 The diagram that appears here is what we're going to call the energy commodities logistics path from the point of production all the way to the point of distribution or retail consumption. It's also known as the value chain because we will start looking at costs and revenue opportunities for the energy commodity that's been produced. After all, this is how we intend to make our profits. So as with almost any type of product, there is the point of production. As you became familiar with the upstream, we will deal with the midstream and downstream portion of getting the energy commodities to market. After production, in the case of natural gas, it will have to be processed. In the case of crude oil, it will have to be refined into the multiple products that are derived from a barrel of crude. All commodities eventually get transported to the marketplace via different methods. They can all be stored in the case of crude oil above ground, in the case of natural gas below ground. And then finally, they're distributed to the ultimate end users, whether those are commercial, industrial, retail, residential, etc. The subgroups here, under production and gathering, there's going to be a well height cost. What does it cost us to produce a barrel of oil? What does it cost us to produce, let's say, a thousand cubic feet of natural gas? If we gather these to a single point, what are the fees involved for the midstream company that gathers them? And then in terms of that gathering process, are we utilizing some natural gas to run the compressors that are necessary to perform that? Or the pump jacks that push the crude oil to that central point as well? In terms of processing and refining, we'll deal with processing fees, refinery fees, and talk about the inputs and outputs for both the natural gas processing plants and crude oil refineries. Transportation via pipelines will have set levels of service, tariffs, or the actual approved rates that they're allowed to charge for the services. And there's also going to be potentially some consumption of natural gas to fuel the compressors that will transport the gas along the pipelines. Storage, again, this is a business whereby we will have various levels of services. There will be a tariff for officially filed and approved rates of service and charges for those services. Again, we will also deal with potentially some fuel consumption. And then finally, under distribution, we will talk about the various types of end users, whether they're utilities, actual end users, households, or retail outlets, such as gasoline stations. We will now basically walk through the logistical path for crude oil from the wellhead pump jack to the retail gasoline pumps. This is a picture of an oil field in Pennsylvania going back a few hundred years. You can notice the old wooden derricks. I believe this would have been about the same field that the first oil well in Titusville, Pennsylvania was discovered and produced. The first type of crude oil that we will deal with is what's known as West Texas Intermediate Crude Oil, or WTI. This is the global standard. It is domestically produced for the most part in the United States. It's what we refer to as low sulfur crude oil, which also makes it sweet. Sour crude oil has a high sulfur content to it. So it's the WTI sweet crude. It is traded internationally in U.S. dollars and cents, and is priced in what we called free on board, or FOB, at a large terminal, both storage and pipeline terminal in Cushing, Oklahoma. And it is traded on the New York Mercantile Exchange, which we will address in future lessons. And because of that, there are financial derivatives that are traded on the New York Mercantile Exchange, these can be used to hedge price and supply risk. Again, another topic that we will address in lesson 7. Brent crude is the other global standard, mostly attributed to Europe. It represents the grade of crude oil that's produced offshore in the North Sea. It's traded on the International Petroleum Exchange, or the IPE, in London. In result, there are financial derivatives, that is financial contracts, that are similar nature to the New York Mercantile Exchange crude oil contracts. In fact, some traders will actually arbitrage or try to trade price differences between the London Exchange and the New York City Exchange. And currently, there are some supply bottlenecks in North America, whereby a lot of the domestically produced crude oil in North America is unable to get to the large refinery corridor in the Gulf of Mexico. As a result, they have to increase the amount of imports, and those imports are generally priced off of the Brent crude pricing. Currently, our refiners along the Gulf of Mexico are having to pay a little more than the WTI price for domestically produced crude oil. As you can see, this is a simplified map of the pipeline infrastructure in the United States. It is critical to balance the energy supply and demand. Crude oil and petroleum products are supplied to major demand centers in the United States by over 200,000 miles of pipelines, representing approximately $31 billion investment. Pipelines 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 about 2% of the nation's cost for such freight. Oil pipeline infrastructure in crude oil transport the crude oil from major producing basins and ports to various refining centers and or supply hubs. The refined products are transported mostly by pipeline, and these include gasoline, diesel, jet fuel, and what is known as liquefied petroleum gases or LPGs from the refineries and ports to end user markets. Other liquids, other energy related petrochemical feedstocks are transported between the major supply chain points. Here is a schematic of the major refined product pipelines, and when you talk about refined products, we're talking about those products that are refined from a crude oil barrel, such as gasoline, jet fuel, heating oil, diesel fuel, liquefied petroleum gases, and so on. Two methods here in terms of transporting crude oil first and the largest is actually crude oil pipelines. They can move the crude oil from the wellhead to the transmission pipelines to refineries. They have large pump systems. They can batch process. That is, they can actually send different products through the pipeline, different grades of crude oil by having a separator in the pipeline. The interstate grid transports two-thirds of all the oil produced in the United States. It's subject to the Federal Energy Regulatory Commission and is also known as a common carrier under the old interstate commerce commission. The U.S.'s network of crude oil pipelines is the largest in the world. It's also the cheapest transport cost per barrel of crude oil. Another method where there is not access or immediate access to pipelines is to use trucks at the crude oil well site. If you ever see one, you'll see large tanks on the site. Those are holding the crude as it's pumped up from the ground until a truck can come and offload those tanks and deliver that crude oil to a pipeline or directly to a refinery. It is the most costly method and it also has the least volume capacity. Each truck has approximately capacity of 200 barrels per load or 8,400 gallons as each barrel of crude oil represents 42 gallons. Another methodology to deliver crude is by rail. That is train cars. They have a very large capacity. Each tank heart could handle 2,000 barrels of crude oil. It is a very cheap cost. The problem is limited access. The railroads aren't anywhere. This is part of the problem right now in the new Bakken Shale in North Dakota. In Dakota there is not a pipeline infrastructure so they currently have to truck the crude oil to the nearest railroads and have it trucked by tank from there to refineries. Another methodology one that we are all pretty much familiar with are the large ocean going tankers. This is where we get our imported crude supplies. They have very large capacity. These days there are even some super tankers. They are strictly water bound. The Gulf of Mexico is the largest petrofining quarter in the United States. This is a snapshot of one part of the Houston Ship Channel which is a huge crude oil refining and petrochemical quarter. Here you see the tanks coming in basically providing the imported crude oil to these above ground storage tanks. That crude will later be piped to refineries and then the refined products will be piped out to some of the petrochemical plants in the area. Back during World War II the United States was concerned about the supply of crude oil in large part because the amount of crude oil that was refined into products that were being used to fight World War II and then also the rationing of the domestic supplies of crude oil to industrials, commercials and households. So they formed what are known as the Petroleum Administrative Defense Districts or PADs. These are still in existence today, are still used to quantify the supply and demand in the various regions and prices are reported by PAD districts. PAD 1 encompasses the east coast as you can see from Maine to Florida. It is the highest petroleum consumption rates in the United States. Again considering the major metropolitan areas along this quarter that makes a high degree of sense. They are highly dependent on imports for both crude oil and refined products. They import 100% of their crude oil, 24% of their refined products and they are the largest recipient of supplies from other regions within the United States. The South Atlantic region has experienced higher population growth rates in the last few decades whereas New England has been in a slower growth mode and is the largest concentration of oil heated homes. Still a very large percentage of homes in the northeast rely on heating oil not only for hot water but for spacing itself. The northeastern part of the United States is the world's largest consumer of heating oil which is a product that is refined from crude oil. PAD 2 encompasses the upper midwest and central states. They are dependent on crude oils which mostly come from Canada. Not many people realize that yes we do import a lot of crude oil but the primary source of our imports is Canada. They are the largest supplier of crude oil to the United States. This region has the second highest crude oil demand in the United States and they are chronically short the market due to combination of demand growth and refinery closures. PAD 3 encompasses the Gulf Coast states. It is the origin of 90% of the crude oil and 80% of the refined products shipped between US regions. The largest crude oil and refined products supply region in the United States. Only two OPEC nations, Saudi Arabia and Iran, have higher crude oil production than PAD 3. No foreign nation has higher refined product output than PAD 3. The pipeline and terminal capacity in the Houston refining center is constrained so this is part of the problem as to why we might see gasoline prices fairly high. We can't move the crude around enough right now to get to the refineries. We also do have refineries that have been shut down and new refineries haven't been built in probably 50 years or more. PAD 4 comprises most of the Rocky Mountain region. PAD 2 and 3 have historically supplied the market to augment local production. In other words, PAD 2 and 3 are sending refined products to these regions because of the lack of refining capacity in PAD 4. It's a small but growing market. There's minimal demand for specialty products. The infrastructure is not well developed due to long distances, limited markets and high costs. When we talk about infrastructure, we're mostly talking about pipelines and refineries. You can kind of imagine in this area with the Rocky Mountains it would be very tough to build pipelines. And finally PAD 5 encompasses the West Coast and Alaska. The West Coast is traditionally isolated from other US supply regions again by the Rocky Mountains. The growing population continues to increase demand for various refined products. The Alaska North Slope crude oil is an important source of supply for West Coast refining. The Alaska pipeline brings the crude oil down to the lower 48 states. The California missions rules isolate that market. It is a very unique market. And so it limits their supply options for refined products. The refined products, especially gasoline and diesel fuel, have to meet very stringent standards in the state of California. And here's just a supply and demand overview of the US crude. Over 50% of all the US crude oil demand exists in the Gulf Coast region. Again, that's because it's the largest petrochemical corridor, refining corridor in the United States. And then production from the Gulf Coast region supplies the majority of the Midwest and East Coast refined products, deficits. The New England region is becoming increasingly dependent on foreign imports as the South Atlantic region continues to grow. Because the South Atlantic region continues to grow, a lot of refined products end up being consumed there and don't make it all the way to New England. And then the deficit in the Midwest is expected to grow as the regional refinery struggles to keep up with demand. So we have that growth in the Midwest and no new refining capacity. The West Coast and Rocky regions are fairly well balanced between regional refined products in terms of supply and demand. There is crude oil produced in California has been produced there for decades and they do refine a lot of their own gasoline and diesel products. Here's basically the consumption of crude oil and petroleum products by the various sectors. You can see transportation remains the highest because transportation encompasses not only gasoline but diesel fuel and jet a and other types of refined products that can be used in the transportation industry. The next category being industrial, the next residential commercial and you can see there's a very tiny sector of electric power. There still are power plants mostly in the Northeast and Upper Midwest that run off of fuel oil or diesel oil. These are very very old power plants and chances are they will either be mothballed or converted to run on natural gas. Given the current market where natural gas is a whole lot cheaper than it has been in quite some time. Here's the comparison of our domestic production and the imports and you can see the net imports and domestic petroleum shares the U.S. demand in 2010. U.S. petroleum we finally produced slightly more than half of our own demand in terms of crude oil. Net imports about 49%. That number is expected to shrink. These new shale plays in North America have become very prolific and are producing vast amounts of crude oil. That and an increase in imports from Canada should shrink the overall imports from non-Canadian sources. In the second chart there you can see 49% of the imports that would be mostly Canada although we import some from Mexico comes from the western hemisphere. 23% comes from Africa, 18% from the Persian Gulf and the remaining 10% from very to other countries. Crude oil and the product import export you can see here that we finally the red line we've taken a dip in crude oil imports over the last few years again. Directly attributed to the shale plays in North America that have found new sources of oil. Petroleum products just supplied by type you can see again motor gasoline being the highest. The distillate fuel oil followed by things like jet fuel and residual fuel oil. Retail motor gasoline and on highway diesel fuel prices again you can see here there have been spikes back in 2008 prices have retraced since then and are slowly moving up in the current marketplace. This particular chart is interesting because it shows the global crude oil demand forecast going up into the year 2030. As mentioned previously in some of the lessons we are truly a global economy. The things that affect one economy these days seem to affect almost all economies. China and India have experienced the largest growth in terms of their overall economies and manufacturing largely due to the exports of various products there. And they use considerable amounts of fuel oil, diesel oil in their production however because of the new found prosperity they've also increased the number of automobiles that are on the road thereby increasing their demand for gasoline. You can see the US will continue to rise in consumption but the hope is and the expectation is that the percentage of imports will decline as well as the consumption goes up. And just kind of on a final note we talk about OPEC the oil producing export countries but we also refer to the Persian Gulf not all the coast countries are the same. The organization of petroleum exporting countries or OPEC was organized in 1960 for the purpose of negotiating with oil companies on matters of oil production prices and future concession rights. Of the 12 countries currently in OPEC only 6 of them are in what we know as the Persian Gulf region.