CHAPTER III

Oil is the crown jewel of commodities that is used in a multitude of ways in our lives, from
plastics to asphalt to fuel. The oil industry is an economic powerhouse and the movements of oil
prices are closely watched by investors and traders.

Learning Objectives:
By the end of this chapter, students will be able to:
1. Learn the basics of oil and natural gas supply chain.
2. Determine the world oil and natural gas reserves.
3. Determine the world oil players.

What is supply chain?

It is a term that describes the planning, sourcing, manufacturing, distribution, and delivery
of products or services from the point of origin to consumption. However, the details are numerous,
highly varied, and difficult for humans to manage in an efficient and profitable manner.

Figure 1. A basic look at a supply chain.

A supply chain network is comprised of many components, or supply chain nodes, that are
connected via flow paths. Inventory and products — as well as information — travel along these
flow paths to the various supply chain nodes, with the ultimate goal of ensuring that customers’
needs are met (in the most profitable way possible).
 Figure 2: An example of a typical supply chain network.

The Oil and Gas Supply Chain

The oil and gas supply chain is unique from other industries.
1. It has a very long link since it involves many parties from the exploration of oil and gas to
the ultimate customer which is the oil and gas consumers.
2. There is an involvement of expensive machinery and equipment and also specialised
logistic services. Most of this equipment requires specific maintenance and operation by
skilled workers.
3. This industry is also influenced by political factors as most oil and gas industry businesses
are controlled by the local government.
4. For the upstream sector, the location of oil and gas drilling activities are determined by the
natural oil and gas resources location. The oil and gas reservoirs’ location vary and their
existence underwater is beyond human intervention. In some cases, it might be far from
basic amenities, which requires additional cost for the logistic services. Even though the
refinery process in the downstream sector might not need to be at a remote location as in
the case of the upstream sector, there are some restrictions applied which are driven by
environmental concerns. Moreover, it needs to be operated in an area that has sufficient
energy supply for its operation. In most cases, refinery plants are located near to coast to
make it easy to be accessed by the crude oil tanker.
5. The industry is subjected to high exposure of risks which require specific mitigation and
measures to prevent accidents. This factor needs to be considered in managing the supply
chain to ensure all operations are safe for people, equipment, and the environment. The
diverse sectors (upstream and downstream) and the multiple business activities within the
sectors require a comprehensive understanding of the industry to enable efficient supply
chain management. The involvement of many business functions within the industry makes
it a necessity for the oil and gas companies to outsource some of their non-core activities
through supply chain networks.
Segments and Elements of Oil and Gas Supply Chain
The oil and gas industry operates through a global supply chain that includes domestic and
international transport, trading, shipping, ordering, and inventory visibility and control. Other
supply chain elements include material handling, import/export facilities, and the distribution of
refined energy products from points of origin to market.
Typically, the supply chain is divided into three segments.

Figure 3: Three Segments of Oil and Gas Supply Chain

1. The upstream segment finds and produces crude oil and natural gas. The upstream sector
which is sometimes known as the exploration and production sector (E&P) and involves
the exploration of potential oil and gas catchment, drilling activities, and also the process
of pumping out the crude oil or natural gas from the well. Due to the nature of operation in
this sector, most businesses involve contractors and service companies which support the
oil and gas operators.
2. The midstream segment handles the processing, storing and transporting of energy
commodities. The midstream sector refers to the interconnecting part between the upstream
and downstream sectors which involves processing, storing, and transportation of
commodities including crude oil, natural gas, and liquids (Lima et al., 2016). Considering
 the small size of midstream sector, this research will consider it to be in the downstream
sector.
3. And the downstream segment encompasses oil refineries, retail outlets and natural gas
distribution companies. Finally, the refining of crude oil, distribution of refined natural gas.
and its product are collectively recognised as the downstream sector of the industry.
Companies operating in the oil and gas industry may own their operations from upstream
to downstream sectors (fully integrated) or just focus on one or two sectors.

Figure 4. Critical Elements of Oil Supply Chain

The first step in the oil supply chain is production. During

production, crude oil is produced on both land and at sea. Oil
production includes drilling, extraction, and recovery of oil from
underground
 Gathering pipelines are the main transportation modes for
movement of crude oil into short term storage. Gathering pipelines
travel shorter distances than long haul pipelines, varying in size,
frequency, and flow levels.

Short term storage serves as the staging area for crude distribution
throughout the entire supply chain. Without storage facilities, the
ability to adjust to supply and demand would be debilitated.

Refineries act as the main transformation point for all crude oil into
its various consumable products and are mainly located domestically.
After receiving oil from storage facilities, refineries use various
chemical separation and reaction processes to transform crude oil into
usable products such as: fuel oil, diesel oil, jet fuel, and multiple
essential manufacturing feedstocks.

Ports of call represent the major entrance and exit points of crude
oil prior to short term storage and, later, refining. Ports serve as
central gathering facilities for entrance into the U.S. Shipping
channels are the most travelled and commonly used source to move
foreign oil to domestic refineries. Large tankers contain thousands
of barrels of crude oil to be refined into fuel and other by-products.
 Once the refined fuel leaves the terminal, it is transported to its
final point of sale, which includes fuel stations and airports. The
trucking, shipping and delivery lines provide the final finished
product which can be delivered across the country.

Figure 5. Critical Elements of Natural Gas Supply Chain

Processing Plant
Processing plants clean raw natural gas by separating impurities
and the various hydrocarbons and fluids from pure natural gas,
producing what is known as ‘pipeline quality’ dry natural gas,
also known as methane. A fully operational processing plant
delivers pipeline quality dry natural gas that can be used as fuel
by residential, commercial, and industrial consumers.
 Processing plants clean raw natural gas by separating impurities and the various hydrocarbons
and fluids from pure natural gas, producing what is known as ‘pipeline quality’ dry natural gas,
also known as methane. A fully operational processing plant delivers pipeline quality dry natural
gas that can be used as fuel by residential, commercial, and industrial consumers.

Pipelines can be characterized as interstate or intrastate.

Interstate pipelines are long-distance, high-capacity pipelines
that transport natural gas throughout the nation. Intrastate
pipelines link natural gas producers to local markets as well
as the interstate pipeline system.

Regasification is the process of transforming liquefied

natural gas (LNG) into a gaseous state through vaporization,
preparing it for use. This process occurs at regasification
plants, where the temperature of LNG is increased, typically
through seawater vaporizers, transforming it into gas.

Natural gas hubs are locations where natural gas is priced

and traded throughout the country. These ‘market hubs’ are
located at the intersection of major pipeline systems.

Natural gas is stored in three principal types of large

underground storage systems: depleted natural gas
reservoirs, aquifers, and salt caverns. More than 80% of
natural gas storage capability consists of depleted reservoirs,
which are relatively easy to convert to storage facilities after
use and are typically located near consumption centers and
existing pipeline systems. Natural gas can also be stored as
liquefied natural gas (LNG), which reduces its volume to
1/600th of the volume of natural gas, making it more efficient
and practical to store and transport.
 The fractionation process is the breaking down of natural
gas liquids (NGLs) into their base components in order to
be useful, and occurs at a fractionator facility. Common
base components of NGLs include ethane, propane, t and
butane. Fractionation occurs in stages, separating each base
component from the stream of mixed NGLs, one-by-one.

Liquefaction is the physical conversion of a gas into a

liquid state. Liquefaction occurs at normal atmospheric
pressure by super-cooling the natural gas to -260°F,
creating liquefied natural gas (LNG). Prior to liquefaction,
certain unwanted components, such as dust, acid gases,
helium, water, and heavy hydrocarbons, are removed as
they can cause difficulty downstream

Liquefied natural gas (LNG) shipping provides a low-

cost, safe, and environmentally responsible method to
move large volumes of product long distances. LNG is
transported in specially-built tanks on double-hulled
ships. LNG carriers are among the safest in the shipping
industry, having made more than 100,000 voyages
without major incident.

How Do Supply and Demand Affect the Oil Industry?

Expectations about the price of oil are the major determining factors in how companies in
the industry allocate their resources. Prices create incentives that influence behavior. This behavior
eventually feeds back into supply and demand to determine the price of oil.
➢ The Low Elasticity of Demand
The most striking feature of the oil market is the low-price elasticity of demand. That means
demand for oil is not very responsive to changes in prices. It is easy to see this by looking at your
own life. If you have a car, you usually continue driving to work, going to stores, and visiting
friends regardless of the price of gasoline. Your demand for oil does not change very much based
on the price, and it works the same way for others.
➢ The Low Elasticity of Supply
As a rule, supply is less responsive to price changes than demand. However, the supply of oil
is inelastic, even by the standards of supply curves.
First, it helps to consider why supply is generally less elastic than demand, particularly in
the short run. There is a fixed supply of goods at any given moment, and demand must adapt. For
instance, the sudden increase in people working from home during the coronavirus crisis created
a shortage of consumer paper products at stores in 2020. People previously got toilet paper, facial
tissues, and paper towels from different companies via their employers while at work. In the short
term, consumers simply had to reduce their demand.
The supply of oil is even less elastic than most other goods because of the specialized
investments that are often needed to extract oil. Much of the equipment that is used to mine gold
or silver can be diverted to mining platinum or palladium as prices shift. However, expensive
equipment used for hydraulic fracturing and offshore drilling often cannot be used for anything
else. As a result, oil companies may take years to develop oil fields when prices are high.
Furthermore, they often must continue producing oil even when prices fall because the equipment
has no other uses.

World Oil and Gas Reserve

Oil/ natural gas reserves denote the amount of crude oil/ natural gas that can be
technically recovered at a cost that is financially feasible at the present price of oil/ natural gas.
Hence reserves will change with the price, unlike oil/ natural gas resources, which include all
oil/ gas that can be technically recovered at any price. Reserves may be for a well, a reservoir, a
field, a nation, or the world. Different classifications of reserves are related to their degree of
certainty.
The total estimated amount of oil/ gas in an oil/ gas reservoir, including both producible
and non-producible oil/ gas, is called oil/ gas in place. However, because of reservoir
characteristics and limitations in petroleum extraction technologies, only a fraction of this oil/ gas
can be brought to the surface, and it is only this producible fraction that is considered to be reserves.
The ratio of reserves to the total amount of oil/ gas in a particular reservoir is called the recovery
factor. Determining a recovery factor for a given field depends on several features of the operation,
including method of oil/ gas recovery used and technological developments

Classifications
All reserve estimates involve uncertainty, depending on the amount of reliable geologic and
engineering data available and the interpretation of that data.
 ➢ Proven reserves
It is defined as the quantity of energy sources estimated with reasonable certainty, from the
analysis of geologic and engineering data, to be recoverable from well-established or known
reservoirs with the existing equipment and under the existing operating conditions." A reserve is
considered proven if it is probable that at least 90% of the resource is recoverable by economically
profitable means.

➢ Unproven reserves
Unproven reserves are based on geological and/or engineering data similar to that used in
estimates of proven reserves, but technical, contractual, or regulatory uncertainties preclude such
reserves being classified as proven. Unproven reserves may be used internally by oil companies
and government agencies for future planning purposes but are not routinely compiled.

World Oil Reserve

British Petroleum estimated that the world had 1.73 trillion barrels of oil reserves as of 2018,
which would be sufficient to meet 50 years of global production at 2018 levels. According to the
British oil company's 2019 Statistical Review of World Energy report, Venezuela is the leading
country in terms of oil reserves, coming in at 300.3 billion barrels. Saudi Arabia is a close second
with 297.7 billion, Canada is third with 167.8 billion, and the U.S. ninth with 61.2 billion barrels.
Here are the 14 countries with at least a 1% share of global proven oil reserves:

Figure 6. Proven Oil Reserves by Country

The Organization of the Petroleum Exporting Countries (OPEC), meanwhile, says the world
has 1.5 trillion barrels. The cartel estimates that 79.4% of global reserves are held by its members,
which includes seven of the world’s top 10 largest oil reserve countries—Venezuela, Saudi Arabia,
Iran, Iraq, Kuwait, United Arab Emirates, and Libya.

Figure 7. OPEC share of world crude oil reserves, 2018

World’s Natural Gas Reserve

According to U.S. Energy Information Administration, As of January 1, 2020, there were
an estimated 7,257 trillion cubic feet (Tcf) of total world proved reserves of natural gas. Proved
reserves of natural gas are the estimated quantities that analysis of geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from reservoirs under
existing economic and operating conditions.
According to BP Statistical Review of World Energy 2020, between 2000 and 2019, global
proved natural gas reserves increased by some 1.9 quadrillion cubic feet. In 2019, worldwide
reserves reached their peak at just over seven quadrillion cubic feet, of which 38 percent are located
in the Middle East.
The United States is the world’s largest natural gas producer as of 2019, despite ranking
fifth in terms of proved reserves. That year, it was responsible for approximately 921 billion cubic
meters of natural gas being extracted. This compared to a production volume of 679 billion cubic
meters by Russia.
 Figure 8. Leading countries by proved natural gas reserves worldwide in 2010 and
2020*(in trillion cubic meters)

Philippines Crude Oil and Natural Gas Reserves

Petroleum and other liquids
According to the Oil & Gas Journal, the Philippines had 139 million barrels of proved
crude oil, including lease condensate, reserves in 2019.
In 2019, total petroleum and other liquids production was 37,000 barrels per day (b/d), and
the country consumed 474,000 b/d.
The Philippines has only two active petroleum fields: Galoc, an offshore field in the
Northwest Palawan Basin, and Alegria, an onshore field in the Province of Cebu. However, the
Philippines Department of Energy (DOE), working with Searcher Seismic, is assessing more than
5,000 miles of the East Palawan Basin for fresh hydrocarbon exploration potential.
Reed Bank, located near the Spratly Islands (a portion of which are claimed by the
Philippines) holds unexplored hydrocarbon stores. EIA estimates contains approximately 11
billion barrels of oil and 190 trillion cubic feet of natural gas in proved and probable reserves.
Natural Gas
According to the Oil & Gas Journal, the Philippines holds 3.5 trillion cubic feet (Tcf) of
proved natural gas reserves.
The Philippines consumes all of the natural gas produced domestically. The country
produced 124 billion cubic feet (Bcf) and consumed 127 Bcf of natural gas in 2018.
Malampaya, the deep-water gas-to-power project located in the West Philippine Sea near
the Province of Palawan, was launched in 2001 with a single offshore platform. An additional
platform began operating in 2015. The project in the Malampaya-Camago natural gas reservoir is
operated by Shell and is a joint venture between Shell Philippines Exploration B.V. (45%),
Chevron (45%), and state-owned Philippine National Oil Corporation-Exploration Corporation
(10%). Malampaya is critical to the country’s energy needs and provides up to 20% of the
country’s power.
The Philippines DOE projects that the Malampaya natural gas field will run dry by 2027.
Imported liquefied natural gas (LNG) will likely replace natural gas supplies from Malampaya. To
prepare for the increase in LNG imports, the Philippines have four LNG import terminal projects
in different phases of approval. U.S.-based Excelerate Energy LP, Australia-based Energy World
Corp, and Philippines-based First Gen Corporation and Batangas Clean Energy, Inc., are potential
candidates for the four projects.

World Oil Players

These are the top ten oil and gas companies in 2020, based on 2019 revenues. While
Chinese and U.S. companies make up half of the 10 companies, major players also are from Saudi
Arabia, Europe and Russia. This list is limited to companies which are publicly traded in the U.S.
or Canada, either directly or through ADRs. All data provided by YCharts and as of September 9,
2020. Chinese companies continue to dominate the industry, with Sinopec topping the list,
followed by China National Petroleum Corp and PetroChina.

#1 China Petroleum & Chemical Corp. (SNP)

Revenue (TTM): $355.8 billion
Net Income (TTM): $486.6 million
China Petroleum & Chemical is a producer and distributor of a variety of petrochemical and
petroleum products. The company's products include gasoline, diesel, kerosene, synthetic rubbers
and resins, jet fuel, and chemical fertilizers, among other related offerings. Also known as Sinopec,
China Petroleum & Chemical is among the very largest oil refining, gas, and petrochemical
companies in the world.
 #2 PetroChina Co. Ltd. (PTR)
Revenue (TTM): $320.0 billion
Net Income (TTM): -$1.8 billion

Oil and gas company PetroChina is engaged in oil products exploration,

development, production, and sales. The company's primary products include crude oil,
petrochemical products, and their derivatives. PetroChina is the exchange-listed branch of the
Chinese state-owned China National Petroleum Corporation and is counted among the largest oil
and gas producers in business today.

#3 Saudi Arabian Oil Co. (Saudi Aramco) (Tadawul: 2222)

Revenue (TTM): $286.9 billion
Net Income (TTM): $64.5 billion
Saudi Aramco, which went public in 2019, is one of the largest companies in the world across all
industries, as well as among the very largest global oil companies by revenue. This company is
unusual in this list in that its stock does not trade in the U.S. While Investopedia would not
normally include non-U.S.-listed stocks, Saudi Aramco is such a major player in the oil industry
that a list of the biggest oil companies would not make sense without including it.

#4 Royal Dutch Shell PLC (RDS.A)

Revenue (TTM): $263.1 billion
Net Income (TTM): -$11.3 billion

Based in the Netherlands, Royal Dutch Shell explores, produces, and refines petroleum through
its subsidiary companies. In addition to operating gas stations around the world, Shell produces
and sells fuels, lubricants, and other chemicals.

#5 BP PLC (BP)
Revenue (TTM): $230.7 billion
Net Income (TTM): -$21.9 billion
British oil company BP is involved in oil and petrochemical exploration, production, and supply.
The company refines and sells petroleum products including chemicals such as acetic acid,
ethylene, polyethylene, and terephtalic acid. BP also generates solar energy for sale as well.

#6 Exxon Mobil Corp. (XOM)

Revenue (TTM): $213.9 billion
Net Income (TTM): $7.2 billion
Exxon Mobil is a global petroleum and petrochemicals business. The company explores, produces,
trades, transports, and sells oil and natural gas. It's also involved in electrical power generation
through coal and minerals operations. Among the many products that Exxon Mobil sells are fuel,
lubricants, and other petroleum-derived chemicals. After Saudi Aramco, Exxon Mobil is the
second-largest oil company in the world by market value even though Exxon Mobil is more than
10 times smaller than the Saudi Arabian company.

#7 Total SE (TOT)
Revenue (TTM): $146.1 billion
Net Income (TTM): -$2.9 billion
Total, headquartered in France, explores and produces crude oil, natural gas, and low-carbon
electricity. Total also refines and produces petrochemical products. The company owns and
operates gas stations throughout Europe, the U.S., and Africa. Like most of its large competitors,
Total is an integrated energy company that engages in all aspects of the oil and gas business, from
exploration through sale.

#8 Chevron Corp. (CVX)

Revenue (TTM): $115.0 billion
Net Income (TTM): -$8.7 billion
Chevron is an integrated oil company with primary business operations both
upstream and downstream. The upstream division is involved in the exploration and production of
oil and natural gas, while the downstream operations cover refining, transportation, and marketing.
Chevron is also involved in chemical and mining operations as well as non-energy activities such
as technology development.

#9 Marathon Petroleum Corp. (MPC)

 Revenue (TTM): $102.4 billion
Net Income (TTM): -$7.7 billion
Marathon is a crude oil refining company. Serving customers across the U.S.,
the company refines, supplies, transports, and sells petroleum products.
Marathon is leaseholder or owner of thousands of miles of petroleum pipelines and has been the
owner of the Speedway gas station chain. In early August, Marathon agreed to sell Speedway and
its 4,000 outlets to Japan's Seven & i Holdings, for for $21 billion. The Japanese retailer is owner
of 7 Eleven. 2

#10 PJSC Lukoil (LUKOY)

Revenue (TTM): $99.1 billion
Net Income (TTM): $3.9 billion
Russian oil and gas company Lukoil conducts exploration, production, refining, transportation,
and marketing of petroleum products primarily in the Siberian region. The company distributes oil
and petroleum through an extensive pipeline system and by ship, serving customers in both Russia
and the U.S.

OPEC
OPEC, which describes itself as a permanent intergovernmental
organization, was created in Baghdad in September 1960 by founding
members Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela.1 The
headquarters of the organization are in Vienna, Austria, where the OPEC
Secretariat, the executive organ, carries out OPEC’s day-to-day business.
The term Organization of the Petroleum Exporting Countries
(OPEC) refers to a group of 13 of the world’s major oil-exporting nations. OPEC was founded in
1960 to coordinate the petroleum policies of its members and to provide member states with
technical and economic aid.1 OPEC is a cartel that aims to manage the supply of oil in an effort to
set the price of oil on the world market, in order to avoid fluctuations that might affect the
economies of both producing and purchasing countries.23
Countries that belong to OPEC include Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela
(the five founders), plus the United Arab Emirates, Libya, Algeria, Nigeria, and four other
countries.
According to its statutes, OPEC membership is open to any country that is a substantial exporter
of oil and shares the ideals of the organization.8 After the five founding members, OPEC added
11 additional member countries as of 2019. They are, in order of joining, as follows:
 1. Qatar (1961)
2. Indonesia (1962)
3. Libya (1962)
4. United Arab Emirates (1967)
5. Algeria (1969)
6. Nigeria (1971)
7. Ecuador (1973)
8. Gabon (1975)
9. Angola (2007)
10. Equatorial Guinea (2017)
11. Congo (2018)
Ecuador withdrew from the organization on Jan. 1, 2020. Qatar terminated its membership on
Jan. 1, 2019, and Indonesia suspended its membership on Nov. 30, 2016, so as of 2020 the
organization consists of 13 states.