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The Putinization of Oil

Most of Russia's oil production today comes from western Siberia, but at the turn of the century, the fields there were in rough shape. As noted in Chapter 3, the industry entered a death spiral in the 1970s. Output declined straight through to the last days of the Soviet Union and the economic and political struggles of the 1990s.

Production had already started to pick up when Putin came into power in 1999, and he supported the oil industry wherever and however he could by encouraging the larger companies to absorb the successful small ones, thus giving risk takers a potential exit route. Since 2007, a staggering $160 billion has been spent consolidating Russian oil companies.

As a payoff, Russia's oil output climbed from 6 million barrels per day (bpd) in 1998 to 10 million bpd a decade later. In 2009, Russia surpassed Saudi Arabia to become the world's top producer. In 2012, the country's wells were yielding 11 million bpd. (See Figure 7.1.) Domestic consumption has changed very little over the past 20 years, so Russia is now exporting almost 8 million barrels of oil every day.

Worldwide Oil Production

Figure 7.1 Worldwide Oil Production

Source: Energy Information Administration. © Casey Research 2014.

That means nearly a billion dollars per day moving to Russia from the rest of the world.

It also means that Russia is a big factor in keeping the planet going. In 2012 the world consumed 85 million bpd, of which 55 million were traded internationally. That means Russia produced 13 percent of the world's oil and 15 percent of the oil moving in world markets.

The country is an oil giant.

Moreover, not only does it produce a lot of oil, but it also hosts vast untapped reserves. It is difficult to put a hard number on Russia's oil potential, but big is too small a word. Proven reserves range from 60 billion to 77 billion barrels (depending on who is making the estimates), representing about 5 percent of the world total.

Oil Talk

Crude Oil

Crude oil is a soup of chemicals produced from organic debris (primarily dead zooplankton and algae) through the action of heat and pressure applied over millions of years. The composition varies from deposit to deposit, but it is primarily hydrocarbons with small amounts of sulfur, nitrogen, and oxygen compounds.

Hydrocarbons are a family of chemicals whose members are built exclusively out of atoms of hydrogen and carbon. The varieties with just a few carbon atoms tend to be more free-flowing than the varieties with more carbon atoms. A molecule of octane (an ingredient in commercial gasoline), for example, has eight carbon atoms, whereas paraffin wax consists of molecules with 25 or more carbon atoms.

Sweet versus Sour Crude

The sulfur in crude oil must be removed during refining in order to yield clean-burning products. Removal is costly, depending on the amount of sulfur present.

"Sweet" crude refers to oil with a low sulfur content. Being cheaper to refine, it trades at a premium to "sour" crude (with a high sulfur content). Brent crude (from the North Sea oil fields) and West Texas Intermediate (WTI) contain no more than 0.5 percent sulfur and are classified as sweet, whereas oil from Saudi Arabia, with a sulfur content of 1.7 percent, and Mexican Maya crude, with 3.5 percent sulfur, are classified as sour. In the U.S. market, the price of West Texas Intermediate is usually $6 to $12 per barrel higher than the price of Mexican Maya.

Heavy versus Light Oil

In "light" crude oil, the ratio of hydrogen to carbon is higher than in "heavy" crude oil. Barrel for barrel, light crude is richer in energy than heavy oil and commands a higher price. Both Brent and West Texas Intermediate are considered light oils.

Crude from Venezuela's Orinoco oil belt is heavy oil. Saudi crude is an intermediate oil, between heavy and light.

Tar

Tar is a mix of large-molecule hydrocarbons. Asphalt, for example, consists of molecules with 35 or more carbon atoms.

What Are Condensates?

Condensates are high API gravity liquid hydrocarbon (above 50 degrees) with low density that generally occur in association with natural gas production. The term "wet gas" comes from natural gas production that is associated with liquid condensates.

Refining

Crude oil refining is a multistep process.

Step 1 is distillation. Crude oil is boiled, and as the resulting vapor cools, each type of hydrocarbon condenses to a liquid at its distinct temperature (its boiling point).

Step 2 is cracking. Heat, steam, and added chemicals are applied to break larger hydrocarbon molecules into small ones (i.e., to turn viscous material into free-flowing fuels). The cracking process can be tuned to control the composition of the output, depending on what types of petroleum products are most in demand at the time.

Natural Oil Temperature

Most oil comes out of the ground at a temperature between 100 and 170 degrees Fahrenheit. Oil from some offshore deposits comes out cooler than 100 degrees.

Finding Oil

The earliest oil wells were dug where oil was seen seeping out of the ground. But all those obvious opportunities have been exploited.

Oil originates in sediments containing organic material, so today the place to search for large pools of oil is in sedimentary rock near continental rifts and basins. Sedimentary rock with a high level of porosity is especially attractive, since if oil is present, it will be easier to pump out than oil trapped in harder rock formations.

After finding a sedimentary rock formation, the next step is a seismic survey (essentially a series of sonograms) to produce a picture of what lies below the surface. If the picture is promising, the company that has been paying for the search may decide to risk the additional, perhaps much larger, cost of drilling an exploratory well. Even if the well fails to produce oil, it will produce valuable information in the form of rock samples that can be examined for oil staining, porosity, and other clues.

 
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