenomenon is contained in the laws of physics and chemistry. All of the components of a natural gas stream are in actuality individual molecules of hydrocarbons. Molecular activity is related to temperature as well as size.

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These molecules are different sizes with methane being the smallest. A larger, heavier molecule such as hexane is relatively "sluggish" and more easily condensed. As shown above, methane has to be cooled to a temperature of -259°F before the molecules slow down enough to condense from the vapor form to a liquid. Hexanes, on the other hand, condense from a vapor to a liquid at 145°F.

Besides temperature, pressure also affects the amount of liquids that condense out of a natural gas stream. A higher-pressure is analogous to each molecule carrying an extra weight. The heavier molecules condense faster and it is much harder for the methane and ethane to keep the other molecules suspended. Therefore, at any given temperature, more molecules condense to the liquid phase as pressure is increased. Compression liquids are formed by increased pressure applied to natural gas.

Crude oil produced directly from a well contains the full range of hydrocarbon components. The lighter hydrocarbons, particularly methane and ethane with lesser amounts of propane, butanes, and pentanes, are typically separated from the crude oil mixture at the lease, and delivered separately as Casinghead Gas. Gas analyses for a typical associated gas and a typical non-associated gas are shown in Figure 4. Comparing the two analyses, the associated gas contains a higher-concentration of the heavier hydrocarbons and is a much more likely candidate for gas processing. Associated gas is said to be "rich" in liquefiable hydrocarbons (also called Natural Gas Liquids or "NGL"). Non-associated gas is said then to be relatively "lean" gas. Historically, the terms "wet" gas and "dry" gas have also been used to describe the relative quantity of NGL. However, I discourage the use of "wet" vs. "dry" when describing NGL content, to avoid any confusion pertaining to the water content of the gas (also an important specification). When a gas processor examines a gas stream, he is primarily interested in the available quantities of NGL that are contained in a given volume of gas, expressed as gallons per Mcf of gas processed, or "GPM." This number is usually shown on the analysis report for each component of the natural gas stream. A gas stream is referred to as "raw" gas prior to any treatment or processing.

In delivering sales gas to the purchaser, transporter, or ultimate consumer, it may be necessary to meet a variety of sales gas specifications. These specifications may be set by contract or by pipeline tariff. Purchase contracts for natural gas at the lease may contain less rigorous specifications. Indeed, raw gas is often delivered at the lease to landowners for rural uses, such as irrigation pump fuel. Natural gas, with little or no processing, is also delivered direct from gathering systems for distribution to remote municipal gas systems. However, in order to safely and efficiently transport natural gas over significant distances, more stringent specifications require additional treating and processing of the natural gas. A list of typical specifications for an interstate natural gas pipeline is shown in Figure 5. While these specifications can and do vary significantly from pipeline to pipeline, the term "Pipeline Quality Gas" generally refers to the higher-quality natural gas required for long-distance transmission of natural gas on intrastate or interstate pipelines.

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Some of the more important specifications involve such items as heating value, hydrocarbon dew...