Why it’s important to know the crude oil extraction process

Before learning the costs components of crude oil extraction, let’s take a look at how producers extract crude oil from the ground.

First, a crude oil well is created by drilling a hole into the earth with an oil rig. A steel pipe is placed inside the oil well for structural strength. Then holes are made at the bottom of the well so oil passes through the base. Collection valves are fitted at the top. These valves maintain pressure when crude oil is pumped.

The oil extraction process includes the following three stages: primary, secondary, and tertiary.

Primary recovery is the first stage of crude oil extraction. In this stage, crude oil flows naturally under the base of the oil rig. The natural underground pressure in the oil well pushes the oil up to the surface, or an artificial lift is used to pump crude oil to the surface. This stage allows ~5% to ~15% of the oil in the reservoir to be extracted.

The natural flow of crude oil due to underground pressure will diminish over time. So a secondary recovery is used to extract crude oil from the well. In this method, the natural flow of oil is increased by increasing the reservoir pressure. This is accomplished by injecting water or natural gas into the well, which drives the crude oil to the base where the oil can be pumped. This stage allows ~35% to ~45% of the oil in the reservoir to be extracted.

When crude oil extraction from secondary recovery becomes impossible, tertiary recovery is applied. In this method, water, gas, and chemicals are injected into the reservoir to improve the natural flow of crude oil. Finally, crude oil is extracted. This stage allows ~5% to ~15% of the oil in the reservoir to be extracted.

When crude oil prices are high, this method can be used to increase oil extraction, and vice versa. The recent decline in oil prices impacts the margins of oil producers. Oil producers who are using tertiary recovery methods to extract crude oil are impacted the most. Some of the US shale oil producers include Southwestern Energy (SWN), Chesapeake Energy (CHK), Halcon Resources (HK), Continental Resources (CLR), and EOG Resources (EOG).

Now that we know something about the extraction process, let’s take a look at the production cost of crude oil and its implications on oil prices. We’ll analyze this in the next part of this series.