Petroleum Industry Overview


3. Midstream

The midstream segment of the value chain comprises transportation, trading, gathering, storing of oil and gas and processing of natural gas.

Transportation

Depending on the distances the petroleum to be carried there are three alternative methods for transportation of oil. Oil can be transported by trucks over short distances, and by barge or rail for medium distances. Tankers and pipelines are the only method for the long-distance transportation of oil.

The usual mode of transport for natural gas is pipelines or tankers, irrespective of the distance between the wellhead and the market. For land-locked producers, pipeline transport is their only access to international energy trade. 

Different transport options in the petroleum sector, covered in this topic material

Pipelines

The petroleum pipeline is a distinct means of transportation, belonging to the category of the so-called “network-bound” or “grid-bound” transportation. Its essential quality is the use of fixed installations, which are extremely capital intensive but involve relatively low operating costs. These capital costs are sunk costs and their payback period is extremely long.

From a technical point of view, there is a distinction between pipelines used for the transportation of oil and those used for gas, the latter being more complex. Both types can be on-land as well as submarine and from the international legal perspective, cross-border oil and gas infrastructures have much in common.

Significant numbers of pipeline projects are proposed and in-progress across North Africa and the Middle East. There are projections of large volumes of pipeline flows into China from both Russia and Central Asia, with possible extensions to northern Asia. For example, in 2013 a service agreement on a Turkmenistan-Afghanistan-Pakistan-India gas pipeline (TAPI) project was signed in Turkmenistan's capital Ashgabat.

Examples of pipeline agreements and arrangements

A range of bilateral and multilateral agreements dealing specifically with cross-border and transit petroleum infrastructure. These instruments are becoming significantly more elaborate and sophisticated, due to the complexity of the legal and jurisdictional issues involved. Some examples of agreements formulated to manage this complexity are provided below:

1. The North Sea Pipelines cross only one border at the edge of the territorial sea; the jurisdiction is divided at the delimitation of each State at the continental shelf. International agreements related to cross-border oil and gas pipelines in the North Sea are mostly bilateral, involving States-producers of hydrocarbons (mostly Norway and the United Kingdom) and States-consumers (such as Germany, Belgium, France). These agreements often regulate similar issues such as jurisdiction, pipeline ownership and operations. They may also contain specific rules addressing construction and safety standards, mutual inspection, abandonment, environmental protection and metering issues.

2. The Baku-Tbilisi-Ceyhan pipeline project, which consists of a trilateral governmental agreement between Azerbaijan, Turkey and Georgia, and individual host government agreements (HGAs) between the project company and respective governments.

Further examples of pipeline agreements

3. The Caspian Pipeline Consortium (CPC) is an integrated trans-boundary pipeline system. The CPC is a consortium that represents the interested parties in a unitary structure. It was created in June 1992 by an intergovernmental agreement (IGA) signed between Kazakhstan and Oman to build an export pipeline. Russia signed a protocol the following month, entering into the IGA. However, due to difficulties in obtaining sufficient funds for the project, a protocol between eight IOCs and the participating governments was signed for the reorganisation of the CPC in 1996. The protocol accorded certain control of the pipeline to the International Oil Companies through transfer of a 50% share in the project.

4. The development of the Chad-Cameroon pipeline, akin to that of BTC, is based on an IGA between the Republic of Chad and Cameroon and the respective HGAs of the project signed between Chad and Chad Oil Transportation Company, and Cameroon and Cameroon Oil Transportation Company.

The design and setup of transportation and processing tariffs differ in each jurisdiction. Some governments, such as in the UK, allow companies to negotiate these tariffs independently, whereas others have government mandated prices or quasi-nationalised midstream pipeline networks, as is the case for Gassco in Norway.

Oil tankers

Tanker sizes. Source: The US Energy Information Administration

 

Crude oil tankers are the most used method for transport of crude oil from the wellhead to refineries worldwide. Oil tanker sizes range from general purpose to ultra-large crude carriers on Average Freight Rate Assessment (AFRA) scale. The approximate capacity of a ship in barrels is determined by using an estimated 90% of a ship's deadweight tonnage (see the diagram below), and multiplying that by a barrel per metric ton conversion factor specific to each type of petroleum product and crude oil, as liquid fuel densities vary by type and grade.

Oil tanker spills

While more common than pipeline transport in carriage of oil, tanker carriage has higher environmental risks. According to data provided by The International Tanker Owners Pollution Federation Limited (ITOPF):

  • In the 1990s there were 358 spills of 7 tonnes and over, resulting in 1,133,000 tonnes of oil lost; 73% of this amount was spilt in just 10 incidents.

  • In the 2000s there were 181 spills of 7 tonnes and over, resulting in 196,000 tonnes of oil lost; 75% of this amount was spilt in just 10 incidents.

  • In the six-year period 2010-2015 there have been 42 spills of 7 tonnes and over, resulting in 33,000 tonnes of oil lost; 86% of this amount was spilt in just 10 incidents.

Number of oil tanker spills 1970-2015 (Source: The International Tanker Owners Pollution Federation Limited)

Mitigation methods

After a major well control incident in the Gulf of Mexico in 2010, the IPIECA (The global oil and gas industry association for environmental and social issues)-IOGP Oil Spill Response JIP (OSR-JIP) was established to implement learning opportunities in respect of oil spill preparedness and response. The OSR-JIP produced around 20 guidelines which cover topics relevant to both Exploration and Production activities as well as shipping and transportation.

LNG tankers

Because of the physical properties of natural gas, it was initially transported and supplied domestically or regionally via pipelines. The development of liquefaction of natural gas to LNG aimed to make gas international and enable bigger volumes of gas to be transferred as liquids, which take less space than gas. With LNG, natural gas produced is piped to a liquefaction plant, turned to LNG, and transported by tankers to be regasified at its destination for supply to the market. LNG tankers are essentially massive thermos bottles that keep the gas cold and liquid.

LNG transport explained

LNG export capacity

There is an ever-growing LNG global export capacity. Since 2006, Norway, Russia, Yemen, Peru, Angola and Equatorial Guinea all have started making LNG, while Qatar, Nigeria, Australia, Oman and Indonesia have expanded production. The United States, Australia, and potentially Canada and Mozambique, are likely to be among the main contributors to an increase in LNG.

With new major players emerging in the global energy market, the world production capacity of LNG can at least double by 2020. However, newly discovered huge gas resources in different parts of the world are unlikely to turn into LNG exports before 2020. In general terms, most of them are still awaiting actual development plans and/or final investment decisions. The current change in market conditions will further delay their materialization. Mozambique for instance still lacks clearly defined development plans with associated costs. Among others, the country’s geography, its lack of both basic infrastructure and technically skilled personnel, will make overall LNG development cost a challenging factor in the current market scenario for the companies holding the major portion of the gas resources in the country.

Rail cars

The cost of transporting crude oil by rail is higher than transport by pipeline. While both railroad tankers and pipelines pose a detrimental risk to communities and public health in the case of an explosion and/or spill, it is reported that in the US, far more oil was spilled from rail accidents – more than 1.15 million gallons – than in the previous four decades combined. Modern railroad tankers have evolved significantly today with an increased load capability. However, most petroleum products are transported via marine tankers and pipelines today.

Trading

Petroleum is the world's most actively traded commodity. The global oil market comprises thousands of participants who help facilitate the movement of oil from where it is produced, to where it is refined into products, and from there to where those products are ultimately sold to consumers.

When it comes to crude oil pricing:

1. Brent is generally accepted to be the world benchmark of petroleum pricing, and is used to price two thirds of the world's internationally traded crude oil supplies.

2. In the United States, the benchmark is West Texas Intermediate (WTI).

3. In the Gulf, Dubai crude is used as a benchmark to price sales of other regional crudes into Asia.

4. The OPEC Basket price is an average of 15 different crudes which include Saharan Blend from Algeria, Girassol from Angola, Oriente from Ecuador, Minas from Indonesia, Iran Heavy, Basra Light from Iraq, Kuwait Export, Es Sider from Libya, Bonny Light from Nigeria, Qatar Marine, Saudi Arabia's Arab Light, Murban from the Emirates and BCF 17 from Venezuela.

Oil price

In principle, while the difference in price of Brent, WTI and the Opec Basket price is not significant, they are priced differently due to significant differences in the compositional characteristics of the crudes and their product yields.

Petroleum (crude oil) and petroleum products are traded on organised exchanges. Crude oil products are traded via futures contracts or spot markets.

A futures contract, in contrast to a spot transaction, concerns the future purchase or sale of crude oil or petroleum products. They are a promise by the seller of a determined amount of oil in a defined location and the exchanges are paid daily based on the market value.

“Spot” contracts typically involve delivery of crude over the coming month. Spot markets are often referred to as the “physical market” since they entail the buying and selling of physical volumes.

Oil trade

Traditionally, oil markets have been made up of long-term and rigid contractual relationships but this has changed to a market with participants now including producers, refiners, marketers, traders, consumers, investment banks and hedge funds.

Natural gas trade

Natural gas on the other hand is still not a fully liberalised market when it comes to trade. There is no generally accepted reference price for natural gas, and it has traditionally been the only commodity not priced by demand, but by substitute indexation. Oil-linked prices have been seen as the only remedy for market failure in natural gas.

In terms of natural gas liberalised markets, the hub model was first rolled out in the US – with its Henry Hub – and in the UK - with the creation of the National Balancing Point or NBP (a virtual trading location for UK gas). NBP in the UK followed an interest model by creating a virtual rather than physical hub. This model was copied by Belgium (Zeebrugge), the Netherlands (TTF), France (PEG’s), Germany (NCG and GPL), Italy (PSV) and others. Today, in most European countries, gas is bought based on hub pricing. Natural gas prices in Asia are mainly linked to crude oil, but also make use of spot indexes increases.

Global natural gas trade trends

Global natural gas trade rebounded in 2015, rising 3.3% mainly as a result of pipeline exports. There had also been a significant growth of LNG exports. The diagram below presents globally traded natural gas volumes in 2015 in billion cubic meters. The bulk of this gas is used in electricity production.

Globally traded volumes of LNG are shown in the diagram below.

Globally traded volumes of natural gas (source: BP)

Storage

Another stage before oil and gas is transported to the downstream market is storage. Storage levels matter globally because they have an impact on oil price. Storage is also importance in terms of ensuring energy security and for avoidance of supply disruptions to the industry, commercial and residential users.

There is no international rule that require national oil and gas storage levels to be revealed, and in fact some of the major consumer and producer states such as Russia and China choose not to report their oil-storage levels. Traders and oil companies that park supertankers have no obligation to make public their supply.

International Energy Agency (IEA) members however are required under the 1974 Agreement on an International Energy Program (I.E.P. Agreement) to hold oil stocks equivalent to at least 90 days of net oil imports and – in the event of a major oil supply disruption – to release stocks, restrain demand, switch to other fuels, increase domestic production or share available oil, as necessary.

Some countries also have detailed regulations on oil storage. Scotland for instance set regulations for above ground oil storage devices including fixed tanks, intermediate bulk containers, drums and mobile bowsers.

As gas has a much lower energy density than oil, gas storage costs are higher. However, due to limited methods of transport options (LNG and pipelines), natural gas storage has a far higher importance in terms of energy security, particularly in winter for residential users. Natural gas is stored in underground salt formations, aquifer reservoirs and depleted reservoirs. It can also be stored as LNG in tankers.