Speaking Oil Gas

SPEAKING
SPEAKING OIL&GAS
bhpbilliton.com
United States of America
BHP Billiton Petroleum (Americas) Inc
OIL&GAS
Written for BHP Billiton Petroleum Pty Ltd
by Rick Wilkinson
1360 Post Oak Boulevard Suite 150

Houston TX 77056-3020
Tel: (1 713) 961 8500
Fax: (1 713) 961 8400
United Kingdom
BHP Billiton Petroleum Ltd
Neathouse Place
London SW1V 1LH
Tel: (44 20) 7802 7000
Fax: (44 20) 7802 7557
Australia
BHP Billiton Petroleum Pty Ltd
Central Park
152-158 St Georges Terrace
Perth WA 6000
Tel: (61 8) 9338 4888
Fax: (61 8) 9338 4899
Printed June 2006
SPEAKING
OIL&GAS
by Rick Wilkinson
First published by BHP Petroleum Pty Ltd as Speaking of Oil in April 1988
Revised as Speaking of Oil & Gas in June 1995 and November 1997
This edition revised as Speaking Oil & Gas and published by
BHP Billiton Petroleum Pty Ltd in June 2006
© BHP Billiton Petroleum Pty Ltd in 1988, 1995, 1997, 2006
ISBN 0-646-45386-6
Printed in Australia
The cover is printed on 250 gsm Impress Silk which is produced in European mills with full ISO 9001,
ISO 14001 and Eco Management and Audit Scheme (EMAS) certification. Primary fibre is sourced from
sustainable forests and all pulp used is either Elemental Chlorine Free (ECF) or Totally Chlorine Free (TCF).
The text pages are printed on 130 gsm Revive Silk, the only Australian made coated paper that uses
35% recycled fibre. Fibre is sourced from ISO 14001 certified plantations and suppliers, and is bleached
using TCF and ECF technology.
Contents
Foreword iv
Introduction 1
Chapter 1. Geology 3
Chapter 2. Surveys 18
Chapter 3. Drilling 43
Chapter 4. Evaluation & Production 69
Chapter 5. Permits 91
Chapter 6. Public Reports & Reporting 102
Chapter 7. Taxation, Pricing & Marketing 110
Chapter 8. Health, Safety, Environment

& Community 129
Chapter 9. Economics 148
Chapter 10. Downstream Processes 155
Appendix 1. Petroleum Specialists 163
Appendix 2. Conversion Factors 167

Glossary 170
INTRODUCTION iii
Foreword
BHP Billiton Petroleum Pty Ltd is a subsidiary of natural resources
company BHP Billiton. BHP, as it was then known, began in the petroleum
business during the late 1950s when it gained title to explore a vast area
of what was then frontier territory in Bass Strait, a stretch of ocean off
southeastern Australia between Victoria and Tasmania encompassing three
offshore sedimentary basins. In the second half of the 1960s BHP Billiton
participated in an amazing run of discoveries in one of these basins — the
Gippsland Basin — which catapulted the company to the forefront of
Australia’s oil and gas industry.
With Bass Strait as a stepping stone, BHP Billiton has expanded rapidly
over the last 40 years to become Australia’s biggest and most successful
petroleum company, both at home and overseas, with interests and
activities in a number of countries. In the 2005 financial year, BHP Billiton
produced 119 million barrels of oil equivalent (combined oil and gas) or
about 326,000 barrels of oil equivalent per day. In June 2005 the company
had proved reserves of 1407 million barrels of oil equivalent, and average
reserves replacement for the three years 2002–2005 stood at 99 per cent.
In order to aid public understanding of the petroleum business,

BHP Billiton commissioned journalist/author Rick Wilkinson1 to compile
a handbook explaining the technical and regulatory aspects of the
search for, and production of, petroleum in Australia. The book was first
published in 1988, then again in 1995 and 1997.
This revised 2006 edition brings the reader up to date with the latest
technical advances and expands its coverage to include the key fiscal and
regulatory petroleum regimes around the world.
1.
Rick Wilkinson is the author of a number of books about the petroleum industry,
including: A Thirst for Burning – the story of Australia’s oil industry; Where God
Never Trod – Australia’s oil explorers across two centuries; Well, Well, Well – behind
Australia’s wildcat names; and Once Upon a Wildcat – images from Australia’s
petroleum story.
iv SPEAKING OIL & GAS

Introduction
Petroleum is among the minerals that have been used by man since earliest
times, certainly prior to metals and coal.
Names like ‘Sweat of the Devil’ and ‘Shining Water’ were coined by
primitive peoples who made use of the unusual surface occurrences.
The use of petroleum during the ages
INTRODUCTION 1
The word petroleum is derived from the Greek word ‘petros’, meaning
rock, and the Roman word ‘oleum’, meaning oil.
Earliest uses included caulking boats, fuelling lamps and preserving

mummies. Written reports on petroleum come from as far back as 4000 BC
and its use is well documented from countries as far apart as Egypt, China
and Mexico.
The modern era can be traced back to Edwin Drake’s 1859 discovery well
in Pennsylvania, yet it is only in the last four or five decades that there has
been any real understanding of petroleum geology.
The technology to begin perfecting the search for, and exploitation of, oil
and gas has an even shorter history and there are still numerous questions
to be answered satisfactorily. Nevertheless petroleum has progressed from
humble beginnings to be a cornerstone of civilization and the key element
in an international industry.
There are signs that it will continue to be a major source of the world’s
energy well into the 21st century.
2 SPEAKING OIL & GAS

Chapter 1. GEOLOGY
Sedimentary basins
Sedimentary basins are fundamental to petroleum geology because most
of the world’s commercial oil and gas fields have been found within
them. The basins develop over tens of millions of years and gradually fill
with fragmented material which hardens into rock layers within which
petroleum is formed and trapped.
Normally the history of a basin begins with subsidence of the land which
allows an invasion by the sea. Surrounding mountains and hills are slowly
eroded by wind, rain and ice, aided by the internal stresses caused by heat
and cold. Particles of rock are gradually washed down streams and rivers.
These particles will be deposited as the rivers lose energy in a number of
environments such as lakes, the sea or deltas.
A phase that occurs early in the history of the basin is transgression, where
the sea extends over the land. As time goes by, the amount of sediment
brought by rivers increases and begins to overtake the incoming sea.
GEOLOGY 3
Eon Era Period Epoch Age* Record of Life
Recent 0.015
Quarternary
Pleistocene 1.8
Man
Pliocene 5.0
CAINOZOIC
Angiosperms
Grasses
Miocene 24.0
Marsupials Eucalypts
Tertiary Oligocene 37.0

Cetaceans
Starfish
Eocene 53.5
Conifers
Birds
Paleocene 65.0
Foraminifera
PHANEROZOIC
Cretaceous 135
MESOZOIC
Chelonids
Dinosaurs Cycads
Jurassic 195
Echinoids Sponges Plesiosaurs
Ferns
Triassic 235 Ostracods
Permian 290
Pelecypods Amphibians Insects Glossopteris
Crinoids Equisetales
Carboniferous 345
Sharks
Bryozoa Lepidodendroids
PALAEOZOIC
Devonian 410
Brachiopods Fish
Ammonoids
Stromatoporoids
Silurian 435 Baragwanathia
(land plant)
Corals Nautiloids
Ordovician 490
Graptolites
Gastropods
Trilobites
Cambrian 570
Late 1400 Bacteria

PROTEROZOIC
Algae
Conodonts Worms
Middle 1800 Jellyfish Archaeocyathids
PRECAMBRIAN
Early 2300
ARCHAEAN
Indicates forms extinct

>3800 All other forms range to the present
(greatest age * Age at base of period or epoch

so far measured) in millions of years
The geological time-scale

Courtesy of Geoscience Australia

The subsidence fills, so that the newly arriving material is distributed
around the edges to form mud banks, beaches and deltas at the river
mouths. Slowly the shoreline builds up, pushing the sea back in a phase
known as regression.
Such a period of transgression and regression is called a sedimentary cycle

and there are many such cycles during the formation of a sedimentary
basin. Layer after layer of sediment is deposited and compressed by the
increasing weight of material above to form sedimentary rock.
The layers themselves will vary in composition — sand grains form

sandstone, fine muds form shale, broken corals and shells form limestone.
At times whole coral reefs fringing the coastline are buried, giving a hard
core of limestone surrounded by sandstone and shales.
A rock is porous when it has many tiny spaces, or pores
A rock is permeable when the pores are connected
GEOLOGY 5
In other locations a nearby volcano may erupt and ash is deposited,
forming a rock known as tuff. At times a basin may be cut off from the sea
altogether to form an inland lake. Vegetation surrounding the still waters
dies, rots, is deposited, buried and compressed with other sediments and
may eventually form seams of coal.
The rocks formed in the basin have varying degrees of porosity and
permeability and the coincidence of these two properties is one of the keys
to petroleum accumulation. A rock is termed porous if it contains voids
and cavities between individual grains. It is permeable if the voids are
connected so that fluid can flow through the rock.
Studies of sedimentary basins suggest petroleum is generated mainly in

fine-grained shales or limestone on top of the more permeable part of a
transgressive sequence, and below the more permeable part of a regressive
phase. The more permeable rock is often associated with the near-shoreline
environment and it is the minor fluctuations within transgressive and
regressive phases that bring the potential source rocks and potential
reservoir rocks together.
Crude oil
Crudes vary widely in appearance and consistency from field to
field, ranging from thin yellow-brown mobile liquids to black viscous
semi-solids. However they all consist essentially of hydrocarbons which
are combinations of carbon and hydrogen atoms.
Classification is based on composition and is grouped into three main

types — paraffins, asphalts and mixes.
• Paraffin-based crude is chiefly composed of isomers of paraffin and

when distilled it leaves a residue of wax. Crudes of this type usually
give good yields of high-grade lubricating oils.
• Asphalt-based crudes are mainly composed of naphthenes and very

little paraffin. When distilled they leave a solid asphalt residue. Crudes
of this type yield lubricating oils with viscosities that are more sensitive
to temperature than paraffin-based crudes.

• Mixed-base crudes, as the name suggests, contain substantial
proportions of both paraffin wax and asphaltic matter along with some
aromatic hydrocarbons.
There is considerable overlapping of these types and most crudes also

contain a variety of impurities. Hydrogen sulphide and sulphur are the
most common and the most problematic to the environment, and to the
cost of production/refining. Other impurities include carbon dioxide,
nitrogen, oxygen and some trace metals.
A yardstick for comparing crude oils is the API gravity (API stands for
American Petroleum Institute). This value, which has been adopted as an
industry standard, is actually a measure of density and is related to specific
gravity using the formula:
141.5
API gravity (degrees) = - 131.5
specific gravity
(at 60˚ F)
So, an API gravity of 10 degrees is equivalent to a specific gravity of one.

The less dense the oil, the higher the API gravity, hence high gravity
oils are known as ‘light’ crudes and low gravity oils are ‘heavy’ crudes.
Australian and North Sea crudes tend to vary between 35 and 45 degrees
API, whereas Middle Eastern crudes tend to be between 16 and 20 degrees
API.
Natural gas
Natural gas is a mixture of gaseous hydrocarbons. It is mostly paraffinic
and consists mainly of the simplest hydrocarbon, methane. It may also
contain smaller amounts of ethane, propane, butane and some pentane, as
well as impurities like sulphur dioxide, carbon dioxide and inert gases like
nitrogen and helium.
Natural gas is generally found in conjunction with oil in a reservoir, but it

can also be found on its own.
GEOLOGY 7
Liquefied Natural Gas (LNG)
LNG is made by simply reducing natural gas to a liquid by cooling it to
minus 161 degrees Celsius. This reduces the space natural gas occupies by
more than 600 times, making the product easier to transport and store.
Liquefied Petroleum Gas (LPG)

The hydrocarbons propane and butane are gaseous under atmospheric
conditions, but they can be easily liquefied by slight cooling and/or
compression. The resultant LPG is used as a motor fuel and an industrial
fuel as well as for domestic and commercial purposes.
Condensate
Fluids are contained in subsurface reservoirs at very high pressures and
temperatures. This pressure is released and temperature lowered as
the fluids are brought to the surface. Some of the gas content naturally
condenses into a liquid during the journey and the resultant liquid is called
condensate. At normal temperatures and pressures condensate is a light oil
that can be refined into petroleum products and is therefore sold in the
same way as crude oil. Wet gas contains significant amounts of condensate,
dry gas does not.
Petroleum formation
Most petroleum geologists believe that oil and gas originate from organic
matter of both plant and animal remains when it accumulates rapidly
in fine-grained sediments under conditions of quiet deposition and
a deficiency of oxygen.
The best pointer to the source material is the occurrence of porphyrin

pigments and nitrogen in petroleum itself. The only known source for
porphyrin pigments is the red colouring matter of blood (hemin) and
the green colouring of plants (chlorophyll). Nitrogen is the essential
component of amino acids which are basic components of animals
and plants. Thus the conclusion is that plants and animals are the main
source material for petroleum.

An older and less popular theory proposes an inorganic origin which
suggests petroleum hydrocarbons originate from volcanic gases, or even
a simple reaction of carbon dioxide, water and catalysts with sunlight.
Evidence for these theories is provided by methane gas which is found
in volcanic gases as well as within the atmosphere of stars and in
metamorphic rocks.
However the organic origin has by far the greatest following and
geochemical studies indicate that petroleum is generated during the
burial of sediment in a sedimentary basin. With increasing depth of burial
the temperature of the source rock rises and, at a given heat value, the
organic matter (referred to as kerogen) transforms into oil and gas. It is then
driven from the source rocks during compaction in a movement known
as migration.
The critical temperature at which crude oil is formed is generally in the

range 110˚–130˚C. Oil is produced in the initial generation period, while
gas forms at greater burial temperatures. Ultimately a source rock will be
‘burnt out’ if temperatures become too high. A source rock is mature when
petroleum generation has begun, and post mature when it is burnt out.
The area containing mature source rocks is often called the hydrocarbon
kitchen.
Geochemical evidence also suggests that conditions favourable for

significant petroleum generation normally do not occur above burial
depths of around 1500 metres from the surface, although some instances
of a ‘threshold’ depth of 600 metres have been found.
Indications are that the chemical changes are brought about by the
combined effects of temperature, time, pressure and also catalysts in the
source rock, as well as in the rocks through which the petroleum moves.
The petroleum may undergo further changes via all these factors after
entrapment.
GEOLOGY 9
Petroleum migration
A vast majority of pores and cavities within rocks below the water table are
filled with water. The balance may be filled with other liquids and gases.
Oil migration
The migration of oil and gas from a source rock to a reservoir rock is
related to hydrology, fluid pressures and water movement. The rate of
water movement may be small and measured in mere centimetres per
year, but the effect of the hydrodynamic conditions can be very important
to the movement of petroleum through the rocks. Migration is split into
two types — primary and secondary.
• The primary phase refers to movement from the petroleum source to

the reservoir. The oil and gas that has been generated and trapped in
pore water is squeezed out during compaction of the rock. In this process
the petroleum tends to enter only the larger pores because there is less
displacement pressure needed than there is to enter smaller pores.
• The secondary phase of migration takes place within permeable rocks

and can be either lateral or vertical movement.

Once in a reservoir, gas and oil, being less dense than water, tend to move
upwards. The upward movement continues until the hydrocarbons are
restrained by a fine-grained, relatively impermeable layer. They can then
follow the bottom of this layer until they either reach the surface where
they form seeps, or they reach a position from which they cannot move
further and are trapped.
The path of migration may cover tens or hundreds of kilometres and much
recent study has been done to try and relate the size of the hydrocarbon
kitchen, and hence the volume of hydrocarbons likely to be produced, to
traps in the surrounding areas. For instance, if the kitchen is small, it is
probable only the nearest traps will be oil bearing. If the kitchen is large
and deep, gas may have replaced the oil in traps closest to the generation
point and this oil may have been forced into more distant traps. It is also
known that oil is often released from a source rock in periodic pulses — like
a slowed down geyser. Time and migration can change the hydrocarbons
such that different types of oil may be found in different traps along the
migration path even though they all came from the same original source
rock.
The characteristics of reservoir rocks and the types of hydrocarbon

entrapments are at the heart of the petroleum exploration and production
industry.
Petroleum reservoirs
Any rock that has sufficient porosity and permeability to contain significant
volumes of hydrocarbons is considered to be a reservoir rock. The porosity
may occur between grains, within grains, or in joints and fractures. Porosity
and permeability may be original or they may be due to alteration during
burial or by later earth movements like faulting and folding. Sandstones
and carbonates (limestone and dolomite) are the most common
reservoir rocks.
The range of porosity in reservoir rocks is between one per cent and
40 per cent, while permeability can vary between less than one millidarcy
and more than 1000 darcies. The textbook commercial oil reservoir will
GEOLOGY 11
have a porosity of 20 per cent or better and a permeability of more than
100 millidarcies. Gas production has lower requirements. However, there
are many exceptions to the norm. Some reservoirs have little pore space,
but contain oil and/or gas in fractures and fissures. Others have good
porosity, but permeability is too low for production and they are produced
via fractures. Permeability can also be stimulated artificially by mechanical
or chemical fracturing.
Most reservoirs have marked differences in permeability from one layer

to the next and, if they are produced too quickly, the hydrocarbons
will only flow from the highly permeable layers. Oil or gas in the finer
grained sections will be cut off by rising water and therefore be lost to
production.
The most important characteristic for production, however, is the thickness

of the reservoir. Some are massive homogenous sands, while others
are thin stringers of sandstone interspersed with impermeable layers of
other material. Thus the term net pay (total thickness of all the permeable
layers), as opposed to gross pay (total thickness of the whole reservoir
zone including both impermeable and permeable layers), is important in
reservoir assessment.
Petroleum traps
Traps are generally grouped into three major categories — structural,
stratigraphic, and a combination of structural and stratigraphic.
Structural traps
The simplest structural trap is one formed by the folding of rock layers into
a dome or elliptical dome shape and is known as an anticline or an anticlinal
trap. It is virtually a ‘buried hill’ and contour lines drawn in a plan view
of the structure will be roughly circular or elliptical. Hydrocarbons may
migrate into this structure from all sides, accumulating in the top where
an impervious roof formation, called a cap rock or seal, brings migration
to an end.

Anticlinal traps and spillpoints
The structure is rarely that simple in practice and it is usually complicated

by faulting, complex secondary folding and changes of porosity within
the reservoir. Up to 50 separate reservoirs have been recorded in some
anticlinal traps.
A fault trap is formed when a fault plane (a line of displacement of the

earth’s crust) interrupts the direction of migration of hydrocarbons.
The accumulation occurs when the oil or gas is prevented from proceeding
up-dip by fine-grained material in the fault itself, or by an impermeable layer
adjacent to the reservoir on the other side of the fault.
However, entrapment will only occur if faulting pre-dates hydrocarbon

generation and migration, and if the fault completely truncates and seals
the reservoir. Some faults do not seal effectively and can become conduits
or ‘escapes’ for hydrocarbons into higher formations, or even the surface.
Often a fold component is present with faulting.
GEOLOGY 13
Trap in dipping strata formed by fault plane
Salt layers have the ability to flow plastically at relatively low temperatures
and, at depth, they are often less dense than the immediately overlying
sediments. Because of this gravitational instability, salt tends to rise
vertically, punching its way through the overlying sedimentary column.
The so-called salt dome structure that is produced provides a number
of trapping mechanisms including faults and anticlines at the head
of the structure, against the impervious flanks of the salt column itself
and against the truncated, overturned or faulted layers along the flanks.
Salt dome traps are common in the Gulf of Mexico petroleum province.
Stratigraphic traps
Stratigraphic traps are defined as those in which the reservoir is sealed due
to depositional or alteration processes rather than structural movements of
the earth’s crust. They are more difficult to find, but when discovered they
have provided some of the largest fields in the world.

Salt dome traps
Stratigraphic traps: organic reef embedded in shale, and wedged-out sand
GEOLOGY 15
A common stratigraphic trap is a buried coral reef which is sealed by the
surrounding claystones and shales. Often the reef itself has extremely
high porosity and permeability and can give prodigious flow rates when
tapped. The Leduc field in Alberta, Canada is an excellent example.
Another type occurs as a truncation, formed when erosion planes an

exposed land surface and sediments are deposited directly on top during
a later phase of the sedimentary cycle, thus sealing the older rocks. Where
there is marked angular difference between the older and newer rocks, the
contact is said to be an unconformity.
Unconformity or truncation traps

A further type of stratigraphic trap can occur when sandy river beds, deltas
or beaches become buried as sand lenses. They form traps when they are
surrounded by finer grained impervious sediments. Changes in the type
and appearance of rocks (such as grain size) occur frequently in regressive
and transgressive sediments. For instance, coarse grained sand is deposited
in shallow waters, but the fine sediments are lighter and are carried further
to be deposited in deeper waters. Thus a porous sandstone may gradually
‘shale out’, i.e. change into an impervious shale or siltstone.
Combination traps
Combination traps are those formed by both stratigraphic and structural
means. In these cases the structure, whether it be a fault, anticline or just
regional dip, does not form the trap alone. It must be associated with a
stratigraphic component, such as a facies change or a truncation.
Types of oil and gas traps
GEOLOGY 17
Chapter 2. SURVEYS
An accumulation of oil and gas is the product of a whole series of chance
events, including the presence of a source rock, burial of the source rock,
a reservoir and a trap in the right geometrical and historical relationships.
Predicting if and where all these critical events have occurred in the
correct succession is no simple matter, and it is certainly not foolproof.
Nevertheless, the petroleum industry has built up a series of survey
techniques to minimise the risks and delineate bona fide targets.
Field geology
The traditional method of finding oil was by mapping the surface geology
and studying the relationships of the various rock units. Efforts were
concentrated on mapping visible structures and potential reservoir rocks
in areas that had some indication of hydrocarbons — like surface seeps.

Petroleum exploration onshore still begins with a scrutiny of field geology,
aiming to understand and predict the types of rock that might be expected
in the subsurface, in prospects outlined by sophisticated geophysical
means. Often the geological survey will begin with a review of large scale
maps of the region and all previous smaller scale maps drawn, and reports
written about specific areas of interest. This will be collated with aerial
photographs and satellite imagery of the region in question. Geologists
identify the rocks in outcrop and, if possible, map the boundaries of rock
units along with any subsurface structural features. Even when the potential
targets are offshore, it is often useful to sample and study rock outcrops
on land that dip down under the ocean. More recently, the combination of
electronic and seismic surveys and computerisation has enabled explorers
to map and construct models of the subsurface in great detail and display
these on the computer screen, in an effort to understand the formation and
detect the presence of potentially petroleum-bearing features.
Geophysics
The principle behind geophysical surveys is to identify a contrast to the
general background of data taken from a given region. In other words,
the geophysicist is looking for an anomaly in relation to the surroundings.
Usually the geophysical data is presented and analysed as some form
of image.
Non-seismic techniques
Gravity surveys
Gravity surveys aim to detect large-scale subsurface structures by means
of the disturbance they produce in the earth’s gravitational field at ground
level. The technique involves measuring the force of gravity at points
on the earth’s surface or alternatively by measuring gravity gradient
data via airborne means. Variations in gravity are caused by changes in
the mass (hence the density) of subsurface rocks in the vicinity of the
measuring point. The gravity survey attempts to detect these variations
in gravitational pull.
SURVEYS 19
MILLIGALS
TRAVERSE DISTANCE
Gravity anomalies relate to geological structure. High values caused by dense rocks
near surface
MILLIGALS
TRAVERSE DISTANCE
Gravity anomalies relate to geological structure. Low values caused by light rocks
near surface

Because density usually increases with depth, a structural uplift generally
brings denser rocks nearer to the surface and laterally adjacent to less
dense sediments. Such uplifts are usually associated with higher gravity
readings than the surroundings although, in the case of salt domes whose
very reason for rising is their low density, it will be marked by low or
negative readings in relation to the surroundings. Gravity techniques were
first developed for detecting salt domes in the Gulf of Mexico region.
Station heights and water depths (in the case of offshore work) have to be
accurately known, as does data on rock densities in the area under study,
so that corrections can be made for elevation and terrain topography.
Corrections are also made for latitude (the earth’s rotation and bulge
at the equator produce an increase in gravity with latitude), earth tides
caused by the sun and the moon (they depend on latitude and time) and
density variations in the earth’s crust (which is generally more dense
below oceans and less dense below land). The gravity measurements are
then plotted on maps (nowadays on computer screens) and equal values
are contoured with lines called isogals. If all the reductions have been
made correctly, the resulting map should reflect only gravity changes
due to subsurface geological structure. The modern techniques produce
contrasting colourations on-screen that clearly highlight the lighter and
denser material.
Historically, detailed gravity surveys were conducted on the ground, using

a helicopter in rugged terrain, or on a ship. Because of the large and rapid
changes in acceleration from aircraft movements, airborne gravity surveys
were not as reliable or accurate. However, with the development in the 1990s
of the FALCON® airborne gravity gradiometer system by BHP Billiton (from
US Navy technology), fast, cost-effective and detailed gravity surveys can
now be acquired over large areas by aircraft. Where ground surveys may
take months or years in very difficult areas, a FALCON® survey can be
completed in a few days.
Since the new millennium, satellite gravity data (originally developed for
military purposes) has been available for all oceans of the world and is
now used extensively by petroleum companies for exploration of offshore
SURVEYS 21
Surface vs Airborne Gravity
About FALCON®
FALCON® is an airborne gravity gradiometer (AGG) that measures minute changes
in the earth’s gravity. This technology has enormous benefits and gives BHP Billiton
a unique competitive advantage in the search for mineral and hydrocarbon deposits.
This competitive advantage is backed by BHP Billiton’s unique value-added processing
and interpretation capabilities.
Three AGG systems have been built to date, and are currently operational in Cessna
Grand Caravans.
*BHP Billiton has 10.5 exclusivity years for mineral exploration and 10 years exclusivity
for hydrocarbons, beginning October 1999. This means Lockheed Martin cannot
build this technology for other parties during this period.

regions. The technique compares differences in sea levels and is based
on the fact that the shape of the sea surface is controlled by the earth’s
gravitational field. Ridges and trenches on the ocean floor create variations
in the height of the sea level and they can still be detected when corrections
have been made for the effects of winds and currents. When a variation in
sea level is detected where there is no rise or fall in the sea bed topography,
then the anomaly causing the variation is under the sea bed. The data is
then subjected to editing and image enhancement to produce colour maps
of the structural composition of the earth’s upper crust.
In summary, gravity surveys are a useful primary exploration tool that can
detect the gross outline of a basin, its structure and the depth to basement.
It can also detect major faulting and folding, salt domes and shallow reef
structures within the basin sediments.
Magnetic surveys
Magnetic surveys are similar in data acquisition and presentation to gravity
surveys and the two techniques are often conducted together. The method
depends on the fact that most rocks contain small, but significant amounts
of ferromagnetic minerals like magnetite, ilmenite and pyrrhotite. Rocks
therefore have a weak magnetism which is partly induced by the earth’s
magnetic field and partly permanent. Thus a magnetic survey measures
local variations in magnetic field.
The most important fact in magnetic exploration for petroleum is that

sedimentary rocks are nearly non-magnetic and have a very small response
compared to basement rocks and intrusions of volcanic and igneous rock.
Thus a magnetic anomaly generally indicates a lack of sediments and the
survey technique is used to rule out areas that are of no interest for the
petroleum explorer. They are particularly useful in outlining the regional
framework of sedimentary basins. Recent advances can also give an indication
of faulting (because magnetic minerals are often concentrated in a fault plane)
and individual structural elements within a basin.
SURVEYS 23
Satellite Gravity — East Indonesia
Australian Continental Shelf
Satellite-derived Bouguer gravity for East Indonesia. Land areas are white, gravity
values increase from blue to red. Dark blue area (left centre) is the Weber Deep
— water depth in excess of 7000 metres.
Satellite gravity image courtesy of GETECH, University of Leeds

Once again, salt domes provide an opposite reaction. Salt is diamagnetic
and tends to oppose the field that is polarising it. This results in a magnetic
low.
Magnetic surveys can be conducted on the surface using land vehicles or

ships, but the most common technique for a more complete coverage is by
air — generally flying at heights of 60 metres above ground and 80 metres
above sea. Accurate positioning and elevation are critical — a need answered
by today’s extremely accurate positioning systems and satellite navigation
systems. Corrections can also be made for the high speed flight.
As with gravity, image enhancement and contrasting colouration can now

produce visually strong maps of the structural elements of an area under
study.
In summary, magnetic surveys are a useful primary exploration tool that

can detect the gross outline of sedimentary basins as well as the depth to
basement, basement faulting, the presence of volcanics such as sills and
dykes and mineralised alteration zones sometimes due to the presence of
salt domes and hydrocarbons.
Geochemical surveys
Geochemical surveys are often undertaken in conjunction with other
survey techniques. Exploration geochemistry follows a path that begins
with characterising oil or gas samples taken from wells, or seeps.
In the marine environment seeps (small oil slicks on the surface of the
sea) may be detected by airborne or satellite imagery and attempts can
be made to obtain core samples (known as drop cores) by dropping core
barrels into the sea bed at that location. The samples are analysed and
grouped into types of hydrocarbons. Even in seeps where weathering of
the hydrocarbons may have taken place, detailed analyses can identify the
original hydrocarbons.
Once samples have been classified into hydrocarbon ‘families’ the

geochemist tries to correlate them back to source rocks in the basin.
The data is built up into a computer model which is then tested in the field.
SURVEYS 25
For instance, if the presence of hydrocarbons has been detected, sampled
and traced back to source in an area, the model can be used to predict
migration paths (sometimes referred to as the basin’s plumbing) and
point to parts in the basin where it would be worthwhile to look for traps
with larger holding capacity. If there are no pre-existing wells or seeps to
sample, analogues from another basin with similar or linked geological
systems are often used to indicate where the same set of circumstances
may be repeated. Most software for this work is available for PCs and the
computer programs are off-the-shelf products. Geochemical modelling is
an increasingly accessible tool for petroleum explorers.
Geochemistry can also be used directly in an area where a number of

prospects have been delineated and there is little to choose between them
in size or potential. The exploration company may decide to begin by
drilling the ones that have a corresponding geochemical anomaly, or ones
that modelling predicts have a higher chance of containing hydrocarbons.
The investigation used is basically one of hydrocarbon gas detection.
Despite the fact that an oil or gas reservoir is sealed in a trap, there is still
some minute leakage of gas through the rocks to the surface.
The usual method of detection on land is to drive a hollow probe into the
ground to a depth of a metre or so and draw off gases present at that depth
through the seal at the top of the probe using a syringe. The sample is then
analysed in a gas chromatograph. Any hydrocarbon values above normal
background levels constitute an anomaly. Airborne methods are also
used (albeit less commonly in recent years) both on and offshore where
a chromatograph in a low-flying aircraft is employed to detect gas ‘halos’
emitted from subsurface structures.
Satellite imagery
The use of satellites in petroleum exploration has mushroomed in recent
years, particularly in connection with geographic positioning, navigation
and communications. But explorers have also found a niche in terms of
satellite imagery where it is now possible to obtain very high resolution
through the light spectrum. This can be used to present very detailed and

accurate pictures showing bathymetry and topography. Landsat pictures
can provide resolutions up to 30 metres on the ground incorporating
eight spectral bands. The high resolution is useful in the study of modern
depositional processes such as the formation, shape and extent of deltas to
use as analogues for planning programs to explore the potential of subsurface
deltaic sand reservoirs within buried coastal sediments.
Satellite imagery can also be used to detect offshore oil seeps. This is a
visual technique and is based on light reflected back off the water surface.
If there is cloud cover, radar can be used. This detects patches of smooth
water that may be caused by oil on the sea in an otherwise rough water
surface (rough water scatters the rays and presents a ‘foggy’ image). Using
several satellites, explorers can home in on the possible source of the seeps.
This technique has been tried with some success in the Gulf of Mexico.
The method can also be used for environmental monitoring, although care
needs to be taken to filter out effects from false positives like algal blooms.
Radiometric surveys
Gamma ray spectrometer surveys are used to detect radiation emanating
from concentrations of uranium and thorium which may be associated
with hydrocarbons. Detection of subtle radiation patterns and anomalies
may indicate surface hydrocarbons which, in turn, may point to
subsurface accumulations.
The earth’s crust contains uranium, thorium and potassium randomly laid
down during the formation of the planet. These elements emit gamma
rays in the course of radioactive decay and contribute to the earth’s
natural radiation background. Of the three elements, uranium is the
most mobile, being water soluble and easily transported by groundwater.
However when the uranium encounters organic matter, such as subsurface
hydrocarbons, the ion becomes insoluble and immobile. Hence higher-
than-background readings of gamma rays may indicate the presence of a
hydrocarbon trap.
The anomalies can be identified by airborne radiometric measurements

using a spectrometer.
SURVEYS 27
Controlled electro-magnetic (EM) surveys
Controlled electro-magnetic (EM) surveys, recently developed for marine
petroleum exploration, involve sending low frequency electro-magnetic
signals into the sea bed and measuring the response to determine the
resistivity of the subsurface.
The Controlled Source Electro-Magnetic measurements (CSEM) method

uses an electric dipole source to transmit low frequency electro-magnetic
signals to a series of receivers on the sea bed that measure the electro-
magnetic field at the sea floor. As the source is towed over the receivers the
variation and phase of the received signal indicates the resistivity of the
subsurface structure down to depths of several kilometres.
The Controlled Source Audio-frequency Magneto Telluric method (CSAMT)

uses an artificial signal source (usually in the range of 0.1Hz–10kHz) in
addition to naturally occurring electro-magnetic source fields to determine
the resistivity of the subsurface. This provides a stronger, more reliable
signal and enables imaging of shallower targets than is possible with low
frequency natural signals alone.
Both these technologies are increasingly being employed during the later,
more detailed phase of exploration work to provide complementary
information to conventional surveys and attempt to identify the fluid
content in defined reservoirs. They use the fact that there is a significant
contrast between resistive hydrocarbon-saturated reservoirs and the
surrounding more conductive layers saturated with saline water.
Electro-magnetic techniques can also be used to define the lower boundaries

of salt bodies. Conventional seismic surveys generally outline the top of
such structures, but the diffuse scattering of signals in the lower layers due
to the presence of carbonates or basalts or even other thin salt ‘blankets’
often clouds the picture. The resistivity contrast between such layers and
the sediments below can be identified using the EM methods. By studying
the variation in response as a function of frequency, the variation in
resistivity as a function of depth can be determined.

Overall, the improvements to all non-seismic survey techniques in recent
years include better instrumentation, the advent of extremely accurate
global positioning systems, improved computing power and processing
algorithms, advanced visualisation techniques such as image enhancement
and 3D visualisation and the ability to combine different data sets.
All these techniques can high-grade areas for a more detailed examination
through seismic survey work.
Seismic techniques
The principal method geologists use to explore the subsurface, besides the
direct and expensive process of drilling, is through the use of sound waves.
Sound waves travelling through the earth are called seismic waves, a term
originally used in reference to earthquakes. Just as ultrasound is used to
investigate the shapes of organs within the human body, seismic waves
are used to map out the geologic structures of the earth. While ultrasound
penetrates a few centimetres into the body using very high frequency
(short wavelength) sound waves, seismic surveys use lower frequency,
longer wavelengths to look many kilometres into the earth.
There are two types of seismic survey: refraction and reflection. Refraction
surveys were common early last century for reconnaissance and salt dome
exploration. They are seldom acquired nowadays, except for deep crustal
studies, because seismic reflection surveys provide far greater information
and accuracy for hydrocarbon exploration.
A controlled pulse of sound is sent into the ground and a range of detectors
are used to pick up the reflected waves as they come back to the surface.
In marine environments the main source of sound energy is an airgun
array — a group of pistons which let out a pulse of compressed air.
Typically this will be two or three litres in volume at a pressure of 2000
pounds per square inch (psi).
SURVEYS 29
Seismic survey — diagram showing typical reflection and refraction wave patterns
Typical marine seismic reflection survey

On land, vibrating trucks send out a controlled sweep of sound between six
and 16 seconds long. This technique, which sends the vibrations through a
large metal plate pressed onto the ground, has largely replaced the older
method of a dynamite charge set off a few metres down a specially drilled
shothole. By spreading the energy over a longer period of time (many
seconds as opposed to a fraction of a second) the same amount of energy
can be used without damage to the local environment. Seismic surveys
have even been conducted on the Champs Elysées in Paris using a fleet of
vibroseis trucks without danger to life, limb or architectural heritage.
When planning a survey, the geophysicist carefully sets the geophone/

hydrophone spacing to provide the required subsurface information.
For instance, the maximum offset (the distance from the energy source to
the furthermost group of phones along the grid line or the streamer) should
be comparable to the depth of the deepest zone of interest. Conversely, the
minimum offset should be comparable to the depth of the shallowest zone
of interest.
Vertical section of 4-fold common depth point shooting
SURVEYS 31
Average P-Wave Velocities
Material Velocity
feet/second metres/second
Weathered surface material 1,000–2,000 305–610
Sea water 4,800–5,000 1,460–1,530
Sandstone 6,000–13,000 1,830–3,970
Shale 9,000–14,000 2,750–4,270
Limestone 7,000–20,000 2,140–6,100
Salt 14,000–17,000 4,270–5,190
Granite 15,000–19,000 4,580–5,800
Metamorphic rocks 10,000–23,000 3,050–7,020
There are three distinct stages in the seismic technique — acquisition of

data, processing, and interpretation.
Data acquisition
2D surveys
When exploring a new area where little is known of the subsurface geology,
a 2D survey is usually performed. This consists of survey lines spaced one,
two, five or more kilometres apart.
Offshore the seismic vessel will sail along with seismic guns deployed
close off the stern (so they are near the on-board air compression source),
letting out pulses every 25 metres or so, with a 12 second gap between
‘shots’. Behind the guns is the recording cable (or cables) whose length is
measured in kilometres. The cable contains groups of pressure sensitive
hydrophones which record the sound waves as they are reflected back
from the geological layers. The recordings are a few seconds long and
sampled every 1–2 milliseconds (thousandths of a second). Sound waves
travel at about 1.5 kilometres per second through water and increase to
2–6 kilometres per second when they pass through rock layers.

Aeromagnetics — Sulu Sea case history
A 2D seismic survey was to be acquired in an area of known buried volcanic ridges.

Reprocessed aeromagnetic data was used to optimise the layout of the new 2D data
and avoid wasted lines over these ridges.
SURVEYS 33
Onshore the recording devices are called geophones and they are placed
at measured distances along a pre-surveyed seismic line from the shot
or vibration point. Geophones (usually grouped together in arrays, with
three or more connected electrically so that the array acts as a single sound
detector) transform the returned seismic energy into electrical voltage
which is then transmitted by cable to recording equipment housed in a
vehicle accompanying the survey team. Typical seismic records will image
10 or more kilometres down into the earth.
Each time the seismic pulse meets a change in rock properties, for example
going from a shale layer to a sand layer, part of the pulse will be reflected
back to the surface. This is called an event. By measuring precisely the
difference in arrival time of a given event from the nearer and further
hydrophone groups, the velocity of the rock material can be measured.
The seismic measurements are made in time, so if the velocity and time are
known, geophysicists can work out the depth of the event.
A seismic line looks like a cross section through the earth. Initially these are
used to map structural traps where hydrocarbons may accumulate — at
its simplest at high points of domes known as anticlines, but also places
where faults or erosion cut off a reservoir. Stratigraphic traps, where the
geology changes laterally from one rock type to another, such as a buried
sandy channel, sand bar, or carbonate reef can also be mapped using
seismic data.
3D surveys
In areas where the larger and more obvious traps are mapped, petroleum
explorers are increasingly using 3D surveys to obtain greater definition.
By placing survey lines much closer together, a more detailed three
dimensional picture can be built.
To economically survey a given area offshore, increasing numbers of

recording cables are being towed behind seismic vessels, with between
eight and 16 cables now the norm. A pair of submerged towed wings pull
the trailing array of cables 50–100 metres apart from each other, resulting
in a typically rectangular acquisition system that is one kilometre or more
wide and six kilometres long.

The demands of deploying tens of kilometres of cables, along with the
ability to repair and replace defective sections of the cables and the
running of large compressors to generate the compressed air for the seismic
sources, mean that seismic vessels have become extremely specialised and
expensive-to-run ‘information factories’. A typical 3D survey covering
1000 km2 of ocean will take one or two months to acquire.
Marine operations
The cables stretching back six kilometres or more from the boat are
affected by waves and currents. Depth controllers keep the cable within
a metre or so of the desired depth, typically seven metres below the
water surface. Towing the cable shallower than this makes it more
susceptible to wave-induced noise, while towing deeper results in the
loss of higher frequencies due to ‘ghosting’. This latter effect is where
the water surface acts like a reversing mirror to the sound waves.
The surface reflection (or ghost) will cancel out the frequencies of later
arriving reflections. Thus, there is always a compromise between this and
using results from a shallow cable capable of recording higher frequencies
(and hence better resolution) but incurring more swell noise.
Currents displace the cables laterally and while a limited amount of cable
steering is possible, any reasonable current may displace the ends of
the cables by a kilometre or more. As the vessel sails up and down the
survey area, there must be very accurate positioning of the boat and of
each recording hydrophone along the cable. A buoy with a geographic
positioning system is attached to the end of each cable and their position
can be determined to within a metre or two.
When the vessel turns to make a second sweep across an area, there is
always the danger of tangling the cables. Tangles can be difficult and time
consuming to unravel. In bad weather it may not be possible to deploy
a work boat to fix the tangle and the equipment must be pulled back
on board.
SURVEYS 35
Because the seismic boat cannot turn quickly, a support vessel is
normally kept on standby to alert other recreational, fishing and
commercial vessels that a seismic survey is being undertaken.
The support vessel is also used to re-supply the seismic boat with fuel and
consumables.
Crew changes are made every four to six weeks, and this is usually carried
out by helicopter. The typical crew size for a large 3D seismic vessel is
60 personnel, evenly divided between the marine crew and the specialist
seismic crew. Surveying continues day and night, so two shifts are required.
With the larger, more modern vessels, there is enough space for theatres,
gyms, saunas, single or two-person ensuite cabins and life on board is
comparatively comfortable.
Land operations
The logistics of land operations can be a more time-consuming and
expensive task, particularly in mountainous, jungle or remote desert
terrain. In BHP Billiton’s Algerian desert leases for example, the activities
take place many hundreds of kilometres from the nearest town. Roads must
be made to enable the vibroseis trucks to reach their required locations.
The geophones are laid out at specified locations and the recording crew
ensures the data is acquired correctly. All personnel need to be supplied
with many litres of water a day in summer desert conditions. The base
camp for operations may have hundreds of personnel to keep the seismic
crew operating.
Overall, the emphasis in data acquisition on land or sea is on maintaining

consistency so that changes seen in the recordings result from changes in
geology and not from changes in technique.
Seismic processing
Processing centres are found around the world, but tend to be concentrated
in cities close to exploration activity such as Houston, London and Perth,
Western Australia.

Seismic trucks, Sahara Desert, Algeria
Sophisticated software and specialised skills are required to turn the raw
recorded data into the final image of the subsurface geology used by the
seismic interpreters to make their drilling decisions.
Amplitude decay — sound waves, like ripples in a pond, spread out,

losing energy as they go. The rock layers reflect some of the energy and
absorb preferentially higher frequencies. These factors cause the signal
to decay with depth. The signal can be boosted, but ambient noise is
also boosted.
Diffractions — near surface irregularities cause the sound waves

to diffract and scatter, like rain drops on a car windshield scattering
sunlight. Filters must be designed to remove this noise.
Multiples — these are a major problem, particularly on marine surveys.

The water surface acts like a mirror, reflecting all the upcoming energy
from the desired rock-layer reflections back down to generate secondary
and tertiary images. In shallower water, trains of multiples are thus
generated. Significant effort is required to predict and accurately
remove these multiples.
SURVEYS 37
Refraction — when a sound wave passes from a material of one velocity
to another it bends or refracts, like light going into water or glass.
The amount of refraction depends on the contrast in velocity. In places
like the Gulf of Mexico, salt bodies have a velocity often more than
twice as fast as the surrounding rock layers. Being irregular in shape,
they can bend the sound waves quite dramatically. It can take months
of work to build an accurate model of the subsurface velocity which is
then used to remove the distortion.
Anisotropy — sound waves can travel faster horizontally compared to

vertically due to the layering in the sediments. This causes the sound
waves to bend in an unpredictable way. In some cases the velocity may
also vary with an orientation that is faster in one horizontal direction
compared to another.
Timing errors — on land data, differences in the topography and degree

of weathering cause the seismic signal at a given location to be delayed
relative to its neighbours. On marine data, tidal changes during the
survey are enough to misalign the reflection events. Seasonal changes
in water temperature can also influence the data. All these need to be
measured and corrected for.
Migration — any non-horizontal reflection will appear mispositioned

in space. The steeper the dip and the greater the distance from surface,
the larger the magnitude of this mispositioning. A process called
migration attempts to reposition the events in their correct locations.
The process is sensitive to the velocity of the sound waves and all of
the above issues need to be addressed before this vital process can
be applied.
Seismic processing software designed to deal with these and other

erroneous effects on the data places high demands on computer resources.
Indeed, the requirements for seismic processing have been a significant
factor driving computer evolution. Some of the pioneering computer
companies were set up by geophysical companies to push the boundaries
of hardware performance. The demands of image manipulation are now
the main drivers of computer hardware and software.

Seismic without interpretation or annotation or wells
Seismic with interpretation
SURVEYS 39
Seismic acquisition, processing and interpretation probably exceed all
other scientific data collection in terms of the amount of raw data collected.
The demand for increasingly large 3D surveys, more sophisticated processing
sequences and shorter turnaround time means that the traditional tape-to-
tape processing is being steadily replaced by huge volumes of disk space
measured in terabytes (1000 gigabytes) and petabytes (1000 terabytes).
The sheer volume of seismic data meant that literally truckloads of

seismic tapes were used in the past to transport the data from acquisition
to processing centre. Modern disk media hold vastly more data than
previously, however it will be a while before there is an end to tapes as a
storage and exchange media.
Seismic interpretation
The final processed data is generated as a number of three dimensional
volumes and turned over to a team of specialists for analysis.
Interpreters map key horizons.
Seismic stratigraphers infer the depositional environment from the

shapes of the geological bodies.
Structural geologists recreate the structural history of the data by

examining the relative positions of faults, unconformities and in
some places the shape of the salt bodies. Salt, being lighter than the
surrounding sediments, flows like an extremely viscous fluid pushing
up through overlying rock layers. This is slower than glaciers, but it does
move over long distances in geologic time. The structural interpretation
recreates the geometry of the geologic layers over time, predicting how
hydrocarbons may have moved.
Basin analysts use the inferred depositional history and what is known
of geothermal gradients to predict where, when and what type of
hydrocarbon may have been generated.
Petrophysicists use well bore measurements to tie the seismic data to

the well logs.

Reservoir engineers build detailed models of reservoir properties. With
the aid of repeat surveys (called 4D surveys), they also examine how a
reservoir is drained and decide on infill drilling.
In better quality data, direct evidence of hydrocarbons can be deduced from

subtle changes in the seismic reflection strength (amplitude), particularly
as measurements at different offsets can show significant differences in
reflection strength depending upon the fluid content of a reservoir.
The bright spot technique, for instance, derives its name from the fact that it
shows up on the seismic profile as a visually brighter reflection. Bright spot
identification is based on the theory that oil or gas in the pore space affects
reflectivity of seismic waves. In other words, there will be an anomalous
change of amplitude at the edge of the petroleum accumulation where the
wave passes from hydrocarbons back into water-filled pores.
An associated indicator is called a flat spot, where the reflections are returned
from a fluid contact. This is more likely from a gas/water interface because
there is a much greater contrast between velocities of seismic waves in
gas and water than there is between velocities in oil and water. A firmer
prediction can be made if two flat spots are detected one under the other.
One is potentially a gas/oil contact within a reservoir while underneath
may be the oil/water contact.
Nevertheless, apparent direct indicators like bright spots and flat spots
can be caused by factors other than hydrocarbons such as coal seams and
porosity changes between rock types.
Another technique is called amplitude variation with offset (AVO). This

is defined as a variation in seismic reflection amplitude with a change
in the distance between the shot point (energy source) and the receiver
that indicates differences in lithology and fluid content in rocks above and
below the reflecting layer. Interpreters use this effect to try and determine
the thickness, porosity, density, lithology and fluid content of rocks.
SURVEYS 41
Seismic interpretation systems are able to store the large volumes of data
generated by the seismic survey and quickly manipulate them so that the
interpreter can scan through it as horizontal or vertical slices. The systems
can be used to generate semi-translucent 3D volumes so interpreters can
better understand relationships between the features they are examining.
They can change the colour, amplitude and orientation of the data. They can
strip away geologic layers to look at the patterns on a horizon of interest.
And they can stretch the data from time recording to depth, if this has not
been done in the original processing.
Even so, seismic interpretation is subjective, particularly in new areas

where there is little or no well control. A number of interpretations can
be made from the same data depending on the number and experience of
interpreters and the variation in guidelines and exploration philosophies in
vogue at the time. It is at this point that a potential target can be condemned
by one explorer, yet seized upon and made into a discovery by another.
Despite all the technical difficulties and unknowns outlined above,

amazingly detailed images of the subsurface can be made in areas of
good signal penetration. Petroleum geologists today have vastly more
information available to make their interpretations than their peers in
academia or the mining industry. High quality seismic surveys covering
thousands of square kilometres allow unprecedented understanding of the
geological history to depths of 10–20 kilometres.

Chapter 3. DRILLING
Once interpretive maps have been completed highlighting prospects worth
investigating, the only way to find out if hydrocarbons are present and in
commercial quantities is by drilling. This introduces the most colourful
side of the industry, both in terminology and activity.
Geologists, geophysicists and drilling engineers combine their professions

to produce a well prognosis which is an attempt to predict the stratigraphic
column (including the depths to each formation) that will be penetrated by
the drill bit. In new areas the prognosis is more difficult than it is in drilled
regions where subsurface information is available, but it still serves as a
guide to the formations and conditions that may be encountered down
the hole.
Prior to 1900 most wells were sunk either by hand digging or by cable tool
(percussion) drilling. In the latter method the bit was dropped attached
to a cable, raised by a surface winch and dropped over and over again.
The weight of the bit penetrated the formation gradually, with pauses
DRILLING 43
from time to time to extract the fragmented rock cuttings from the hole.
Percussion drilling in some areas was used until the late 1950s. However
modern drilling is by rotary means whereby the bit is connected to lengths
of pipe and mechanically rotated on the bottom of the hole.
Rig types
Bottom-supported Floating
Submersible Jack-up Semi-submersible Drillship
Types of offshore drilling units
Essentially all rotary drilling units have the same components and the only
real differences in rigs themselves stem from the medium in which they
are used.
On land the large rigs can be broken down into a number of loads for
transport to and from drilling locations, while smaller rigs are permanently
mounted on a truck or trailer. When working in dense jungle or other areas
inaccessible by surface transport, a heli-rig is used. It is simply a land rig
capable of being broken down to load sizes that can be airlifted to location
by helicopter — usually about 2000 kilograms per load.
Offshore rigs are of four types — submersibles, jack-ups, drillships and

semi-submersibles.

GlobalSantaFe’s GSF Development Driller I, semi-submersible rig
Semi-submersible drilling rig showing the intermediate columns
DRILLING 45
Jack-up rig — development drilling at John Brookes gas field, Carnarvon Basin,
offshore Western Australia
Courtesy of Santos
Elevation of a jack-up drilling unit

‘CR Luigs’ ultra-deepwater drillship
THRUSTERS
TELESCOPING JOINT
RISER
BALL JOINT
BLOWOUT PREVENTER
DRILL HOLE
A dynamic positioning offshore drillship
DRILLING 47
Submersibles are fitted with ballast tanks so they can be floated to shallow
water locations, then ballasted to sit on the sea bed or lake bed to provide
a stable drilling base.
Jack-ups arrive on location (usually towed by tugs) and mechanically jack

their legs down to the sea bed, raising their hulls clear of the water for
drilling mode. They are usually used in water depths up to 150 metres,
although some of the larger units can drill in up to 300 metres.
Drillships are ship-shaped vessels usually with the drilling derrick placed
amidships to drill through a central hole (moonpool) in the hull. Some early
vessels were also equipped to drill over the side with the derrick mounted
on rails so it could be skidded across the deck. The vessels have their own
propulsion, although a variation — the drilling barge — does not have its
own locomotion and has to be towed.
Drillships are either anchored or kept in position by a dynamic positioning

system which employs computer-controlled propellers along the hull to
continually correct drift in any direction. These vessels are used in medium to
deep waters, but suffer the usual ship instability in rough weather.
Semi-submersibles are mobile vessels with superstructures supported by

columns sitting on hulls or pontoons ballasted below the depth of wave
action for drilling mode. For transport mode the hulls are deballasted to
the surface. Anchoring can be conventional or via dynamic positioning.
Some semi-submersibles have their own locomotion, but many are towed
or placed on a barge (especially for long distance moves). These vessels
are remarkably stable in rough weather and can be used in medium to
deep waters.
Rig systems
No matter what the transport or carrying mode, a rotary drilling rig has
five main systems — hoisting system, rotary system, circulation system,
power system and blowout prevention/safety system.

Drilling system
The hoisting system consists of a winch (draw-works) on the rig floor.

A wire rope (drilling line) is spooled around the winch drum and is run
up to the top of the steel derrick, over the crown block and down to an
attachment on the travelling block. This latter has a hook for attaching the
drill string via a rotary swivel.
The draw-works are controlled from the rig floor and are used to raise
and lower drill pipe, casing and tubing, or any other equipment run into the
well. The exceptions may be logging tools. These are often run on a separate
winch as a separate operation to drilling, although in modern systems they
may actually be mounted in the drill string just behind the bit to enable a
continuous logging record to be kept while drilling.
DRILLING 49
The mud or circulatory system
The rotary system has three main components. First is the rotary swivel
for suspension of the drill string to the travelling block. Second is the
rotary table located in the rig floor and turned mechanically. Its speed and
direction is controlled by the driller. The third item is the kelly, a hexagonal
or square hollow pipe about 15 metres long which is attached to the rotary
swivel at the top and to the drill pipe at the bottom by tapered screw
threads. A piece called the kelly bushing fits into the rotary table so the
rotary motion can be transferred from the table to the drill pipe via the
kelly. The kelly bushing runs freely up and down the kelly, but cannot
rotate independently of the kelly.
Another method of rotating the drill string is a top drive system. This
involves hanging a motor from the hook and connecting it directly onto the
drill pipe from above. It imparts the rotation without the need for a kelly
or rotary table. The method promotes faster drilling and is particularly
advantageous during directional drilling programs.

Blowout preventer stack
An additional item in offshore drilling is the marine riser which is a large

diameter tubular connection between the rig and the blowout preventer on
the sea floor. It is a conduit for the circulation of drilling fluids as well as
a guide for running drill pipe and casing. It is fitted with a giant shock
absorber called a telescopic joint to allow for the vessel’s movement on
the sea surface and it can be quickly disconnected if sea states become too
rough for drilling to continue.
The circulation system pumps drilling fluid down the well and consists
of mud pumps, suction and storage tanks for the mud itself, a stand pipe
which runs up the derrick, a kelly hose connecting the stand pipe to the
swivel and a return mud line below the rotary table which returns mud
from the well to the shale shakers. The latter item removes the drill cuttings
before the mud is sent to the mud tanks for further cleaning by de-sanders
and de-pitters to remove the finer debris before recirculation.
DRILLING 51
The power system to operate the rig is either a diesel motor via a direct drive
compound system, or (particularly offshore) a direct current electric drive.
The blowout prevention system consists of a series of hydraulically-

operated valves and pipe rams which are open to allow the mud to
circulate during drilling, but which can be quickly closed around the
pipe if excessive pressure (a kick) enters the well and threatens to circulate
during drilling. If a kick occurs (i.e. excessive pressure from the formation
being drilled suddenly entering the well), the pipe rams are closed to
prevent this overpressure reaching the surface out of control. The last line
of defence in such an emergency are the shear rams which, if necessary, cut
right through the drill string and seal the well completely.
Well types
Petroleum industry wells are of three types — wildcat, appraisal and
development.
A wildcat is the first exploration well in a new or previously undrilled

target. The term seems to have originated from 19th century drilling in the
backwoods of the USA where drillers reported wildcats (pumas perhaps)
lurking in the vicinity. If the well is the first in a completely new region
where there are no close reference points, it can be called a rank wildcat.
Appraisal (sometimes called delineation) wells are drilled as follow-up

exploration wells on structures where wildcats have been successful. They
are often located to try to provide a rough outline of the field and evaluate
its various parameters.
Development (or production) wells are drilled once the discovery has been
appraised and judged economically viable. They are drilled specifically to
tap the hydrocarbons at definite places in the reservoir.
On some occasions during a drilling program only a small diameter hole

is required as an initial exploration tool because it is cheaper, or because
conditions deem it more practical. This is referred to as slim hole drilling.

Another category of well — which can be a wildcat, appraisal or a
development type — is the directional well. Depending on the purpose,
it can be inclined at various angles up to and exceeding the horizontal,
by introducing a bias down one side of the hole which causes the bit to
deflect away from the vertical. The early method involved placing an
angled length of metal called a whipstock downhole to act as a wedge to
change the bit direction.
In recent times a technique known as geo-steering has been introduced

for directional wells. Instead of using a whipstock to change the well
direction, modern techniques employ steerable motors mounted
just behind the bit. They are powered by the hydraulic force of the
mud circulating down the hole to turn the bit independently of the
drill string (like the force of wind turning the blades of a windmill).
The assembly includes a bend at the motor bearing housing so that the bit
points at an angle relative to the well centre-line (typically 0.5˚–2˚). This
allows the trajectory of the well to be changed when the bit is advanced by
using the weight of the whole assembly pushing down on it, and is called
sliding. In other words, the mud motor powers the bit so the drill string
can be advanced without pipe rotation.
An even later variation of this technique is the rotary steerable system in

which a sleeve with several hydraulic rams attached is mounted behind
the bit. A pulse sent down through the mud tells onboard computers
what rams to push in order to move in the desired direction. Changes are
achieved by the rams jamming against the side of the hole, thus pushing
the bit off in the opposite direction. The advantage of this system is that
the drill pipe can be rotated in the hole independently of the mud motor
rotating the bit. This enables a continuous operation and provides more
control as opposed to the sliding system which must advance in stages,
i.e. slide, rotate the drill string, slide, rotate the drill string until the
desired new angle is achieved.
DRILLING 53
A relatively new directional drilling system is known as coiled tubing
drilling. The steel drill string is a continuous piece of thin steel tubing
wound onto a reel or spool. During drilling the tubing, with bit attached,
is progressively wound off the spool and into the hole via a gantry erected
over the wellhead. The technique does not require a drilling derrick.
The bit is driven by a mud motor or turbine, but the steel tubing itself is not
rotated. The flexibility of the tubing enables the bit to be steered around
tight bends to reach and stay within very narrow reservoir formations.
Coiled tubing is generally used to probe various formations and can be
directed in any number of directions from a selected point in wells already
drilled by conventional means. It is often used to enhance production from
existing producing wells by accessing reserves nearby.
Overall, directional drilling may be used to reach an offshore target from

an onshore location (such as the Wytch Farm field in southern England
which extends out under Poole Harbour) or to reach outlying parts of a
field from a central platform offshore, or to kick off in several separate
directions from a single surface wellhead in onshore work. It might also
be a deliberate ploy to sidetrack around a lost bit stuck in the original well,
or perhaps to seek a new part of the reservoir after the bottom of the
original well has watered out and is no longer capable of producing oil.
The extreme case is a well which is actually horizontal by the time it enters
a reservoir. This exposes a longer section of the well to potential production
(particularly in thin petroleum-bearing formations) than a normal vertical
or moderately inclined well.
The term long reach well (or extended reach well) is used when the ratio of
vertical depth of the target formation versus the lateral extension from the
well head is biased to the extension. These wells (usually offshore) can be
drilled into a target up to 10 kilometres away from the rig or platform.

Multi-casing oil well completion
DRILLING 55
Bit types
Drill bits can be divided into several classifications.
The rolling cutter bit (or tri-cone bit) for rotary drilling was first successfully
designed by Howard Hughes in 1909. It has hardened steel or tungsten
carbide teeth of varying lengths and spacings, mounted on three roller
cones. The cones are designed to attain maximum cutting rate without
causing the teeth to clog.
For soft formations the teeth are long and widely spaced and the cones are
offset such that their axes do not intersect at a common point. This offset
produces a gouging action on the formation as the bit is rotated.
For progressively harder formations the teeth are shorter and more closely
spaced, while the cone offset is made less and less until, for very hard
rock, there is no offset at all. These bits rely on destroying the compressive
strength of the rock being drilled.
The diamond bit, adapted from the mining industry, imparts a grinding
action as the drill is rotated. The bit itself consists of industrial diamonds
embedded in a metal matrix. It is long-lasting in all but the hardest
formations, thus reducing the number of bit changes while drilling.
Diamonds are also used in core head bits which have a hole forged through
their centres allowing a core of rock to pass through into a core barrel
mounted directly on the drill pipe behind it.
The polycrystalline diamond compact (PDC) bits have come into use in
the last 15 years or so and have dramatically increased penetration rates.
PDCs are very durable man-made diamond cutters set into a body to
produce a very aggressive cutting action.
As mentioned in the previous section, a relatively recent evolution is the

use of downhole motors (and also turbines) attached to the drill string
to turn the bit. The power to rotate is supplied by the circulatory drilling
mud and it requires a greater pumping effort from the surface than in
conventional rotary drilling. The drill pipe itself is also rotated slowly

Rolling cutter drill bit
(tri-cone)
Tri-cone drill bit

(end view)
Diamond core bit
DRILLING 57
and independently from the bit to prevent sticking. Generally mud motors
rotate at 150–250 rpm, while turbines can rotate at 2000 rpm and are used
when penetrating hard rock.
Hole sizes
The diameter of the drill bits used, and thus the hole itself, becomes
successively smaller as the well is deepened. There are no hard and fast rules
relating hole depth to bit sizes because much depends on the stability of the
formations being drilled and the target depth of the well.
Nevertheless, it is usual to run through a series of sizes beginning with

the spud in or surface bit of 36 inches in diameter for offshore wells and 26
inches diameter for land wells. Drilling then progresses through diameters
of 26 inches, 17½ inches, 12¼ inches, 8½ inches, down to 6 inches.
In most wells the hole is cased (lined) with steel pipe to prevent cave-
ins and to retain circulation of drilling fluid. The casing is inserted prior
to every bit diameter change and the casing sizes correspond to the bit
sizes just mentioned: 40 inches or 30 inches for surface (conductor) casing,
20 inches, 13 3/8 inches, 9 5/8 inches down to 7 inches, the latter sometimes
called a liner or production tubing if the well is a development well.
In slim hole drilling, diameters usually begin at 10 or 8 inches and end at

between 5½ and 3 7/8 inches. Early slim hole work was limited to probing
relatively shallow targets, but advancing technology and the use of special
high-strength drill string able to withstand the high torque forces involved
in rotary drilling now enables the bit to reach depth of 3000 metres
and more.
Casing
Casing is made up of lengths of steel pipe screwed together, much like
drill pipe, which lines the well and acts as a pressure vessel establishing
barriers between different producing formations and the surroundings.
The surface, or conductor, casing is anchored to the wellhead and each

successively smaller casing size is ‘hung’ from the preceding one as the

hole is deepened. Usually casing is cemented into place against the well
sides by pumping cement under pressure down the centre of the pipe and
back up the outside. When set, the cement casing shoe left at the bottom of
the well is drilled out, and drilling into new, deeper formation continues.
A specialised form of casing can be manufactured with a diameter profile

in the form of two D shapes. This is then pushed down over a wedge
placed in the bottom of the hole to drive the two D sections apart making
an inverted Y shape. This is used for drilling two lateral (directional) wells
from the same location.
Drilling fluid
Drilling fluid is often referred to as drilling mud — a term relating to
earlier times when water used to help drill the well became mixed with
drill cuttings from downhole to produce a muddy liquid. At first the fluid
was discarded, but then explorers found the drilling was easier when
using this natural mud. The discovery sparked experiments into variations
of drilling fluid. Today muds can be divided into several categories.
Water-based muds (fresh water and salt water) can be simple clay-water
mixes, clay-water plus chemical additives, or numerous other combinations.
The most commonly used clays are bentonite or montmorillonite, both of
which are sodium aluminium silicates that expand to about 10 times their
original volume when mixed with water.
For some operations (such as high inclination wells where there can be
torque problems on the drill string as well as a danger of hole collapse)
and in some geological formations (such as water-reactive shales), water-
in-clay is not appropriate because it can destroy permeability and prevent
accurate evaluation of a reservoir formation.
Sometimes specialised chemical mud, such as potassium chloride and

polymer solutions, is used to counter these difficulties.
Another category is oil-based mud. This can be an oil-in-water or water-in-oil

emulsion. The oil used today is diesel, synthetic or pseudo (ester).
DRILLING 59
There are stringent conditions attached to the use of drilling mud,
including strict regulations on the disposal of used materials. In the marine
environment the spent mud is sometimes stored in containers and sent to
shore for disposal, or it may be re-injected into a higher formation or into
a dedicated hole already drilled for that purpose.
In some circumstances compressed air, or foamed air, or an inert gas like

nitrogen is used as the drilling fluid to prevent damage to a water-sensitive
formation or when there is a risk of losing mud into a porous formation.
Drilling fluid has five important uses.
It can be weighted to prevent high pressure formation fluids downhole

from entering the well. Usually the weighting material used is barite,
a dense, heavy sulphate of barium. However, care must be taken with
the mud weight. If it is too high the drilling fluid may break down
the formation and escape into it. If it is too low there is a danger of
the well being under-pressured and this could potentially result in a
blowout. Having said that, there are some circumstances when using
air or nitrogen as the circulating fluid, that the well is deliberately
drilled underbalanced. This allows formation fluids to escape up the
well to the surface where the flow is continuously monitored to detect
hydrocarbons. However extreme vigilance and great control is needed
to prevent a sudden inrush that might cause a blowout.
It cools and lubricates the bit and the drill pipe.
It acts as a carrier to flush drill cuttings up out of the hole, thus keeping
the bit clear and allowing geologists to examine the formation being
penetrated.
It coats the hole with a thin layer and acts as a semi-permeable membrane
which prevents loss of mud into all but the most porous formations
being drilled.
It prevents caving of loose formations.

In recent times an additional use for drilling fluid is to transmit data up
and down the well during a drilling operation. The messages are sent as
coded pressure pulses that change the settings of the mud motor or the
logging tools. Data from the tools is sent back up the hole the same way and
decoded at the surface. During exploration drilling this enables geologists
and engineers to get data quickly to enable continuous monitoring and
adjustment of the program. During development drilling it can be used
to provide an accurate ‘fix’ on the location of the bit at all times and make
corrections as necessary.
Logging
The purpose of logging a well is to compile a comprehensive record while
it is being drilled and immediately after it has reached its total depth.
In this sense cuttings and core samples can be included in the category as
well as the various electronic devices used to identify the formations and
their properties encountered downhole. Three types of information are
obtained through logging methods: rock type and porosity, fluid content
of the pores, and mechanical and fluid flow conditions of the well.
Mud logging includes a routine geological examination of the drill

cuttings as they are flushed from the hole, plus a comprehensive record of
the variations in drilling rates, the variations in mud pumping pressure,
the depths of formation changes and an analysis of the mud properties,
including hydrocarbon content measured by a gas detector. Any oil in the
cuttings causes them to fluoresce under ultraviolet light.
Coring is usually restricted to a reservoir zone or to a section of interest

encountered during drilling. Core is collected in a core barrel, which is a
cylindrical tube about 20 metres long mounted just above the special coring
bit. Once brought to the surface, core is examined on site by a geologist and
then sent to a laboratory where porosity, permeability, hydrocarbon saturation,
water saturation and detailed lithology (rock composition) are determined.
DRILLING 61
Taking a core sample
A variation of the technique is side wall coring. This is normally done

after electric logging to take a sample from zones not evaluated by normal
coring methods, but picked up on the log charts as sections of interest.
A core gun containing up to 60 small core barrels about one inch in diameter
is lowered into the hole. The barrels contain an explosive charge and are
fired electronically from the surface.
The charge drives the barrel into the side of the hole at the required depth
and is retrieved by wire rope attachments when the gun is withdrawn.
A core obtained in this way has a number of disadvantages in that the
explosive force often destroys the texture of the formation sample and,
because it is collected from the wall after drilling, it often has pore contents
completely altered from the natural state. Nevertheless it is better than no
core at all.
Electric logging is accomplished by lowering instruments called sondes

down the well. Each type of sonde measures a different physical property of
the rocks that have been drilled, such as electrical resistivity, self potential,
natural radioactivity, sonic velocity and induced radioactivity.
Hydrocarbons in the rock are detected directly by an increase of resistivity

when compared to the same rock containing water. They are indirectly
detected by the various ways in which the responses of the sondes are
caused to deviate from normal.

Electric logs measure the resistivity of the rock and also determine rock
type. In general, shale has a low specific resistivity, while limestone and
sandstone resistivity is relatively high. Oil and gas within a rock will
increase resistivity because they are non-conductive materials.
Nuclear logs measure gamma rays and thermal neutrons and can be
used to determine porosity (including fractures) and lithology in a
given formation. They are also the only porosity determinants which
can be used in a cased hole.
Acoustic logs measure the velocity of sound within the formation in the
same way as seismic surveys on the surface detect changes in formations.
Acoustic logging is mainly used for porosity determinations and to help
in differentiating gas-bearing zones from liquid-bearing zones.
Other logs are run specifically to assess mechanical and fluid flow
conditions down the well. They include a calliper log (which measures
well diameter), a cement bond log (which measures strength and bonding
of cement to casing), a temperature log (which detects the top of the
cement column outside the casing because heat is given out when
cement sets), and the dipmeter (which measures the formation dip
relative to the well), and a compass to determine the well orientation.
Electric logging
DRILLING 63
In earlier days the logging operation was performed separately to drilling.
Wells were drilled to a given depth before the drill string was hauled out
and the logging tools lowered to take their readings. This is known as
wireline logging. More recently the logging operation is accomplished
while drilling. The well is drilled to the reservoir or inquiry depth and
then the logging tools are sent down to sit behind the bit and the motor.
This technique is known as formational evaluation while drilling (FEWD).
It provides immediate detailed information about the well and the
formations it is passing through.
Thus the ‘business end’ of the drill string starts with the bit and its drive
system (the motor, which can be 10 metres long and uses the hydraulics
of the drilling fluid to impart a rotation to the bit). The survey package
(compass and orientation tools) come next and make up another 10 metre
long section. Finally the formation evaluation tools make up the third 10
metre long package and contain gamma ray, resistivity, neutron density,
acoustic, calliper and formation pressure tools.
One of the original and still the most important uses of logging is the
correlation of equivalent strata from one well to the next, allowing accurate
subsurface plotting. This in turn helps determine the formations present
relative to other wells. It also indicates whether a well is within a particular
geological structure, whether a well has reached a known horizon, the
presence of faults and the existence of dips, folds, unconformities,
thickening and thinning of formations.
Testing
Notwithstanding all the logging techniques, the final confirmation of the
presence and character of hydrocarbons is by producing a sample from the
reservoir formation. There are two methods of obtaining such a sample,
and both depend on allowing the natural pressure of the reservoir to drive
the formation fluids to the well collection point.
A wireline formation interval test involves lowering a test chamber

on the end of a wire to the depth of the reservoir and sealing it against

the well walls using expanding rubber packers above and below.
Pressure inside the chamber is atmospheric and a valve assembly, when
opened, allows reservoir fluids to flow naturally into the chamber.
If there is no flow, a shaped charge is detonated, piercing the formation
and opening a flow channel to the chamber.
The volume collected in these tests is small (about 10–15 litres), but
it does give an indication of the formation fluids in the reservoir.
The test also records pressure of the incoming fluid and some general
extrapolations can be made about flow rates. The wireline test is particularly
useful in locating hydrocarbon/water contacts and the extent of transition
zones.
A drill stem test is more expensive and involves the lowering of a test tool
into the well on the end of drill pipe. Packers again isolate the section to
be tested and, when the valve is opened, the reservoir fluid is allowed to
flow into the drill pipe. It is then recovered when the pipe is pulled out
at the end of the test. Alternatively the hydrocarbons may be allowed to
flow to surface in a full production test where they are controlled via a series
of chokes of different sizes. Pressure and volume of fluids are measured.
Oil is collected, while gas is flared.
An open hole test is one that is done on a part of the hole that has not
been cased. In a cased hole the test is conducted through perforations shot
through the steel walls at the level of the reservoir zone.
Often the test will be shut in after a time to allow the pressure in the
reservoir to build up again after the initial flow. Then it is reopened for a
second and even a third measurement. Continuity of pressure during a test
run and rapidity of pressure build-up between tests give some indication
of the permeability of a reservoir and its potential performance in full
production mode.
Occasionally, when the discovery is small or marginal, companies will run

a long-term production test, stopping and starting the well flow over a
period of months to better determine the economics and overall viability
of a full development program.
DRILLING 65
Acidising and fraccing
There are times when logs and testing techniques indicate that oil and/or
gas is present in a reservoir, but the formation is not permeable enough to
readily allow hydrocarbon flow.
If the reservoir is a limestone or a dolomite, an acid solution can be

pumped down the well and forced into the formation. The acid etches into
the carbonate rocks of the reservoir around the well, opening up channels
and unlocking the hydrocarbons.
If the reservoir is a sandstone with low permeability, the formation can be

forced open by pumping a specially blended fluid (chemicals that don’t
adversely react with the formation, even air and inerts like nitrogen)
under great pressure downhole and into the formation until it literally
cracks it open. The pumping pressure exceeds the formation strength. This
technique is known as fracture stimulation or fraccing. Proppants mixed
in with the fluid (such as sand, aluminium pellets, even walnut shells in
the early days) are also forced into the formation and they keep the new
fractures open so that a path remains for hydrocarbons to flow to the well.
Abandonment or completion
If a well is dry, or if hydrocarbons found are non-commercial, the well
is plugged and abandoned (P & A). This process calls for isolating various
formations with cement, taking particular care to block the reservoir zones
and any high pressure zones that may have been encountered.
Sometimes wells are suspended by setting cement plugs as a temporary seal.

At a later date the well may be re-entered for evaluation and the cement
plugs are simply drilled out using standard drilling techniques.
If the well has tested commercial hydrocarbons, it is usually completed as

a producing well or suspended so that completion can be carried out at a
later date. A completed well has production tubing installed and the well
casing is perforated in the reservoir zone. A system of valves (known as a
Christmas tree) is placed at the wellhead on the surface for later hook-up to
the production system.

Typical Christmas tree
Offshore a successful well is often plugged and abandoned because it is

not optimally placed for future development. Development drilling will be
done later from one or two platforms at other locations on the field, selected
for ensuring an even drainage of the reservoir. The exception is for small
fields offshore where subsea completions may be installed on each successful
well, or where single-well platforms are used. In those cases the original
exploration wells may be used as production wells.
Remedial work
Few wells are textbook operations in practice and any number of problems
can be encountered during drilling or testing.
DRILLING 67
Some of these include the drill pipe sticking in the hole, twisting off a
section of drill pipe in the hole, the loss of equipment such as logging or
test tools down the hole, washouts and loss of mud circulation into the
formation and, most serious of all, formation fluids overcoming drilling
mud pressure causing blowout and possible fire, explosion and equipment
damage at the surface.
When there is a stuck pipe or equipment is dropped or sheared off downhole,

the operator has three alternatives. They can fish for the obstruction with
specially designed grappling, cutting, grinding and magnetic tools.
Another option is to drill around the obstruction by deviating from a
point a little above it (sidetracking). However, if a sidetrack is also likely to
be difficult, the operator may decide on the third (albeit very expensive)
alternative — drill a completely new well from the surface.
Loss of circulation and washouts in soft formation can also be difficult to

contain and often the well program must be changed so that casing is run
through the troublesome section earlier than originally planned. Recently
a way around this dilemma has been provided by the development of
‘expanding casing’ which is made of very pure steel. Once in position over
a bad patch in the well, a cone is pushed down through it to open out the
diameter. This avoids the need to set the next casing size and thereby lose
diameter for the next part of the hole.
An increase in the density of mud weight, and blowout equipment in

working order, can usually overcome any sudden pressure inflows in a
well. In such events too, a lot depends on the experience of the drilling
personnel. A crew trained in well control and blowout prevention can
circulate a kick of high pressure out of the system using the valves and
chokes in the well.
Another form of remedial operation is the well workover. This can either be
a program of widening, cleaning or re-perforating an old abandoned well,
or a producing well that has already had a long life and needs rejuvenating.
The workover is usually carried out with a small drilling rig on land and
on a production platform, or one of the four types of offshore rigs suitable
for an offshore location.

Chapter 4.
EVALUATION & PRODUCTION
Evaluation of a discovery is still, strictly speaking, an exploration function
and involves detailed appraisal work.
Reserves estimates
Once exploration drilling has discovered an oil and gas accumulation,
appraisal drilling is needed to determine whether or not it is large enough
to be commercially viable. As the drilling results come in, the geological/
reservoir engineering team makes an evaluation of the discovery and an
estimate of the reserves. Naturally enough, the more well data collected,
the more confidence can be placed in the estimate.
EVALUATION & PRODUCTION 69

Appraisal
Appraisal wells are sited to determine the physical parameters or dimensions
of the field. For instance, if the discovery well has successfully penetrated
the crest of a structure, the appraisal wells will probably be drilled down
the flank to establish the lateral extension in four directions by finding the
oil/water contact. If the discovery well has penetrated a structural flank
and already established an oil/water contact, then there is scope to drill an
appraisal well closer to the crest (or up-dip) to try and find a gas/oil contact
point. This can indicate the true height of the highest and lowest point
of oil in the structure (the hydrocarbon interval or pay zone). Sometimes
oil may not have a gas cap and this can be determined by drilling on the
top (crest) of the structure. A purely gas reservoir will be indicated if the
appraisal finds a gas/water contact.
Appraisal work includes input from seismic mapping, downhole log data
and well tests. The results are used to determine the oil/gas, oil/water
and/or gas/water contacts and to indicate the horizontal and vertical
dimensions of the trap. This in turn, enables an estimation to be made
of the potential volume of oil and/or gas in place (in situ). However, the
calculations are rarely straightforward. Complications arise through errors
or uncertainties in seismic interpretation, faulting, lithological changes
and erosional features. A general rule is: the thicker the pay zone, the more
continuous it is likely to be. But this is by no means absolute.
Three other factors of major importance are net pay, porosity and
hydrocarbon saturation.
Net pay thickness in the reservoir or reservoirs is the interval filled with
hydrocarbons, and is generally derived from core or cuttings and logs or
interpretations from test results.
Porosity is the capacity of a given volume of the reservoir to hold

fluids. An estimate is made from the well logs and core analysis.
Hydrocarbon saturation is also derived from well logs and is the fraction
of the porosity that is hydrocarbon filled. The degree of confidence in the
estimate varies with the type of lithology, the type and quality of the logs
and the availability of data from previous wells in the area.

Once the physical shape of the accumulation and volume of hydrocarbons
in situ are known, it is possible to estimate the reserves (the proportion of
hydrocarbons expected to be commercially recovered from the reservoir).
Due to the nature of the fluids, uncertainties in knowledge of the reservoir
parameters and the limited number of wells that will be drilled, recovery is
always much less than 100 per cent. For an oil field, recovery will generally
be 10–40 per cent, but it can in exceptional circumstances reach 70–80 per
cent. Gas recovery is normally 50–80 per cent of the hydrocarbons in situ.
Recovery estimates
The so-called recovery factor, which denotes the percentage of hydrocarbons
in situ that will be recoverable, depends on three main items — nature of
the fluid, reservoir drive mechanism and productivity.
The nature of the oil or gas in a reservoir is described by chemical analysis

of its components. For oil, measurements of the API gravity value, the
pour point (the temperature at which oil changes from liquid to solid), the
bubble point (the point, during decreasing pressure, at which gas begins to
come out of solution with the oil), the viscosity and the gas/oil ratio (GOR)
are also relevant.
The drive mechanism of the reservoir is the availability of natural means of

supporting the pressure in the reservoir. There are three common types:
• A water drive occurs when water in the reservoir formation is directly

in contact with the oil (or gas). As oil (or gas) is produced, pressure in
the reservoir is reduced causing an influx of the water, which in turn
sweeps through the pores of the rock and pushes the oil (or gas) out as
it advances.
• A solution gas drive occurs where pressure support is provided solely

by the oil. The drop in pressure caused by production releases gas
from solution in the oil. As the gas expands, it displaces an increasing
quantity of oil from the pores.

• A gas cap drive occurs when there is a large gas cap in direct
communication with an oil zone. As the pressure is reduced, the gas
cap expands and sweeps oil ahead of it.
Often the drive mechanism is a combination of these and other mechanisms.

Water drive is the most favourable and solution gas is the least favourable.
In all cases, pressure, and therefore production, declines with time.
Productivity is often the least predictable parameter. It is mainly a function

of the reservoir permeability and fluid viscosity. It can be determined in
part from cores and interpretation of test results.
Reserves classification
Common terms used when describing petroleum reserves in a field are
proved, probable and possible. They reflect the confidence that is felt about
the reserves calculated. Proved reserves reflect a very high degree of
confidence (90 per cent certainty and labelled P1 reserves). At the other
end of the scale possible reserves have a very low degree of confidence
attached to them (10 per cent certainty or P3 reserves). Probable reserves
represent the mid-range of confidence (50 per cent certainty, or P2).
Companies sometimes also use a slightly confusing notation — 1P, 2P and

3P — when reporting reserve figures. Taken respectively these simply
mean proved reserves only, proved plus probable reserves, and the sum of
proved plus probable plus possible reserves.
Market potential
Modern field evaluation techniques also include preliminary marketing
investigations. For oil discoveries, the field operator will run a detailed
assay to determine the exact nature of the crude, including a breakdown
of its components and the type of petroleum products that may be
obtained when it is refined. This step is also a check for any impurities
in the crude that need to be dealt with to comply with companies’ strict
health and safety programs, as well as to give an early start in establishing
plans for their removal during any development stage. The assays are
done on samples obtained upon discovery and during appraisal drilling.

The assay results are circulated to potential buyers to gauge interest and
the possibilities for sale, if and when the field is brought on stream.
For gas, assays to determine the nature and percentage of the

components (including any impurities such as carbon dioxide, nitrogen
and sulphur compounds) are an important factor in establishing economic
value. However, it is usual when dealing with gas accumulations to
establish a market before development can take place. Hence an initial
market evaluation, domestically and internationally, is often carried out in
conjunction with field appraisal work.
In some instances the results of market surveys can influence the

nature of development plans and the design of the production facilities.
Once the reserves for a field are estimated and declared viable, planning
for development can begin. Sometimes the go-ahead to proceed to
development will be given immediately. At other times a more cautious,
stepped approach is taken which involves preliminary design (or feasibility
studies) followed by a front end engineering and design (FEED) stage.
The FEED stage provides definitive costs and technical data to enable a
decision on whether or not to make a final commitment to finance a full
development plan.
Development drilling
Offshore, petroleum engineers draw on their knowledge of the field gained
during the evaluation (aided by the computer-generated models based on
the acquired data) to choose an optimum number of well locations to
effectively and efficiently drain the reservoir across the whole field. Generally
these wells must be identified prior to actual development to permit proper
design of the facilities. Wells can be vertical, deviated or horizontal and may
be drilled from one or more central platform locations. Sometimes well slots
on a platform are not used immediately. Rather, those wells are drilled at
a later date when the engineers have some idea of the field’s production
history. For instance, they may be directed into spots in the reservoir where
oil has been left behind, or to boost production from an area that is flagging.
Development wells can also be individual subsea completions and in this case
it is often possible to re-use exploration wells as subsea production wells.

In the onshore sector, development drilling generally occurs in a more
step-wise fashion. Additional wells are committed to and drilled only
after the results of earlier wells are known. There is less need to commit
to a full field development at the very beginning. Wells are often vertical,
although recent perfection of the horizontal drilling technique and the
use of motorised bits has provided this option for use particularly in
thin reservoirs. In onshore work it is generally possible to use successful
exploration wells as producers.
Improved technology is blurring the former distinction between offshore and

onshore development because some offshore fields can also be developed in a
step-by-step progression using subsea completions and monopod platforms
as an initial guide to future development options. Nevertheless, whether
onshore or offshore, the number and spacing of wells will be determined by
reservoir parameters, the field size and, particularly in the case of gas, the
commercial contract requirements.
Information obtained from development drilling improves the reliability

of reserve estimates and further improvements occur as the field is
produced.
Production techniques
Field production comes under three main headings — primary, secondary
(or supplementary) and tertiary (or enhanced) recovery.
In primary recovery the reservoir pressure (drive mechanism) forces oil

and gas to the well and hence to the surface under natural flow. Some
fields may have several producing horizons, each with a different pressure,
petroleum type and other variables that need separate production. This
can be accomplished with separate wells. Alternatively, a dual or multiple
completion can be established in the one well.
The latter methods are mechanically more complex and therefore more
difficult to maintain, despite the fact that they are cheaper to install than
drilling second and third wells using single completions in each zone.

A beam pump unit (nodding donkey)

Natural flow accounts for most of the world’s oil production but, as
previously mentioned, only a portion of the hydrocarbons are recovered
via this means.
Secondary or supplementary recovery is achieved in a number of ways.

Re-injection is a method where reservoir pressure is maintained by
returning natural reservoir fluids such as water (water flooding) or gas
to the producing zone via strategically placed wells in the field that are
dedicated to re-injection. This technique bolsters the main (primary) drive
as long as possible.
Gas lift (or artificial lift) is also a means of extending natural oil flow.
It involves increasing the amount of gas produced with the oil by
injecting gas directly into the flowing column in a well rather than into the
reservoir. Gas lift is accomplished by using special valves set up at various
depths and then controlling the amount of gas entering the flow stream.
The increase in gas/oil ratio reduces the pressure needed to drive the oil
to the surface.
Pumping is another form of artificial lift and is accomplished in three

ways — a beam or rod pump (the familiar oil field ‘nodding donkey’),
a hydraulic pump or a submersible electric pump. The latter two pumps
are installed in the well bore itself.
Tertiary or enhanced recovery involves oil production only. It is achieved

by injecting fluids which are not normally present into the reservoir with
the aim of altering the properties of the oil to enable a greater proportion
to be produced. Enhanced recovery methods are generally applied after
primary and secondary techniques have been exhausted. The methods
include injection of miscible fluids like carbon dioxide and nitrogen and
injection of complex polymers or steam. Another technique is in situ
combustion, particularly for viscous oil. This involves igniting some of the
oil in the underground reservoir to heat the remaining oil and render it less
viscous and thus more able to flow to the wells.
These tertiary methods can raise ultimate petroleum recovery by 10 –20

per cent under favourable conditions.

Diagram of dual completion in producing well
Gas lift operation

Production hardware
The production process for oil and gas is generally the same onshore as it
is offshore and any differences in technique are a matter of economics and
designing an engineering solution to best deal with the fluids involved. Space
limitations offshore may also influence the process design.
Processing includes six systems — gathering, separation, treatment/

storage, water treatment, safety, and utility handling facilities.
• The gathering system is a series of small diameter pipelines connecting

to each wellhead and feeding into the main processing inlet.
• The separation system relies on the fact that oil, water and gas have
different densities and will settle into separate layers. Internal devices
in the separation vessels assist in speeding up the process.
• The treatment, storage and disposal system for oil and gas is usually
split into two streams. Oil leaving the separation system is virtually
free from dissolved gas and is termed ‘stabilised’. However, it may still
contain water in emulsion form. Further treatment can remove this
water using various techniques, including the introduction of chemicals
or the use of electrostatic separation.
Gas leaving the separation system is saturated with water vapour

and hydrocarbon liquids, with the amount of liquid depending
on temperature and pressure. Water is removed with absorbing
substances such as glycol. Special membranes remove carbon dioxide,
and dehydration enables the capture of sulphur compounds. Nitrogen
and hydrocarbon liquids, mainly ethane, butane and propane, are then
separated using a refrigeration process until the various components
condense out of the gas stream.
• The water treatment and disposal system involves further action on

the water to reduce residual oil content to acceptable environmental
levels before it is discharged. The methods may include de-aeration,
filtration or chemical treatment, with time allowed for settling out of
the two phases.

GAS
Flare system
Pipeline
Compression
Gas Gas liquids
dehydration recovery Gas lift
system system
Compression Gas re-injection
GAS OIL
Pipeline
Oil
Gathering Separation Storage Pumping
Reservoir treatment
system system system system
system Tanker
WATER
Oily water
Filtration De-aeration
separation
system system
system
WATER
Water
Pumping
injection
system
SEA system
Possible production systems on an offshore platform
• The safety system includes installation of alarms, automatic shut-

downs, back-up units on important equipment, exhaust (flare) stacks
and fire fighting equipment, plus strict administrative procedures and
frequently practised emergency containment and evacuation plans.
• The utility systems include power generation and facilities for normal
services, all of which can be, and frequently are, powered by the gas or
oil being processed in the plant.

Facilities design and layout
Onshore, the individual production wellheads on a field are connected
by gathering pipelines to a main processing plant or to individual storage
tanks if the field is small. After processing, the oil is transported either
by truck, tanker or pipeline to a refinery. Onshore facilities are placed as
convenient and in accordance with any civil planning and environmental
considerations.
STEEL CONCRETE FLOATING GUYED TENSION

PILED GRAVITY TOWER LEG
Some examples of production platforms
Depending on the volume, gas associated with oil production is either

re-injected into the reservoir for pressure maintenance or processed
and sent to market via pipeline. Small amounts of the gas can be used
to generate power for the production facilities. Flaring unwanted gas
is now a rare occurrence, especially on a long-term basis, as most
authorities and companies view this as wasting a valuable asset.
There are also environmental considerations to do with greenhouse effects
and any flaring generally requires a special permit.

BHP Billiton-operated ‘Griffin Venture’, offshore northwest Australia
FLOATING CRUDE
PRODUCT HOSE
BRIDGE & HELIDECK
CONTROL
ROOM SHUTTLE
FLARE OFFTAKE TANKER
HAWSER
UNIVERSAL MOORED STORAGE/

JOINT ASSEMBLY PRODUCTION TANKER
RISER
CHAIN TABLE
ANCHOR CHAINS
SUBSEA
WELLHEAD
ANCHORS
FLOWLINES &
CONTROL UMBILICAL
A floating production storage and offtake facility (FPSO)
Offshore, there are various ways of tackling the production layout, space
being at a premium on a production platform or production vessel.
For medium to large fields it is common to have one or more fixed
platforms which house all the wellheads and the processing equipment,
plus accommodation for the field workers. A pipeline can then be run to
shore to permit more extensive processing and storage and/or distribution.
In some isolated oil fields, a short pipeline may be laid from a platform to
a nearby buoy mooring system which is used to load the oil directly into
offtake tankers.

Douglas complex at BHP Billiton-operated Liverpool Bay Development, Irish Sea
Offshore platform system

West Tuna concrete gravity based facility being towed out from Port Kembla to Bass Strait
Platforms vary in size, shape and type depending on the size of the field, the
water depth and the distance from shore. Most common is a steel structure
with piles sunk into the sea bed, but there are also concrete and/or steel
structures that are held onto the sea bed by their own weight (gravity
structures) or converted jack-up exploration rigs that stand on the sea bed.
Other systems employ floating vessels (usually ship-shaped) known as
floating production, storage and offtake facilities (FPSO). Another type is a
tension leg platform that is tethered to the sea bed by vertical cables and yet
another is the guyed tower which is supported upright by radiating cables
anchored into the sea bed, acting much like the guy ropes of a tent.
In fixed platforms, the legs have a primary function of supporting the deck
and its load of processing facilities. The leg structure also surrounds and
protects the well conductors (hence the term jacket). Some fixed platforms,
particularly the concrete gravity type, also contain oil storage tanks in their
bases or in the column legs.
If the water is shallow and land (or another platform) is nearby, small
platforms may be used with the main processing facilities located ashore
(or on a centrally-located master platform).

In other cases, subsea production units are used. These sit on the sea
bed and feed oil and gas into fixed platforms or floating production
and storage units via flexible flow lines and buoyed marine risers.
The floating facility can range from a vessel just for storage purposes to a
disconnectable, self-propelled tanker. Processing is still done on the facility,
not on the sea bed, although subsea processing is a developing technology.
The subsea units may be open to the sea (a wet tree) or, in the past,
encapsulated in a chamber under which pressure is kept at atmospheric
levels to allow operators to enter and work under normal conditions (a dry
tree). Dry chambers permitted manual intervention beyond diver depths
and opened the door to deep water development.
Production engineering is continually pushing the frontiers of technology,

especially in offshore applications. At the same time, the best designs
include equipment and systems that are as simple as possible to improve
reliability and avoid potential flow problems. Robust system design
enhances economic performance. There is also consideration given to
geographic location. If the field is remote from infrastructure, such as West
Africa or the North West Shelf off Australia, construction vessels have
to be brought in especially and this may increase the overall cost of the
project. On the other hand, in the active Gulf of Mexico or North Sea, many
construction vessels are employed in the region and mobilisation costs to
a project are much less.
As the industry tackles deeper and deeper water, FPSOs connected to

subsea wellheads are replacing fixed platforms as the main development
technique. FPSOs allow the facilities to be placed over the field. Platforms
in shallow water often have longer tie-backs, while the reservoirs on the
edge of the continental shelf are developed subsea. Oil flow lines between
the wells and the production facilities can be up to 30 kilometres long and
must combat pressure drop-off, heat loss and an increase in oil viscosity.
For gas, the flow lines can be much longer (up to 200 kilometres) allowing
production to flow directly to a shore plant rather than an offshore facility.
In some instances artificial islands have been created for shallow water
and Arctic applications.

‘Apache’ reel pipelay barge
There have also been recent advances in the remote control of subsea
wellheads. Undersea umbilicals carrying the hydraulic, power and
electronic communication cables can be up to 150 kilometres long. In the
Arctic, work is being done to perfect an umbilical system that runs under
the ice to connect with and control a subsea system 400 kilometres away.
Steel tubes are replacing the thermo-plastic hoses of earlier umbilical
design. Another emerging technology is the development of autonomous
control systems where the umbilicals only carry the communication cables,
and the power for operating the subsea valves is actually generated at the
wellhead. Electric trees are also being developed for long distance and
very deep water application.
An alternative technique is the use of remote controlled buoys stationed in

the ocean above the subsea system, such as the East Spar field off Western
Australia. However these buoys are best for relatively short distances from
the shore line. For ‘over the horizon’ applications, satellites are needed
as relay stations to bounce the control signals. In addition, the logistics
of supplying chemicals such as the injection of glycol or methanol at the
wellhead to improve the oil flow rate from the subsea wells is more difficult
with a remotely controlled buoy system.

Pipelines
Pipelines are an important part of all phases of production, from the
gathering systems joining wells to process facilities and in the distribution
system delivering oil and gas to refineries and markets. Pipelines vary from
simple steel tubes to state-of-the-art spiral-wound, flexible lines. They may
vary in diameter from 50 millimetres to two metres.
Laying of pipelines can be expensive, particularly offshore where

sophisticated techniques are used to ensure the line is properly placed.
The traditional approach offshore is to weld lengths of pipe together on
a lay barge and progressively lower or slide the pipeline to its designated
sea bed location. The pipe is guided and supported for a short distance
after leaving the lay barge by a ramp called a stinger mounted at the stern
of the vessel. It is possible to lay pipe in 1000 metres of water using these
conventional techniques.
For deeper water, up to 2500 metres, a J-lay method is used whereby

the pipe, still welded into a continuous length on the barge, is dropped
vertically and then laid on the sea bed in a bowed incline (like the letter J).
Lines of up to 700 millimetres diameter have been laid in very deep water
with this technique using heavy lift/lay barges.
Other methods for shallower water include welding the pipe lengths
together onshore and then pulling (or towing) the completed line into
the desired location as one whole unit. For smaller (up to 150 millimetres
diameter) lines, it is feasible to have the pipe delivered on a reel to
a specially designed reel barge which then unrolls the line along the
appointed route.
Onshore pipelines are also welded and laid in sections. Usually the onshore
lines are buried, thus the laying operation is preceded by trench cutting
and followed by burial.

Pipe-laying operations from conventional lay barge, ‘Semac I’
Pipe-laying operations from conventional lay barge

Many offshore lines are also buried, especially in shallow water where
currents and tides may cause scouring and movement if laid on top of the
sea bed. Sometimes, if not buried, the lines are given thick outer coatings
of concrete to weigh them down. However, there is no need for weight
coating in very deep water as the currents are less and the increased
thickness of the steel needed to withstand the higher external pressures at
depth adds sufficient weight to keep them in place.
Petroleum pipelines are also coated with several layers of protective

material and fitted with cathodic protection devices that inhibit corrosion.
Internal pipe maintenance and cleaning is conducted by sending a
scrubbing device or pig (originally named because of the squealing noise
early versions made as they traversed the line) through the pipeline at
regular time intervals. Other, more sophisticated pigs are able to inspect
the integrity of welds and the internal condition of the pipe as they
move along.
Some pipelines, particularly from offshore oil and gas fields to shore
production facilities, carry oil, gas and condensate together. This is known
as multi-phase flow. At the shore end of the line a device called a slug catcher
(a series of parallel horizontal pipes) slows down the flow and enables the
liquid (oil and condensate) ‘slugs’ to be separated from the gas.
Remote operating vehicles

Beyond diver depths of 200 metres, major enabling technical advances in
subsea work are typified by the use of remote operated vehicles (ROVs).
ROVs and remote tooling systems can be operated long distances from
the mother ship or control point. This enables subsea construction work,
such as connection of pipelines and production systems, to take place in
very deep water. The ROVs are operated from the surface, usually via an
umbilical. Cameras fitted to their hulls enable the operator to guide the
vehicles into position and then send signals to the mechanical arms to
perform the given task. In recent times, digital systems and the use of mega-
pixel chips have revolutionised the visibility of the onboard cameras.

In addition, capabilities of these vehicles developed for the military have
been made more generally available and the offshore petroleum industry
is developing autonomous underwater vehicles (AUVs). These are
untethered, free-ranging vehicles that can be programmed to do a task,
such as a grid pattern sea bed survey or a complete pipeline survey, and
then be picked up later once the job has been completed. There is no longer
any need to tow the vehicle during a survey, thus saving time which can
be devoted to other work.
Coal Seam Methane

Coal seam methane (CSM, sometimes called coal bed methane or coal seam
gas) is natural gas formed as part of the geological process of changing
organic matter into coal. The CSM is generated either from a biological
process resulting from microbial action or from a thermal process resulting
from increased heat with the depth of burial of the coal seams.
Unlike conventional natural gas reservoirs, where the gas is trapped in

the pore spaces within rocks like sandstone and limestone, the methane
trapped in coal is adsorbed onto the surface of cleats or joints in the coal
and held in place by the pressure of water within the seam. Thus coal is
both the source and the reservoir for CSM.
The surface area of the cleats is very large, so coal can potentially contain
more methane per unit volume than many conventional gas reservoirs.
The amount of trapped gas is related to the coal type and the pressure
and temperature of burial. However most coals have lower permeabilities
than conventional gas reservoirs and the production rates are lower, often
requiring some form of stimulation such as hydraulic fracturing.
This is achieved by drilling wells into the coal seam and pumping down
large volumes of water and sand to produce new fractures and/or force
open and extend the existing cleats and joints. Generally the fracturing
extends for up to several hundred metres in all directions from the well
bore. The sand helps to keep the fractures open.

However the gas trapped on the coal surfaces cannot be released until the
water pressure holding it there is decreased. This is done by physically pumping
water from the wells until gas comes free and begins to flow naturally up
the wells. The time taken for gas to begin flowing after starting the pumps
can vary from several weeks to several months. The water can be re-injected
into formations below the coal seams, or collected in dams at the surface
where it is allowed to evaporate. Research is also being conducted into the
potential for using the water for agriculture and other purposes.
CSM is typically found at shallower depths than conventional gas

(200 metres –1000 metres compared to 1500 metres – 4000 metres plus)
and reaches the surface at very low pressure. It must be compressed before
being sent through pipelines to market. Nevertheless, the shallower depths
do enable the use of small truck-mounted rigs to drill the wells which
improves the economics of an operation.
Wells are generally drilled in groups of five — one central well and four
surrounding it — called a ‘five spot’. The four outer wells are designed
to drain water away from the central well which can then flow gas to
surface. Development of a CSM field progresses when the four outer wells
are themselves surrounded by newly drilled wells pumping water until the
four also become producers and so on. A CSM field can contain hundreds
of wells during its lifetime.
Not all parts of a coal seam are conducive to CSM production and explorers
concentrate on ‘sweet spots’ — areas that have the highest degree of natural
fractures. These can be detected using the same geophysical techniques
employed in conventional petroleum exploration. Sometimes a CSM operation
is employed in advance of underground coal mining, the extraction of the
gas lessening the risk of explosion during the mining operation.
CSM has become an important source of natural gas in the USA where it
supplies about eight per cent of the nation’s gas demand. In Australia, CSM
is being produced in the Sydney Basin of New South Wales and in the
Bowen and Surat Basins of Queensland. The Queensland CSM flow supplies
30 per cent of the State’s gas demand.

Chapter 5. PERMITS
The ownership of oil and gas resources is usually vested in the government
of the country concerned, although a notable exception is the onshore USA
where the landholder holds the rights. In fact, in the USA, the landowner
can bequeath and/or sell all or a portion of these rights to other parties.
Over time this can lead to a complicated ownership structure, even to the
extent that there might be different owners to the petroleum rights in a
vertical sense — in other words, one individual or group of people may
own the rights from the surface down to, say, 1500 metres while another
group may own the deeper rights.
Any oil company wishing to explore for petroleum must make a contract
or agreement with the owners or their representatives before exploration
can begin. The contract regulates the relationship, and the rights and
obligations of the parties to it. Contracts can be forged between oil
companies and host governments, between oil companies and national
petroleum or energy companies representing host governments and
(in onshore USA) between oil companies and the private owners of the
petroleum rights. Additional agreements are made between oil company
partners, one of which is elected operator of the joint venture.
PERMITS 91
The overriding role of government today is to regulate to provide a level
playing field (tempered, however, in countries that want to promote their own
national oil companies) as well as to set out rules for safe operation and care
of the environment in which the companies work.
Evolution of permit agreements

The traditional arrangement is a concession or lease agreement. Historically
this was an arrangement whereby an oil company was given exclusive
permission by a government to explore a large portion of a country over a
long period of time in return for an agreed percentage of any oil production
that resulted. Often the country concerned had no infrastructure or expertise
and lacked finances, thus the company came in and provided all these
necessities. There are few concession arrangements with governments of
developing nations left today. Those that exist usually include provisions
for government participation, a good example is that between Royal Dutch
Shell and the Government of Brunei Darussalam.
Changes to this system began in Russia with the revolution of 1917

when the Soviets nationalised their industry. In 1938 Mexico did the
same thing. Following World War II the world rapidly moved from
coal-driven to oil-driven industry which naturally increased the demand
for oil. This in turn led to more exploration and production activity, more
competition and a marked change in the dynamics between the oil companies
and the host countries. As the host countries gained more bargaining power
they began to demand an increased share of the profits.
Venezuela introduced a 50:50 share split in 1948, although it retained the

basic form of the concession agreement. Saudi Arabia did the same in 1950
and other Middle East countries followed suit.
In 1952 Iranian leader Mossadeque nationalised the country’s petroleum

industry. Mossadeque was then toppled by a coup which brought the Shah
to power. The Shah retained the nationalisation, but introduced the idea of
international oil companies forming joint ventures with the government.
Italian company AGIP was the first to form this alliance.

In 1960 Indonesia took the industry on a new turn when it introduced the
concept of a Production Sharing Contract (PSC). Essentially this is a system
where a contractor (international oil company) is exclusively appointed to
conduct petroleum operations within a specific contract area for a specific
period, but under stringent conditions and strict supervision. The company
carries all the financial risks, provides capital expenditure, personnel and
expertise. It also deals directly with the national petroleum company which
takes a high percentage of any production. The international company is
allowed to recover costs from production, but often pays royalties before
it can make any profits via its percentage of production agreed with the
national company. The PSC system is now widely used for petroleum
permits around the world, including countries in South East Asia, Africa
and South America.
Further inroads into the former international oil company dominance came
in 1969 when Libya broke the 50:50 split by imposing a 50 per cent tax to
the companies’ half share of production. In effect companies working in
Libya received only 23 per cent of the oil they produced.
The oil crises of the 1970s introduced the concept in Middle East countries
of exacting a 20 per cent royalty plus a tax of 85 per cent on all production
and added the clause that there would be mandatory participation by the
relevant national petroleum company in each production concession. This
system is still widely used throughout the Middle East.
Today, most petroleum permit systems are based on the production

sharing contract or the concession agreement. The overriding point is that
nationalism plays a key role in both.
Permit variations
Concessions versus PSCs
Essentially the principles of PSCs and concession agreements are similar.
The oil companies (contractors in PSCs or licensees in Concessions) have
an exclusive right to explore for and produce hydrocarbons from a given
area over a given period of time. In addition, the oil companies carry all
PERMITS 93
the financial risks and supply all the expertise, personnel and capital
expenditure. Both systems also incorporate the obligation to submit work
programs, progress reports (including all geological and geophysical data,
test results etc) and budgets for approval.
However there are differences between the two systems. Some of the main
ones are:
• In a PSC, oil companies deal with the national petroleum company,

while in a Concession they deal with the host government.
• In a PSC, oil companies agree, and are subject to, a production split after
being allowed to recover costs from initial production. In a Concession
the companies can take all the petroleum produced, but they must pay
a royalty based on a percentage of production. (Royalties are sometimes
incorporated in a PSC arrangement as well).
• In a PSC, oil companies may be asked to market the national oil

company’s share of production.
• In a PSC the oil companies are subject to regular audits.
• In a PSC the title to assets (including equipment and production outlets)

are transferred to the national petroleum company when costs are
recovered. In a Concession the title to assets are returned to the host
government at no cost upon termination of the permit.
The fiscal regimes vary between both systems and between individual
countries using the same system. A general principle has been to have a
taxation level that is generous to oil companies when a country has untried
potential and wishes to entice exploration. When that potential is proven
with discoveries, oil companies wanting to join the hunt are subjected to
a more onerous taxation level. The country then returns to a generous tax
regime when its petroleum province has matured and the government
wants to entice companies to look at less prospective or frontier areas.

Risk Sharing Contracts
This is a variation on the PSC which combines a contractor-type service
agreement with provision for the contractor to supply risk capital for a
share of the rewards. The contractor (oil company) has no ownership rights
to the petroleum produced, but will be paid either in cash or sometimes
in a volume of oil to the same value in lieu of cash. If the latter payment is
used, the value is capped — in other words, the oil company is unable to
benefit from any rise in oil price on world markets.
Although such a deal is onerous, oil companies enter the arrangement to

get access to crude supplies for refineries they have already operating in
that country. The arrangement may include a deal whereby the national
petroleum company supplies feedstock to the refinery.
Risk sharing contracts are used in Argentina, Peru, Venezuela, Brazil

and Ecuador.
Technical Service Agreements

This is an arrangement whereby the international oil company does not
supply any risk capital, but does provide technical services and sometimes
training for a country’s nationals. The company’s payment is on a cost
plus basis unrelated to the success of the venture. Usually it is a flat fee
related to production and the arrangement may also include the right to
buy production.
Companies enter such agreements in places where the production volumes

are large and where they can obtain marketing rights for the downstream
end of the operation.
Technical service agreements are in place in Saudi Arabia, Abu Dhabi,

Mexico, Argentina, Iran and Venezuela.
PERMITS 95
Participation
Most agreements now include participation rights for the national
petroleum company. For instance, the national company may be ‘carried’
through the exploration stage (i.e. the international oil company will pay
the national company’s share of exploration costs) and then be given the
option to participate in the production phase.
The arrangement may specify that the international oil company is able
to recoup payment of the national company’s percentage of exploration
costs through a future share of its production, but often not. Usually,
however, the national company will pay its own way in production and
development costs. Sometimes the international oil company will market
the national company’s share of production on its behalf, but often the
national company is large enough to do that for itself.
Permit applications
The method of application for exploration permits generally falls into two
categories — tender in response to an invitation (or gazettal) and by direct
application at any time.
• Calls to interested parties for gazetted (publicly advertised) areas

are generally made known through government or trade journals
and notify the petroleum industry of a government’s intention
to licence new permits. The size of each permit is specified.
The notice sets a deadline for explorers to consider the areas on offer
and make applications as well as informing them what type of bid is
required. In countries like Australia, Britain and the USA (offshore) the
gazettals will be held at regular intervals — usually once or twice per
year. Often the government will also make available a data package
of geological information about the areas in question to aid potential
bidders in their decision making.
The most common bid application is a work program bid whereby

companies submit an indication of the type and amount of exploration
work (research, surveys and number of wells drilled) they intend to

carry out if their bid is successful. This is accompanied by financial
and technical bona fides. The government department (or national
petroleum company) responsible then makes a decision based on
this tendered information. This is the usual bid system in Australia
and Britain. Generally the company with the largest work program in
terms of expenditure wins the permit and is obligated to carry out, as a
minimum, the work program tendered. In some places, such as onshore
Australia, Papua New Guinea and Canada, the successful applicant
must also come to an agreement with the traditional owners of the land
under Land Rights legislation before the permit award is made final.
The work program system also provides the successful bidder with
an option to renew the permit (after mandatory relinquishment,
usually of 50 per cent of the area) upon expiry of the initial term.
In addition, the regulatory authority has the capacity to waive, vary or
grant a deferment of work programs and/or relinquishment conditions
of the permits.
A second system is a straight out cash bid. Companies bid an

up-front amount and send it, with their bona fides to the regulatory
authority — like a sealed-bid auction. A work program is also submitted,
but this is a secondary consideration. The highest bidder wins. This
system is commonly used offshore USA and only entitles the winner to
one permit term. There is no option to renew.
A combination of the work program and cash bid occurs in some countries
where the company awarded the permit on a work program basis is also
required to pay the host government or national petroleum company a
cash signature bonus to secure the title.
• Direct application involves an eligible company (or person) applying for

a permit to explore land that is not covered by an existing permit, and
that is not the subject of intended government gazettal or excluded for
some other reason, such as being in a national park or other heritage land.
The application can be made at any time.
PERMITS 97
Usually the applicant submits an intended work program along with
financial and technical bona fides. The regulatory authority reserves the
right to grant or refuse the application as well as the right to vary the size
or shape of the area applied for and to set minimum work conditions.
Again, if onshore Australia, traditional owners must be consulted and
an agreement reached before the permit is awarded.
In the special case of onshore USA, companies must make agreements

concerning access to land and payment of fees, as well as future
production royalties, to the owners of the petroleum rights (if different
from the surface owners). To make sure all relevant owners are
contacted, companies employ landmen whose specific job is to trace and
make deals with everyone concerned.
In some jurisdictions, such as Australia and Britain, successful explorers

need to apply for a production licence before being able to develop
any discovery, but usually this is a formality and rarely denied.
The application sets out the proposed development plan and includes a
full environmental study outlining the effects of development on the area
concerned. It also contains native land rights permissions (in Australia,
Papua New Guinea and Canada for instance) if they have not already been
incorporated in the exploration phase.
In PSCs the right to proceed to development is enshrined in the original

agreement, but development plans and environmental studies must be
submitted before a go-ahead is given.
The geological and geophysical data acquired during exploration and

development programs must be submitted to the regulatory authority but,
in general, it remains confidential, unable to be accessed by rival exploration
companies for a number of years (usually two). Any interpretations based
on that data remain confidential, for an average of five years.
All permits (whether granted for exploration or production) require

compliance with applicable rules and regulations, including those relating
to safety specifications, environmental considerations and other technical
requirements, as well as the restoration of the permit area to its original
state (this includes the sea bed offshore) at the end of the permit term.

Tenure and permit sizes
The tenure of permits varies from country to country, but the average
duration for an exploration permit is six years. Some jurisdictions allow
for several renewal periods of five or six years with 50 per cent of the area
concerned relinquished at each renewal. A production permit is generally
granted for an average initial period of 21 years, with renewals granted for
as long as production lasts.
In some jurisdictions, such as offshore Australia, provision is made for

discoveries which are not commercial at the time, but that may become
viable for development in the future. The companies concerned can
apply for a retention lease around the discovery which requires no, or
minimal, work commitments. This lease has an average duration of
five years, with up to two renewals of five years each. However at
each renewal the company must demonstrate why the discovery is
non-commercial and yet still holds the potential for future development.
The actual area encompassed by an exploration permit is usually

determined by the regulatory authority in the country concerned.
The permit boundaries are usually guided by parallels of latitude and
meridians of longitude, but sometimes the boundaries follow geographic
features like rivers and coastlines. In rank wildcat areas where there has
been no previous exploration, the permits can encompass tens of thousands
of square kilometres. In more mature areas the permits are smaller and
the boundaries are irregular, to take into account areas that have been
previously relinquished.
Where geology is relatively well known, the authorities try not to place
a permit boundary through a subsurface structure that has potential to
contain hydrocarbons. A discovery that crosses a permit boundary usually
requires the companies concerned to make a sometimes complicated
unitisation agreement that apportions interests in line with the percentage
interests of each and the proportion of the field on each side of the
boundary.
PERMITS 99
The area of production and retention leases is much smaller than that
of the exploration lease as they encompass only the region immediately
surrounding the discovery. They are excised from the surrounding
exploration permit and again the boundaries are generally based on lines
of latitude and longitude. Usually the company makes a judgment about
the size of the area it wants to apply for, but the ultimate area is determined
by the regulatory authority.
Farm-ins
A farm-in is a way in which a company, individual or group can join a
licensee in an exploration or production permit. The move involves
commercial negotiations between the incoming company (farminee) and
the company, individual or group already in the permit (farminor) which
is willing to farm-out some of its percentage interest.
The entry sometimes involves a straight cash settlement and/or a grant of

company stock, but the more usual case is that the farminee undertakes to
pay for all or some of the work program in the permit to earn a percentage
interest from the farminor. The farminor is thus financially carried through
that particular part of the program.
Most farm-in/farm-out negotiations are done with the knowledge and

permission of other interest holders or joint venturers in the permit.
Nevertheless, any negotiated agreement must have the approval of the
regulatory authority before the new interests can become effective.

Other interests
A member of a consortium which actually pays its percentage of program,
whether it be survey, drilling or development, and enjoys a proportional
part of the resultant benefits, is said to have a working interest.
Other companies may have an override interest which is negotiated with one
or more members of the working consortium and is usually a percentage
of production, in cash or in kind. Usually this occurs when a company
holding the initial licence sells all its working interest to an incoming party
in return for an agreed percentage of the proceeds from any commercial
discovery.
A third type is net profit interest where a company negotiates a percentage

of the net profit from production after deduction of royalties and other
charges. This often has a strict legal framework drawn up, and the
deductions can vary from case to case.
Pipelines
Although pipelines are often a part of a field development program,
licences to build and operate petroleum pipelines are quite separate
from production licences and are usually applied for under separate
legislation. The application for a pipeline permit must include a
detailed map of the proposed route as well as the construction plan.
It must also include environmental studies for all sections of the proposed
route and must have permissions from all affected parties along that route,
including native title and other landholder agreements.
PERMITS 101
Chapter 6.
PUBLIC REPORTS & REPORTING
Stock exchanges
Listing
Petroleum companies, in common with companies of every endeavour,
may choose to list on a stock exchange principally to raise money in the
public market place. Some companies with operations and/or shareholders
in a number of places around the world choose to list with more than
one exchange so they can raise funds in different capital markets and give
shareholders the convenience of trading locally.
Stock exchanges that are often used by resources companies are the London
Stock Exchange (LSE), New York Stock Exchange (NYSE), Australian Stock
Exchange (ASX), Johannesburg Stock Exchange (JSE) and the National
Association of Securities Dealers Automated Quotation — better known as
NASDAQ. Smaller companies sometimes choose a listing on an exchange

that specialises in the smaller end of the market, such as the Alternative
Investment Market (AIM) in London which was begun by the London
Stock Exchange in 1995.
Listing requirements
As part of the listing requirements for all stock exchanges, companies are
required to submit a number of reports about their activities. The general
rule in the UK and Australia is to notify the exchange immediately in order
to inform the market about any inside information that may affect the share
price. This is known as continuous disclosure and may include events such
as petroleum discoveries and takeover bids. Companies are typically also
required to disclose more routine occurrences like a change in directors on
the company board or a change in the registered office address.
One of the contentious issues is the reporting of a company’s petroleum

reserves, and efforts have been made to standardise this around the world.
Different rules have been adopted in different jurisdictions, including
guidelines on how reserves should be calculated and who is authorised
to sign off on the calculations. These rules are designed to give investors
a degree of confidence in the information they receive in the company’s
reports. Unfortunately, the rules are not identical in all jurisdictions,
leading to slight differences and reporting complexities for companies
with listings in multiple jurisdictions.
For listed resources (including petroleum) companies, there are a number

of other regular mandatory reports, including quarterly exploration,
development and production reports, and half-yearly and annual financial
reports (which must be audited).
When drilling wells, smaller petroleum exploration companies will also

need to submit regular drilling reports to meet their continuous disclosure
obligations. These drilling reports usually include details such as well
name, permit location and position in relation to previous wells (if any),
other fields and facilities. In addition, the report should contain the time
and date, any hydrocarbon indications or test results, the depth of the well
and particulars of the company’s interests in the consortium.
PUBLIC REPORTS & REPORTING 103

Drilling reports
There are some basic parameters contained in drilling reports that are
useful indicators of the well outcome.
Type of test
A drill stem test will usually give more information about a potential
reservoir than the small samples obtained in repeat formation tests.
Flow rate
A strong flow indicates good permeability and good reservoir drive
mechanism, but it can be qualified by other factors during the test.
Some wells may have a very strong initial flow rate, but quickly decline if
the reservoir is small. So the duration of the test is important. If it is short
there may not be enough time to indicate whether the flow rate will decline
and how long it will take to stabilise at a certain rate.
In other cases, some horizons may not be very strong-flowing, perhaps

because the formations have been damaged during drilling. That doesn’t
necessarily mean the reservoir is not commercial. Explorers may be able to
make a viable development using different drilling techniques.
Some reports give total or combined flow rates from several reservoir
horizons which can be misleading when trying to draw conclusions about
the size and potential of the find.
Choke size
If the reservoir pressure is high, an open hole test (one where casing is not
used) or a large choke size will allow a large flow, whereas a small choke
size will restrict flow from the same reservoir.

Fluid recovery
If the flow contains water, it can mean the test zone is at or near the oil/
water contact. This may indicate a thin reservoir pay if the test has been
made at the top of the formation.
Condensate values recorded with a gas flow are usually an enhancement

of the commercial prospects of the find.
Interval tested
If the test is over a thick horizon and it is all pay, a good flow can indicate
a sizeable reservoir.
Pressure build-up
Some tests are run for a time, stopped for a while and then resumed.
If the flow during the second test is as strong as the first it indicates
there is rapid pressure build-up and a strong reservoir drive. If the
second flow is not as strong it can mean there is a slow pressure
build-up and indicate the reservoir zone is thin or the drive mechanism
is weak.
Report assessment
All the above parameters need to be looked at together when assessing a
well result. No single factor can pronounce or dismiss viability. In addition,
most discoveries need at least one and probably two or three appraisal
wells before an accurate commercial assessment can be made. Good results
in a wildcat do not necessarily mean a commercial field has been found.

Examples
“Zephyr-1 exploration well tested lower Cretaceous age sands over

the interval 4939m – 4942.7m using a ½ inch choke. The test recovered
80 barrels of fluid during a three-hour period. The fluid contained 70 barrels
of muddy water and 20 barrels of oil/oil-water emulsion. Testing of other
zones of interest is continuing.”
This report identifies the reservoir under test is in lower Cretaceous rocks,
so knowledge of other wells in the area will help the reader decide whether
it is the usual reservoir in the region, or a potentially interesting new zone.
However the 3.7 metre test interval gives no indication of the potential net
reservoir pay zone.
A ½ inch choke indicates the diameter of the test orifice and a recovery of
80 barrels in three hours indicates the flow, although it does not necessarily
translate to 640 barrels a day in practice. The fluid composition indicates
there is little oil in that zone, although its presence at all could be noted as
encouraging for further tests in other zones in the well.
“Magpie-26, an oil and gas appraisal well located 1km southwest of

Magpie-4 and 63km due east of the company’s gas plant, has made a new
pool discovery of oil in basal Jurassic sediments. A cased hole test of the
interval 1981.8m–1990.0m flowed 46 degrees API gravity oil at 1500 BOPD
and gas at 5600 cubic metres a day through a 3/8 inch choke. The well will
be completed as an oil producer from this zone. A second zone identified
from electric logs in the overlying upper Jurassic sands will be completed at
a later date. The proximity of the discovery to adjacent infrastructure means
that production from this well can be quickly brought into production.”

The well number in this report indicates it is some time since the original
find was made and makes the discovery of a new pool at this stage
something of a surprise. The worth of the well is spelt out by the statement
that it will be completed as an oil producer. A cased hole means the well
was cased and then perforated in the test zone.
The oil, at 46 degrees API gravity, is a fairly light variety and it flowed at
a good rate of 1500 barrels a day. The gas flow at 5600 cubic metres a day
is minor.
The reference to a second zone identified by logs and due for completion
later, indicates there is a full knowledge of the region from other wells
and fields nearby which can be correlated across to the discovery with
confidence in its accuracy. However the second zone would be tested
before an attempt was made to bring it on stream.
“The Jellyfish-2 well, 0.5km east of Jellyfish-1 discovery has reached a

total depth of 2750m KB. Electric logs were run to TD and a wireline test
recovered the following samples:
2424m 1.6 cu m gas

10.0 litres of 38 degree API oil
3.0 litres water/mud filtrate
2440m 0.2 cu m gas
0.3 litres oil
20.0 litres water/mud filtrate
2450m 26.0 litres water/mud filtrate
2430m 1.1 cu m gas
5.0 litres oil
10.0 litres mud/water filtrate
2415m 3.5 cu m gas
0.5 litres 57 degree API condensate
Final electric logs were run prior to abandoning the well.”

This report identifies Jellyfish-2 as an appraisal or confirmation well that
was drilled half a kilometre away from the discovery well to a depth of
2507 metres below the level of the kelly bushing (KB) which is located on the
floor of the drilling rig. The KB reference is mostly used in offshore wells,
so to work out the depth of the well below the sea bed it is necessary to
know the water depth and the height of the drill floor above sea surface.
Wireline tests are small samples collected in a test tool lowered down the
well and they represent specific points only. Nevertheless, the tests indicate
the presence of a hydrocarbon column or zone in the well with a gross pay
of at least 25 metres between 2415 metres and 2440 metres. The column has
gas/condensate at the top and oil beneath, plus a water column below.
There is no real indication from these samples of potential flow rates,

although pressure data (not given in the report) would help in this regard.
The electric logs would indicate whether the reservoir was continuous or
whether it was broken by impervious shale zones. The logs would also give
some indication of the position of the gas/oil and the oil/water contacts.
If the area is well known from nearby fields, this information may be
enough to make a decision about viability. If not, a drill stem test and/or
production test would be needed.
The reference to abandoning the well after final logging is not unusual
offshore. It does not necessarily mean the discovery is judged non-commercial
because often exploration wells are not used as final producers.
More information
Other pieces of information about the economics of a discovery can be
gleaned from the more descriptive quarterly and annual reports.
• Discoveries on land generally have lower production and operating

costs than those offshore (especially in deep water).
• Discoveries close to existing infrastructure enhance the economics of

development.
• Shallow reservoirs are usually less costly to develop than deeper

reservoirs because of the need for less drill pipe and casing, and the
shorter time required for drilling development wells.

• Higher production costs are usually associated with high temperature
and high pressure reservoirs.
• Low permeability reservoirs can be more expensive to produce because

they require artificial stimulation to increase permeability.
• Friable reservoir rock can crumble easily and hence require special
completion tubing to stop sand clogging the well perforations.
• The thicker the reservoir sands, the better the likely reservoir pressure
and flow rate. In addition, thin reservoirs often require more difficult
and expensive horizontal drilling techniques.
• Oil discoveries are generally preferred because oil can always be sold
on the world market. Gas is most valuable when the discovery is close
to a potential market or existing infrastructure. Isolated gas discoveries,
unless huge, can be virtually worthless.
• Light crudes are preferred to heavy crudes. The heavy crudes are often
more viscous than lighter crudes and are harder to produce. Heavy
crudes usually require more extensive refining and attract lower prices
in the market place.
• Sour crudes (containing hydrogen sulphide) are more difficult to produce

in an operational sense. They are toxic and corrosive and require extra
equipment and increase the costs of development.
• Similarly, operational difficulties and costs are increased if the crude or

the natural gas discovery contains high levels of inert gases like carbon
dioxide and nitrogen which must be removed during processing.
• Condensate associated with a gas discovery can be sold at an attractive

margin, hence the higher the volume of natural gas liquids recovered
with the gas, the better the economics of a field.
• High oil prices improve the viability of even the most technically
difficult discoveries, whereas discoveries made in, say, very deep water
are likely to be marginal or uneconomic in times of low oil prices.

Chapter 7.
TAXATION, PRICING
& MARKETING
Taxation
There are numerous types and rates of taxation on petroleum around the
world, but the basic principle is to try and reconcile two objectives that
often appear to be in conflict. The tax system is an attempt to maximise
a government’s revenue from a depletable resource and yet preserve
an appropriate (but not excessive) incentive for an explorer to find and
develop those resources.
Usually a government owns the rights to the resources and relies on the
private sector for discovery and development. So when setting tax rates,
the government must understand the effect of after-tax incentives as
perceived by private-sector explorers. On the one hand, under-taxation

is not a good way to promote development because excessive incentives
will mean the government gains unnecessarily low revenues. Conversely,
over-taxation can be even less efficient because governments may lose oil
and revenues from small and/or marginal fields. Equally, over-taxation
may gratuitously increase geological risk so that wildcatting and other
exploration is discouraged altogether.
Petroleum taxes are levied in addition to the normal business company

taxes and apply to crude oil, natural gas and natural gas liquids like LPG
as well as to refined products. They come in various forms, but the main
fiscal regimes around the world include one or more of the following:
• Royalties — these are paid to the owner of the petroleum rights, usually
a government, but can be private owners in onshore USA. Royalties are
a percentage of the gross wellhead value of production and are usually
charged at a fixed rate (typically 10 per cent–12.5 per cent). However
sometimes they can be calculated on a sliding scale depending on the
world oil price.
• Excise — this is a tax levied as a percentage of price, the rate set as a

volume-weighted average realised price. For instance an annual
production rate of up to 500 million litres (3.146 million barrels) of
crude oil may be levied at, say, three per cent excise. A higher annual
production of more than 800 million litres (5.034 million barrels) may
be levied at a rate of 35 per cent excise. There will be other rates set for
volumes of production in between these values.
Sometimes, as an incentive to develop smaller fields, low production

rates (or production of a nominated volume) will be granted excise-free
status. In other regimes condensate production marketed separately
from crude oil may be granted an excise exemption.
A separate excise can be levied on both imports and domestic production

of petroleum products like petrol, diesel and aviation fuel.
TAXATION, PRICING & MARKETING 111

• Petroleum Resource Rent Tax (PRRT) — this is a tax on oil company
profits arising from crude oil and natural gas production. It is usually
levied before normal company taxation, but PRRT payments are allowed
as a deduction for company tax purposes.
Generally the tax is applied separately to each individual production

project and not to aggregate company results. However companies are
allowed to deduct development expenditure for their projects as well as
their exploration costs incurred from all activities in a country’s PRRT
regime areas.
The threshold to trigger the tax is usually related to some well-known

rate such as a government bond rate. The tax itself is set at a fixed
amount. In Australia, for instance it is 40 per cent. This rate is applied to
net cash flows after returns on project outlays (determined by reference
to actual expenditures) that exceed the threshold level.
• Production Sharing Contracts — this type of fiscal regime is now the

most common around the world, but the applicable rates and percentages
vary considerably from country to country. The effective tax rates
are embedded within the regime although sometimes a separate royalty
payment applies as well. An average PSC has a term of 30 years, usually
with a termination upon request after about six years if no discovery has
been made and an automatic termination after about 10 years without
a find.
The sharing process begins with a given percentage of any production

(say 10 per cent) being designated ‘first tranche petroleum’. This
percentage rises (say, to 20 per cent) after a set period of production
(perhaps five years). First tranche petroleum is shared by the contractor
(oil company) and the host government or its designated authority, such
as the national energy company, at ratios that vary with production
rates. In this example it effectively means a flat royalty of between five
per cent and seven per cent is paid to the host government during the
first five years of production and between 10 per cent and 14 per cent
after that.

Once this figure has been calculated, contractors are allowed to
recover investment credits equalling the quantity of production
equivalent to say, 127 per cent of the exploration and capital costs
incurred in each calendar year. Upon recovery of all these costs, the
remaining petroleum production is shared so that the host government
receives a percentage (say 50 per cent) of flows between, say, 0 and
50,000 barrels a day; maybe 60 per cent of flows between, say, 50,000
and 150,000 barrels a day; and an even higher percentage, perhaps
70 per cent, of flows greater than 150,000 barrels a day.
• Signature bonus — in some countries a company must pay the

government a flat one-off amount known as a signature bonus fee to
secure an exploration permit. Other countries apply what is known as
an area fee which is calculated at a rate per square kilometre of the area
of a company’s production permit. Such fees are effectively a front-end
non-refundable tax.
• Refinery throughput tax — this is a downstream tax that is calculated

at a given value per barrel of crude oil that is processed in the refinery.
• Carbon tax — a relatively new tax, this has the backing of the
environmental lobby and is gaining acceptance in a number of
countries, particularly in Europe, following the Kyoto Protocol
and the ongoing debate about curbing greenhouse gas emissions.
Not confined to the petroleum industry, the tax is levied on emissions
of carbon dioxide and calculated per standard cubic metre of gas
burned or released directly into the air from production facilities and
transportation of raw material and product.

Pricing and Marketing
Crude oil and condensate
Pricing and marketing of crude oil and condensate has two broad
components — assaying and trading.
No two crude oils or condensates are exactly the same and the first thing
a producer wants to know about a new discovery is the composition of
the oil — in case there are any toxic components that need to be countered
as part of a company’s health and safety program — and its value in
the market place. The preliminary step is an elemental analysis which is
carried out in a laboratory and is known as an assay.
It involves a miniature form of the refinery distillation process where the

crude oil or condensate sample (usually 5–20 litres) is heated and the
various fractions are separated out at their different boiling points. A note
is taken of the percentage volume of each fraction within the sample before
they undergo individual testing. The analyses are performed to determine
such physical properties as freeze and pour points, smoke points and flash
points.
Assays can be of varying complexity, but are usually one of three types
— mini, intermediate and marketing.
• A mini assay is usually done on a new discovery at the exploration phase

prior to any production plans. This test provides a broad indication of
the type and quality of the crude.
• The intermediate assay involves sufficient testing of the fractions to

indicate the quality and quantity of products contained in the sample.
For a new crude or condensate, this assay gives the marketers an idea of
which refiners might find the feedstock a suitable input for their particular
refineries. Sometimes the intermediate assay is also done on crudes that
have been on stream for a while as a check to see if the composition has
changed since production began.

• A full marketing assay provides a very detailed analysis and involves
a large number of boiling point fractions. The assay sets out all the
detail a prospective buyer needs to determine whether the crude or
condensate will match a particular refinery configuration.
The crude oil/condensate assay has become a vital basis for sales
promotion. Competition is strong, particularly in the realm of light, low
sulphur (sweet) crudes as many are vying for the same markets where
the accent is on obtaining feedstocks suitable for maximising the yield
of transport fuels. Hence producers ask the assay laboratories to look
for the fractions and characteristics within their crudes and condensates
that refiners value highly. The information also indicates the potential for
blending various feedstocks to provide optimum qualities.
In many cases, samples of a new crude or condensate will also be given

to prospective buyers so they can perform their own assays to confirm
suitability.
Trading of crude and condensate is done at prices commercially negotiated

between buyers and sellers. Crudes and condensates are generally priced
in relation to what is known as a marker crude, which is a representative
type for a particular region. It is picked because of its characteristics
and because it has a significant volume of production traded on the
international market. Malaysian Tapis crude is the marker for the Southeast
Asian/Australasian region, while UK Brent crude is the usual marker for
the North Sea/European region. Other markers include Dubai crude for
the Middle East and West Texas Intermediate for the USA.
As an example, Tapis crude contains a more or less equal quantity of

naphtha, jet/kerosene, gas, oil and residue fractions i.e. 25 per cent of
each. The crude has a gross product worth (GPW) which is calculated
by multiplying the weighted average of each product by that product’s
price. Other crude oils, by comparison, contain varying amounts of these
products and therefore have different GPWs. Crude oils which yield large
amounts of the premium products (middle distillates like jet fuel and diesel
fuel) have a greater GPW and are valued higher in the market than crudes

which yield more of the lower value products like fuel oils. Therefore
light sweet crude oils, such as Gippsland (Bass Strait, Victoria) and Cossack
(offshore Western Australia) which yield lots of transport fuels, are valued
higher than the heavier sourer crudes from the Middle East which contain
more fuel oil and residues and also more contaminants, such as sulphur
and nitrogen.
Oil and condensate can be sold on the spot market (in which cargoes
are priced individually at the market rate at the time of sale) or on term
contracts (where shipments of a particular crude are contracted and sold to
one buyer or group of buyers for a fixed term at a negotiated price set at a
differential to the floating price of a bench mark crude).
In fact, crude oil can be priced, bought and sold anywhere along its supply
chain from the point of loading, through the transportation period and the
refining process to the individual end products stage. The end buyer of
crude and condensate is the refiner, but a shipment can be bought and
on-sold by oil traders or intermediaries before the physical crude shipment
reaches the refinery. Oil producers must be able to sell their crude oil
otherwise their storage will fill up (tank tops) and they will be forced to
shut in production, which is a very costly process. At times when demand
for crude is less than the supply available, producers find themselves in
this predicament and therefore oil shipments that are unsold become
known as distressed cargoes. To make a sale, the producer or trader must
take a loss on the deal.
During the 1980s the practice of forward selling crude and condensate
became a significant marketing strategy and established a futures market
in the commodity. This involves producers offering crude for sale which
they will not produce from their fields for several months or more, giving
rise to the term paper crude.
Buyers (refiners or traders) negotiate a price which they believe will be

competitive when the physical crude is available. This involves a degree of
risk-taking and judgment about future world crude prices. The practice is
known as hedging. The price that producers and buyers negotiate may prove

Boiling Point
-200 -10 0 30 150 200 250 350 380 520 1000+
Range ˚C
General Light Middle Heavy

Gases Residue
Classification Fraction Fraction Fraction
Fuel
Gases Gasolines Asphaltenes
light heavy Oils
dry wet
Gas Oils
Main Components
LPG Kerosenes Lubricating Oils
TAXATION, PRICING & MARKETING

Naphthas
Hydrocarbon C4 and
Pentane Plus Liquid Solid
Range lower
C1 C4 C5 C8 C14 C16 C60
US Bureau of Mines
Paraffinic – Paraffinic Paraffinic – Naphthenic Naphthenic – Paraffinic Naphthenic – Naphthenic
Correlation Index
Classification of crude oil and its components
Base Classification Paraffinic (Light) Mixed (Aromatic) Naphthenic (Heavy) Asphaltic
Typical API
38˚–47˚ 37˚–30˚ 25˚–15˚
Gravity Range
Specific Gravity 0.835–0.800 0.840–0.876 0.900–0.970
Note: The classifications shown in this table are intended to be representative, and no precise demarcations are implied
117
to be above or below the world price at the time of physical production of
the crude. Either way the hedging deal guarantees sale for some or all of a
producer’s production — which is particularly important for small producers
who want to safeguard an income stream in times of volatile world prices
— while refiners are guaranteed the most suitable crude for their needs well
in advance. Both parties are able to plan their corporate future with a greater
degree of certainty.
Natural gas
Natural gas leaving a treatment facility to be sold into the retail market
(sales gas) usually has strict specifications in terms of its content that are
demanded by the buyer. The gas is virtually 100 per cent methane, but
there are traces of other compounds. The specifications set limitations
(in parts per million) on the amounts of these other ingredients, such as
ethane, propane, butane and inert gases like nitrogen and carbon dioxide.
Sometimes higher amounts of ethane, propane and butane are left in the
gas if a dedicated industrial customer wants to extract them for their
own use.
The price paid for the sales gas by consumers typically comprises four
main parts:
• Ex-plant price is the price at which producers sell their gas.
• Transmission cost is the cost of transporting gas to main market centres

through high-pressure pipelines, including a return for the pipeline
owner.
• Distribution cost is the cost of transporting gas to the end consumer

through low-pressure pipelines, including a return for the pipeline
owner.
• Retail margin is the margin obtained by the seller of gas.

Ex-plant price
These prices are set by negotiations between gas producers and gas buyers
and are usually controlled by market forces rather than by regulation.
Gas buyers may be gas utilities that then on-sell the gas to consumers.
Sometimes large gas users buy gas directly from the producers.
Some typical characteristics of gas contracts include:
• Long terms, sometimes 10–20 years.
• Maximum quantity provisions.
• Minimum quantity provisions (‘take or pay’ i.e. buyers contract to take

a certain volume and if they don’t, they pay for the contract volume
anyway).
• Pricing clauses that enable regular renegotiation of prices between the

parties.
• Price arbitration provisions that enable an arbitrator to set a price if

buyers and sellers cannot agree at a renegotiation.
Transmission cost
Gas is usually transported from the producing basins to major markets
via large diameter, high-pressure pipelines, sometimes referred to as trunk
pipelines. In most cases trunk lines represent natural monopolies, i.e. it is
not economically efficient to duplicate them and therefore they are often
subject to regulation to ensure that monopoly rents are not extracted.
Often there are trunkline access provisions established by regulatory

authorities to enable third parties to negotiate access to pipeline
transmission systems on fair and reasonable commercial terms.
In addition, transmission tariffs are usually approved by the regulator,
although the party seeking access is free to accept a set reference tariff or try
to negotiate for a lesser transmission fee with the pipeline operator.

Distribution cost
Typically, gas is transported from the point where the high-pressure line
ends (often referred to as the city gate) to individual gas users via a grid of
low-pressure pipelines referred to as a distribution system. As with trunk
pipelines, distribution systems are usually natural monopolies, although
there may be several different distributors serving different sectors of a
city or metropolitan area. Again this area is often subject to regulation.
Retail margin
Usually consumers buy gas from a retail company, often privately owned
and competing with other gas retailers. (The exception may be a large
customer able to buy its gas direct from the producer). Retailers charge a
margin which is calculated as a percentage of the sum of the wholesale price
of gas plus network charges that include transmission and distribution
charges, as well as the cost of metering individual consumers.
Liquefied natural gas (LNG)

Most LNG is produced in countries that have large uncommercialised gas
reserves with limited domestic market opportunities. The major buyers
and end-users of LNG are electric power and gas utility companies in
the so-called Pacific and Atlantic Basins. In most cases LNG is an export
commodity. The projects are very large and capital intensive involving
dedicated gas fields feeding by pipelines into liquefaction facilities on the
coast, and special LNG vessels to carry the product to coastal reception
terminals in the importing country, where it is re-gasified and used in the
same way as pipelined natural gas.
There are exceptions where LNG plants are quite small and built in
isolated, inland locations. An example is the plant at Karratha in Western
Australia which is fed by gas from the North West Shelf fields. The LNG
is taken by special road trains (trucks) to be used for power generation at
remote towns such as Derby and Fitzroy Crossing in the Kimberley region
of northern Western Australia. However this type of operation is likely to
remain a niche application in the total LNG picture.

Most LNG projects are developed to supply long-term contracts
(15–25 years) hence a large quantity of proven gas reserves is required to
secure the supply. For instance, an LNG plant built with two processing
trains to produce a total of 8 million tonnes of LNG a year will require
about 8 trillion cubic feet of proven gas reserves to support the production
and delivery of LNG to buyers over a 20 year contract life.
Market place
Globally, LNG is a rapidly growing market, firstly because of continuing
Asian demand and secondly because there is now a marked and steady
increase in USA and European demand.
In Asia the Japanese (and Korean) market is already large and growing
steadily. However it is the demand for LNG in China that is driving
the speed and size of new increases in the overall Asian market.
This has come about because of environmental problems surrounding
China’s traditional use of coal, plus the high cost and difficult logistics of
transporting coal and indigenous gas from the country’s west to industrial
centres in the east. Hence importing LNG has become a viable option.
The other big growth area is the Atlantic Basin — particularly the east
coast and Gulf coast of the USA, but also Europe and notably the UK.
In general the Pacific Basin market (including the USA west coast) is catered
for by Australian/Asian suppliers, while Middle East/African suppliers
cater to the Atlantic Basin and the Mediterranean region. Some exceptions
to this are a contract negotiated by Yemen to supply Korea and another
for Oman to supply Japan. This trend is expected to continue as the LNG
market becomes more global. The increasing need for power generation
fuel is a large driver for the growth in demand for LNG, especially in the
Asian region.

LNG train, North West Shelf Project, Western Australia
Decreasing costs
The real cost of LNG has been falling since the early 1990s. The first LNG
carriers had capacities of 125,000 cubic metres and less. Now vessels of
165,000 cubic metres capacity are becoming the norm and some are being
built with a capacity up to 220,000 cubic metres. In addition, the capacity
of LNG production trains has markedly increased from about 2.7 million
tonnes per year in the mid 1980s to 6 million tonnes a year per train today.
Overall, the economies of scale that result from these capacity increases have
reduced the cost of the LNG product. However, partially offsetting this is
the remoteness and/or harshness of the new producing regions such as
Sakhalin, a Russian island north of Japan.
Terminals are also becoming cheaper to build because of technological

advances, modularisation of components and competition between
construction groups. And there is increasing competition on the supply
side as more and more players enter the market.
As a consequence LNG can now compete with pipeline gas where the
pipeline is more than 1500–2000 kilometres long. For example, in the UK,
the Southern North Sea gas fields have depleted to the extent that Britain
has become a net importer of gas, but as the country is located at the far
end of the European pipeline system, LNG has become a viable competitor
for the still growing UK market.

LNG storage tanks, North West Shelf Project, Western Australia
Another example is the USA. Although there are some pipelines connecting
the east and west USA states, the connection is not across the full network.
Thus the east and west USA are really two different markets and both can
be served, at least in part, by LNG coming in from the Atlantic and Pacific
Basins respectively.
Pricing mechanisms
The export price of LNG has historically been linked to the price of crude oil
on international markets. In the main north Asian markets, LNG competes
with alternative fuels like diesel, naphtha and fuel oil. An oil price marker
called the Japan Crude Cocktail (JCC) is used which relates to the average
price of crude oil imported into Japan in a particular month. Other factors
taken into account in the price formula are the cost of insurance and the
freight costs for landing fuels in Japan.
In the USA, UK and Europe the main competitor for LNG is pipeline gas
and hence this has become a significant base for LNG price negotiations.
There is a need to match the daily market prices of natural gas traded on
well known commodity exchanges like the New York Mercantile Exchange
(NYMEX).

‘Northwest Swan’ LNG carrier
LNG price formulae can be fixed for the life of the contract or reviewed
periodically by mutual agreement, taking into consideration changing
market conditions. There is also a small, but growing spot market in
LNG, particularly during periods of peak demand, such as the northern
hemisphere winter. The spot market makes up about six per cent of the
world LNG trade and some LNG vessels are being built to cater exclusively
for it.
LNG can be priced on FOB (free on board) terms where the buyer arranges
the shipping, or CIF (cost including freight), sometimes also referred to
as ex-ship terms, where the seller provides the transport arrangements.
The difference in price between the two arrangements relates to the cost of
ocean freight from the loading to the discharge point.
Liquefied Petroleum Gas (LPG)

LPG refers primarily to the two gases, butane and propane. Butane tends
to be more associated with oil production while more propane is produced
with natural gas. Butane is liquid at a pressure of 4 atmospheres or
a temperature of -4 degrees C. Propane is liquid at a pressure of
14 atmospheres or a temperature of -43 degrees C.

Uses
The primary use of LPG is as an automotive fuel, favoured because it has
lower sulphur dioxide and nitrogen oxides than petrol and diesel fuel.
Japan is traditionally a large user, although the market there has plateaued
in the last few years. Australia is one of the largest users of LPG as an
automotive fuel in the world, per head of population. Western Europe is
also a major market, largely because of the environmental considerations.
Manufacturers are now designing vehicles especially to run on LPG and
incorporating the gas cylinders into a fuel tank rather than taking up extra
space in the boot.
A secondary use of LPG is as a feedstock for the petrochemical industry

and a tertiary use is as an industrial fuel.
There is also domestic use of the commodity in heating and cooking,

particularly in regions not served by natural gas. In this sense LPG can be
looked upon as a ‘frontier’ commodity that is used in remote areas until
the demand becomes high enough to justify construction of natural gas
pipelines into the region. In fact, LPG can also be reticulated and, with a
few minor adjustments to the hardware (burners etc), the LPG reticulation
system can be used when natural gas arrives.
LPG for the leisure market (camping gas) is very strong.
In the USA the LPG mix in a cylinder is generally 90 per cent propane
and 10 per cent butane, while in Europe the balance is 80 per cent butane
and 20 per cent propane. This preference has to do with the individual
properties of the two gases. For instance, propane vapourises at lower
temperature than butane and is more suitable for cold weather starts.
(As an aside, butane is used for cigarette lighters because it requires very
little pressure for the liquid phase.)
In Australia the LPG distributed in cylinders and used for domestic heating
and cooling contains a high proportion of propane. Automotive LPG can
obtain up to 50 per cent butane with the remainder being predominantly
propane under Australian national fuel standard legislation.

Market place
Butane and propane are sold as separate commodities on world markets
and each requires specialised handling. LPG carriers can take both in one
cargo using a refrigeration system, but the on-board tanks require separate
temperature control to keep each in its liquid phase. Any boil-off gas is
recompressed into a liquid and reintroduced to the respective tanks.
The standard carrier size for an LPG carrier is 45,000 tonnes and the
vessel is known as a VLGC (very large gas carrier). Loading and reception
terminals are built to match this capacity. Any increase in trade is more
likely to result in an increased number of vessels rather than construction
of larger individual vessels.
World production of LPG is likely to rise in the short to medium term

because of the increase in natural gas production (especially the huge
600 trillion cubic feet of reserves coming on stream in Qatar). There is also
likely to be a substantial ongoing demand for LPG. China in particular is
seen as an important emerging market. Although that country is increasing
its intake of LNG, the terminals and distribution networks for natural gas
are around the coastal areas. LPG will still be required in the inland regions.
LPG is closely associated with the production of oil and gas. If the LPG
cannot be sold, the whole production system is halted. Hence it is important
to find and maintain a steady outlet for LPG. Regular and predictable
offtake is achieved by setting supply contracts for terms of one to two
years with reliable and flexible buyers.
However, in recent years the growing Chinese demand is also leading to

an increase in spot market sales.
Pricing mechanisms
The LPG price tracks other hydrocarbon prices and is seasonal, especially
in the northern hemisphere where winter cold increases the demand for
heating fuel.

There are two main marketing divisions in the world for LPG — west of
Suez and east of Suez.
West of Suez (USA and Europe) LPG is priced against the liquid market,
i.e. the price of competitive crude oil and product prices.
East of Suez (Asia) the LPG price tends to be based on a Saudi Arabian-
Japanese producer-buyer price agreement. This latter arrangement, known
as the Saudi Aramco contract price, is struck every month and has become
a world marker. The price for propane and butane is set separately. Other
buyers and sellers then take these prices as the lead.
LPG sold into Japan is usually on an FOB basis because Japan has a fleet
of specialised LPG carriers. The trade with China is on CIF terms and the
LPG is carried in ships owned by international LPG traders.

Crude oil properties
Comparison of BHP Billiton crudes with world marker crudes
North West Shelf
Liverpool Bay
Intermediate
Condensate
West Texas
Gippsland
CRUDE OIL
Mad Dog
Saharan
Cossack
Calypso
Griffin
Brent
Tapis
Algeria, North Africa
Bass Strait, Australia
Gulf of Mexico, USA

Northwest Australia
Northwest Australia
Northwest Australia
North Sea, UK
Irish Sea, UK
ORIGIN
Malaysia
Trinidad
USA
Key Properties
API Gravity degrees API 49.3 47.7 54.0 60.0 45.7 29.0 44.7 27.7 45.3 38.7 37.9
Sulphur Wgt% 0.089 0.045 0.014 0.004 0.097 0.609 0.25 2.52 0.029 0.45 0.45
Pour point degrees C -24 -12 -30 -60 -42 -39 0 -28 12 -24 -3
Viscosity @
Centistokes1 1.7 1.9 1.3 0.8 2.4 7.7 4.9 32.9 3.5 5.5 5.6
20˚C
UOP K factor2 11.9 11.9 12.2 12 11.9 11.7 12.1 11.7 12.2 11.9 11.9
Carbon
Wgt% 0.30 0.35 0.10 <0.1 0.85 2.6 0.94 6.7 0.45 1.55 2.10
Residue
3
Nickel ppm 0.1 0.9 0.5 <0.1 0.3 15 <0.1 29 1.7 7 1.5
Vanadium ppm <0.1 <0.1 <0.1 <0.1 <0.1 78 <0.1 103 <0.1 6 7.7
Yields vol%
C4 minus4 <20˚C 2.1 1.4 3.9 5.2 5.1 0.1 3.4 1.7 3.1 2.9 4.2
Naphtha 20-165˚C 44.0 40.1 47.6 68.6 33.4 10.9 32.3 15.8 27.4 26.9 25.0
Jet/kerosene 165-230˚C 12.7 15.4 20.4 13.5 16.1 11.0 11.9 11.0 16.4 13.8 12.2
Diesel 230-360˚C 23.2 22.9 20.9 12.2 22.9 36.0 24.1 23.1 30.9 23.2 23.2
Long residue5
360˚C+ 16.1 17.0 6.7 0.5 22.5 42.0 28.3 48.4 22.2 33.2 35.4
(LSWR)
Short residue 540˚C+ 1.9 3.2 0.5 0 6.2 12.6 7.2 27.5 3.4 12.1 12.6
Comparison table of crude oil properties:

1) Centistoke is a unit of viscosity
2) UOPK or United Oil Products K Factor is a characterisation for various crudes. The values usually range
between 11 and 13. The lower the K factor the more paraffinic the crude
3) ppm signifies parts per million
4) C4 minus signifies the hydrocarbon gases methane, ethane, propane and butane. Propane and butane
are more commonly known as LPG
5) LSWR is low sulphur waxy residue i.e. what is left after distillation up to 360 degrees Celsius

Chapter 8.
HEALTH, SAFETY,
ENVIRONMENT & COMMUNITY
The petroleum industry has been acutely aware of environmental issues for
many decades. Geologists, geophysicists and design/production engineers
are keen observers. Their training has taught them to respect and conserve
the natural phenomena which surround them every time they venture
into the field to initiate and build a project. As a consequence, through
their work the petroleum industry has been taking steps to minimise its
disturbance to flora and fauna, both on and offshore, for a number of years
prior to the recent wave of public concern.
It was realised as early as the 1950s, for instance, that using dynamite as
a wave-generating source for seismic surveys had the potential to cause
problems, such as the cratering of surface limestones. While dynamite is still
used in some regions of the world, the industry has developed alternative
and generally safer, more sophisticated techniques for supplying the
seismic source in many areas.
HEALTH, SAFETY, ENVIRONMENT & COMMUNITY 129

During the 1960s in Australia, the oil search on Barrow Island off the
Western Australian coast led to the early industry environmental
protection initiative of contracting a professional naturalist as a consultant
to the exploration program and the field development that followed.
Today, as preparations are being made on the island to build new facilities
to liquefy gas fed in from the offshore Gorgon and Jansz fields, Barrow
has become a classic example of the industry’s ability to explore for and
produce petroleum without serious or lasting disturbance to the delicate
ecosystem of the region.
Another recent example is the development of oil and gas fields in Liverpool
Bay in the United Kingdom. The near-shore facilities are close to densely
populated sections of both the Welsh and English coasts and have been
the focus of very tight environmental controls. These include measures to
immediately combat any oil spill, no matter how small, and dealing with the
odour caused by natural mercaptans (strong-smelling compounds of carbon,
hydrogen and sulphur) in the natural gas. A well-managed and professionally-
staffed community and education centre was established to inform and
maintain contact with the local population.
More than ever, the modern petroleum industry is aware of the need to pay
close attention to environmental matters and safety in its operations and to
work with the local and broader communities in which it operates. Public
concern and government legislation dictates that an increasing amount of
detailed research and data collation is carried out to produce environmental
impact assessments prior to any oil or gas program or project going ahead,
onshore or offshore. There is also a continual monitoring of systems and
procedures during the exploration, appraisal and construction phases as
well as during a project’s working life. In addition, as part of a project’s
design and implementation phase there must be detailed consideration
given to the removal of exploration and/or production equipment, and to
the restoration of sites once a program has been completed or fields have
been depleted. Decommissioning plans are now a standard part of any
project design.

Today the concept of environmental care has broadened to include all
aspects of sustainable development. A petroleum company’s operations are
continuously measured against self-imposed Health, Safety, Environment
and Community (HSEC) standards established as an integral part of the
overall business plan. Many companies conduct regular audits of these
standards on all of their sites, publicising the results so that they are fully
transparent and accountable. Zero harm is the ultimate aim in any operation.
Health
Employee health and associated occupational illness, such as noise-induced
hearing loss, respiratory problems and long-term chronic exposure to low-
level chemical substances, is a key focus of health management. The aim
is to remove or avoid hazards through engineering or design solutions
wherever possible. As a final line of defence, this approach includes
continued improvement of personal protective equipment. It also involves
establishing monitoring and reporting procedures which point to areas of
potential harm so that measures can be taken to mitigate exposure.
In some instances the industry (and individual company) standards and

medical surveillance are more stringent than those set by regulatory
authorities.
Many companies also work with public authorities to implement

community health programs where diseases like malaria, tuberculosis and
HIV/AIDS may impact the workforce.
Safety
The public expects that risks from industrial activities like petroleum
exploration, production, refining and distribution will be regulated
and controlled. People should be able to work in an environment that
assures their safety and wellbeing. Many countries have safety regulating

authorities to provide an independent assurance to society, governments
and the industry itself that companies have identified risks to health
and safety and have implemented proper measures to control the risks.
The ‘control’ can be exercised in a number of ways. At one end of the

spectrum it can be that licences to operate are not issued until certain
prescribed safety procedures and guarantees are carried out by the
companies concerned. At the other end of the scale is the so called safety
case regime where the regulator sets the broad safety goals to be attained
and the companies concerned develop the most appropriate methods for
achieving those goals. The basic tenet here is that the ongoing management
of safety is the responsibility of the operator and not the regulator.
Safety case
The safety case regime stems from the 1988 ‘Piper Alpha’ disaster in
the North Sea when a series of massive explosions and fire destroyed
the production platform on the Piper oil and gas field. The incident
resulted in 167 deaths and substantial financial losses to the UK industry
and the British Government. The world petroleum industry and
most governments studied the lessons from the disaster and rapidly
put in place a safety regime to ensure that it could not occur again.
The result is an internationally recognised regime of risk assessment where
companies establish self-regulated controls to avert mishaps.
The output of the safety case regime is a document produced by the

companies operating every petroleum facility which identifies the hazards
and risks and describes how the risks are controlled. It also describes the
safety management system in place to ensure those controls are effectively
and consistently applied.
Safety cases must be produced by the operator of a facility, the principle

being that those who create the risk must manage it. The operator must
assess the processes, procedures and systems to identify and evaluate
risks, and establish the appropriate controls because it is the operator that
has the greatest in-depth knowledge of the various installations.

The safety case must identify both the technical and managerial aspects of
safety. It is also vital that the operator establishes a performance standard
required of a system, an item of equipment, a person or a procedure that is
used as a basis for managing the risk of a major incident.
Equally, the company workforces must be involved in the process so they know
what happens in practice and why, rather than rely on a rules-based culture.
Each safety case is assessed by an independent regulator to ensure the

arrangements set out in the document demonstrate that the risks will be
reduced to as low as is reasonably practicable. Following acceptance of a
company’s safety case, the regulator will visit the facilities to monitor the
practical application of the arrangements.
Monitoring and design

In petroleum facilities there needs to be a monitoring, inspection and
maintenance program to ensure the integrity of all equipment and processes
is preserved. Sophisticated alarm systems are included, so that operations
can be shut down within seconds (by remote control from shore if necessary
for an offshore installation) in the event of a malfunction of equipment.
Importantly, safety studies and risk assessments today begin during the
facilities design stage, i.e. Safety Case, areas where hazardous operations
take place (HAZOP) etc. Consideration is given to things like the spacing
of people (particularly in accommodation/recreation rooms) away from
hazardous areas and providing safe areas in case of an accident. A similar
approach is made when retrofitting new equipment on older facilities.
Behaviour and awareness

Many companies are now looking at behaviour in the workplace to improve
performance. This is an area where great gains can be made. Company
leadership should drive the improvement and set the standard. Ensuring
performance to these standards will then be reflected in workplace
behaviour. This includes involving the whole workforce to define and
report the ways employees are most likely to be injured. The workforce is
also encouraged to discuss remedies to perceived safety risks.

Environment
Environmental management covers the whole range of upstream and
downstream petroleum operations — from exploration and appraisal right
through to decommissioning and rehabilitating upstream facilities, then
transportation, refining, distribution and retail of downstream products.
Many countries now have legislation in place that addresses the likely
environmental impacts of any petroleum (and other industrial) programs.
In countries with less sophisticated legislation and regulation, the World
Bank imposes similar requirements for any project that it finances.
The wording and names of the various legislations may vary, but
internationally the moves and the intent are the same. Basically, any proposed
project needs to test itself against its potential impacts on a number of key
receptors: air, water, land, flora/fauna and natural resources, and people.
Environmental controls
In some cases the petroleum industry sets more stringent environmental
controls on its own operations than are called for in government regulations
or legislation. Toxicological tests are carried out before any substance or
material is used. Some examples of petroleum industry moves to ensure
no contamination and minimal disturbance to the environment are:
Drilling fluids — all drilling muds are ecologically tested to ensure

there are no toxic effects on the surrounding environment. This involves
extensive laboratory work as well as studies of natural reef, sea bed and
shoreline conditions in areas where drilling is to take place.
Biocides and oil-based muds (made with biodegradable synthetic oils) are
only used in special circumstances. Where downhole difficulties do require
their use, stringent controls are employed to ensure minimum discharge
and coating of cuttings.
Waste disposal — regulations governing the chemical and heavy metal

content of waste material are strictly adhered to and often surpassed,

particularly in offshore locations. Some platforms have chambers called
skimmer piles built into one of the structure’s legs and connected to drains
on deck. Collected run-off water can be retrieved using pumps and then
either treated in hydrocyclone oil/water separators on board or sent
directly to shore in containers for treatment and disposal. Spent drilling
mud is sometimes sent to shore. At other times it may be disposed of in
subsea formations.
Formation water produced with oil is sometimes treated on the platform

offshore to reduce the oil content to very low levels (average international
standard of 30 parts per million) before being discharged. If the production
is close to a significant area like a coral reef, the water is re-injected into the
reservoir. At other times, where all offshore production is piped ashore for
treatment, the water separation is conducted at the onshore facilities.
Onshore sullage ponds, flare and mud pits are lined so that pollutants have
limited chance of entering the natural ground water system. Hazardous
wastes are stored in containers and sent to appropriate disposal units.
All pits are filled in after use and the area remediated.
Treatment facilities, refineries and storage tanks are bunded to prevent

the escape of any spillage or run-off of contaminated water into the
surrounding area.
Land care — clearance of vegetation for tracks or drilling sites (sometimes

called a footprint) is kept to a minimum to avoid erosion and to allow
speedy regeneration. Instead of cutting through topsoil to make tracks,
many seismic lines are rolled so that vegetation ‘springs back’ once the
seismic vehicles have passed. Seismic lines are also diverted around large
trees and thickets.
Blocking or diverting natural drainage patterns by building raised roads

or pipeline easements is avoided and water courses are approached and
departed from at an angle to prevent erosion and washout of stream
banks.

Burying pipelines onshore and through inter-tidal inshore zones is
common practice. Offshore pipelines connecting with land facilities are
commonly fed through horizontal holes drilled under coastal dunes and
cliffs to avoid disturbance of the shoreline. The offshore end of the line is
usually tunnelled down beyond the surf zone and the landward portion
emerges well inland.
Restoration of sites after use, including re-contouring to the natural line

and re-sowing natural vegetation is common practice. The industry also
pays special attention near sensitive areas such as mangroves, coral reefs,
fauna breeding grounds and heritage areas. In many instances directional
long-reach drilling is used so that drilling rigs and platforms are located
well away from these sensitive areas.
Flare-stack control — flaring of gas from a production area is rarely done

as this represents an ineffective recovery of hydrocarbons from the well
and a loss of revenue. However, where flaring excess gas is required as a
safety measure at treatment facilities and refineries, new generation flare
tips have been installed. These use the rush of gas to suck air into the flare
burner and create more complete combustion. There is also less smoke and
less heat radiation produced than from earlier flare types.
Sites of significance — petroleum companies work under heritage

agreements that may call for liaison with relevant indigenous owners
(Aboriginal, First Nation, Traditional) before any exploration or development
programs begin. Consultation may occur at every step in an exploration
program to ensure there is ample time to relocate seismic lines and drill
sites, if necessary, to avoid any sites of significance in a region. The liaison
may also be maintained during the project life, sometimes also during the
operational and restoration phases.
Cetacean avoidance — offshore seismic survey operators take a range of

measures to avoid interfering with whales and other marine mammals.
The most common is to time surveys to avoid significant cetacean activity,
such as migration paths and calving grounds.

In addition, before commencing operations (day or night), visual
observations are taken for a set period of time to check for cetaceans in
a precautionary zone. Australian Government regulations set the time at
90 minutes and the zone at a three kilometre radius around the front of
the seismic vessel. If a cetacean is seen within that zone, the vessel must
wait until the animal has moved further than three kilometres or, if it
can no longer be seen, wait for 30 minutes after the last sighting within
the zone before commencing operations. If a cetacean is seen within the
precautionary zone during a survey, the vessel must shut down operations
immediately.
So-called ‘soft-starts’ are the norm in seismic operations. This involves

activating a small section of the sound-producing and recording equipment
and slowly adding other streamers and more devices over time, thus
allowing marine mammals to move out of the area.
Oil spill control — any oil spill has the potential to damage the
environment. For instance a land spill can get into groundwater or rivers
and lakes. Marine spills can cause a serious impact, especially in coastal
areas because they can spread over a wide area. However the impact of a
marine spill is not only to do with volume of oil involved, but also the type
of oil, the climate, the prevailing weather and the geographic area.
Light oil spilt at sea in a warm climate will rapidly evaporate. Heavy oil in
a cold climate will be much slower to dissipate. Calm seas will make the
job of the oil spill response team easier than trying to deploy booms and
dispersants in rough water. Oil spilt in coral reef or mangrove areas is more
difficult to remove than oil coming ashore on sandy beaches.

There have been a number of well-documented oil spills around the world
over the past few decades, most of them from tanker accidents. These
incidents have led to a world-wide cooperation of petroleum industry,
shipping industry and non-government enterprises in preventing and if
necessary combating marine oil spills. Some of those bodies involved are:
• International Petroleum Industry Environmental Conservation

Association (IPIECA)
• International Association of Oil and Gas Producers (OGP)
• Oil Companies International Marine Forum (OCIMF)
• International Tanker Owners Pollution Federation (ITOPF)
• International Association of Independent Tanker Owners (INTERTANKO)
• International Maritime Organisation (IMO).
Today there are a number of large, specially equipped oil spill response
centres located around the world. Each is close to major airports and
available for call out on a 24 hour, 365 days a year basis. The equipment
is pre-packed and always at the ready. It is customs-secured for rapid
transport to anywhere in the world at very short notice. These key centres are:
• Australian Marine Oil Spill Centre (AMOSC) in Geelong, Victoria,

Australia
• Clean Caribbean and Americas (CCA) in Fort Lauderdale, Florida,

USA
• East Asia Response Pte Ltd (EARL) in Singapore
• Fast Oil Spill Team (FOST) in Paris, France
• Oil Spill Response Ltd (OSRL) in Southampton, England
• Petroleum Association of Japan (PAJ) in Tokyo, Japan.

In addition, many countries have established their own government
authorities, such as coastguard services, to deal with marine pollution in
their ports and around their shores. These bodies work in cooperation with
the petroleum companies in setting plans to coordinate oil spill response
and establishing stockpiles of equipment and dispersants at strategic ports
and harbours.
The international convention is to classify oil spill response into three

tiers.
• Tier 1 is a small spill of up to 50 tonnes that can be handled locally by

port authorities and/or the companies concerned.
• Tier 2 is a medium spill of up to 200 tonnes, or it might be remote from

ports and harbours. This may require the assistance of industry and
national government response agencies.
• Tier 3 is a major spill of up to 10,000 tonnes that will require the use
of national agencies as well as teams from the international response
centres.
Usually in a major incident the international response centre that is closest

to the spill is called first. Depending on the severity, response centres from
other parts of the world may be requested to help.
Oil spill combat equipment includes a wide variety of containment and

oil retrieval devices, such as booms and skimmers, as well as a variety of
spray mechanisms and dispersants to help break up the oil on the water
surface. Often helicopters and fixed-wing aircraft are employed in this
work. In addition there is increased use of computer modelling techniques
to predict the direction and speed of marine oil slicks.
All the major response centres and national industry bodies conduct
lectures and courses on oil spill response for government, petroleum and
maritime personnel, at both operator and management levels.

Climate change
The debate about climate change suggests that greenhouse gas emissions
associated with human activity are contributing to global warming and that
steps must be taken to mitigate this. The petroleum industry globally is both
a user and producer of fossil fuel energy products that create greenhouse
gas emissions. Fossil fuels are still an important source of world energy
and are likely to remain so, at least for the next three or four decades.
The use of these fuels underpins economic growth and development.
Thus the petroleum industry sees its challenge as balancing the need to
help meet the world’s energy needs while mitigating the potential impact
of greenhouse gas emissions on world climates.
Many petroleum companies now set out to reduce greenhouse gas

emissions in all their operations, setting themselves targets and publicising
the results. Some put an absolute value on their reduction targets, others
prefer to set intensity targets which are commitments to reduce emissions
on a per-unit-of-output basis.
The companies require their individual sites to develop greenhouse

management strategies and energy conservation plans. They ask
management to price carbon in all investment decisions. They also fund
research and development activities and collaborate with customers by
assessing emissions over the life cycle of products, i.e. estimating the level
of emissions emitted by customers using a company’s products. This
latter initiative leads to an improvement in the overall energy efficiency in
downstream consumption of energy products.
Some of the main initiatives to curb greenhouse emissions are:
Operational efficiency — this may be as simple as better design of

buildings to take advantage of natural light or using less lighting at night
or installing better insulation to cut down the energy needed to power
heating or cooling appliances.

Efficiencies are also aided by new technology such as improved flare stack
efficiency and control. In addition, gas produced in association with oil is
used as much as possible to run project facilities. There is also continued
research into the conversion of excess gas into methanol for separate sale,
even from remote locations.
Another push has been to phase out the use of lesser known greenhouse
gases such as halons, which have been part of fire protection systems both
offshore and in onshore production and treatment facilities. These are
known to be ozone-depleting substances as well as contributing to the
enhanced greenhouse effect.
Coal Seam Methane — methane, which would otherwise be vented to

atmosphere, can be drained from coal mines ahead of mining. Methane
has a global warming potential more than 20 times that of carbon dioxide,
hence this can represent a significant reduction in greenhouse emissions.
It also provides a safer mining environment and the drained methane can
be used as a fuel in an associated power plant to generate electricity.
Carbon dioxide sequestration — there are two types of sequestration

currently being researched, and in some cases, used around the world.
• Biological sequestration is the natural absorption of carbon dioxide

into plants. For instance, trees absorb carbon dioxide from the air
and release oxygen. Large tree plantations are being established in a
number of countries such as the USA and Australia to offset carbon
dioxide emissions from other activities, including land clearing and the
consumption of fossil fuels.
• Geosequestration is a relatively new concept that injects carbon dioxide

into deep, secure underground geological storage, including deep
geological reservoir formations under the ocean. The concept is for
carbon dioxide to be captured from industrial flue gas streams, such
as power stations, refineries and petroleum production facilities and
injected underground via specially drilled wells. The captured carbon
dioxide is liquefied under high pressures and must be injected to depths
of at least 800 metres below ground to be kept in the liquid state.

One of the challenges is to separate carbon dioxide quickly and efficiently
from other flue gases, such as nitrogen. Another is to determine which regions
are geologically suitable for the injection process. A third is to reduce the
costs of carbon dioxide capture and storage to commercial levels.
The technique has a precedent in Statoil’s Sleipner field in the Norwegian

North Sea where carbon dioxide content is about 10 per cent. This has
been extracted from the natural gas flow since 1996 at the rate of 1 million
tonnes a year and re-injected into a non-petroleum reservoir at 1200 metres
depth which overlies the field reservoir at 3000 metres depth subsea.
Norway and the European Commission are collaborating in Phase II of this

project which will continue to monitor the field to track the carbon dioxide
migration using seismic survey techniques. There will also be studies
to obtain information about geochemistry and dissolution processes.
Additional work will carry out feasibility studies on other suitable geologic
settings in the region. The overall aim is to gather data to develop sound
scientific-based methodologies for assessment, planning and long-term
monitoring of underground carbon dioxide storage both on and offshore.
The proposed development of Statoil’s new Snohvit gas field in the

Norwegian sector of the Barents Sea includes piping the field gas flow to
an onshore facility. Carbon dioxide will be extracted from the gas stream
and piped back offshore for injection into a sand aquifer underneath the
gas field (differing from Sleipner where the carbon dioxide storage lies
above the gas reservoir). Snohvit is expected on stream in 2006.
Statoil is also involved in a field development onshore Algeria at the

Inshalla field operated by BP. The re-injection of carbon dioxide will have
the double bonus of sequestering carbon dioxide and providing pressure
maintenance.
Another project proposal is the Gorgon gas field offshore Western

Australia operated by Chevron. With carbon dioxide content in the fields
of this project above 12 per cent, the plan is to pipe gas to LNG production
facilities on Barrow Island and re-inject the carbon dioxide into a deep
aquifer underneath the island.

There are a number of other collaborative carbon capture and storage
projects around the world, four of which directly involve oil and gas or coal
seam methane fields and reservoirs. These pilot projects are designed to
increase knowledge in aspects of geosequestration, including technology,
economics, health, safety, and environment issues.
One of the most advanced is the Weyburn enhanced oil recovery (EOR)
project in Saskatchewan, Canada where the USA, Canada and Japan are
working together. Phase 1 (between 2000 and June 2004) conducted trials
of carbon dioxide injection into the oil reservoir. Phase II will magnify the
scale with the transport of 95 million cubic feet per day of 95 per cent pure
carbon dioxide to the field via a 320 kilometre pipeline from North Dakota
in the USA. The carbon dioxide will be injected into the field for enhanced
oil recovery purposes. This new phase will closely monitor the carbon
dioxide migration within the reservoir to determine its performance as
an enhanced oil recovery tool and to assess any risks involved in its long-
term use and intake into the reservoir formations. The project will run for
about four years.
Other pilot projects include work by the European Commission and

Germany, and a government-backed project in Australia involving
industry and research institutions. The EU study will evaluate carbon and
geosequestration in an existing natural gas storage facility near Berlin in
a deeper land-based underground saline aquifer nearby. The Australian
study will involve production of carbon dioxide from a field in the onshore
Otway Basin of western Victoria and re-injecting it into a depleted natural
gas reservoir nearby. The movement of carbon dioxide in the underground
reservoir will be monitored over a period of four or five years.
Emissions trading — this is emerging as a key instrument in the drive

to reduce greenhouse gas emissions. The rationale is to ensure that the
emission reductions take place where the cost of the reduction is lowest,
thus lowering the overall costs of combating climate change.

Such schemes allow governments to regulate the amount of emissions
produced in aggregate by setting the overall cap for the scheme, at the same
time giving companies the flexibility of determining how and where the
emissions reductions will be achieved. This flexibility to trade allowances
achieves the overall emissions reductions in the most cost-effective
way possible.
Participating companies are allocated allowances, each allowance

representing a tonne of the relevant emission, in this case carbon dioxide
equivalent. Emissions trading allows companies to emit in excess of their
allocation of allowances by purchasing allowances from the market.
Similarly, a company that emits less than its allocation of allowances can
sell its surplus allowances.
Although some companies have long-established internal trading schemes, the

UK began the world’s first economy-wide greenhouse gas emissions trading
scheme in March 2002, when 31 organisations voluntarily took on emissions
reduction targets. They agreed to reduce their emissions against 1998-2000
levels, delivering 11.88 millions tonnes of additional carbon dioxide
equivalent emissions reductions over the life of the scheme (2002-2006).
The scheme is also open to the 6000 companies with Climate Change
Agreements. These negotiated agreements between business and
government set energy-related targets. Companies meeting their targets
will receive an 80 per cent discount from the UK Climate Change Levy,
a tax on the business use of energy. These companies can use the scheme
either to buy allowances to meet their targets, or sell any over-achievement
of these targets.
The European Union began an emissions trading scheme in January 2005

which is the largest multi-national greenhouse gas trading scheme in the
world, with all 25 member states of the EU participating. Phase 1 will run
until December 2007. Phase 2 will run from 2008 until 2012 to coincide with
the first Kyoto Protocol commitment period.

The scheme works on a ‘cap and trade’ basis where member state
governments are required to set an emission cap for all installations
covered by the scheme. Each installation is then allocated allowances for
the particular commitment period. The installation is required to have its
annual emissions verified. Allowances equal to these verified emissions
will then be retired.
In the USA the concept of dealing with unwanted emissions has its roots in
a bid to curb acid rain in the 1990s. Although a separate issue to greenhouse
emissions, a cap was put on how much sulphur dioxide a fossil-fuelled
plant could emit. Then, extending this idea into the greenhouse arena,
New York State obtained a commitment from nine northeast states in
2003 to cap and trade carbon dioxide emissions. There is also an informal
trading scheme in California and some southeastern states. However, as
yet there is no USA-wide scheme in place for carbon trading.
Cleaner fuels
Since lead was removed from petrol beginning in the early 1970s, the
refining industry has made a number of additional improvements to petrol
and diesel fuel. Vehicles running on these new fuels run more cleanly and
efficiently and hence reduce pollution.
In the USA the most important improvement has been the development of
reformulated gasoline (petrol), particularly for use in smog-affected cities.
This is a refined and blended product aimed at reducing smog-forming
and toxic pollutants in the fuel. Individual refiners are allowed to use their
own formulae provided they meet the government standard.

In the USA and elsewhere, sulphur has also been reduced, to the point
where advanced emissions reduction equipment will produce only about
three per cent of the emissions of a vehicle manufactured in the 1960s.
The technologies that have made these improvements possible include:
• Additives that allow petrol to more fully combust, thus improving

vehicle efficiency while reducing emissions.
• Improved catalysts and refining processes which have helped reduce

the volatility and sulphur content of petrol and diesel fuels, leading to
lower emissions.
Community
For many petroleum companies, consultation with local communities
is carried out well before a project even reaches the design stage.
In some cases community participation is also sought in project audits
so that people understand the type of development envisaged, while the
company benefits from local knowledge and opinion. The aim is to develop
a trust that will continue through construction and commissioning to the
ongoing production stage for the life of the project.
In addition, a number of companies become involved with the local

communities, particularly in remote areas, by helping to provide services
and supporting existing community organisations and initiatives. These
can range from support for medical and educational facilities and
programs (including traineeships, work experience, career guidance and
scholarships) through to aid for local economies, conservation and heritage
programs. BHP Billiton, for instance, allocates one per cent of its pre-tax
profit to community projects throughout its areas of operation.
In other instances, companies and petroleum industry associations fund

research projects relevant to their operations such as whale migration
and breeding patterns, coral reef habitats, studies of wetland biodiversity
and health watch programs to study the long-term health of petroleum
industry employees.

Community Development Case Study — Pakistan
BHP Billiton operates the Zamzama gas plant in Sindh Province, Pakistan.
As part of the company’s commitment to sharing success it is working
closely with its partners, customers and local communities to make a real
contribution to sustainable development in Pakistan. One of BHP Billiton’s
operating values is that the communities with which it works value its
citizenship. Since its inception the company’s Community Development
Program in Pakistan has made a significant difference in the areas of
health, education, basic infrastructure and sustainable livelihoods.
The health aspect of the program has been specifically designed to cater
to the needs of local women and children in an attempt to reduce maternal
and infant mortality rates. BHP Billiton is supporting five community health
centres run by partner NGOs which serve a population of over 13,000,
with the help of 38 trained medical staff. Thirty three community health
workers have been trained in primary healthcare, with a view to establishing
health houses and small local clinics at the village level. Future plans include
upgrading a local hospital in collaboration with the government.
The educational component focuses on providing quality education for children,
especially girls. In collaboration with local NGOs, the local community and local
government, BHP Billiton has established 11 community schools in the area
in which over 800 students are enrolled. The schools are run by community-
based School Management committees. A Learning and Information Centre
has also been established in association with a local partner NGO. The Centre
helps students develop basic computer skills and teaches them English.
Lack of clean drinking water in the villages is a common problem around the
Zamzama gas facility. To overcome this, the company installed a reverse osmosis
unit in one village, providing access to clean water for 1100 people daily, and
has also facilitated the installation of hand pumps in 30 villages in the area.
A vocational centre has also been established in nearby Johi town to enable
women to take part in entrepreneurial activities. The objective of the
Entrepreneurship and Marketing Development element of the program is
to contribute to a sustainable community development process through
improved livelihoods for local women, by providing them with opportunities
for income generation and training in production and marketing.

Chapter 9. ECONOMICS
Crude Oil
Price history
Crude oil prices behave the same way as any other commodity — there are
wide price swings in times of shortage or oversupply. The crude oil price
cycle can extend over several years in response to changes in demand as
well as to OPEC (Organisation of Petroleum Exporting Countries, formed
in 1960) and non-OPEC supply.
The history of oil prices post World War II shows that when adjusted for
inflation and expressed in 2004 USA dollars, the world price has averaged
US$22.86 per barrel to 2004. In fact, until 2000 oil prices only exceeded
US$23 a barrel in response to war or conflict in the Middle East.
From 1948 to 1957 the price of oil rose from US$2.50 to about US$3 keeping
pace with inflation. From 1958 to 1972 prices were stable at about US$3 a
barrel (actually declining in real terms), but by 1974 the price had quadrupled

to US$12. This came about because of the 1973 Yom Kippur War when
Egypt and Syria invaded Israel and many western nations (headed by
the USA) supported Israel. As a result several Arab oil exporting nations
imposed an embargo on Israel’s supporters and curtailed production by
5 million barrels a day (bbl/d). One million barrels a day was made up by
increased production in other countries, but the net loss of 4 million bbl/d
represented seven per cent of non-communist world production.
From 1974 to 1978 world crude oil prices remained stable ranging from
US$12.21 –13.55 a barrel (actually a moderate decline when adjusted
for inflation). Then between November 1978 and June 1979 the Iranian
revolution cut 2.5 million bbl/d from world production. This loss was
compounded in 1980 when Iraq invaded Iran and the combined production
from both countries fell to 1 million bbl/d, some 6.5 million bbl/d less
than the previous year. In world terms crude oil production in 1980 was
10 per cent lower than in 1979. The events in Iran and Iraq sent prices from
US$14 a barrel in 1978 to US$35 a barrel in 1981.
Some countries, such as the USA, imposed price controls on domestically

produced crude oil during this period in an attempt to lessen the impact,
and in the short term this did ease the recession induced by the 1973–1974
oil price rises. On the other hand it took away incentives for USA domestic
exploration and production and did nothing to curb domestic oil consumption
or promote efficiency in energy use. Consequently the USA was more
dependent on crude oil imports and less prepared for the price increases
of 1979–1981 than it might have been without the earlier price controls.
Australia was also somewhat insulated from the rapid world oil price
spikes because it already had in place a complicated system of government-
imposed levies that prevented the bulk of indigenous production being
sold at world prices. The government did not allow free-market prices for
Australian crude until 1988.
Interestingly during 1979–1980, Saudi Arabia, the world’s largest oil

producer, warned other OPEC countries that continued spiralling prices
would lead to a reduction in demand. This is exactly what happened as
ECONOMICS 149
consumer nations finally began to introduce energy efficiencies, such
as better insulation in buildings, more efficient industrial processes and
vehicles that used less fuel per kilometre. In addition, the higher oil prices
encouraged increased exploration and production in non-OPEC countries.
OPEC was faced with lower oil demand and greater competition as
non-OPEC production increased 10 million bbl/d between 1980 and 1986.
World oil prices began to fall.
During this period OPEC tried to set its production quotas at levels low
enough to stabilise prices, but individual members repeatedly broke ranks
and produced at higher rates. In 1985 Saudi Arabia, which had been acting
as a ‘swing producer’ and cutting its production to stop the price free
fall, suddenly tired of this practice. Saudi linked its price to the crude oil
spot market and increased its own production from 2 million to 5 million
barrels a day. In response to this induced oversupply world prices fell
below US$10 a barrel in mid-1986.
Prices remained weak for the remainder of the 1980s and into the early
1990s, with the exception of a short spike in 1990 linked to the uncertainty
surrounding the Iraqi invasion of Kuwait. However by the mid-1990s
prices had begun to rise again on the back of a strong US economy and high
demand in Southeast Asian countries. World oil consumption increased
more than 6 million barrels a day during the 1990–1997 period — 95 per
cent of this rise absorbed in Asia.
In another piece of poor OPEC management and timing, the OPEC quota
was increased by 10 per cent to 27.5 million bbl/d in 1997 just at the time
of the Asian economic crash which saw a rapid decline in consumption.
Oil prices fell rapidly in 1998 until belated OPEC remedial moves to reduce
quotas again moved prices back above US$25 a barrel.
Prices see-sawed for the next three years including a rise in 2000 after Y2K
computer network problems did not eventuate and a fall in 2001 after the
World Trade Centre terrorist attack in New York. Prices moved into the
US$25 a barrel range again by early 2002.

In 2003, production cutbacks in Venezuela (due to unrest within the
national oil company) and Iraq (because of the USA-led military action)
coincided with improvements in USA and Asian demand. This loss of
production combined with growing demand quickly eroded the excess
of world production capacity that had been built up in the previous few
years. In mid-2002 the excess stood at 6 million bbl/d. In mid-2003 excess
production capacity had fallen to 2 million bbl/d. In 2004/2005 it has
fallen below 1 million bbl/d.
Exacerbated by continuing political instability in a number of producing

countries and the burgeoning demand in Asia, particularly China, there
are concerns that this latest figure is insufficient to cover any future
interruption of supply. Mirroring those concerns, the world oil price
topped the US$60 a barrel mark during 2005.
Price impacts
There are a number of factors within the petroleum industry linked to the
prevailing price of crude oil.
Rig count — the number of exploration drilling rigs, both on and offshore,
is often seen as a barometer of the industry’s activity. The number of rigs
around the world rose steadily following the price rises of the 1970s as
explorers took to the field buoyed by the potential higher rewards from
new discoveries. The number declined again after the price collapse of the
mid-1980s, albeit with a year’s lag between the start of price decline and
the fall in the rig count. In recent years the number of rigs is rising again
although the response time of rig count to significant price changes is now
down to a few months.
Well completions — not all wells that discover oil (or gas) are completed
for production. The general rule is that if the well can produce sufficient oil
or gas to cover the cost of completion and subsequent ongoing production
costs it will be developed. Hence, a high oil price will improve the viability
of small discoveries that may be marginal at low prices, and increase the
number of economic well completions.
ECONOMICS 151
Workovers — a workover is an operation to repair or perform maintenance
on an existing production well, such as replacing tubing and pumps. If oil
prices are low, workover activity may be deferred until the cost can be
justified by the price received for rejuvenated production. If prices stay
low, workovers may be foregone altogether and a well kept in production
only as long as it produces a positive cash flow.
Enhanced recovery — the average primary recovery of oil from a field’s

total volume in place is around 40 per cent. High oil prices can make
secondary and tertiary recovery programs viable so that overall yields
from a field are above 75 per cent of the total.
New technology — low oil prices can be a catalyst for improved technology
and efficiency in exploration, development and production techniques.
In recent times many oil companies have cut their costs to the extent that
they can still make a profit from new projects down to an oil price of
US$15 a barrel. Equally, refineries have been improved to accept inferior
low quality heavy and sour (high sulphur content) crudes to take advantage
of their low price in relation to light crudes and still manufacture a wide
range of products.
Conversely, when crude prices are high, exploration of deep water and
other difficult prospects becomes more attractive, and this in turn can lead
to advances in technology so they can be reached affordably.
Alternative fuels — the other factor to impact on the petroleum industry

in times of continuing high oil prices is the potential for energy users
to switch to alternative fuels and to give developers of alternatives the
incentive to make the technologies viable at more moderate oil prices.

Natural gas
Unlike oil, which is easily transported across the world through pipelines
and tankers and hence considered as one global market, natural gas prices
follow local markets. Although gas can be transported long distances
(from North Africa to and across Europe, across the USA and some long
distances in Asia/Australasia) as well as via an expanding LNG fleet, the
availability on a global scale is more limited than oil.
Like other commodities, natural gas is governed by supply and demand

but, because of long lead times, response can be measured in months or
even years, not hours and days as for oil. Similar to oil, low gas prices
inhibit exploration expenditure and subsequent production. At the same
time low prices increase demand. Overall though, supply is relatively
inelastic in response to changes in price.
There is often an incentive to continue producing even in the face of lower

prices. This is because:
If production is halted, it may not be possible to restore production

because of reservoir and well characteristics.
Net present value of recapturing production in the future may be

negative, i.e. it is better to produce today rather than wait as there are
no guarantees the future prices will be higher.
Some gas is associated with oil production and hence to stop gas flow
will mean stopping oil as well.
A producer may be contract-bound to produce specific volumes of gas.
There is no world price for natural gas, although it is often linked, at

least in part, to the price of oil. Gas price also depends on factors such as
its proximity to market and its status in relation to other fuels. In some
instances customers may be able to switch fuels (for example from gas to
coal) to take advantage of price changes.
ECONOMICS 153
Historically demand for natural gas has been seasonal. As recently
as the 1970s, gas discoveries were considered as second prize after oil.
Markets were limited and often it was left in the ground, especially when
discoveries were made in remote areas. It was also capital intensive, with
large up-front costs and long-term contractual arrangements.
Recently, however, the demand for natural gas has increased markedly.
It is the fastest growing source of energy for generating electricity, and
overall it now makes up about 22 per cent of the world’s energy mix.
In today’s environmentally-conscious world natural gas is recognised
as an abundant, clean-burning fuel. In the USA, for instance, natural gas
used for power generation grew from 15.5 per cent in 1992 to 26.6 per cent
in 2002. The use for power generation has also begun to smooth out the
seasonal nature of demand.
Liquefied natural gas is also growing in stature. Where a large domestic

gas network is already in place but domestic reserves are dwindling (such
as in the USA), the development of LNG import reception terminals is
being seen as a way to revitalise the economy and capitalise on the existing
infrastructure of pipelines, processing and storage facilities.
The USA is the world’s largest importer of natural gas, followed by

Germany, Japan and Italy. Russia is by far the largest exporter followed by
Canada, Norway and Algeria.

Chapter 10.
DOWNSTREAM PROCESSES
Crude oil
Crude oil is delivered from the wellhead generally by pipeline to a
stabilising plant which removes water and associated natural gas, although
for offshore gas this treatment may now occur on a floating unit. It is then
piped or shipped to a refinery to be made into petroleum products.
The basic process in refining crude oil involves distillation. Just as

boiling water turns into steam, so oil — a complex mixture of different
hydrocarbon molecules plus olefins, aromatics and impurities like sulphur
— can be separated into its different parts by heating. Distillation takes
place in a heated refinery tower about 45 metres high where crude oil is
fed in continuously at the bottom. The heat causes the various parts (called
fractions) to boil off.
DOWNSTREAM PROCESSES 155

The lightest fractions — gases like butane and propane — have simple
molecular structures and are boiled off first. They rise to the top of the
column where they are removed. The rising vapours of other fractions
cool sufficiently to condense back into liquid form and they are taken off
at progressively lower condensation points in the tower. Fuel oils and
bitumen at the heavy end are taken from near the tower base.
This distillation process separates the crude into eight basic components
which are then subjected to a secondary refining process known as cracking.
This usually combines more intense heat in the presence of a zeolite
catalyst — hence the term catalytic cracking or cat cracking. The treatment
rearranges the particular fraction’s molecules which are then sorted and
blended, sometimes with the addition of other chemicals, to make final
products like kerosene, petrol, diesel, lube oils and asphalts.
The products are distributed by pipeline, road and sea to distribution

terminals, then to smaller depots and finally to the end consumers.
Natural gas
Pipeline gas
Natural gas flows from the wellhead to production facilities that initially
separate out oil, condensate and water. This is followed by a process to
remove remaining water and any sulphur compounds and ‘scrubbing’ to
remove inert gases like nitrogen and carbon dioxide as well as natural gas
liquids such as butane and propane. Sometimes ethane is also removed.
The remaining methane sales gas is piped to market or it is liquefied to be
transported as LNG.
Liquefied Natural Gas (LNG)

LNG is produced by refrigerating the methane to a temperature of
-161 degrees Celsius. The supercooled gas condenses to form a liquid
which occupies one six-hundredth of the space of its gaseous form. It is an
elaborate process, but the only economic and proven method of reducing
natural gas volumes sufficiently for bulk transport by ship (or occasionally
by road tanker).

The first stage of the process is the same as for production of domestic
sales gas, i.e. removal of all impurities, inert gases, water and heavier
hydrocarbons (oil, condensate, butane and propane). If left in the gas
stream they would freeze and disrupt the cooling process.
The liquefaction plant can be likened to a giant household refrigerator

where the four main elements in the cooling cycle — a compressor, a
condenser, a pressure-expansion valve and an evaporator — are built on a
huge scale. A single liquefaction unit (called a train) can contain hundreds
of kilometres of special cold-resistant nickel steel and aluminium alloy
piping. Ordinary steel is unsuitable because it becomes brittle at low
temperatures.
The cooling cycle begins with the compression of a low pressure gas
(a refrigerant). Compression raises its temperature and pressure. The warm
high pressure gas is then passed through a condenser where it gives up its
heat to a coolant (which may be water or the directed flow of ordinary air).
The refrigerant’s temperature falls and it liquefies. Using the principle that
the lower the pressure, the lower the boiling point, the refrigerant is then
passed through an expansion valve to lower its pressure.
With the low temperature thus produced, the refrigerant can then be used
to take heat from the raw natural gas stream. This is done in an evaporator
where a heat exchange lowers the temperature of the natural gas and
increases that of the refrigerant to the point where the latter regasifies.
The refrigerant gas is returned to the compressor to begin its cycle again,
while the continuous heat exchange in the evaporator cools the natural gas
stream to its liquefaction point.
To keep the LNG in a liquid state, special steels and insulating materials
are used in the tanks in which it is stored, as well as in the loading lines to
seagoing LNG carriers and in the carriers onboard cargo tanks. Despite this,
a proportion of the LNG inevitably evaporates. This so-called boil-off gas is
compressed and recycled back to the LNG plant’s fuel system. In the LNG
carrier the boil-off gas is used to fire the vessel’s boilers.

<90° Butane and Lighter Gas processing
90°–220° Straight Run Gasoline Motor Gasoline Blending
220°–315° Naphtha Cat Reforming
Crude Oil
315°–450° Kerosene Hydrotreating

450°–650° Light Gas Oil Distillate Fuel Blending
650°–800° Heavy Gas Oil Cat Cracking
800°+ Straight Run Residue Flashing
Distilling crude and product disposition
Elements of a typical refinery

C4H10 Butane
Liquefied
Petroleum Gas
C3H8 Propane
Natural Gas Liquids

C2H8 Ethane
CH4 Methane Liquefied Natural Gas
N2 Nitrogen
CO2 Carbon Dioxide Natural Gas
H2O Water
Constituents of the respective gases
There has been some work done on the design of floating offshore LNG
plants as well as locating LNG plants on artificial islands, but as yet there
has not been any commercial application.
Methanol
Another process of growing importance and using natural gas as a
feedstock is the production of methanol. Methanol in turn can be used
as a feedstock for chemical manufacture, such as acetic acid and
formaldehyde, and is being considered as a fuel for power generation
as well as in fuel cell technology. In addition it can be used as a petrol
extender, i.e. blending small amounts with petrol for use in an internal
combustion engine. Methanol is also a mid-stage in the process for making
petrol from natural gas.
The conversion of natural gas to methanol involves removing impurities

followed by production of synthesis gas (a mixture of carbon dioxide, carbon
monoxide, hydrogen and oxygen) using hot water and steam. This synthesis
gas is then passed over a catalyst which promotes the rearrangement of
chemical elements to produce methanol.

The further step of converting methanol to petrol involves the use of
another catalyst which again promotes rearrangement of the chemical
elements. There is also successful research into the conversion of natural
gas directly to petrol without the intermediate methanol stage.
Methanol plants are relatively common around the world. One of the best
known is in New Zealand which uses gas fed in from fields in the Taranaki
Basin off the west coast of the North Island. At one time it also took the second
stage to produce petrol, but this is now a minor side in the plant’s operations.
Ammonium
Hydrogen Ammonia Fertilisers
Sulphate
Urea
Methanol formaldehyde
Plastics &
Adhesives
Natural Gas Ethene Ethylene Polyethylene
Ethanol Chemicals
Plastics &
Styrene Adhesives
Naphtha Benzene
Insecticides
Cyclohexane
Synthetic
Fibres
Xylene
Polyesters
Paints, Varnishes
Toluene
Phenols Plastics
Synthetic Rubber
Butadiene Chemicals
Plastics,
Propylene Acetone
Synthetic Fibres
Petrochemicals from petroleum — simplified diagram

There has also been research into ‘miniaturising’ a methanol plant for use in
remote natural gas fields offshore, either as a floating facility or built on a man-
made concrete island. The former concept prompted construction of a small
research facility built by BHP Billiton near Melbourne in Victoria, Australia
which takes gas from Bass Strait as its feedstock. Plans to construct a floating
facility have not yet come to fruition.
The island concept however, is under design feasibility stage for the
proposed Tassie Shoals 1.7 million tonnes per year methanol project
planned for shallow water in the Timor Sea off northern Australia, which
will take gas from the nearby Evans Shoal field.
Petrochemicals
Some of the products from the oil refinery cat cracker and the gas
fractionation plants are further treated by refrigeration, compression and
chemical reaction in a separate plant to produce a range of petrochemicals.
The most familiar of these are polymers or plastics such as polyethylene,
polypropylene, nylon and perspex. Petrochemical products also include
synthetic rubber, pesticides, fertilisers and a host of solvents which are
used as additives in petrol, anti-freeze, pharmaceuticals, foods, cosmetics,
paint and detergents.
Although economic alternatives may be found for some petroleum fuels

during the next three or four decades, the wide range of applications
and growing array of end products from the petrochemical industry has
established petroleum as a cornerstone of modern living. Its significance
is unlikely to diminish in the foreseeable future.

The oil transportation network

Appendix 1.
PETROLEUM SPECIALISTS
Assayer – an analyst who performs physical and chemical tests on petroleum
samples to determine the type and amount of each component.
Derrickman – a member of the drilling crew who works on the monkey

board up in the rig derrick above the floor and guides the top end of each
stand of drill pipe as it is pulled out or run into the hole.
Diver/Sub-mariner – carries out underwater mechanical tasks down to

depths of 200 metres during drilling and production via diving bells.
For deeper waters a remotely operated vehicle (ROV) is used and controlled
electronically by an operator from the surface.
Driller – the senior member of the drilling rig crew who manages the
drilling operation and keeps a log or drilling report which is a narrative
account of events on the rig floor during his/her tour of duty.
Drilling Superintendent – head of a company’s drilling department

who is in overall charge of drilling operations, often with responsibility
for work being done by several rigs at one time. Duties include planning,
supervision and liaison with other company departments.
Electrical/Electronic Engineer – is responsible for electrical and electronic

systems used in production and treatment facilities and in refineries.
Environmental Engineer – responsible for design aspects that minimise

environmental impact of the equipment and various processes used in
production and treatment of petroleum and petroleum products.
Geochemist – studies the chemical composition of the earth’s crust and

analyses sediments above likely petroleum-bearing formations that could
help determine the presence of petroleum traps.
APPENDIX 1. PETROLEUM SPECIALISTS 163

Geologist – studies the origin, history and construction of the earth’s crust
and uses knowledge of rock types, fossils and structural movements to
help pinpoint places where petroleum traps may be found. Some geologists
look at the global ‘big picture’ to determine which countries and regions of
the world are the most prospective for petroleum discoveries.
Geophysicist – studies the structure of the earth by physical measurement

and uses a range of techniques such as seismic pulses, magnetics and
gravitational forces to define potential petroleum traps. There are
geophysicists who look at whole basins and entire regions to determine
major structural features and trends within the global context.
Jughound (Juggie) – a member of the survey crew who places geophones

and cables in position (onshore).
Landman (USA only) – an agent who works on behalf of an oil company

to acquire land for oil field operations through lease arrangements, direct
purchases and access/usage agreements with land owners.
Marketer/Trader – responsible for sale and/or purchase of petroleum

and petroleum products using knowledge of global supply and demand,
petroleum prices and hedging techniques.
Motorman – a member of the drilling rig crew who maintains the prime
mover motors that keep the drill turning.
Mud Engineer – plans the type and weight of drilling mud that best suits
the formations being drilled.
Petrochemical Engineer – a chemical engineer responsible for the design,

management and control of the process which transform crude oil into
energy products, such as petrol, diesel and gas, and other products such
as plastics, fibres and paint. Processes can include gas-to-methanol and
gas-to-oil techniques.

Petrophysicist – responsible for determining the potential quality and
performance of a petroleum resource by estimating how much hydrocarbon
is present and whether it can be produced economically. The primary task
is to estimate porosity and water saturation by analysing core samples, well
logs, pressure measurements, well tests and other geological information
gained from downhole operations.
Pipeline Engineer – responsible for design and construction of petroleum

pipelines.
Process/Chemical Engineer – designs and oversees the facilities for

treatment and quality control of petroleum during the separation and
manufacture of its various components, particularly in the refining and
petrochemical stages.
Production Engineer – designs and oversees the production facilities used

to extract petroleum from the underground reservoir and treat or separate
the fluid components.
Reservoir Engineer – studies the type of petroleum trap discovered,

including areal extent, rock properties, fluid pressures and structural
elements to determine the volume of reserves and the optimum placement
of development wells to efficiently recover the maximum volume of oil
or gas.
Roughneck – a rig labourer who assists in facets of the drilling operation,

such as handling casing, drill pipe, tongs and other tools used on the rig floor.
Roustabout – a general purpose labourer who works on a drilling site

handling bulk supplies and assisting in tasks not directly connected with
drilling.
Seismic Operator – a member of the seismic crew who records all the data
from the seismic pulses using specialised computer equipment.
APPENDIX 1. PETROLEUM SPECIALISTS 165

Seismic Surveyor – uses conventional optical or global positioning system
technology to place the seismic line in the correct position and decides
where to deflect lines to avoid major obstacles.
Survey Coordinator – the oil company representative responsible for the

safe operation, conduct and productivity of all survey crews on the job.
Toolpusher – an experienced drilling engineer with direct responsibility

for the work done by the drill crew on a rig.
Vibe Operator – a member of the seismic crew who drives the vibroseis
trucks and operates the vibrators at specified points along the survey line.
Other Roles
In addition to the above, there are a number of positions in the petroleum
industry that call for specialisation within broader professions. Examples
include lawyers who specialise in areas like joint venture contracts, lease
agreements and production sharing contracts. There are finance people
liaising with banks and lending institutions and looking after project
finance negotiations, and economists who become involved in corporate
strategy. There are safety specialists and industrial relations people as well
as those skilled in personnel and recruitment for the specialised jobs in the
petroleum industry. And there are those involved in the medical side and
community liaison. The petroleum industry, more than most, is made up
of a vast range of skills and job descriptions.

Appendix 2.
CONVERSION FACTORS
Product figures shown are typical. However the actual value for any
particular sample of a product can differ to some extent from the typical
figure, depending on crude oil source, method of refining or blending etc.
Abbreviations
Some common abbreviations and their metric equivalents used in the
petroleum industry are:
M = thousand = 103 = k (kilo)

6
MM = million = 10 = M (mega)
B = billion = 109 = G (giga)
12
T = trillion = 10 = T (tera)
– 1015 = P (peta)
18
– 10 = E (exa)
APPENDIX 2. CONVERSION FACTORS 167

Equivalents
1 barrel = 158.987 litres (L)
= 34.9726 Imperial gallons
= 42.000 USA gallons
1 kilolitre = 6.2898 barrels (bbl)

1 Imperial gallon = 0.02859 barrels

= 4.546 litres
1 USA gallon = 0.02381 barrels

= 3.785 litres
1 cubic metre = 1000 litres

= 35.315 cubic feet
1 cubic foot = 0.02832 cubic metres
1 megajoule = 947.8 British thermal units (BTU)

= 0.2778 kilowatt hours (kWh)
= 0.009478 therm
1 therm = 100,000 BTU

= 29.31 kWh
= 105.5 megajoules (MJ)

To convert Volume Multiply by
Litres to Imperial gallons 0.21997
Imperial gallons to litres 4.54609
USA gallons to kilolitres 0.0038
USA gallons to barrels 0.023
USA gallons to metric tonnes 0.00325
Barrels to metric tonnes 0.1364
Barrels to kilolitres 0.159
Barrels to USA gallons 42.00
Barrels per day to Imperial gallons per year 12765.0
Kilolitres per year to barrels per day 0.017232
Million tonnes LNG to billion cubic metres natural gas 1.38
Million tonnes of LNG to million barrels oil equivalent 8.68
Billion cubic metres natural gas to million tonnes LNG 0.7
Billion cubic feet natural gas to billion cubic metres 0.028
Billion cubic feet natural gas to million tonnes LNG 0.02
Billion cubic feet natural gas to million barrels oil equivalent 0.18
Billion cubic metres natural gas to millions barrels oil equivalent 6.29
To convert Mass Multiply by

Tonnes to long tons 0.98421
Long tons to tonnes 1.01605
Kilograms to pounds 2.20462
Pounds to kilograms 0.45359
Courtesy Australian Institute of Petroleum
APPENDIX 2. CONVERSION FACTORS 169

Glossary
acidise – injecting acid solution down a well to dissolve carbonate rocks in
a reservoir, or improve the flow of hydrocarbons to the well.
acoustic log – a measurement of the velocities of sound waves imparted to

a formation in a well and used mainly for determination of rock porosity.
anomaly – a divergence from the background levels of physical or chemical

properties of an area under survey.
anticline – an upfold in rock strata producing an arch or dome structure.

One of the most common hydrocarbon traps.
API – American Petroleum Institute. API gravity is a standard method of

measuring density of crude oils and is expressed in degrees.
appraisal well – a well or wells drilled to follow up a discovery and

evaluate its commercial potential.
assay – a mini distillation process carried out in a laboratory to determine

the exact composition and the physical properties of crude oil.
associated gas – natural gas found as part of or in conjunction with other

constituents of crude oil, as opposed to gas found on its own.
AVO – amplitude variation with offset. This is a variation in seismic

reflection amplitude with a change in the distance between the energy
source and the geophone/hydrophone. It indicates differences in lithology
and fluid content in rocks above and below the reflecting layer.
ballast – extra weight taken on to increase a ship’s stability to prevent

rolling and pitching. Most ships use seawater as ballast. Empty tank space
is filled with inert (non-combustible) gas to prevent the possibility of fire
or explosion.
barite – a sulphate of barium used to add weight to drilling fluids.

barrel (bbl) – measure of crude oil equal to 42 USA gallons, 35 Imperial
gallons or 159 litres. Takes its name because the first oil produced in the
USA was stored and transported in wooden barrels.
basin – a dip in the earth’s crust usually filled or being filled with sediment.
It is a basic concept in petroleum geology.
bathymetry – relates to the measurement of water depths, usually referring

to the ocean.
bentonite – a type of clay often added to drilling fluid because of its

swelling properties when added to water.
bit – the cutting part of the drilling equipment.
blowout – when downhole pressure overcomes the weight of drilling fluid

and rises in a well to the surface out of control. An underground blowout
is where the overpressuring enters another formation higher in the well,
but before it reaches the surface.
blowout preventer – a system of valves and rams set in a well which can
be closed successively to counteract the uncontrolled rise of oil or gas from
a reservoir below.
boe – barrels of oil equivalent. A figure used when expressing the combined
volume of oil and gas reserves.
bright spot – a point on a seismic profile which shows up brighter than

surrounding traces because of an increase in amplitude of seismic waves
passing from hydrocarbons to water within the pores of a rock.
calliper log – a measurement of the diameter of a well.
cap rock – an impermeable layer of rock that traps or halts the upward
movement of oil and gas, forming the top or cap of a reservoir.
casing – steel pipe screwed together to line the inside of a well bore and
cemented into place.
casing shoe – a heavy section steel tube fitted to the lower end of a casing string
to protect the end of the string from damage when running into a well.
GLOSSARY 171
cat cracking – a secondary refining process which uses heat and the presence
of a catalyst to ‘crack’ apart the molecules of the various components of
crude oil obtained from the primary distillation process to form refined
petroleum products.
cement bond log – a measurement of the strength and bonding of cement

to the casing in a well.
choke – a valve or valves used to control the flow of hydrocarbons from a

well by changing the diameter of the orifice.
Christmas tree – the system of valves and controls placed at the wellhead.
CIF – cost including freight, where the seller of a cargo of petroleum or

petroleum product provides the transport to its destination.
city gate – the point at which high pressure pipelines deliver natural gas to
low pressure pipelines for distribution to individual users.
closure – a term used to indicate that a trap exists in the subsurface and
there are no avenues for hydrocarbons (if present) to escape.
completion – the final preparations to ready a well for production.
concession – an arrangement whereby an oil company is given exclusive

permission by a government to explore a large portion of a country over
a long period of time in return for an agreed percentage of any oil or gas
production that results.
condensate – hydrocarbons which are gaseous in a reservoir, but which

condense to form a liquid as they rise to the surface where the pressure is
much less.
conductor – the first casing string in a well.
coning – this occurs when an oil well is produced at excessive rates.

The reduction in reservoir pressure may draw up water underlying the oil
and gas can be drawn down from an overlying gas cap.
coring – an operation whereby a sample of rock being drilled is allowed

to pass through the centre of a special bit and be collected in a core barrel
mounted directly behind it.

crown block – an assembly of sheaves at the top of the drilling derrick of
a rig over which the hoist lines are passed.
cuttings – the broken pieces of rock formed by the bit during drilling.
These are flushed up the well and examined by the well site geologist to
determine the type of formations being drilled.
darcy – the unit of measurement of permeability of rock.
delineation well – see appraisal well.
development well – a well drilled specifically into a previously discovered

field for the purpose of producing oil or gas.
deviated well – a well whose path has been deliberately diverted from
the vertical.
diamond bit – a drill bit with impregnated diamonds as the cutting edge.
dipmeter – an instrument lowered down the well to measure the dip of the
drilled formations relative to the well.
directional well – see deviated well.
distillation – the refining process of separating crude oil components by

heating and subsequently condensing of the fractions by cooling. The basic
principle in refining is that of heating crude oil until various vapours or
gases ‘boil off’, and then condensing them to form a condensate or distillate.
The first to boil are the very light, dry gases; then highly volatile natural
gasoline, kerosene, gas oil, light lube oil stock, and so on until heavy resin
is left. This resin is broken up by other, more sophisticated processing.
distribution cost – usually refers to the cost of transporting gas to the

consumer through low pressure pipelines and includes a fee for the
pipeline owner.
distribution system – usually refers to the network of low pressure gas

pipelines delivering gas to individual consumers.
downstream – refers to all petroleum operations occurring after delivery

of crude oil or gas to refinery or fractionation plant.
GLOSSARY 173
downtime – the time an operation is postponed, usually due to bad
weather or mechanical failure.
draw-works – the hoisting winch for handling drill pipe and casing on a rig.
drill collar – the top of a well, usually a cemented section from which the
conductor pipe is hung.
drill pipe – steel pipe screwed together and used to carry and rotate the
drilling tools in a well and to permit the circulation of drilling fluid.
drill stem test – a valved test tool is lowered down a well on the end of the
drill string to a specific reservoir formation and the valve opened to admit
formation fluids.
drill string – the column of drill pipe lengths screwed together.
drilling fluid – see drilling mud.
drilling line – the wire cable on a rotary rig, one end of which is wound
around the drum of the draw-works and the other passes through the
crown and travelling block sheaves to a fixed point on the derrick frame.
As the wire round the drum is wound in or paid out, it is the means of
raising and lowering the travelling block.
drilling mud (drilling fluid) – is the suspension of minerals and chemicals

in oil or water which forms the well circulatory system.
drillship – a ship-shaped marine exploration drilling vessel usually with

its own means of locomotion.
dry gas – natural gas (methane and ethane) with no significant content of
heavier hydrocarbons.
dry tree – a subsea wellhead where the equipment is enclosed in a water-

tight chamber.
dynamic positioning – a method of keeping an offshore drilling rig on

location without anchors using computer-controlled propellers around the
vessel’s hull.

electric logs – measurement of rock properties (e.g. resistivity, radioactivity)
down a well which leads to determination of the rock types.
ethane – a component of natural gas and the basic feedstock for

petrochemical industries.
extended reach well – a well in which the horizontal distance from the
wellhead to the target location is much greater than the vertical depth to
the reservoir horizon.
farminee – a company which earns an interest in an oil and gas permit

from the company holding the lease. This may be done through a direct
cash payment, a share trade or, more usually, by agreeing to pay all or
some of the costs of a seismic survey, a drilling program or a development
project on that permit.
farminor – a company holding the exploration or production rights in

a permit which agrees to bring in another company to help defray the
costs of its work program in return for allowing the newcomer to take a
percentage interest in the permit.
farm-in/out – an arrangement between one or more parties and the

company or group holding a lease title to an exploration or production
area whereby the former pays to earn an interest in the permit. Payment
may be in cash or in the form of a work program.
fault – a break or fracture in the earth’s sub-strata where one side of the
break moves relative to the other.
FEED – front end engineering and design. This process provides definitive
costs and technical data on a proposed project to enable a decision on final
commitment to construction.
fishing – to retrieve equipment which has fallen into or is caught in the well.
flaring – the practice of burning off waste gas or oil as a safety measure in
a refinery or during a test of an exploration well. It is rarely done during
production as associated gas is used or returned to the reservoir.
flat spot – a flat trace on the seismic profile indicative of a fluid interface
in the subsurface.
GLOSSARY 175
FOB – free on board, where a buyer of a cargo of petroleum or petroleum
product arranges the shipping from the seller’s port.
formation interval test – see wireline test.
FPSO – a floating production storage and offtake (offloading) vessel
fraccing – a process used to improve the permeability of a tight reservoir.

A specially blended fluid, charged with proppants like sand or aluminium
pellets, is pumped down a well at high pressure to force passageways into
the rock. The proppants keep them open once the pressure is released.
gas cap – the natural accumulation of associated gas in the top of an oil
reservoir.
gas oil – a medium distilled oil from the refining process that is intermediate
between light lubricating oils and kerosene. Used to produce diesel fuel
and in heating and air conditioning systems.
gas/oil ratio (GOR) – the ratio of gas to oil by volume, measured during
a production test.
gazettal – the advertisement of permits by the government calling for

applications for exploration licences.
geophones – microphones used in seismic surveys to electronically pick

up returning shock waves and pass them on to the recording equipment.
geo-steering – a modern drilling technique in which a hydraulic motor

turns the drilling bit independently of the drill string. A bend in the motor
housing enables the trajectory of the well to be changed as the full weight
of the drill string bears down on the bit.
gross pay – the total thickness of a reservoir rock, including the impervious
layers which do not contain hydrocarbons.
guyed tower – a type of offshore production platform surrounded by a

series of cables anchored in the sea bed to hold it in place, much like the
guy ropes of a tent.

heavy crude – crude oil with high viscosity and high specific gravity.
The API classifies heavy oil as crudes with a gravity below 22.3° API.
hedging – forward selling of petroleum shipments at a price believed to be

competitive when the physical cargo is available.
heli-rig – a land rig capable of being broken down into loads small enough
to be carried by a helicopter. Usually used in inaccessible terrain to replace
land transport.
horizontal drilling – a technique for deviating wells through up to

90 degrees from the vertical, usually to produce thin reservoirs by exposing
more of the oil zone to the well perforations.
hydrocarbon kitchen – the part of a sedimentary basin containing mature

petroleum source rocks. A general term for conditions deep in the subsurface
rich in organic sediments which, with the necessary burial history (heat
and pressure) generate significant amounts of hydrocarbons.
hydrophones – the marine equivalent of geophones.
infill drilling – production wells drilled between existing wells to increase

hydrocarbon recovery. Often the wells are drilled to reach oil or gas
stranded by the rising water drive in a reservoir and unable to flow to the
original wells.
injection well – a well through which water or gas is injected to maintain

reservoir pressure.
in situ (in place) – refers to total oil or gas reserves contained in a reservoir
in the ground as opposed to those reserves which may be recovered.
isogals – contour lines drawn through points of equal gravity values and
referring to the ‘gal’ which is the unit of gravity measurement.
jacket – the leg section of an offshore production platform, so called because

it surrounds and protects the well conductors as well as supporting the
deck and its equipment.
jack-up – a type of mobile drilling rig which jacks its legs down to the sea
bed and then hoists its deck and drill floor above the sea surface.
GLOSSARY 177
jet bit – a drilling bit with nozzles through which fluids like air, mud or water
are forced under pressure, thus breaking up the formation to be penetrated.
J-lay – an offshore pipe laying technique in which the pipeline is lowered

vertically to the sea bed from the lay barge and then allowed to bend in a
J-curve shape as the vessel moves forward adding new sections of pipe.
joint venture – a group of companies or individuals who share the cost

and rewards of exploring for and producing oil or gas from a permit.
kelly – hexagonal or square pipe about 15 metres long attached to the top
of the drill string and turned by the rotary table. It is used to transmit the
twisting movement from the rotary machinery to the drill string and thus
the bit.
kelly bushing – a piece of equipment which fits around the kelly at the
point where it passes through the rotary table. It is often used as a datum
from which to measure the depth of a well.
kerogen – the organic matter which is the base for the formation of oil or
gas.
kick – a sudden influx of high pressure into a well, usually experienced

while drilling.
kill – the process of increasing drilling fluid weight to control a potential

blowout.
landmen – generally only applicable in the USA where the rights to

subsurface minerals are often owned by private individuals. These
individuals are entitled to ask for a royalty on any oil or gas production
from their portion of the subsurface. These subsurface rights began by
being attached to the surface landholding of the original landholder.
However, they can be bequeathed or sold and onsold separately to the
surface rights, such that after a period of time it is difficult for an oil
explorer to trace who actually owns the rights in question and who to
deal with when negotiating royalties. Landmen are employed by the oil
explorers specifically to unravel the paper trail and find the royalty holders
in the lease they want to drill.

lay barge – a specially designed vessel used to lay a pipeline along the
sea bed.
lease – a specific area of land or sea bed marked out by a government

and usually put up for tender. The successful bidder is given exclusive
right to explore for oil and gas for a specified length of time provided it
upholds the work program mentioned in the winning bid and obeys the
set conditions of the leasehold agreement.
light crude – generally refers to crude oil with an API gravity of 30 degrees
or more.
liner – steel tube of small diameter extending into a producing reservoir

from the bottom of the last string of casing in a well.
lithology – a study of the rock types in a given region, including

descriptions of mineral content.
LNG – liquefied natural gas.
LNG train – the liquefaction of natural gas to form LNG is carried out in
a refrigeration unit that has four main elements in the cooling cycle — a
compressor, a condenser, a pressure-expansion valve and an evaporator.
A single liquefaction unit is called a train. An LNG plant may comprise
just one train. Larger plants comprise a number of trains arranged side by
side each doing exactly that same liquefaction task.
logging tools – devices lowered down a well to measure various parameters

and properties of the formations being drilled (electric loop).
LPG – liquefied petroleum gas, usually refers to propane and butane.
marine riser – the conductor pipe for offshore wells. It extends from the
drill floor to the sea bed.
marker crude – a commonly traded crude oil in a particular region that is

used as a quality standard to price other crudes.
mercaptans – compounds of carbon, hydrogen and sulphur found in sour

crude and natural gas which have a strong, repulsive odour. They are
re-introduced in small amounts as a safety measure so that the presence of
sales (retail) gas can be detected by smell.
GLOSSARY 179
migration – the movement of oil/gas from a petroleum source rock into
and then within a reservoir rock.
monkey board – the small platform high in the derrick of a rig occupied by
the derrickman when guiding stands of drill pipe and casing to and from
storage racks during drilling operations.
moonpool – the open hole in the centre of the hull of a drillship through
which drilling takes place.
mud logging – this includes routine geological examination of drill cuttings

from a well, plus a record of the variations in drilling rate, mud pumping
pressure, depths of formation changes and an analysis of the mud for oil
and gas traces.
naphtha – a collective name given to a range of distillates covering the

heavier end of the gaseous fuel and the light end of the kerosene range.
net pay – the aggregate thickness of only those parts of the reservoir which
contain and produce hydrocarbons.
nuclear logs – a measurement of gamma rays and thermal neutrons from

downhole formations which can be used to determine rock porosity and
lithology.
on stream – in production.
open hole – refers to a well which has no casing or which is cased only to
the top of the reservoir section.
operator – the company which organises the exploration and production

programs in a permit on behalf of all the interest holders in the permit.
override interest – this occurs when a company holding the permit sells all
its working interest to an incoming party in return for an agreed percentage
of the proceeds from any commercial discovery.
P1 reserves – see proved reserves.
P2 reserves – see probable reserves.
P3 reserves – see possible reserves.

packer – a device (often rubber) which seals off a section of the well during
testing.
paper crude – crude oil which is sold on the futures market, but which will
not be physically produced for several months or longer.
pay zone – a formation within a reservoir containing producible

hydrocarbons.
percussion drilling – a system whereby the drill bit penetrates rock with a
hammer action. The drill can either be dropped using its own weight and
gravity or it can be pressure driven into a rock face.
perforations – holes punched through the casing of a well at the pay zone
to allow oil and gas to enter the well.
permeability – the degree to which fluids can move through a rock.
permit – an area of specified size within a sedimentary basin which is

licensed or allocated to a company or companies by the government for the
purpose of exploring for and producing oil and gas. In Australia separate
licences are issued for exploration and production.
petroleum resource rent tax (PRRT) – a form of profit-based tax which

applies after a producing oil/gas project has reached a set rate of return.
The tax itself is levied at specified percentage. Usually exploration and
development costs can be deducted from cash flow so they are recouped
before tax trigger or threshold is reached.
pig – a mechanical device sent through a pipeline to scour the inside walls
or to run internal checks on the integrity of the line.
plug – a seal deliberately placed in a well to prevent escape of high pressure

material from the substance after it has been abandoned. Usually plugs are
of cement.
plugged and abandoned – where all the reservoir and high pressure zones
in a well are sealed off with cement so that no fluids can escape after the
drilling rig leaves the location.
GLOSSARY 181
porosity – a measure of the pore space within a rock and expressed as a
percentage of volume.
possible reserves – those unproved reserves which analysis of geological

and engineering data suggests are less likely to be recoverable than
probable reserves. In this context, when probabilistic methods are used,
there should be at least a 10 per cent probability that the quantities actually
recovered will equal or exceed the sum of estimated proved plus probable
plus possible reserves. [Society of Petroleum Engineers, www.spe.org]
probable reserves – are those unproved reserves which analysis of

geological and engineering data suggests are more likely than not to be
recoverable. In this context, when probabilistic methods are used, there
should be at least a 50 per cent probability that the quantities actually
recovered will equal or exceed the sum of estimated proved plus probable
reserves. [Society of Petroleum Engineers, www.spe.org]
production platform – a fixed facility on an offshore field from which

development wells are drilled. It carries all the associated processing plant
and other equipment needed to keep the wells flowing and treat the oil
and gas once it reaches the onboard wellheads, as well as accommodation.
See also jacket.
production sharing contract – see PSC.
production test – a test conducted in a well to assess its production

potential by measuring pressures and fluid volumes produced through
various choke sizes at specified time intervals.
production well – see development well.
proppant (propping agent) – a granular substance such as sand grains,

aluminium pellets, glass balls and in the early days even walnut shells,
that are carried in suspension in a fluid that is injected into a formation at
high pressure during a well fraccing program to improve the permeability
of a reservoir. The proppant keeps the newly made fractures open when
the fluid is withdrawn.

proved reserves – are those quantities of petroleum which, by analysis of
geological and engineering data, can be estimated with reasonable certainty
to be commercially recoverable, from a given date forward, from known
reservoirs and under current economic conditions, operating methods,
and government regulations. If deterministic methods are used, the term
reasonable certainty is intended to express a high degree of confidence
that the quantities will be recovered. If probabilistic methods are used,
there should be at least a 90 per cent probability that the quantities
actually recovered will equal or exceed the estimate. [Society of Petroleum
Engineers, www.spe.org]
PSC – production sharing contract, where an oil company is contracted

to explore for and produce oil and gas under pre-set arrangements to
share the proceeds with the host government or its national petroleum
company.
recovery factor – the amount of oil or gas that can be recovered from a
reservoir is considerably less than the total volume of hydrocarbons
actually in place. Recovery factor is expressed as a percentage of the total
reserves believed to be in place.
refinery – an installation that manufactures finished petroleum

products from crude oil, unfinished oils, natural gas liquids and other
hydrocarbons.
reservoir – a rock or formation which holds hydrocarbons within the pore

spaces between individual grains.
retention lease – a permit enabling a company to keep ownership of a

hydrocarbon discovery that is not commercial at the time of discovery, but
that may be in the future if parameters change, such as a higher oil price
or the discovery of significant new fields nearby.
rolling cutter bit – a bit with hardened steel or tungsten carbide teeth of
varying lengths and spacings mounted on three roller cones.
rotary drilling – a system whereby a bit is forced against a rock face and
mechanically rotated to penetrate the various formations.
GLOSSARY 183
rotary swivel – the part of a rotary drilling rig which connects the travelling
block to the drill string.
rotary table – a flat plate in the drill floor which is turned mechanically
at varying speeds and directions imparting the rotary action to the drill
string which passes through its centre.
roughneck – a rig worker who handles the drill pipe and other equipment
on the drill floor.
round trip – the complete operation of pulling out the drill string from a
well (for instance to change a bit) and then running it back into the well.
roustabout – a general labourer on a rig.
safety case – where government sets broad safety goals to be attained

at industrial facilities and the companies concerned develop the most
appropriate methods for achieving those goals. The basic tenet is that the
ongoing management of safety is the responsibility of the operator and
not the regulator.
sales gas – natural gas that is sold into the distributor/retail market after
being treated to remove impurities.
sand lenses – porous sandstone reservoirs that are completely surrounded

by fine-grained impervious rocks. The lenses are often buried river beds
or deltas.
sedimentary cycle – the period encompassing an encroachment of the sea

over the land and then a subsequent withdrawal of the sea.
seep – a point where migrating oil or gas, not already trapped, reaches the
earth’s surface.
seismic survey – a method of determining the subsurface features by

sending sound waves into the various buried rock layers in the earth and
measuring the time they take to return to the surface.

semi-submersible – an offshore drilling vessel which has its deck
supported by columns fixed to pontoons which can be ballasted below the
wave action and provide a stable drilling base.
shale shaker – equipment near the rig floor which separates the drill
cuttings from the drilling mud.
side wall coring – is the extraction of a small core of rock from the side
of a drill hole. It is obtained by lowering a percussion gun to the required
depth and firing a small core tube into the well wall. The core in the tube
is then pulled back to the surface.
sidetracking – when a well is deliberately deviated around an obstruction

or branched off part way down a completed well to reach another part of
the reservoir.
slim hole drilling – drilling a hole where 90 per cent of its length has a
diameter of seven inches (180 millimetres) or less. The smaller hole and
casing sizes result in reduced costs and are sometimes used in the initial
phase of an exploration drilling program.
slug catcher – a device which uses a very long length of pipe to create
a pressure drop in an incoming natural gas pipeline sufficient to allow
‘slugs’ of associated heavier hydrocarbons like condensate to drop out and
be separated from the gas flow.
sour crude – crude oil that contains appreciable amounts of sulphur

compounds.
spot market – the sale of individual shipments of crude oil priced at the
international market rate at the time of sale.
spud date – the date when drilling of a well begins.
spud in – to begin drilling. To start a well.
stinger – a ramp or boom mounted on the stern of a lay barge used to

gradually lower the pipe onto the sea bed.
GLOSSARY 185
stratigraphy – a description of the rock formations in sequence from top to
bottom in a sedimentary basin.
streamer – the string of cable with hydrophones attached which is towed

behind a vessel during an offshore seismic survey.
structure – in oil industry terms it refers to a feature within the earth’s

crust with the potential to trap migrating hydrocarbons.
submersible – a form of floating drill rig which can be ballasted down to

sit on the sea floor or lake floor during marine drilling mode. The term can
also refer to a remote-controlled or a manned submarine used in inspection
and maintenance offshore.
subsea completion – a production wellhead which is placed on the sea bed

instead of on a platform at the surface.
suspended – a well is suspended when it is likely to be re-entered at a later

date, either to continue drilling or to run a test of a reservoir that was not
possible or convenient during the original drilling. The well is suspended
by setting cement plugs that can be drilled out when re-entry takes place.
sweet crude – crude oil that is free of sulphur compounds.
tension leg platform – a type of floating offshore production facility that

is tethered to the sea bed with steel cables and uses its buoyancy to keep
the cables tight (in tension).
term contracts – when shipments of a particular crude oil or condensate are

contracted and sold to one buyer or group of buyers for a specific period
of time (often 5–10 years) at a negotiated price which is set at a differential
to the floating price of a bench mark crude.
thin stringers – a term referring to oil and gas reservoirs that measure a
few metres or less in thickness.
three dimensional seismic survey (3D) – a survey with seismic lines set
out in close grid pattern to gain better resolution of detail in an area.

tight – a term indicating that a formation has little permeability.
time map – a plan of mapped horizons from the seismic sections where the
contours connecting equal values in times of waves reaching the geophones
are plotted on the grid map for the survey. To convert this to a geological
map, velocity measurements are used to change time to depth values.
toolpusher – the chief driller in charge of operations on the rig floor.
top drive – a drilling system where a motor is attached to the top of the
drill string in the rig derrick to impart a rotary action directly, rather than
use a kelly and rotary table.
trap – a formation in the earth’s subsurface which prevents the onward

migration of hydrocarbons.
travelling block – a large pulley with sheaves at the top end that allow
the drilling line to pass through and a hook at the bottom end which is
attached to the drill pipe. Raising or lowering the drilling line will move
the travelling block and the attached drill pipe up or down within the
derrick.
tri-cone bit – see rolling cutter bit.
tubing – see liner.
turbo drill – a drill bit which is rotated via a multi-stage turbine mounted
at the bottom of the drill pipe. Power to rotate is supplied by the drilling
fluid being pumped down hole from the surface.
underbalanced drilling – where the weight of the drilling mud in the

well is less than the formation pressure of the rock layers penetrated. This
allows formation fluids to rise up the well to the surface where the flow is
continuously monitored to detect hydrocarbons.
unitisation agreement – where owners of petroleum reserves pool their

individual interests in return for an interest in the overall unit which is
then operated by a single company on behalf of the group.
GLOSSARY 187
up-dip – a term referring to any point in a reservoir that is higher up in
the structure or trap.
vibroseis – a form of survey where the seismic waves are created by

mechanically vibrating a steel pad or plate on the earth’s surface.
wet gas – natural gas that contains significant amounts of associated

liquid hydrocarbons such as condensate, propane and butane. In terms of
quantity, gas is sometimes declared ‘wet’ when 10 or more barrels of liquid
hydrocarbons can be separated from 1 million cubic feet of gas.
wet tree – a subsea wellhead where the equipment is exposed to the sea.
whipstock – a wedge-shaped piece of equipment placed in the bottom of

a well which forces the bit and the drill pipe to deviate from their original
direction when drilling is resumed.
wildcat – the first well drilled in a new area. It can also mean the first well
in a new structure or prospect.
wireline logging – an operation to obtain information about the rock

formations in the well by lowering a suite of logging tools down the hole
on a cable called a wireline.
wireline test – a test for hydrocarbons in a formation by lowering a

chamber downhole on the end of a wire and allowing reservoir fluids to
flow into it.
working interest – where a company pays a percentage of a survey,

drilling or development program and receives a proportional part of the
resultant benefits.
workover – the re-entry into a completed well for modification or repair

and maintenance work.

SPEAKING
SPEAKING OIL&GAS
bhpbilliton.com
United States of America
BHP Billiton Petroleum (Americas) Inc
OIL&GAS
by Rick Wilkinson
1360 Post Oak Boulevard Suite 150

Houston TX 77056-3020
Tel: (1 713) 961 8500
Fax: (1 713) 961 8400
United Kingdom
BHP Billiton Petroleum Ltd
Neathouse Place
London SW1V 1LH
Tel: (44 20) 7802 7000
Fax: (44 20) 7802 7557
Australia
BHP Billiton Petroleum Pty Ltd
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152-158 St Georges Terrace
Perth WA 6000
Tel: (61 8) 9338 4888
Fax: (61 8) 9338 4899
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© BHP Billiton Petroleum Pty Ltd in 1988, 1995, 1997, 2006

Chapter 4. Evaluation & Production 69

Chapter 6. Public Reports & Reporting 102

Chapter 7. Taxation, Pricing & Marketing 110

Chapter 8. Health, Safety, Environment

Chapter 9. Economics 148

Chapter 10. Downstream Processes 155

Appendix 1. Petroleum Specialists 163

Appendix 2. Conversion Factors 167

In order to aid public understanding of the petroleum business,

iv SPEAKING OIL & GAS

The use of petroleum during the ages

Earliest uses included caulking boats, fuelling lamps and preserving

2 SPEAKING OIL & GAS

Tertiary Oligocene 37.0

Late 1400 Bacteria

Indicates forms extinct

(greatest age * Age at base of period or epoch

The geological time-scale

4 SPEAKING OIL & GAS

Such a period of transgression and regression is called a sedimentary cycle

The layers themselves will vary in composition — sand grains form

A rock is porous when it has many tiny spaces, or pores

A rock is permeable when the pores are connected

Studies of sedimentary basins suggest petroleum is generated mainly in

Classification is based on composition and is grouped into three main

• Paraffin-based crude is chiefly composed of isomers of paraffin and

• Asphalt-based crudes are mainly composed of naphthenes and very

6 SPEAKING OIL & GAS

There is considerable overlapping of these types and most crudes also

So, an API gravity of 10 degrees is equivalent to a specific gravity of one.

Natural gas is generally found in conjunction with oil in a reservoir, but it

Liquefied Petroleum Gas (LPG)

The best pointer to the source material is the occurrence of porphyrin

8 SPEAKING OIL & GAS

The critical temperature at which crude oil is formed is generally in the

Geochemical evidence also suggests that conditions favourable for

• The primary phase refers to movement from the petroleum source to

• The secondary phase of migration takes place within permeable rocks

10 SPEAKING OIL & GAS

The characteristics of reservoir rocks and the types of hydrocarbon

Most reservoirs have marked differences in permeability from one layer

The most important characteristic for production, however, is the thickness

12 SPEAKING OIL & GAS

The structure is rarely that simple in practice and it is usually complicated

A fault trap is formed when a fault plane (a line of displacement of the

However, entrapment will only occur if faulting pre-dates hydrocarbon

14 SPEAKING OIL & GAS

Stratigraphic traps: organic reef embedded in shale, and wedged-out sand

Another type occurs as a truncation, formed when erosion planes an

Unconformity or truncation traps

16 SPEAKING OIL & GAS

Types of oil and gas traps

18 SPEAKING OIL & GAS

20 SPEAKING OIL & GAS

Historically, detailed gravity surveys were conducted on the ground, using

22 SPEAKING OIL & GAS

The most important fact in magnetic exploration for petroleum is that

Australian Continental Shelf

Satellite gravity image courtesy of GETECH, University of Leeds

24 SPEAKING OIL & GAS

Magnetic surveys can be conducted on the surface using land vehicles or