Published on EBF 301: Global Finance for the Earth, Energy, and Materials Industries (https://www.e-education.psu.edu/ebf301)

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Lesson 6 - Crude Oil Logistics & Value Chain

Lesson 6 Introduction

Overview

The term “logistics” has become more and more popular to define the process whereby goods move from the point of manufacturing and production to the point of sale and consumption. UPS® and FedEx® are no longer just in the package shipping business. They now provide a full range of services, from receiving parcels to transporting them via truck, rail and plane, to storing them in warehouses and ultimately, distributing them to their final destinations. All the while, they are tracking packages throughout the entire process, which can also be done by their customers.

The delivery system for energy commodities is no different, as products—either from the wellhead, plant, or refinery—are transported using various methods, stored, and ultimately distributed to places of final consumption. As we explore the ways and methods in which energy commodities are delivered to market, you will see this same basic theme consistently applied.

Additionally, we will learn the “value chain” for energy commodities. That is, what are the costs and revenues along this delivery path?

Graphic illustration showing steps of process to get raw products from wells to markets
Figure 1: Overall Energy Commodity Logistics Chart - Crude Oil
Source: Dutton e-Education Institute [1]

This graphic illustrates the various steps in the "wellhead-to-burnertip" logistical path for oil and natural gas:aggregation (gathering), the "cleaning" of the raw stream and production of valuable natural gas liquids (NGLs) and, the steps for getting crude oil and natural gas from the wells all the way to market. As you can see, there is processing of natural gas or refining of crude, the transportation and storage and, finally, the distribution and retail delivery to the various end-users. As you will see, each step along this "path" will have some costs associated with it and most will represent an opportunity for generating revenue. These will add to the total profit that can be derived from the initial wellhead production.

Learning Outcomes

At the successful completion of this lesson, students should be able to:

  • Define the steps in the movement of crude oil from the wellhead to the end-user (“pump-to-pump” path).
  • Recognize the “value chain” along the path.
  • Understand the general methods of transporting crude oil from well to refinery.
    • Trucks
    • Pipeline
    • Rail
    • Barge
    • Tanker
  • Become familiar with the Crude Refning processes and their refined products.

What is due for this lesson?

This lesson will take us one week to complete. There are a number of required activities in this module. The chart below provides an overview of the activities for this lesson. For assignment details, refer to the location noted.

All assignments will be due Sunday, 11:59 p.m. Eastern Time.

Lesson Requirements
REQUIREMENT LOCATION SUBMITTING YOUR WORK

Reading Assignment: Crude Oil Refining Process

Lesson6 Reading Assignment page

No submission
Mini-lecture: Crude Oil Mini-Lecture: Crude Oil page No submission
Mini-lecture: Crude Oil Refining Mini-Lecture: Crude Oil Refining page No submission
Lesson 6 Activity 1 Lesson 6 Activity page Submit through Canvas Discussion
Lesson 6 Quiz Summary and Final tasks page Submit through Canvas
Fundamental Factors Lesson 6 Activity Page Submit through Canvas

Questions?

If you have any questions, please post them to our General Course Questions discussion forum (not e-mail), located under Modules in Canvas. The TA and I will check that discussion forum daily to respond. While you are there, feel free to post your own responses if you, too, are able to help out a classmate.

Reading Assignment: Lesson 6

The refining of crude oil is a complex process. In preparation for this topic, please complete the reading assignment below. My lecture will closely follow the steps in refining as outlined here.

Reading Assignment:

Crude Oil Refining Process

Go to HowStuffWorks: "How Oil Refining Works" [2] and read pages 1 through 6 in preparation for the mini-lecture on Crude Oil Refining. As you read the sections, keep these questions in mind:

  1. What is meant by “crude” oil?
  2. What are the two main refining processes?
  3. What are the various products derived from raw crude oil?
  4. How does “distillation” work?
  5. What is “cracking”?
  6. What is “reforming”?
  7. What is “alkylation”?

Mini-Lecture: Crude Oil Logistics

The following mini-lecture traces the flow of crude oil from the wellhead to the refinery using various forms of transportation. We also discuss the two global standards for crude oil, West Texas Intermediate, and Brent North Sea. The major supply/demand districts in the US are presented, as well as supply and demand statistics.

Key Learning Points for the Mini-Lecture: Crude Oil Logistics & Refining

While watching the Mini-Lecture, keep in mind the following key points and questions:

  • Wellhead to retail pump infrastructure
  • What are the costs and revenue opportunities on the “value chain”?
  • “West Texas Intermediate” crude oil vs. “Brent North Sea” oil
  • What are “PADDs”?
  • Supply & Demand overview
EBF 301 Crude Oil Logistics
Tom Seng - John A. Dutton e-Education Institute

Mini-Lecture: Crude Oil Refining

The following mini-lecture presents each phase of the crude oil refining process and the various products that are extracted from each barrel of oil.

Key Learning Points for the Mini-Lecture: Crude Oil Refining

While watching the Mini-Lecture, keep in mind the following key points and questions:

  • Products made from a barrel of crude oil
  • Refining process
    • Distillation
    • Conversion = “Cracking,” Reforming, Alkylation, “coking”
  • Types of refined products
EBF 301 Crude Refining
Tom Seng - John A. Dutton e-Education Institute

Lesson Activities

Petroleum Products Activity

  1. Think about the various products derived from crude oil that you encounter on a daily basis. Other than gasoline and lubricating oil, what other distillates impact your existence?
  2. We know that the amount of crude oil the US imports continues to decline due to increased domestic production, but, do you see demand increasing or, decreasing, over the next decade? What are your reasons for this stance?

Grading Criteria

You will be graded on the quality of your responses. This question is worth up to 20 points on the EBF 301 grading scale; each question is worth up to 10 points.

Fundamental Factors

The Fundamental Factors activity is due as usual this week, at 11:59 pm on Sunday, and is worth 30 points on the EBF 301 grading scale. Please refer to the Fundamental Factors Instructions [3] for additional information and grading rubric.

Submitting Your Work

Petroleum Products Activity: Submit your work as a word processed document to the Petroleum Products Activity on Canvas.

Fundamental Factors: Submit your work as a single word processed document to the Lesson 6 Fundamental Factors Activity in Canvas.

Summary and Final Tasks

Key Learning Points: Lesson 6

  1. There are various methods used to transport crude oil from the wellhead to the refinery.
    • Truck/rail/pipeline/barge/tanker
  2. Brent is the “global standard” crude oil stream while WTI is the North American standard and is also the standard for futures trading in crude oil.
  3. PADDs are regional districts for supply and distribution of crude oil.
  4. The US still relies heavily on imported crude but domestic supplies are increasing.
  5. The refining process consists of distillation and conversion and produces several products used in transportation and as petrochemical feedstocks.

Quiz

Log onto Canvas and complete the lesson quiz

Reminder - Complete all of the lesson tasks!

You have reached the end of this lesson Double-check the list of requirements on the first page of this lesson to make sure you have completed all of the activities listed there before beginning the next lesson.


Source URL: https://www.e-education.psu.edu/ebf301/node/473

Links
[1] https://www.e-education.psu.edu/
[2] http://science.howstuffworks.com/environmental/energy/oil-refining3.htm
[3] https://www.e-education.psu.edu/ebf301/680