 In this lesson we're going to talk about crude oil, the actual logistical path, getting it from the pump at the wellhead to the pump basically at the retail gasoline station. And then we'll talk about the value chain. Crude oil itself has no real value. It's what the refiners can turn it into, it's where the value actually lies. Here again is this schematic of the value chain for both natural gas and for crude oil. Crude oil parts we've got basically we go from the wellhead where there is the cost to lift the crude oil and we've got refining and then there's fees associated with that. Then we're going to have to get the crude to the refineries by various methods that we'll talk about. Then we also have to take away the refined products to market itself. You can store crude oil, you can also store the refined products and ultimately you get to a distribution point where you're at the retail level or in the case of crude oil you're also manufacturing some petrochemical feedstocks. So we're talking again about crude oil logistics from pump to pump. Here's an old wooden derrick crude oil probably back from the time of the first discoveries in Titusville, Pennsylvania. West Texas Intermediate Crude Oil is going to be the standard we talked about. We did talk about that in a previous lesson when we talked about the contracts for the New York Mercantile Exchange. But it is the North American standard, it is known as low self or sweet crude, traded in international currency as the US dollar, it is priced free on board at Cushing, Oklahoma. Again, as we talked about in a previous lesson it is traded on the New York Mercantile Exchange as a financial derivative which does allow for hedging. Brent Crude is the North Sea Global Standard, is traded on Ice Futures Europe in London which is formerly the international petroleum exchange in London. There are financial derivative instruments over there that are similar to the NIMEX Crude contract. A lot of traders take the price opportunity or arbitrage between the London contracts and the NIMEX contracts in New York City. It is still due to some supply bottlenecks US Gulf Coast refiners are paying higher prices since imports are priced off of the Brent Crude price. We can't get enough of the surplus domestic supply that we have to the Gulf Coast refiners at the present time. Here is basically what the EIA shows to be the growth in crude oil production over the last year or so, going back actually two years to 2013, a four week average on each plot point and then showing the 2014 to 2015 period again four week averages on each plot point. So you can see there has been a significant increase in US domestic crude production. And then imports as you would guess, imports have declined steadily over the same two year period and will continue to do so. The pipeline infrastructure of course is critical to balancing the supply and demand for energy across the United States and the same holds true for crude oil and petroleum product pipelines here is a very simplified schematic of the grid across the US. Crude oil and petroleum pipeline product lines are supplied to major demand centers in the United States by over 200,000 miles of pipelines representing about a 31 billion dollar investment. As transport over 38 million barrels of crude oil, feedstocks and petroleum products each day, 17% of the nation's freight is transported via pipelines for only 2% of the nation's cost. The infrastructure now for crude oil in terms of various pipelines you've got pipelines to transport the crude oil from major producing basins and various imports ports to various refining centers and or supply hubs. Other pipelines transport refined petroleum products including gasoline, diesel, jet fuel and LPGs which are liquefied petroleum gases from refineries and ports and user markets. Other liquids energy related petrochemical feedstocks are transported between supply chain points perhaps from the tailgate of a refinery to the inlet side of a petrochemical processing plant. These modes for crude oil delivery, the primary one is the pipeline, in essence it's the well head to transmission pipeline to the refineries themselves, you have pump systems along the way and they can batch process the crude, put it in different volumes at different times and separate them with a batch separator. The interstate grid in the United States transports about two thirds of all the oil. The pipelines are subject to the Federal Energy Regulatory Commission and the former interstate commerce commission, they are labeled as common carriers that do not have utility status which natural gas pipelines do get. The U.S. network of petroleum and petroleum product pipelines is the largest in the world. It's also the cheapest method on a cost per barrel basis to move crude around. We also truck crude oil mostly from well head tanks to refineries or from the well head tank batteries to rail terminals where it's loaded onto rail cars. It is the most costly method, you can imagine it's the smallest amount that can be transported, it's the least volume capacity, approximately 200 barrels per tank per truck tank or 8400 gallons. Other modes of transportation, rail cars, very large capacity, 2000 barrel tank cars, relatively cheap cost. The problem is there is limited access, railroads obviously aren't everywhere. Tankers, we're mostly familiar with those, generally for import purposes, they are very large capacity, of course they vary from standard tankers to what they call VLCC's which are the very large crude tankers, so called super tankers. These are water bound. We also can barge crude oil in truck country, these are large capacity tanks also but they are strictly water bound as well. Here's just a schematic, kind of a simplistic map of petroleum refined product transportation infrastructure across the U.S. What you see here on the map is pipeline, rail, barge and tanker locations around the U.S. Just a couple of thoughts on the actual regulation of crude oil, we've talked about regulated non-regulated industries before and pipelines have been regulated going way far back. You can see here in 1887 the Interstate Commerce Act placed pipelines under the regulation of the ICC, the Interstate Commerce Commission because railroads had been regulated and now there was a concern about potential monopolistic power for those who owned the pipelines. This then under 1906 pipelines replaced under what was known as the Hepburn Act and then the Interstate Commerce Act in 1887 set some ground rules which still apply to the pipelines today. Rates that they can charge have to be just and reasonable, they have to disclose their terms of service, in other words the rules and regulations under which they will transport the crude oil, they have to have a form and content of tariffs. That means they have to have some documentation in terms of how they are going to conduct operation, the rules for you to be a shipper to move crude oil on there and then tariffs are the rates that they're going to charge. Accounting methodologies, all reporting requirements and then disclosure of shipper information. All of these things are requirements for pipelines to operate and again come out of this Interstate Commerce Act from 1887. Today the Federal Energy Regulatory Commission or FERC as it's most widely known has jurisdiction over the crude oil pipelines. Congress abolished the Interstate Commerce Commission in 1995. Again they have common carrier status, that means they need to be able to carry or ship crude oil for just about everyone. They don't have utility status. Natural gas pipelines received utility status under the Natural Gas Act or the NGA of 1938. They don't have franchises, in other words crude oil pipelines don't have protected territories. They also have no right of eminent domain. The right of eminent domain especially for those of you who are familiar with land law allows the entity to come in and condemn the property if the property owner protests the building of the pipeline. But again these pipelines still have to provide just and reasonable rates and have the reporting requirements that I mentioned above. Here's just a sample crude pipeline tariff. This is from Shell Pipelines Company. They have a pipeline and a crude line in the Houston, Texas area. And if you look at it at the top the issue is Shell Pipeline. The regulator in the state of Texas is the Texas Railroad Commission. And we have in essence the originating point or the input points to the pipeline for the crude oil. And then the destination is East Houston which is more than likely the very large Houston Ship Channel which is the world's largest petrochemical refining corridor that is the U.S. Gulf Coast. The shipping petroleum you can see that the date of this particular contract agreement was June 1st of 2012. The unit measuring they're going to be paying so many cents per barrel and if you get all the way down to the bottom here you can see that the actual tariff rate for volumes of 0 to 65 million barrels they're going to be paying 16 cents per barrel. If they ship a greater amount than 65 almost 66 million barrels they will only be paying 8 cents. So this would be a typical crude oil pipeline tariff if you were interested in being a shipper you would be issued one of these by the operator of the pipeline.