1 INTRODUCTIONIntroduction] | 1 EARLY HISTORY OF THE OIL INDUSTRY According to recorded history, the oll industry apparently began at least 6,000 years ago, in the Middle East around the Arabian Gulf, when the peoples of the region found orf seeping to the surface through natural seeps. As a result ofits availability, they found uses for this resource, primarily as a mortar for constuction, a8 a sealant for vessels containing liquids, as a medicine, and as a lubricant for simple mechanisms, As the ol available at the Surface was consumed, it was concluded that it must be flowing from sub-surface reservoirs. Consequently, shellow wells were dug with stone chimneys or walls fre support as heavy oil slowly flowed into these wells. ‘This primitive industry spread from the Middle East to China with the discovery of oil while drilling wells to obtain salt waver from which salt could be obtained. ‘The Chinese developed a primitive industry, using the oil for illumination, medicine, and as a sealant for vessels and pipelines to transport fluids. They wrapped large bamboo rote with linen and sealed the linen with oil, so that these pipelines could transport water for irrigation, in agriculture, for community use, and even for the tanspoxt of natural ges Produced from the wells as associated gas used in home heating. With the discovery of petroleum distillation techniques by Arabs in the Middle East, about 2,000 years ago, the use of oil was extended. Weapons of war could now be gbiained from the oll, since many of the products of petroleum distillation are not only flammable but also explosive. During this time period, for example, the city of Alexandre in Egypt was burned during warfare, using an oil product referred to as Greek fire. With the development of petroleum distillation, a primitive industry began in Europe approximately 1,000 years ago. This industry came into competition with the whale ol industry as a Source for illuminating oil for European city streets It is generally agreed, however, that what is considered to be the modem petroleum industry did not begin until 1859 when, in the United States, a group of businessenen frown New Haven, Connecticut contracted with Col. Edwin A. Drake to drill for oil nowy Titusville, Pennsylvania, ‘This was the first recorded agreement to purposely seek eats surface hydrocarbon in the U.S. Edwin Drake was not a Colonel, but had wora a uniform in his position as a railroad conductor. Those promoting the drilling operations felt that giving Drake the title “Colonel” would give more prestige to the project and, therefore, attract greater financial support. The drill site chosen was in a region of surface sceps or oil springs, which had been developed by people native to the region over previous centuries. "It was therefore concluded that this oil was flowing from sub-surface reservoirs. In 1859, as a result of the agreement with the business group, Edwin Drake drilled his well near Titusville. It was originally known as Drake’s Folly. However, he struck oil at a depth of 69 is? fee Qver time of production, the well produced approximately 8 barrels per day (STB/day), Historical production estimates ranged from 4 to 20 barrels per day (STB/day), With Drake's discovery, excitement and activity developed in the region, and hundreds of wells were drilled in northwestern Pennsylvania through the 1860s and the balance of che Century. Some of these produced at rates as high as 3,000 barels per day (STB (day).Introduction} | 1 ‘This oil was used primarily for illumination and sealant purposes, but was found to be extremely effective as a lubricant for use with rotating machinery. This provided a market for oil in industry. Around Titusville, through the 18603, the oil was transported to refineries using horse-drawn wagons carrying the oil in 50 gallon wooden wine barrels, or by transport on barges down the Allegheny River. It is interesting that Drake's well is considered to be the beginning of the modem oil industry. In 1829, 30 years prior to Drake's discovery, oil was discovered while drilling a water well in Kentucky. ‘The well blew out (flowed out of control). It is estimated that 1,000 barrels per day (STB/day) flowed from the well under blowout conditions, yet this well is seldom mentioned in the history of the oil industry. It may be asked, “Why was Drake’s well significant in the history of the industry and the Kentucky well not significant?” There are probably several reasons for this, one being that the developing market for the produced oii as an industrial lubricant was not available until the 1860s, Another reason was the interest in Drake's discovery, of a 20-year-old man who had a ‘wading company in Cleveland, Ohio, a short distance from Titusville. At the age of 21, this young man visited the Pennsylvania oil fields. Recognizing the potential of this new industry as a source of illuminating oil for Europe, he became involved, first in the area of refining, By the end of the century, however, he admitted control of 90% of the industry, including production, transporation, and tefining. His name was John D. Rockefeller. With his Standard Oi Company, Rockefeller maintained majority control of the world industry well into the twentieth century. Oil was first discovered in Oklahoma at a commercial level in 1897, initiating some activity. However, the next major event in the industry occurred in 1901 ‘near Beaumont, Texas, ‘Through the 1890s, a man named Patillo Higgins promoted drilling at a site near Beaumont. He concluded that, because of surface land fearures, sub-surface geology was ideal for oil presence. This conclusion was based on his observation of a tegion of land 15 fest higher than the surrounding land, which was essentials sce one eo diameter, He believed that this indicated sub-surface geologic high elevations, ides! for nual resence of oil. Higgins drilled extensively over this surface dome through the 1890s, Bus as history would indieate, he did not dell to sutieee depths. In 1901 he sold significant shares in his operations to Capt. Anthony Lucas, Lucas drilled the first discovery well at Spindletop in 1901. He struck oil at a depth just over 1,000 ft, The well blew out, and it is estimated that this first Spindletop well (considered the largest gusher in the history of the oil industry) produced an average of 100,000 barrels per day (STB/day) over the next 10 days. ‘This was @ tots! of approximately 1 million barrels in 10 days from a single well. The oil was being lost, however, since it was flowing under blowout conditions. In an attempt to save some of this oil, an earthen dam was constructed around the drilling rig. Itis estimated that this lake of oil collected 500,000 barrels. However, as the story is presented, it caught on fire and was lost. The major result, therefore, of this initial Spindletop well was excitement followed by the first major oil boom in Texas. ‘Through the carly years of the century, the industry began to flourish, particularly as the shipping industry converted to oil as a fuel to replace coal. Through the early 1900s, oflIntroduction] | 1 was discovered in many regions of the world as demand for oil increased. However, most activity was in the United States, with the oil states of Pennsylvania, Texas, Oklahoma, Louisiana, and California experiencing the major growth in production and processing from the new industry. Although it was significant in many world regions, from the standpoint of world operations, the modern oil industry was primarily a United States industry until the middle of this century. By the 1960s, with further developments in the Middle East, southeast Asia, and the North Sea, the oil industry truly became a world industry. Production outside the United States far exceeded U.S. production, as production in the U.S. reached a maximum and began to decline, The Arabian Gulf region, particularly Saudi Arabia, has become the dominant influence on the industry. Technological as well as economic developments have been particularly impressive in the industry during this time period, with major technical changes occurring with such a world dependency on oil and its associated gas resources. THE MODERN OIL INDUSTRY From an operational standpoint, the petroleum industry may be defined as “that induswry where a well is drilled through the rock structure of the earth to a sub-surface reseryoir of the resource (hydrocarbon), and, by some means, that resource is caused to flow into the well to be produced back to the surface.” It will be noticed that, even though this operational definition is simple, it properly defines the petroleum industry. When compared to the synthetic fuels industry (which includes production of the resource from such sources as the tar sands, oil shales, and coal through coal gasification), this operational definition of the petroleum industry excludes the synthetic fuels industry. However, because of relatively new technical developments within the industry, such as horizontal drilling, itis quite probable that the two industries will tend to merge over the next few decades. ‘The organization of the petroleum industry can be represented as illustrated in Figure 1-1,z 7 Introduction] [7 The Oil Industry ‘Transportation’ Exploration Figure 1-1. The Organization of the Modern Petroleum Industry ‘The petroleum industry is that industry where a search is conducted for the resource. Once it is found, it is produced to the surface and transported for processing into useable materials which are then delivered to the consumer to be used for their intended purpose. As illustrated in the Figure 1-1, this sequence may be represented by © Exploration . Production Transportation © Refining and Petrochemicals © Marketing © Consumer Research is involved in all of these processes. In fact, in recent decades, no industry has benefited more from research than has the petroleum industry. Because of the organization of the industry, Exploration and Production (E&P) is often considered to be the petroleum indusiry. That portion of the industry beyond the point where the produced resource (oil and gas) is metered into the transportation system, is considered to be outside the petroleum industry. This distinction has occurred in part because, generally, the majority of the capital investment in the industry occurs in Exploration and Production, but also because of organization of most major companies.Introduction|| 1 In many world companies the production divisions are credited with production of oil and gas at the point at which it is metered into the transportation system. It is considered to have left Exploration and Production, and therefore the petroleum industry, once this metering occurs. ‘These production divisions have received credit for that production, There is therefore litte reason for concern as to events which occur beyond the metering operation, Consequently, this has led to the division of the industry into upstream operations and downstream operations. Upstream operations are considered to be Exploration and Production, or those operations to the point of metering the produced resource into the transportation system, Downstream operations xe therefore considered to be those operations which occur beyond the point of mietering the produced resource into the transportation system. Upstream therefore includes Exploration and Production, where Downstream includes Transportation, Refining and Petrochemicals, Marketing, and Delivery to the Consumer.