University of Technology

Petroleum Technology Department

Petroleum Engineering Branch

Economics

Third Year
2019 - 2020

Ass. Prof. Dr. Ramzy. Syhood. Hamied

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 Petroleum economy

Petroleum economy known as one of scientific disciplines that deal with studying the oil
industry across multiple rings (exploration, extraction, transportation, refining, and
consumption). The oil economy as a branch of applied economics, which tries to take
advantage of the tools of economic analysis in the study of the behavior of the oil
industry as units producing or consuming in terms of the (supply, demand, prices, costs,
the behavior of the product, and consumer behavior).

Economics is the basis of all branches of applied economics and the oil economy is
aware of the economics branches, like other types of industrial and agricultural economy
and the international economy and the rest of the other branches.

The oil economy and other sciences

The economics of oil has relation with multiple branches of knowledge of humanitarian,
and like other science it will exchange the benefit with other science and the relationship
are distributed in two directions:

1- The relationship of oil economics with other branches of knowledge, such as

geography and history and politics. For example, the geographical (the oil
economy relation to the geographical distribution of oil sites in the world), and
history (the evolution of the oil industry in the world) by several indicators and
patterns of ownership and its evolution over time and the control of companies
and countries on the industry.
2- Relationship of oil economy with the branches of statistics and mathematics, and
the intervene in many areas and operations research as well as the functions of
demand and supply, prices and functions (linear and non-linear and logarithmic)
in building models and estimate and analyze the behavior of the product oil as

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 well as the growth rates of oil consumption, energy and oil production as well as
quantitative analysis and the other different fields.

Tools study of the oil economy

There are several methods and tools in the study of the oil economy, and there are a
number of concepts, terminology and metrics that are used in the study of this kind of
economy, and will be presented in short:

1- Energy map:

Divided into different energy sources, whether the sources of energy depleted or non-
depleted sources and distributed between what is commercial and non-commercial, and
as shown below:

- Conventional (classical) energy sources (wood, animal waste).

- Sources of commercial energy (normal):

1- Depleted energy sources (oil, gas, and coal .......).

2- A renewable energy sources (hydropower, geothermal energy).

- Sources of commercial energy (unusual) future:

1- Depleted sources (heavy oil, oil sands asphalt, and tear gas from the unusual
sources).
2- Renewable sources (solar; direct solar energy (thermal conversion and
photoelectric transformation) and indirect solar energy (wind, waves, tides, and
organic energy).

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2- A map of a barrel of oil

It can be identify as the components of a barrel of oil refining process before and after
the process of refining it to be valid for direct consumption in all known areas and as
shown in the attached figure (1) for a barrel of crude oil.

3- Metrics and conversion factors in the oil industry and energy

It is a set of scales and transactions for transferring crude oil and energy in order to
deviate from the measurements between overlapping sources of fuel and energy, and it
can be seen below:

A- The units of measure are supported in the calculation of units of oil:

103 = 1000 Thousand 106 = 1000000 million

109 = 1000000000 billion 1012 = 1000000000000 trillion

B- Switcher units in crude oil:

- metric ton = 7.33 barrels 1 barrels of oil = 42 gallon (USA)
- 100 barrels of oil/day = 50(1013)/ ton/year
C- Supported standards in terms of oil and energy:
- bd =barrels per day
- cfd = cubic feet per day
- mbd = million barrels per day
D- Switcher units between energy source:
- 1 tons (LG) = 16 barrels of oil
- 1 tons (coal) = 0.67 million tons oil
- 1 tons (coal) = 25 million Btu
- 1 barrel = 5 million Btu
- 1 tons oil = 39 million Btu

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 The importance of oil

1. Oil represents the great importance in the economic life of nations; it is

considered the main source of energy and the main engine of economic
developments and industrial civilization that prevailed around the world.
2. Oil characterized by the highest degree of flexibility in many needs, in
addition to its use as a raw material for industry and energy, also used in the
petrochemical industry, fertilizers, plastics, pesticides, and other industries.
3. Adoption of oil-producing countries on the returns as an indispensable source
of national income for the regular budget and investment and a means to
achieve economic development.
4. Strategic importance of oil where it enters in many cases, as policies and state
field and evolution of life.
5. Enters in the food industry as a source of protein.

Despite many attempts to discover and develop alternatives to oil, but the oil will be
the major source of energy in the world because of its advantage of the
characteristics as shown below:

1- Ease of extraction, transportation, refining and storage.

2- High calorific value of oil compared with other sources of energy.
3- The possibility of refining to multiple vehicles with different benefits, such
as gasoline, kerosene and lubricating oils and lubricants.

In spite of the above benefits there are some problems, namely:

a. Oil is one of the finite resources in the future.

b. The combustion products of oil caused significant environmental problems on a
global level.

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 Oil and Gas reserves

Oil reserve: represents the amount of oil and natural gas inventories in the oil fields or
represents the volume of oil and natural gas, which has not been brought out from the
earth.
The subject of estimating oil reserves one of the core issues to determine the possibility
of exploiting oil wells according to the prevailing conditions economically and
technically.
Methods adopted in estimating oil and gas reserves are classified as follows:

First: Classification on the basis of the degree of confidence in the estimates

According to this classification the oil reserves can be divides into three sections which
shown in below:
1- Proven oil reserves (certainly):
This reserve represents the amount of crude oil that makes their presence sure incised,
through the information available engineered and geology, so that it can be extracted in
accordance with the technical and economic prevailing conditions.
Where Iraqi proven oil a reserve in the past was estimated about 115 billion barrels, but
in recent years Iraq's oil reserves become are estimated at more than 145 billion barrels
of oil as a result of new studies and modern techniques that have been used.
2- probable oil reserves :
This is the kind of reserve quantities that have been discovered and is probably to enter
production stage depending on the conventional techniques. This reserve is technically
known quantity but unknown economic cost to extract it.
Where the Iraqi oil reserves up to 500 billion barrels in 2010 while it was up to 230
billion barrels in the previous year. This type of reserve can be divided into two types as
follows:

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 A. Oil field sectional that cannot be accessed, so it cannot enter in the process of
oil production. However depending on the special methods (such as
activation field operations or field processing with sophisticated equipment,
especially for the production).
B. Isolated fields which are inadequate of economic returns, either because of
low production capacity or because of the type of crude oil located where
(such as heavy oil).

3- Possible oil reserves:

These reserves are not yet been to exploration, but we can assume that its presence with
a reasonable degree. These reserves are located in areas that previously discovered oil or
in areas with geological nature similar to other areas where oil was discovered.

Second: Classification on the basis of the degree of oil well development

this type of classification based on proven reserves only and it can be divided into two
types as shown below:
1. Proven oil reserves development: expected crude oil extraction according to
the technical and economic prevailing conditions.
2. Proven oil reserves not development: a defending as crude oil which can be
extracted through a process of deepening the existing wells and production
facilities as well as doing through high investment costs.

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 Stages of the oil industry (briefly)

There are five stages related rings of the oil industry and for each of these stages
specificity and nature of which differs from the other stages, which described briefly
below:

1-stage of research and exploration:

Includes various studies, research and business technical and economic knowledge, this
aims to identify the presence of the oil wealth in terms of quantity, quality and degree
economically exploited.

2-Oil extraction stage:

This stage includes a set of economic events and technical work on the creation of crude
oil for the purposes of extraction and becomes ready to be transferred to centers and
export demand, and this stage also includes preparation oil-producing wells and set up
the equipment and facilities necessary for the pipeline and extraction operations.

3- Transportation stage:

Which include the establishment, formation and provide specialized transportation to

transport crude oil from production centers to centers and export demand, as well as the
creation of tankers, container and in order to complete the transfer of the oil internally
and externally.

4-Rfining stage:

The process of converting crude oil into petroleum products and the few products for use
in its final form or centrist such as petrochemical and other industries.

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5-Stage of distribution:

This stage represents the link between the producer and the consumer, and includes the
establishment and formation of the distribution centers for internal and external storage
or oil products and distribution final networks.

* Petrochemical manufacturing stage:

There are several petrochemical products and is based on the manufacture of refined
products (gasoline, kerosene, associated gas, natural gas) in order to produce various
chemical products (detergents, pesticides, fertilizers, paints, plastic materials……..).

The characteristics of the oil industry

1-Magnitude capital money invested in this industry, as it requires large investments by

virtue of the multiplicity and diversity of the stages and the exploitation of the product.
An additional to the nature of the earth and water, which is where the process of oil
production.

2- A high proportion of fixed capital investment to variable capital investment, which

means that the capital structure in the oil industry have mostly fixed elements of which
include (machinery, equipment and construction) and the percentage of this group to
more than 80% compared with variable capital.

3- The use of development technology, because the nature of this industry and try to
reduce the cost of the production to increase the returns from it.

4- Low elasticity of demand and supply in the short term as the elasticity of demand is
less than the correct one and those leaves traces which is clear on the prices of crude oil
and its derivatives from the sharp rise.

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5- The oil industry and because of their nature and specificity are more inclined towards
the monopoly of it to the competition.

6- High level of risk and uncertainty in economic activity.

7- Oil industry need to be staff cadres of skills and scientific skills trainer and a high
degree of educational attainment and professional.

The economics of the oil industry stages

There are several stages of the oil industry and contains a number of economic and
technical issues for example, you need to use multiple techniques and equipment,
sophisticated and also characterized by an increase total costs.
The oil industry needs a relatively long periods of time ranging from (7-10) years, and
this includes a large investment before reaching the first barrel of oil, as well as the
advantage of rising oil project size in terms of production capacity, or the size of
investment or the techniques used. Therefore the stages will show in detail as below:

1- Stage of detection, investigation and exploration

This stage aims to identify presence of crude oil practically and theory and everything
related to the type and quantity of oil wealth and the subsequent stage will depend on the
success of the mission of exploration, this stage includes:

A- Geological, geophysical and geochemical survey.

B- Exploratory drilling.
C- The evaluation and developmental drilling.
A- Geological survey: mapping oil lands and conducting surface, aerial and geological
survey. The geophysical surveys contains check and see recipes and ground layers and
determine the degree of gravity and magnetism, and this is done through magnetic

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survey. The geochemical survey contains knowledge of the extent of presence of oil
wealth.

B- Exploratory drilling: mean drilling oil wells for the purpose of finding more crude
oil or identify the components of the layers containing oil.

C- Evaluative or developmental drilling; which are drilled several wells prepared

productivity to extract or wells deterministic to see the limits of the oil field and this
stage aims to increase the exploitation of the oil field efficiently and maintain the natural
flow of oil and increase the coefficient of extraction with the accurate determination of
the size of the reserve.

2- Stage of oil extraction

Determined by this stage the extraction of crude oil from the earth to become accessible
to economic actors are used for energy, this stage require to identify and create the wells
and successful installations extraction of pipelines and tanks. Ranging of this stage
duration between (3-5 years) and the oil is extracted by one or more of the following
methods:

A- Natural way:

It is the natural flow of crude oil from the earth under the influence of natural forces
inherent in the oil well, which formed from dissolved gas, water or heat, or the
gravitational forces in the oil reservoir. This is the way of low-lying roads cost and need
short period of time where the oil flows easily from the oil well.

B- Synthetic method:

This method relies on the intervention of the human element, machinery and equipment
for the purpose of increasing the reservoir pressure of the well oil, leading to an
increased flow of crude oil and called this method (method of secondary and triple
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extraction), where is injected into oil wells with gas or water, and the price of crude oil
extraction varies from state to state (country).

The oil extraction operations affected by, among other factors which are set out in
below:

Oil extraction rates

It is the largest amount of oil extracted continuously during a certain time period and
aims to extract the oil from the product as much as possible of crude oil and this depends
on a number of factors, economic, technical and political among the most prominent
production rates as follows:

*well depletion influenced by some factors as shown below:

1- Volume of oil reserves and the extent of added or decline.

2- Representatives of the amount of oil extracted production rates.
3- Ratio coefficient of extraction.
4- The demand for crude oil.
5- Techniques used and the oil extraction rates.
6- Impact of crude oil alternatives.

3-Stage of crude oil transportation

This stage constitutes as one of the importance rings in the oil industry, as it a crude
oil and its products becomes accessible to the final consumer, commercial and
industrial, household. Since the spacing areas of the production from the
consumption showed the important of this stage.

You must choose the means of transport in the light of a set of criteria (economic,
technical, and political) as well as knowledge of the amount of oil to be moved and
transportation costs, flexibility, speed, and the means to provide the elements of
safety and stability.

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 There are several means of transportation common in the transportation of crude oil
and its products, including:

1- Ground transportation: include pipelines, railways and large tanker trucks.

2- River transport: includes tankers and container ships and river floating platforms.

Transportation of crude oil and gas needs significant financial investment, and is
characterized by the high proportion of fixed costs; the longer pipeline and tankers are
the most commonly used means of transport crude oil.

The world oil consumer countries linked to a set of pipelines and a range of different
means of transport. Volume of investments depends in industry pipelines used to
transport crude oil on the size and the length of the pipeline and on geographical factors
and natural extensions of the pipeline oil and connecting pipes between the centers of
production and export centers.

There are some difficulties in marine tanker transportation:

i. Pollution problems when exposed to accidents and high maintenance costs and
drag and-password and wait ... in the port.
ii. The return of empty tankers after unloading the cargo of oil and gas.
iii. The rising cost of insurance and the costs of the crew, when passage in the straits
and this will be different from country to other country.

4- Stage of refining crude oil

This stage represents the manufacturing process crude oil to be ready for final
consumption and thus raise the economic value and benefit formalism of crude oil
through the conversion into refined products and refining operations give more than
12 final products and some of these products can be used as an average product for
Petrochemical Industries.

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 Refining industry affected by the combination of factors such as:

1- Volume of demand for refined products in terms of quantity and quality for the
consumer.
2- Display of refined products.
3- Type of crude oil used in refining operations.
4- Policies of oil-producing countries.
5- Method of refining process used.
6- Geographical location of the crude oil refinery for the production and
consumption centers.
5- Stage of marketing and distribution of crude oil

This stage aims to put the crude oil or refined products within the reach of the final
consumer at the inner and outer market; this can be done through a variety of means and
possibilities also through fixed and movement stations.

This stage requires a set of economic events and this is done through:

1- Conduct studies to determine the size and nature of the demand and supply of
crude oil or its products.
2- Identifies the transacting parties in the oil market and to provide the capabilities
and necessary procedures for the development of purchase and sale contracts.
3- Create specialized transportation and all associated events.
4- Providing facilities and administrative services for marketing and distribution
operations for crude oil or its products.
5- Provide the requirements of advertising for refined products both internally and
externally.
Each of the above mentioned shows that this stages need to have extensive
experience in operations, marketing and administrative knowledge of the nature of
the oil market, regional and international.
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