Oil and Gas 101
Investing in gas and oil can be relatively simple, and is also an excellent way to supplement your portfolio with positive, regular cash flow. There are many unique benefits to taking advantage of oil and gas investment opportunities, and these prospects normally feature fast turn-around times to when you can start reaping the benefits.
Thanks to modern drilling technology, much of the risk traditionally associated with drilling for oil can be mitigated, making an investment in oil and natural gas a very smart choice. And perhaps best of all, investing in the oil industry presents individuals with the greatest number of available tax deductions when compared to all other types of investments.
Participating on the ground floor in the oil and gas investment industry is the best for private investors to experience the benefits mentioned above and tax breaks. But, the best part might be that this strategy doesn’t require micro-managing or maintenance, making it an exceptionally time-efficient asset.
Oil and Gas Learning Center
Investing in oil and Gas
Oil is one of the most important natural resources known to mankind. For most societies in the world, oil is the principal natural resource that fuels their economies. Then why, in this great age of communication and technology, do we need to be concerned about a natural resource like oil? Simple. Nearly 98% of everything you have or do is in some way related to crude oil. Heat for your home, gas for your car, 2 liter plastic bottles for pop, and petroleum jelly are just a few examples of products created from crude oil. The United States has the greatest standard of living in the world, as well as the largest economy. Why? Because we have always tried to maintain control over the supply, as well as price, of oil. Over the last 10 years, the U.S. economy has undergone the largest economic expansion in history and cheap oil has fueled this unprecedented growth. Unlike the 1970s, when the U.S. was held at bay by OPEC withholding oil production for political reasons, the growth of the oil industry during the 1990s, and beyond, will be more likely be determined by the laws of supply and demand. As democracy and capitalism are spreading around the world, global oil consumption is at record levels. Throughout Latin America, Russia, India and Asia, economic growth is accelerating at a remarkable pace; much faster than anything we have seen in the U.S. Recently, Forbes described the development now exploding across Asia: You can almost smell the money in Shanghai, Bangkok, Kuala Lumpau or just about any East Asian commercial center outside Japan these days. Traffic snarled, construction booming, glitzy shopping malls showing the latest Hollywood movies… These formerly traditional societies, stagnant for centuries, are exploding into the modern capitalist world and spawning vast new middle classes with a taste for consumer goods and the means to indulge that taste. Healthy economics generate great wealth, and Asia is churning out billionaires as though on a conveyor belt.” —Forbes
In these countries, more than two billion people, or more than 40% of the world’s population, are suddenly entering the age of consumerism. Thanks to American movies, TVs and VCRs, they have seen what the rest of the world has and they want it all. “They want McDonald’s french fries. They want Coke. They want Levi jeans. They want Caterpillar tractors. They want cars, cameras, mouthwash, homes, toothpaste, Tide, aspirin and ten thousand other products we take for granted. “In vast regions of these countries, they’re starting from the raw basics of modern life. They need electric power, running water, sewage treatment plants, bridges, tunnels, roads, cities — you name it. “And oil is the one commodity absolutely essential to this tidal wave of global growth. It’s literally the blood supply of capitalism. If you’re a developing country, you need all the oil you can get to drive your trucks, your cars, your planes and ships. You need oil to run your factories, machines and power plants so necessary to a modern industrial economy. “What we’re seeing is the first simultaneous, worldwide economic expansion since the late 1970s. But this time, many newly industrialized countries are joining the party and importing an unending procession of super-tankers laden with black gold.” —
An immense market and the promise of continuing growth are why oil and gas is such a sure energy investment.
Tax incentives of oil and gas
Direct participation in oil and gas can generate several tax benefits. These benefits range from large up front deductions for intangible drilling costs (IDC), to tax credits for the development of certain types of tight formations. Deductions are generated mainly from the cost of non salvageable equipment or services conducted during the drilling phase, testing, and/or completion of the well. The following is a synopsis of the tax benefits generated by direct participation oil and gas investments. There are many energy investing opportunities to create and build wealth in the oil and gas/energy sector. Investing in oil and gas drilling programs, while considered high risk, can offer significant returns and substantial tax advantages. Additionally, domestic oil and gas development helps make our country more energy self-sufficient and reduces our dependence on foreign imports. In light of this, Congress has provided tax incentives to stimulate domestic natural gas and oil production financed by private sources. Investments in oil and gas can have many tax advantages which greatly enhance the economics of Crude’s oil and gas investment opportunities.
Oil and Gas Tax Benefits
Direct participation in oil and gas can generate several tax benefits. These benefits range from large up front deductions for intangible drilling costs (IDC), to tax credits for the development of certain types of tight formations. Deductions are generated mainly from the cost of non salvageable equipment or services conducted during the drilling phase, testing, and/or completion of the well. The following is a synopsis of the tax benefits generated by direct participation energy investments. 1. Intangible Drilling Costs (IDC): When an oil or gas well is drilled, several expenses may be deducted immediately. These expenses are deductible because they offer no salvage value whether or not the well is subsequently declared to be dry. Examples of these types of expenses would be labor, drilling rig time, drilling fluids etc. IDCs usually represent 80% to 85% of the well cost. Investors usually put up the drilling portion of their investment before drilling operations commence, and the investor’s portion of the intangible drilling costs is generally taken as a deduction in the tax year in which the intangible costs occurred. The accounting method adopted however could affect the deduction period. 2. Intangible Completion Costs: As with IDCs these costs are generally related to non salvageable completion costs, such as labor, completion materials, completion rig time, fluids etc. Intangible completion costs are also generally deductible in the year they occur, and usually amount to about 15% of the total. 3. Depreciation: As opposed to services and materials that offer no salvage value, equipment used in the completion and production of a well is generally salvageable. Items such as these are usually depreciated over a seven year period, utilizing the Modified Accelerated Cost Recovery system or MACRS. Equipment in this category would include casing, tanks, well head and tree, pumping units etc. Equipment and tangible completion expenses generally account for 25 to 40% of the total well cost. 4. Depletion Allowance: Once a well is in production, the participants in the well are allowed to shelter some of the gross income derived from the sale of the oil and/or gas through a depletion deduction. Two types of depletion are available, cost and statutory (also referred to as percentage depletion). Cost depletion is calculated based upon the relationship between current production as a percentage of total recoverable reserves. Statutory or percentage depletion is subject to several qualifications and limitations. This deduction will generally shelter 15 per cent of the well’s annual production from income tax. For “stripper production” (wells producing 15 barrels/day or less), the depletion percentage can be up to 20%. 5. Tax Credits: Congress has enacted several tax credits in relation to oil or natural gas production. The enhanced oil recovery credit is applied to certain project costs incurred to enhance a well’s oil or natural gas production. This credit is up to 15% of the costs incurred to enhance production. The non conventional source fuel credit provides for a $3 per barrel of oil equivalent credit for production from the so called qualified fuels. Qualified fuels include oil shale, tight formation gas, and certain synthetic fuels produced from coal.
The Alternative Minimum Tax (AMT)
Historically the tax benefits from oil and natural gas production could potentially present the possibility for taxation under the Alternative Minimum Tax (AMT). In the early 1990’s however, Congress provided some tax relief for “independent producers”. An independent producer was defined as an individual or company with production of 1,000 barrels per day or less. Although there is still the potential for AMT taxation for excess IDCs, percentage or statutory depletion is no longer considered a preference item.
Lease Operating Expense
This expense covers the day to day costs involved with the operation of a well. The expense also covers the costs of re-entry or re-work of an existing producing well. Lease operating expenses are generally deductible in the year incurred, without any AMT consequences.
As is evident from this discussion, the tax benefits generated by a direct participation in oil and/or natural gas are substantial. The immediate deduction of the intangible drilling costs or IDCs is very significant, and by taking this up front deduction, the risk capital is effectively subsidized by the government by reducing the participant’s Federal, and possibly state income tax. Each individual participant of course, should consult with their tax advisor.
The history of oil and gas
All of the oil world is divided into three: 1) The “upstream” comprises exploration and production; 2) The “midstream” are the tankers and pipelines that carry crude oil to refineries, and; 3) The “downstream” which includes refining, marketing, and distribution, right down to the corner gasoline station or convenient store.
A company that includes together significant upstream and downstream activities is said to be “integrated.” By generally accepted theory, crude oil is the residue of organic waste–primarily microscopic plankton floating in seas, and also land plants–that accumulated at the bottom of oceans, lakes, and coastal areas. Over millions of years, this organic matter, rich in carbon and hydrogen atoms, was collected beneath successive levels of sediments. Pressure and underground heat “cooked” the plant matter, converting it into hydrocarbons–oil and natural gas. The tiny droplets of oil liquid migrated through small pores and fractures in the rocks until they were trapped in permeable rocks, sealed by shale rocks on top and heavier salt water at the bottom. Typically, in such a reservoir, the lightest gas fills the pores of the reservoir rock as a “gas cap” above the oil. When a drill bit penetrates the reservoir, the lower pressure inside the bit allows the oil fluid to flow into the well bore and then to the surface as a flowing well. “Gushers” — “oil fountains” as they were called in Russia — resulted from failure (or, at the time, inability) to manage the pressure of the rising oil.
As production continues over time, the underground pressure runs down, and the wells need help to keep going, either from surface pumps or from gas reinjected back into the well, known as “gas lift”. What comes to the surface is hot crude oil, sometimes accompanied by natural gas. But as it flows from a well, crude oil itself is a commodity with very few direct uses. Virtually all crude is processed in a refinery to turn it into useful products like gasoline, jet fuel, home heating oil, and industrial fuel oil. Crude oil is a mixture of petroleum liquids and gases in various combinations. Each of these compounds has some value, but only as they are isolated in the refining process. So, the first step in refining is to separate the crude into constituent parts. This is accomplished by thermal distillation–heating. The various components vaporize at different temperatures and then can be condensed back into pure “streams.” Some streams can be sold as they are. Others are put through further processes to obtain higher-value products. In simple refineries, these processes are primarily from the removal of unwanted impurities and to make minor changes in chemical properties. In more complex refineries, major restructuring of the molecules is carried out through chemical processes that are known as “cracking” or “conversion”. The result is an increase in the quantity of higher-quality products, such as gasoline, and a decrease in the output of such lower-value products as fuel oil and asphalt.
Crude oil and refined products alike are today moved by tankers, pipelines, barges, and trucks. In Europe, oil is often officially measured in metric tons; in Japan, in kiloliters. But in the United States and Canada, and colloquially throughout the world, the basic unit remains in “barrel”, though there is hardly an oil man today who has seen an old-fashioned crude oil barrel, except in a museum. When oil first started flowing out of the wells in western Pennsylvania in the 1860′s, desperate oil men ransacked farmhouses, barns, cellars, stores, and trash yards for any kind of barrel — molasses, beer, whiskey, cider, turpentine, sale, fish, and whatever else was handy. But as coopers began to make barrels specially for the oil trade, one standard size emerged, and that size continues to be the norm to the present. It is 42 gallons. The number was borrowed from England, where a statute in 1482 under King Edward IV established 42 gallons as the standard size barrel for herring in order to end skullduggery and “divers deceits” in the packing of fish. At the time, herring fishing was the biggest business in the North Sea. By 1866, seven years after Colonel Drake drilled his well, Pennsylvania producers confirmed the 42-gallon barrel as their standard, as opposed to , say, the 31 1/2 gallon wine barrel or the 32 gallon London ale barrel or the 36 gallon London beer barrel. And that, in a roundabout way, brings us right back to the present day. For the 42 gallon barrel is still used as the standard measurement, even if not as a physical receptacle, in the biggest business in the North Sea–which today of course in not herring, but oil.
Finding oil and gas
Fundamentals of Finding & Producing Oil & Gas
Hydrocarbons – crude oil and natural gas – are found in certain layers of rock that are usually buried deep beneath the surface of the earth. In order for a rock layer to qualify as a good source of hydrocarbons, it must meet several criteria.
Once an area has been selected and the right to drill thereon has been obtained, actual drilling may begin. The most common method of drilling in use today is rotary drilling. Rotary drilling operates on the principle of boring a hole by continuous turning of a bit. The bit is the most important tool. The rest of the rig ( a derrick and attendant machinery) is designed to make it effective. While bits vary in design and purpose, one common type consists of a housing and three interlocking movable wheels with sharp teeth, looking something like a cluster of gears. The bit, which is hollow and very heavy, is attached to the drill stem, composed of hollow lengths of pipe leading to the surface. As the hole gets deeper, more lengths of pipe can be added at the top. Almost as important as the bit is the drilling fluid. Although known in the industry as mud, it is actually a prepared chemical compound. The drilling mud is circulated continuously down the drill pipe, through the bit, into the hole and upwards between the hole and the pipe to a surface pit, where it is purified and recycled. The flow of mud removes the cuttings from the hole without removal of the bit, lubricates and cools the bit in the hole, and prevents a blow out which could result if the bit punctured a high pressure formation. (See the drilling rig to the right.) The cuttings, which are carried up by the drilling mud, are usually continuously tested by the petroleum geologist in order to determine the presence of oil.
Drilling to Total Depth
The final part of the hole is what the operating company hopes will be the production hole. But before long, the formation of interest (the pay zone, the oil sand, or the formation that is supposed to contain hydrocarbons) is penetrated by the hole. It is now time for a big decision. The question is, “Does this well contain enough oil or gas to make it worthwhile to run the final production string of casing and complete the well?”
Once an accumulation of oil has been found in a porous and permeable reservoir, a series of wells are drilled in a predetermined pattern to effectively drain this “oil pool”. Wells may be drilled as close as one to each 10 aces (660 ft. between wells) or as far apart as one to each 640 acres (1 mile between wells) depending on the type of reservoir and the depth to the “pay” horizon. For economic reasons, spacing is usually determined by the distance the reservoir energy will move commercial quantities of oil to individual wells.The rate of production is highest at the start when all of the energy from the dissolved gas or water drive is still available. As this energy is used up, production rates drop until it becomes uneconomical to operate although significant amounts of oil still remain in the reservoir. Experience has shown that only about 12 to 15 percent of the oil in a reservoir can be produced by the expansion of the dissolved gas or existing water.
Completing the Well
After the operating company carefully considers all the data obtained from the various tests it has ordered to be run on the formation or formations of interest, a decision is made on whether to set production casing and complete the well or plug and abandon it. If the decision is to abandon it, the hole is considered to be dry, that is, not capable of producing oil or gas in commercial quantities. In other words, some oil or gas may be present but not in amounts great enough to justify the expense of completing the well. Therefore, several cement plugs will be set in the well to seal it off more or less permanently. However, sometimes wells that were plugged and abandoned as dry at one time in the past may be reopened and produced if the price of oil or gas has become more favorable. The cost of plugging and abandoning a well may only be a few thousand dollars. Contrast that cost with the price of setting a production string of casing – $50,000 or more. Therefore, the operator’s decision is not always easy.
Setting Production Casing
If the operating company decides to set casing, casing will be brought to the well and for one final time, the casing and cementing crew run and cement a string of casing. Usually, the production casing is set and cemented through the pay zone; that is, the hole is drilled to a depth beyond the producing formation, and the casing is set to a point near the bottom of the hole. As a result, the casing and cement actually seal off the producing zone-but only temporarily. After the production string is cemented, the drilling contractor has almost finished his job except for a few final touches.
When all equipment is in place, the oil may begin to flow into the holding tanks to await pick up. It can be expected that a well will not be in production for certain times due to adverse weather conditions, mechanical malfunctions and other unforeseen circumstances. After the production period commences, it is necessary to incur certain costs in order to bring the oil to the surface. These costs include normal maintenance on the pump and other equipment, replacement of any pipe or tanks as needed, compensation to the operator of the pump, and payment of any incidental damages to the owner of the surface rights of the leased property. In some cases, the oil in a pay zone will be mixed with salt water. In such cases, the oil must be separated from the salt water and the salt water disposed of in a manner which is not harmful to the environment. The water may be hauled away by tank truck but often this phenomenon requires the drilling, nearby the oil producing well, of another well into which the salt water will be pumped. The cost of this water disposal well is normally considered to be a cost of operation. Finally, there may be additional costs incurred in opening up a new pay zone when any presently producing pay zone becomes economically unfeasible. Because opening a new pay zone involves the installation of very little, if any, new equipment, the costs involved therein usually are not very substantial.
In the ordinary producing operation only a portion of the oil in place is recoverable by primary production methods. Such methods include free-flowing wells and production maintained by pumps. As oil is extracted from a reservoir or sands the pressure which brings the oil to the well is reduced. Secondary recovery methods are intended to increase the recoverable percentage of the oil in place by injecting a substance such as gas or water into the producing formation. The injected substance is intended to increase the pressure on the oil in the formation and drive it toward the well-bore. A well, called an injection well or water injection well, is usually drilled in order to inject the substance. Sometimes a previously drilled, abandoned well can be reworked as an injection well. When water is used as the injectant it is often produced on the property itself. Excess water produced by operating wells may be diverted to the injection well and used as the injectant. This method of water disposal usually alleviates the need for a separate water disposal well. If the water from the producing wells does not provide enough injectant to provide proper pressure for secondary recovery, a water supply well may be required to provide an adequate supply of water.
Types of Petroleum Traps
Geologists have classified petroleum traps into two basic types: structural traps and stratigraphic traps. Structural traps are traps that are formed because of a deformation in the rock layer that contains the hydrocarbons. Two common examples of structural traps are fault traps and anticlines. An anticline is an upward fold in the layers of rock, much like an arch in a building. Petroleum migrates into the highest part of the fold, and its escape is prevented by an overlying bed of impermeable rock (A). A fault trap occurs when the formations on either side of the fault have been moved into a position that prevents further migration of petroleum. For example, an impermeable formation on one side of the fault may have moved opposite the petroleum-bearing formation on the other side of the fault. Further migration of petroleum is prevented by the impermeable layer (B). Stratigraphic traps are traps that result when the reservoir bed is sealed by other beds or by a change in porosity or permeability within the reservoir bed itself. There are many different kinds of stratigraphic traps. In one type, a tilted or inclined layer of petroleum-bearing rock is cutoff or truncated by an essentially horizontal, impermeable rock layer (C). Or sometimes a petroleum-bearing formation pinches out; that is, the formation is gradually cut off by an overlying layer. Another stratigraphic trap occurs when a porous and permeable reservoir bed is surrounded by impermeable rock. Still another type occurs when there is a change in porosity and permeability in the reservoir itself. The upper reaches of the reservoir may be impermeable and nonporous, while the lower part is permeable and porous and contains hydrocarbons.
To help the operator make his decision, several techniques have been developed. One thing that helps indicate whether hydrocarbons have been trapped is a thorough examination of the cuttings brought up by the bit. The mud logger or geologist (Remember him? He’s been there all along, monitoring downhole conditions at the location.) catches cuttings at the flow ditch and by using a microscope or ultraviolet light can see whether oil is in the cuttings. Or he may use a gas-detection instrument.
Another valuable technique is well logging. A logging company is called to the well while the crew trips out all the drill string. Using a portable laboratory, truck-mounted for land rigs, the well loggers lower devices called logging tools into the well on wireline. The tools are lowered all the way to bottom and then reeled slowly back up. As the tools come back up the hole, they are able to measure the properties of the formations they pass. Electric logs measure and record natural and induced electricity in formations. Some logs ping formations with sound and measure and record sound reactions. Radioactivity logs measure and record the effects of natural and induced radiation in the formations. These are only a few of many types of logs available. Since all the logging tools make a record, which resembles a graph or an electrocardiogram (EKG), the records, or logs can be studied and interpreted by an experienced geologist or engineer to indicate not only the existence of oil or gas, but also how much may be there. Computers have made the interpretation of logs much easier.
In addition to these tests, formation core samples are sometimes taken. Two methods of obtaining cores are frequently used. In one, an assembly called a “core barrel” is made up on the drill string and run to the bottom of the hole. As the core barrel is rotated, it cuts a cylindrical core a few inches in diameter that is received in a tube above the core-cutting bit. A complete round trip is required for each core taken. The second is a sidewall sampler in which a small explosive charge is fired to ram a small cylinder into the wall of the hole. When the tool is pulled out of the hole, the small core samples come out with the tool. Up to thirty of the small samples can be taken at any desired depth. Either type of core can be examined in a laboratory and may reveal much about the nature of the reservoir.
Once a likely area has been selected, the right to drill must be secured before drilling can begin. Securing the right to drill usually involves leasing the mineral rights of the desired property from the owner. The owner may be the owner of all interest in the land, or just the mineral rights. As payment for the right to drill for and extract the oil and gas, the owner will usually be paid a sum call a “lease bonus” or a “hole bonus” for every well drilled on the leased land. He will also retain a royalty on the production, if any, of the leased property. The royalty is the right to receive a certain portion of the production of property, without sharing in the costs incurred in producing the oil, such as drilling, completion, equipping and operating or production costs. The costs are borne by the holder of the right to drill and extract the mineral, which right is usually referred to as the working interest.In many cases the procurement of the lease from the land owner is accomplished by a lease broker who will, in turn, offer and then assign the lease to an operator such as Maverick Energy, Inc. Maverick Energy is very selective in choosing leases for drilling. The lease broker usually retains an overriding royalty on the working interest as compensation for his services. In the case of Maverick’s leases, there generally is a retained land owner’s royalty of 1/8 of all production and a 1/16 overriding royalty on the working interest, retained or granted to one or more persons who may have acted as lease brokers.
After the well has been perforated, acidized or fractured, the well may not produce by natural flow. In such cases, artificial-lift equipment is usually installed to supplement the formation pressure.
The artificial-lift method that involves surface pumps is known as rod pumping or beam pumping. Surface equipment used in this method imparts an up-and-down motion to a sucker-rod string that is attached to a piston or plunger pump submerged in the fluid of a well. Most rod-pumping units have the same general operating principles.
Sale of Oil
Once the oil is out of the ground and into the holding tanks, it must be sold. In most cases each holder of a working interest has the right to take his portion of production in kind, therefore, make his own arrangements for its sale. It is not uncommon, however, for all the holders of a working interest of a well to enter into the same arrangement with the same buyer of the oil production. These sale contracts are normally entered into for periods of not longer than a few months but in no case longer than one year. The buyer of the oil will generally be advised by the operator of the working interest as to the identity and extent of ownership of each of the holders of the working interest, as well as the identity of the royalty holders and the amount of their interests. The information will be compiled on division orders which are the basis upon which the buyer of the oil can divide the proceeds of sale among the various holders. The buyer of the oil will pick up the oil from the holding tanks at periodic intervals, gauge it and remit the remaining proceeds in the proper amounts to the holders of the working interest and the royalties.
Drilling To Total Depth
The final part of the hole is what the operating company hopes will be the production hole. But before long, the formation of interest (the pay zone, the oil sand, or the formation that is supposed to contain hydrocarbons) is penetrated by the hole. It is now time for a big decision. The question is, “Does this well contain enough oil or gas to make it worthwhile to run the final production string of casing and complete the well?”
Characteristics of Reservoir Rock
For one thing, good reservoir rocks (a reservoir is a formation that contains hydrocarbons) have porosity. Porosity is a measure of the openings in a rock, openings in which petroleum can exist. Even though a reservoir rock looks solid to the naked eye, a microscopic examination reveals the existence of tiny openings in the rock. These openings are called pores. Thus a rock with pores is said to be porous and is said to have porosity (Figure 1). Another characteristic of reservoir rock is that it must be permeable. That is, the pores of the rock must be connected together so that hydrocarbons can move from one pore to another (Figure 2). Unless hydrocarbons can move and flow from pore to pore, the hydrocarbons remain locked in place and cannot flow into a well. In addition to porosity and permeability reservoir rocks must also exist in a very special way. To understand how, it is necessary to cross the time barrier and take an imaginary trip back into the very ancient past. Imagine standing on the shore of an ancient sea, millions of years ago. A small distance from the shore, perhaps a dinosaur crashes through a jungle of leafy tree ferns, while in the air, flying reptiles dive and soar after giant dragonflies. In contrast to the hustle and bustle on land and in the air, the surface of the sea appears very quiet. Yet, the quiet surface condition is deceptive. A look below the surface reveals that life and death occur constantly in the blue depths of the sea. Countless millions of tiny microscopic organisms eat, are eaten and die. As they die, their small remains fall as a constant rain of organic matter that accumulates in enormous quantities on the sea floor. There, the remains are mixed in with the ooze and sand that form the ocean bottom. As the countless millennia march inexorably by, layer upon layer of sediments build up. Those buried the deepest undergo a transition; they are transformed into rock. Also, another transition occurs: changed by heat, by the tremendous weight and pressure of the overlying sediments, and by forces that even today are not fully understood, the organic material in the rock becomes petroleum. But the story is not over. For, while petroleum was being formed, cataclysmic events were occurring elsewhere. Great earthquakes opened huge cracks, or faults, in the earth’s crust. Layers of rock were folded upward and downward. Molten rock thrust its way upward, displacing surrounding solid beds into a variety of shapes. Vast blocks of earth were shoved upward, dropped downward or moved laterally. Some formations were exposed to wind and water erosion and then once again buried. Gulfs and inlets were surrounded by land, and the resulting inland seas were left to evaporate in the relentless sun. Earth’s very shape had been changed. Meanwhile, the newly born hydrocarbons lay cradled in their source rocks. But as the great weight of the overlying rocks and sediments pushed downward, the petroleum was forced out of its birthplace. It began to migrate. Seeping through cracks and fissures, oozing through minute connections between the rock grains, petroleum began a journey upward. Indeed, some of it eventually reached the surface where it collected in large pools of tar, there to lie in wait for unsuspecting beasts to stumble into its sticky trap. However, some petroleum did not reach the surface. Instead, its upward migration was stopped by an impervious or impermeable layer of rock. It lay trapped far beneath the surface. It is this petroleum that today’s oilmen seek.
Waterflooding is one of the most common and efficient secondary recovery processes. Water is injected into the oil reservoir in certain wells in order to renew a part of the original reservoir energy. As this water is forced into the oil reservoir, it spreads out from the injection wells and pushes some of the remaining oil toward the producing wells. Eventually the water front will reach these producers and increasingly larger quantities of water will be produced with a corresponding decrease in the amount of oil. When it is no longer economical to produce these high water-ratio wells, the flood may be discontinued. As mentioned previously, average primary recoveries may be only 15% of the oil in the reservoir. Properly operated waterfloods should recover an additional 15% to 20% of the original oil in place. This leaves a substantial amount of oil in the reservoir, but there are no other engineering techniques in use now that can recover it economically. In most cases, oil reservoirs suitable for secondary recovery projects have been produced for several years. It takes time to inject sufficient water to fill enough of the void spaces to begin to move very much oil. It takes several months from the start of a waterflood before significant production increases take place and the flood will probably have maximum recoveries during the second, third, fourth, and fifth years after injection of water has commenced. The average flood usually lasts 6 to 10 years.
After the casing string is run, the next task is cementing the casing in place. An oil-well cementing service company is usually called in for this job although, as when casing is run, the rig crew is available to lend assistance. Cementing service companies stock various types of cement and have special transport equipment to handle this material in bulk. Bulk-cement storage and handling equipment is moved out to the rig, making it possible to mix large quantities of cement at the site. The cementing crew mixes the dry cement with water, using a device called a jet-mixing hopper. The dry cement is gradually added to the hopper, and a jet of water thoroughly mixes with the cement to make a slurry (very thin water cement). Special pumps pick up the cement slurry and send it up to a valve called a cementing head (also called a plug container) mounted on the topmost joint of casing that is hanging in the mast or derrick a little above the rig floor. Just before the cement slurry arrives, a rubber plug (called the bottom plug) is released from the cementing head and precedes the slurry down the inside of the casing. The bottom plug stops or “seats” in the float collar, but continued pressure from the cement pumps open a passageway through the bottom plug. Thus, the cement slurry passes through the bottom plug and continues on down the casing. The slurry then flows out through the opening in the guide shoe and starts up the annular space between the outside of the casing and wall of the hole. Pumping continues and the cement slurry fills the annular space. A top plug, which is similar to the bottom plug except that it is solid, is released as the last of the cement slurry enters the casing. The top plug follows the remaining slurry down the casing as a displacement fluid (usually salt water or drilling mud) is pumped in behind the top plug. Meanwhile, most of the cement slurry flows out of the casing and into the annular space. By the time the top plug seats on or “bumps” the bottom plug in the float collar, which signals the cementing pump operator to shut down the pumps, the cement is only in the casing below the float collar and in the annular space. Most of the casing is full of displacement fluid. After the cement is run, a waiting time is allotted to allow the slurry to harden. This period of time is referred to as waiting on cement or simply WOC. After the cement hardens, tests may be run to ensure a good cement job, for cement is very important. Cement supports the casing, so the cement should completely surround the casing; this is where centralizers on the casing help. If the casing is centered in the hole, a cement sheath should completely envelop the casing. Also, cement seals off formations to prevent fluids from one formation migrating up or down the hole and polluting the fluids in another formation. For example, cement can protect a freshwater formation (that perhaps a nearby town is using as its drinking water supply) from saltwater contamination. Further, cement protects the casing from the corrosive effects that formation fluids (as salt water) may have on it.
Since the pay zone is sealed off by the production string and cement, perforations must be made in order for the oil or gas to flow into the wellbore. Perforations are simply holes that are made through the casing and cement and extend some distance into the formation. The most common method of perforating incorporates shaped-charge explosives (similar to those used in armor-piercing shells). Shaped charges accomplish penetration by creating a jet of high-pressure, high-velocity gas. The charges are arranged in a tool called a gun that is lowered into the well opposite the producing zone. Usually the gun is lowered in on wirelin (1). When the gun is in position, the charges are fired by electronic means from the surface (2). After the perforations are made, the tool is retrieved (3). Perforating is usually performed by a service company that specializes in this technique.
Sometimes, however, petroleum exists in a formation but is unable to flow readily into the well because the formation has very low permeability. If the formation is composed of rocks that dissolve upon being contacted by acid, such as limestone or dolomite, then a technique known as acidizing may be required. Acidizing is usually performed by an acidizing service company and may be done before the rig is moved off the well; or it can also be done after the rig is moved away. In any case, the acidizing operation basically consists of pumping anywhere from fifty to thousands of gallons of acid down the well. The acid travels down the tubing, enters the perforations, and contacts the formation. Continued pumping forces the acid into the formation where it etches channels – channels that provide a way for the formation’s oil or gas to enter the well through the perforations.
When sandstone rocks contain oil or gas in commercial quantities but the permeability is too low to permit good recovery, a process called fracturing may be used to increase permeability to a practical level. Basically, to fracture a formation, a fracturing service company pumps a specially blended fluid down the well and into the formation under great pressure. Pumping continues until the formation literally cracks open.Meanwhile, sand, walnut hulls, or aluminum pellets are mixed into the fracturing fluid. These materials are called proppants. The proppant enters the fractures in the formation, and, when pumping is stopped and the pressure allowed to dissipate, the proppant remains in the fractures. Since the fractures try to close back together after the pressure on the well is released, the proppant is needed to hold or prop the fractures open. These propped-open fractures provide passages for oil or gas to flow into the well. See figure to the right.
Market Watch Updates
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