“People blame the president, OPEC and anyone else they can think of for the price of fuel today; it’s nonsense. In over 30 years of exploration nobody ever told me when and how much I could sell my oil for,” retired oilman Jean LaForge told AIN.
“If I could have gotten $100 a barrel 20 years ago I’d have taken it and why not? My partners and I have used our homes and anything else we owned as collateral over the years. I’ve been busted then flush more times than I can remember. How many people are willing to risk everything to put up the money necessary for exploration?
“And after spending millions of dollars does anyone really think I would go back to my investors and say, ‘I know oil is going for $60 a barrel but gas is too expensive so I sold it for $50.’ What makes oil expensive is capitalism. You want to see the price of oil drop like a rock in the Gulf? Stop using it. The price is set by two simple things: supply and demand, end of story.”
According to David Brown of the American Association of Petroleum Geologists (AAPG), oil producers behave like producers in any other industry. When inventories are low and prices are high, they produce more. When inventories are high and prices are low, they produce less. “Nobody needs OPEC to tell them to do that,” he said. “There was a time when [OPEC] had a lot more influence, but for the most part those days are gone because there are so many players now.” Yet of all the areas of concern within business aviation few, if any, will spark a more heated discussion than jet fuel.
Regardless what you call it–Black Gold, Texas Tea, crude or a host of other names– petroleum has been evoking strong emotions for more than 4,000 years. Crude was used as medicine and to provide light for wealthier members of ancient societies.
By the 4th century there were oil wells in China as deep as 700 feet drilled with bamboo poles and bits. The first commercial oil well drilled in North America was in Oil Springs, Canada in 1858. But it was the introduction of the internal combustion engine in the early 20th century that fueled the industry people love to hate today. In fact, a Golin/Harris poll taken in 2003 asked people what industries they felt they could trust. At a negative 63 percent the oil and gas industry was at the bottom of the list.
According to the Manual of Petroleum Measurement Standards put out by the American Petroleum Institute (API), petroleum is “a substance, generally liquid, occurring naturally in the earth and composed mainly of mixtures of chemical compounds of carbon and hydrogen with or without other nonmetallic elements such as sulfur, oxygen and nitrogen.”
A common misconception is that crude oil is similar to an underground lake. In reality it fills the pores of porous rock just as water fills a sponge. Once crude is formed it seeps slowly upward through tiny pores in rock until it is trapped by a layer of impermeable rock. If it never encounters impermeable rock, the oil, and the gas associated with it, eventually comes to the surface of the Earth. While there are still some places on earth where crude oil does surface, it is far more common to find it in oil-containing rocks thousands of feet below either the ground or ocean surface.
Sid Jansma Jr., president and CEO of Wolverine Gas & Oil, has been in the oil business most of his life. He said he bought Wolverine from his father, an immigrant who came to the U.S. from the Netherlands in 1920.
Jansma explained that Pangea, the single supercontinent that eventually drifted apart, forming today’s continents, was criscrossed by rivers all flowing outward toward the sea carrying organic material and sand. “Over millions of years organic material flowed from Pangea to the sea, was buried by a layer of sand followed by another layer of organic material and so on,” he said. According to what geologists call the biogenic theory, the organic material is composed of decayed plants, algae, bacteria and even dinosaurs.
“When you have hydrogen and carbon atoms from organic material under pressure and temperature they form hydrocarbons (chains of atoms) that become the molecules we call oil,” Jansma said. “Sometimes the silt became coal as a result of huge swamps full of multiple canopies causing a denser accumulation of organic matter. Oil sources were essentially a more broadly spread area. Compressed silt becomes shale and compressed sand becomes sandstone; oil forms in shale.”
As the layers of mud became thicker, the pushing down on the organic material increased the pressure. Because of other processes going on inside the core of the Earth, the temperature of the organic material was also increased. These conditions proved favorable for microorganisms that can live without oxygen and they acted on the organic material. In those pressure cooker-like conditions, crude oil and gas were formed. Oil forms first; then, as the temperature and pressure increase at greater depth, gas starts forming.
Jansma said, “[Central Utah] was one of the largest desert areas in North America. It ranges from as far north as Yellowstone National Park to as far south as New Mexico. This entire area sits on top of a buried 2,000-foot sand dune. The oil we’re drilling here today originated about 50 to 100 miles west of us in what’s known as the Chainman Shale.”
According to Jansma, the shale uplifted more than 150 million years ago and butted up against a more porous rock known as Kaibab limestone and flowed through the limestone to the Navajo sandstone underneath the current drilling operation, where it encountered an impervious rock called the Arapien that essentially held it in place.
Part Science, Part Luck
Jansma points out that looking for crude is part science and part luck. Geologists know what characteristics to look for so they examine the composition of the rocks and rock formations. A geophysicist measures the magnetic and gravitational properties of a sample of rocks and in particular how sound waves travel through different kinds of rock. One common method is a seismic survey.
Jansma said, “A seismic survey involves firing pulses of sound energy down through the layers of rock beneath the Earth’s surface and recording the energy that is bounced back. The geologist can interpret from the way the sound energy travels back what kind of rock and structures are below.”
The most complicated and difficult part of finding and producing oil begins when an ideal place to drill has been located. According to the AAPG, the time required between locating an area of interest and pumping a gallon of jet fuel into an aircraft can be five years or more.
For example, the first discovery in the Boomvang field in the East Breaks area of the Gulf of Mexico happened in 1997, but oil production didn’t begin until 2002 and took another year to reach full swing. The more remote the discovery, the longer it takes to bring a field into production. In fact, bringing in Alaska’s Prudhoe Bay discovery took almost 10 years.
Jansma holds about 1,000 land lease agreements covering approximately two-thirds of the more than a million acres in the Central Utah area. “We do a lot of scouting, and when we find an area we’d like to explore we send a ‘landman’ to negotiate a lease with the owner. The landman is a very specialized job. A landman has a knack for working with people and putting together win-win relationships. Still, just arranging for leases can take up to a year.”
When negotiating a lease the oil driller gives the landowner a fixed fee in return for the right to drill on the property. In addition, it is also common for a property owner to get about one-eighth of the value of the hydrocarbons produced on his property.
Jansma said there are four types of land available to be leased: private, Bureau of Land Management (BLM, which controls millions of acres of land and puts oil rights up for public auction), state-owned land and U.S. Forest Service land. “We hold quite a few leases with the federal government,” he said. “I write a check to them for $1.6 to $2 million a month,” he said.
Once the leases are secured, the next step is to do a seismic survey. The sound required can be generated with small dynamite charges in a series of holes or the company can vibrosize the ground using a truck with a vibrator. In either case it requires government permits.”
Ellis Peterson, senior production engineer for Wolverine Gas & Oil, said the permits required are so complex and so limiting that in a given 12-month period the company might have only a one-and-a-half month window of opportunity to conduct a seismic survey. He cited archeological artifacts as one impediment to the conducting of seismic surveys.
“When you run a seismic line you’re required to have an archeologist on site,” Peterson explained. “He will walk 100 feet outward on either side of the line looking for artifacts. If he finds anything more than 50 years old we are required by the federal government to develop a plan that explains how we will go around and have it approved. Think about that: finding an article on the ground from before 1956 is all it takes. And we’re not allowed to map it because the map might get out into the public, causing people to come look at the artifact and damage it.
“In fact, if you even pick it up the federal government will shut down your entire seismic line. It costs about $30,000 a mile to run a seismic line and we’re running about 275 miles of seismic lines this year. Can you imagine having that shut down because someone picked up an arrowhead? Worse, if you keep it you’re looking at violating a law that carries a prison term.”
Time To Drill
If the seismic evaluation indicates a likely location for oil, the next phase begins–obtaining drilling permits. According to Jansma, a permit is required to drill on private or state-owned land. To drill on BLM land you need both state and BLM permits; state, Forest Service and BLM permits are required to drill on Forest Service land. To make matters more difficult, often the permits cannot be granted simultaneously, prolonging the permit process to a year or more.
“Once the permits are obtained you have to study the environmental limitations. In a given 12-month period we might have an actual window of only five to six months during which we can actually drill. There are myriad things that will prevent drilling from taking place, such as federally protected plants and animal migrations,” Jansma said.
Peterson told of a situation when the company was permitted to drill in a location and after the rig was constructed a plant was discovered that came in two variations. One was federally protected and the other wasn’t. Drilling was delayed until the plant bloomed, which was the only way to tell the difference between the two types. When it did bloom, Peterson learned that it was the protected variety, “so we had from that day until December 15 to drill, after which we had to shut down until the following May 15th to allow the plant to go through its normal cycle again.”
Plants aren’t the only impediment to drilling. According to Peterson, federal law prohibits an operating rig from being located within half a mile of a raptor nest. “Raptors are migratory. You can build a rig, get ready to start drilling and a raptor will fly into the area and build a nest,” he explained. “Bingo, you are instantly shut down until the eggs hatch and the fledglings leave the nest,” shutting down production for some four months.
Jansma said in the Covenant Field in Central Utah he secured the leases in March 2000, their first discovery occurred on May 12, 2004, and it wasn’t until May of this year they were fully producing–more than six years after he signed the leases.
“This has been a fairly typical time line for developing oil and natural gas. There is an enormous amount of capital and time invested up front before any return on investment is made,” he emphasized. “The big thing in this business is knowing how to play the risks because the costs are huge and it usually takes partnerships to make it work.”
On Jansma’s Wolverine Federal Glenwood 10-1 Drill Site in Glenwood, Utah, the 190-foot drilling rig operates 24 hours a day. There are approximately 30 people working the rig on 12-hours shifts, seven days on, seven days off. They’ll live out of small trailers, on top of the plateau where the rig is located, for about two months, at which time they’ll either have a producing well or they won’t. When they’re done the rig is disassembled, moved to the next location and they start again.
“Communities welcome oil exploration,” Peterson said. “It brings money, jobs and even improvements to a local area. There are fees, taxes and supplies purchased locally, and drilling rigs often provide employment for some local people. In addition, we have over 1,000 families on leases in this area. We have one property owner who’s making $2 million a year.” But it’s far from a sure thing.
A Gamble Nonetheless
Once the environmental and seismic surveys are completed, and if the results look good, drilling an exploratory well is considered. Even at this stage, there are no guarantees that oil will be found, and if it is, it could be in such small quantities that it isn’t worth extracting.
According to petroleum industry statistics, the average U.S. wildcat well (an exploratory well drilled a mile or more from existing production) has a one-in-10 chance of striking hydrocarbons. A wildcat well drilled in an unproven frontier area stands a one-in-40 chance.
Jansma doesn’t like the term “wildcat well,” preferring “exploration hole” instead. “I think the industry has grown out of that term,” he said. “The amount of time required to actually drill an exploration hole varies with the location, the type of rock you’re drilling through and other variables,” he said. “In this area it’s been taking about 60 days of drilling to either produce or shut down.”
Knowing when to shut down a rig isn’t as mystical as it might seem. “The Earth is layered in sedimentary rock laid down by old oceans and rivers,” Jansma said. “Our seismic analysis records those layers of rock. We know that certain types of formation such as sandstone are conducive to holding oil so we look for what appears to be the optimum location and we drill an exploratory well.”
Jansma said they drill to reach a specific, identified layer of rock and they have an understanding of its thickness. “If we get there and there’s no oil; it’s a dry well,” he said. He added that some rock is porous but because of its structure it tends to trap oil rather than let it flow freely. In that situation even though there is oil present it may not be economically feasible to get it.
If an exploration hole turns into a discovery the company immediately begins applying for permits to drill other exploration holes in the immediate area to maximize production. If it doesn’t produce they shut it down, move and start the process over again. “In this location the cost of a well is $4 to $6 million. So far we’ve had two dry exploration wells and one discover,” he said.
“We named our discover field here ‘Covenant Field.’ It has 10 wells producing 6,000 barrels a day. We’re drilling to 14,500 feet on our current well but we have a producing well as shallow as 7,500 feet,” he said.
Oil & Gas Investor Magazine awarded the company the Oil Discovery of the Year for 2005. “We were drilling in an untested area in Central Utah where others had tried and failed,” Jansma said. “It set off quite a stir in the industry because it’s a large discovery–millions of barrels, perhaps more–in an area no one expected to find oil.”
The process of drilling is complex, using a series of decreasing-diameter pipes with a drilling bit at one end. The drilling is done through a 60-foot-long conductor casing that provides a return flow for drilling fluid so it comes up in a pipe rather than through the ground to prevent erosion at the surface. As the drill goes deeper into the ground, cement casing is added to protect the ground water as the drilling operation takes place.
Drilling fluid, called drilling mud, is pumped in the bottom of the hole, forcing the drilling cuttings to come to the surface, but even the composition of the drilling mud will differ depending upon various conditions.
“Let’s say you happen to be drilling through a layer of salt,” Peterson said. “If you use water as your drilling mud it will absorb the salt, causing erosion of the drilling hole. If you pull the pipe out for any reason it becomes very difficult when you want to put it back down again. There’s no longer a clearly defined hole for it to follow.
Instead there is this eroded area thousands of feet below the surface. So you have to add salt to the mud to prevent it from absorbing the salt in the hole. A major aspect of drilling is constantly evaluating the drilling mud that comes up to be on top of the situation and make changes as necessary.”
If a drilling rig produces oil, it then becomes necessary to file for permits to build a facility to extract the oil. Once you have a producing well, the permit process starts all over again so you can add more wells in the immediate area to increase productivity.
Jansma’s producing wells in Utah are called the Kings Meadow Ranches 17-1 field. The original discovery well is bringing in roughly $50,000 a day, or 24,000 42-gallon barrels (Bbls) per month.
(Trivia item: oil is sold in 42-gallon barrels, abbreviated Bbls. According to Jansma, during the early days of oil exploration someone in East Texas had a contract to provide the oil producers with barrels. The barrels they had in inventory happened to be 42-gallon capacity and blue. Once the 42-gallon barrel was established as an industry standard, the producers began specifying the delivery of the blue barrels, which became abbreviated to Bbl. Today oil barrels can be in any color but the abbreviation, and the 42-gallon quantity, is an industry standard.)
“When it comes to a producing well there are always unexpected costs,” Jansma said. “For example, there was no power in the Kings Meadow Ranches 17-1 field so we had to make a choice–on-site generators or bring in power. We evaluated the options and decided to run two miles of power line at a cost of about $1 million. And it’s not as simple as just bringing in oil. That well brings in about 800 Bbls of oil a day that contain about 200 Bbls of water. So it has to go to a separation facility to extract and dispose of the water in a salt water disposal well we had to dig but first get permitted. Then there’s always the unexpected.”
Jansma said they had recently discovered unforeseen bacteria in the water being separated from the oil that caused the iron pipes in the oil/water separation facility to corrode. They all have to be removed and replaced with fiberglass pipes, an unforeseen problem that will cost about $20,000 to fix.
The Kings Meadow Ranches site now has an additional five wells side by side, with each one going in different directions ranging out as far as a half a mile. Together they’re producing about 2,000 Bbls per day and within about a two-mile by one-mile area Jansma has a total of 10 wells bringing in 6,000 Bbls of oil per day.
Once the crude is above ground and the water is separated out, it is either transported via pipeline to a refinery or, in the case of Jansma’s wells, stored in a tank and subsequently picked up with tanker trucks and brought to a refinery.
John Bisney, a spokesman for the API, said there are 144 operating refineries in the U.S. capable of processing a total of 17 million Bbls of crude a day. “In 1985 we had 199 refineries capable of processing 14.4 million Bbls per day. In just the past 10 years we’ve increased the industry’s productivity by 13 percent despite the decrease in the number of refineries. This is partly due to increased efficiency and partly due to increasing the capacity at existing facilities.”
Refineries vary in size from multibillion-dollar facilities on hundreds of acres to the relatively small 33 acres of the Calcasieu Refining Co. of Lake Charles, La.
Dennis Lawson, manager of oil movements and marketing for Calcasieu Refining, said his company produces only jet-A, K-1 kerosene, high-sulfur dyed diesel, regular mineral spirits and diesel tug fuel. Regardless of size, all refineries perform three basic steps: separation, conversion and treatment that results in the production of various products.
Lawson explained that the crude is dirty when it arrives at the refinery. “The primary contaminants are water, various salts and sediment,” he said. “Water in a distillation tower can cause process upsets and, in some cases, severe equipment damage. Salts tend to form strong acids in a distillation tower, which can cause rapid corrosion and premature failure of process equipment. Sediments can cause plugging and fouling of process equipment. It is therefore imperative that these contaminants be removed from the crude charge oil.”
According to Lawson, the crude is cleaned in a Desalter Feed Section, which is designed to warm the charge oil to approximately 300 degrees F, thoroughly wash the crude with water and then separate out the water which contains the salt and sediment from the crude oil.
The crude then goes into the towers for separation of liquids and vapors into fractions according to weight and boiling point. The lightest fractions, including gasoline and liquid petroleum gas, vaporize and rise to the top of the tower, where they condense back to liquids.
Medium-weight liquids, including kero-sene and diesel oil distillates, stay in the middle. Heavier liquids, called gas oils, separate lower down, while the heaviest fractions with the highest boiling points settle at the bottom. The conversion and treatment steps then finish the process and yield a specific product for sale.
Calcasieu Refining is ideally located on the Calcasieu Ship Channel near Lake Charles, La., in the heart of the Gulf Coast refining and petrochemical area. It is accessible by land, water and via pipeline. The facility currently has an operating capacity of 32,000 Bbls per day.
The company operates two barge docks that can accommodate two sets of barge vessels simultaneously for loading all refined products and unloading crude oil. One PIC (person in charge) is legally allowed to handle two manifolds at a time via a control console.
Truck rack facilities are also available for truck loading of products out of, and crude oil into, the refinery. Crude storage capacity totals 300,000 barrels and total crude and product storage capacity is currently more than 750,000 barrels.
Once the crude oil is refined and the jet fuel has been produced it is stored in a 20,000-Bbl tank that is sealed, then tested and certified by a third party. “We then sell the jet fuel as a given batch number,” Lawson said. “We will have filtered the product a total of five times from the refining process to the rack from which the trucks will load it.”
Fuel Safety on the Ramp
Avfuel lays claim to being the leading independent supplier of aviation fuels and services in the country.
Avfuel provides jet fuel and avgas, Avfuel branding programs with signage, refueling equipment, state-of-the-art above- ground fuel storage systems, fuel quality assurance support and aviation parts for fuel testing and fueling equipment, explained Tracie Yergin, a product supply assistant manager for the Ann Arbor, Mich.-based company.
It also supports its customers with FAR Part 139 fire safety and fuel quality training seminars, and charge-card programs for FBOs and pilots. Yergin was at Calcasieu Refining to observe the transfer of fuel from the refinery to one of its contract haulers–Hydro-Walk Energy of Greenwood, La.
Doug Adkinson, a Hydro-Walk Energy driver, has been driving hazmat since 1995 and hauling fuel for the company for about two-and-a-half years. Adkinson drives a 20-foot International tractor truck with a 42-foot, 9,200-gallon trailer.
“Today’s systems are very automated,” he said. “The refinery has a Scully Overload System, so I just dial in the number of gallons I want to load and program the system for the amount of Prist to inject and it does it automatically. Today we’re hauling 8,000 gallons of jet fuel, leaving enough empty space in the tanks for expansion as the day gets hotter. Our total weight over the road will be 75,000 pounds.”
After verifying the correct quantity and the quality of his load, Yergin climbed in the truck with Adkinson to make the delivery. En route he was asked if it worries him to be running down the road that heavy with 8,000 gallons of flammable liquid.
“I don’t think of it as dangerous,” he said. “I think about the safety precautions, but that’s it.”
When Adkinson wheeled the big truck into Million Air-Lake Charles on Chenault International Airport, Bob Carman, Million Air’s general manager, joined him and Yergin at the fuel farm along with Mike Leger, a lineman for the company. Leger immediately set about testing Adkinson’s load of fuel and checking the results against Atkinson’s records from when he loaded it into his truck. “We really have to check this stuff out,” Leger said. “It’s not like a car where you can just pull over if you have a problem. We have no margin for error when it comes to fuel.”
“When Mike finishes testing the fuel we’ll connect to the truck and it will be filtered as it goes into our fuel farm tanks. The tanks also have floating suction units that prevent the fuel intake line from going all the way to the bottom where condensation would collect,” Carman said. “We filter the fuel again when we transfer it from the farm to the refueling truck and yet again coming out of the fuel truck into the aircraft. The fuel-farm filters are also drained daily, we sump the tanks daily and regularly check the filters to see how effective they are.”
Carman said they also recirculate the fuel every morning so contaminants are forced back into the fuel, where they will be trapped by the filter. “We do that to prevent contaminants from collecting inside the tank and growing,” he explained.
How Much Does It Really Cost?
Exactly how much it costs to bring a gallon of jet fuel to the market is a slippery subject. There are so many variables that it’s difficult to nail down a number. According to the AAPG, the crude oil accounts for about 42 percent of the cost, taxes roughly 30 percent, refining about 15 and everything else, including the FBO’s mark-up, about 13 percent. But LaForge’s answer ends up being the most realistic indicator of cost: supply and demand.
“Take for example the effect that China has on the market. For the past several years China has been consuming more oil than it produces,” he said. “Its production rate has remained constant but its consumption has increased steadily every year. If some city in China is building a new business center they’re not going to shut it down because of the price of a barrel of oil; they’re going to compete for a limited supply of oil by raising the price they’ll pay for it. It’s just that simple.”
One of the most frequently raised concerns is whether or not we’re running out of crude oil. The answer is yes and no.
Oil is a renewable resource; the ingredients are being brewed every day just as they were millions of years ago. Unfortunately, we are using it far faster than it is being replaced. However, we have hardly consumed the majority of the Earth’s crude oil in the opinion of some industry experts.
“Take ANWR [the Arctic National Wildlife Refuge], for instance,” Jansma said. “There are two million acres, of which the oil industry wants to use 2,000 for exploration. It’s estimated to contain 6 to 10 billion Bbls of oil, or roughly the equivalent of one year of U.S. oil consumption. Producing wells in ANWR would probably last about 50 years. When the field is shut down they will dig about four feet below the surface around a well, cut the pipe, plug it permanently, bulldoze over it and there’ll be no trace it ever existed.”
Recently a trio of oil companies led by Chevron tapped a petroleum pool beneath the Gulf of Mexico that could boost the nation’s reserves by more than 50 percent. A test well indicates it could be the biggest new domestic oil discovery since Alaska’s Prudhoe Bay a generation ago. It’s roughly four miles under the ocean floor, but the oil industry has the technology to go after it.