Petroleum and Natural Gas, Crude

SIC 1311

NAICS 211111

Industry companies operate oil and gas field properties for the extraction of crude petroleum and natural gas. Key activities include exploration; drilling, completing, and equipping wells; operation of separators, emulsion breakers, desilting equipment, and field gathering lines for crude petroleum; and related preparation activities up to the point of shipment.

For discussion of petroleum production at the next stage of processing, see Petroleum Refineries and for more information on petroleum as an energy source, see Energy.

INDUSTRY SNAPSHOT

Crude oil and natural gas combined are the world's leading raw materials for energy. They are used in production of motor vehicle fuel and in industrial power, heat, and electricity generation. According to the International Energy Agency, in 1995 oil accounted for 46.9 percent of the world's energy consumption, while natural gas accounted for 17.8 percent. By 2000, this balance had been reversed: natural gas had increased to 22 percent of world energy consumption, while oil had fallen to 39.8 percent. The Energy Information Administration (EIA) predicted that world energy use would grow by 54 percent from 2001 to 2025, with oil remaining the primary source at about 39 percent. Natural gas, however, was expected to remain the fastest-growing primary energy commodity. Concerns about the stability of future oil supplies—as well as a growing interest in hydrogen power—contributed to this trend away from reliance on oil, as did the popularity of natural gas as a more environmentally friendly source of energy than crude oil. Other benefits of natural gas include traditionally stable pricing and a higher number of known gas reserves that have not yet been tapped.

Often viewed as part of the total petroleum industry, the natural resources of oil and gas are chemically similar (they are both hydrocarbons), are often found in the same underground reservoirs, and are often produced by the same companies. Commercial production of oil and natural gas, however, usually comes from distinct oil or gas fields.

Crude oil is a liquid hydrocarbon mixture that may be characterized as "heavy" or "light" depending on its gravity and as "sour" or "sweet" depending on the presence of sulfur impurities. Crude oil is refined to produce fuel (the activity of the Petroleum Refining industry) and lubricants (see Lubricating Oils and Greases). In its natural state, natural gas is a gaseous mixture consisting of about 80 percent methane, 7 percent ethane, 6 percent propane, 3 percent pentane, 2.5 percent butane, and 1.5 percent isobutane. Natural gas is processed to produce commercial natural gas, which contains only methane and ethane. Natural gas sometimes condenses when it reaches the earth's surface and is then referred to as condensate. Additionally, natural gas may be liquefied to facilitate transportation. Crude oil, condensate, and natural gas liquids are collectively referred to as petroleum liquids.

Oil and gas are commodities whose world market prices are determined by fluctuations in supply and demand. Some producing countries, however, subsidize prices for domestic consumption. Levels of production are usually determined by market price, although quotas, especially for petroleum production, are used in some cases to prevent prices from falling and to prevent oil fields from becoming too rapidly

depleted. The most significant international production quota system is the one voluntarily adopted by member countries of the Organization of Petroleum Exporting Countries (OPEC).

The United States was by far the leading market for oil and gas. Through the early 2000s it consumed more than 25 percent of the petroleum and gas produced each year. Though Japan was the world's second-largest oil consumer until 2003, China surpassed Japan that year with petroleum consumption totaling 5.56 million b/d. According to the EIA, China's continued economic growth will stimulate demand for oil reaching 12.8 million b/d by 2025, accounting for about 40 percent of world growth in demand. With consumption far surpassing demand, China's oil imports are projected to reach 9.4 million b/d by 2025.

ORGANIZATION AND STRUCTURE

The scope of the crude oil and gas industry is difficult to measure, because it is an integral part of the broader "petroleum industry." Many leading oil and gas extraction companies are themselves "vertically integrated" petroleum companies. That is, in addition to exploring for and producing crude petroleum and natural gas from wells, they are also involved in the refining of petroleum and processing of gas, the transportation of oil and gas through pipelines and tankers, and even the retail distribution or marketing of refined oil products—such as gasoline and diesel fuel—at their own gas stations. The terms commonly used to distinguish between the exploration and production side and the refining and marketing side of the petroleum industry are "upstream" and "downstream." Thus, the oil and gas extraction industry is also known as the upstream portion of the entire petroleum industry. While some companies specialize in either upstream or downstream activities, the largest companies in oil and gas extraction are integrated petroleum companies.

In the early 2000s, the largest oil and gas companies in the world were state-owned companies in major petroleum-producing countries of the Middle East, Asia, Africa, and Latin America. These firms tended to be integrated petroleum companies with monopolies on domestic production. In some countries, though, domestic companies invited foreign companies with additional capital and expertise to participate in joint exploration and development of reserves in exchange for a share in the equity of production. State-owned companies of oil- or gas-producing countries, however, often preferred that foreign companies act merely as service contractors in order to retain greater control over their own natural resources.

The best-known companies in the industry were the Western multinationals. These integrated petroleum companies boasted numerous subsidiaries throughout the world, both in production and in refined product distribution. These traditionally dominant companies were referred to as the "majors," both globally and within the U.S. industry, which was home to the largest number of international majors. "Independents" are other, smaller companies that tend to operate at the domestic level and may specialize in areas of exploration and production.

Oil and gas production companies either own or lease the land from which they extract the natural resources. Thus, they own not only the oil or gas that they produce but also the underground reserves. Industry participants sell oil to refiners (unless they are integrated companies owning their own refineries) and gas to gas processors and utility companies. Nevertheless, the actual drilling and maintenance of oil and gas wells is often contracted out to third-party companies belonging to the oil and gas services industry segments. Historically, these companies tended to be small, independent enterprises operating on a local level. By the late 1990s, however, industry consolidation had created a handful of "major" international service companies, most notably Halliburton Company, Schlumberger Limited, and Baker Hughes Incorporated. In fact, Halliburton grew even larger through a US$7.7 billion merger with Dresser Industries, Inc. in 1998; Baker Hughes acquired Western Atlas Inc. for US$5.5 billion in August of that year.

Major natural gas-producing countries are not necessarily the same countries as those that lead the world in oil production. This is due in part to the unique properties of natural gas, which must undergo a costly liquefaction process before it can be shipped by tanker. As a result, natural gas tends to be consumed domestically rather than exported. Otherwise, it can be exported only to neighboring countries via pipelines. In the late-1990s, about 100 countries of the world were commercially producing oil or gas; the vast majority produced both. New exploration constantly was bringing new countries into the industry as well.

Oil-producing countries tend to be categorized by whether they are members of OPEC. Along with Saudi Arabia, the largest producer and exporter of oil in the world, OPEC members in 2004 included Algeria, Indonesia, Iran, Kuwait, Libya, Nigeria, Qatar, United Arab Emirates, Venezuela, and Iraq—which, in the wake of the U.S.-led invasion in 2003, was not operating under OPEC production ceilings. OPEC members adopt voluntary production quotas in order to maintain higher prices. OPEC's crude oil production in 1999 was 26.6 million barrels per day (b/d)—39.4 percent of the world's total—and OPEC countries accounted for about 61 percent of world oil exports. An even higher percentage of the world's known oil reserves were under OPEC control as of 1997: 76.8 percent, or about 797.1 billion barrels, of the world total of 1.04 trillion barrels. But by 2004, according to a Boston Globe report, OPEC's share of global oil exports had dropped to about 33 percent, largely because of increased production in Russia. OPEC deals only with oil production and not natural gas.

Outside OPEC, the leading countries in terms of proven crude oil reserves in early 2005 were Canada (178.8 billion barrels; this...

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