Exploration

Understanding Crude Oil Classifications

EIA Crude oil production report

The first crude oil had actually been discovered by the Chinese in 600 B.C. and transported in pipelines made from bamboo. However, Colonel Drake’s heralded discovery of oil in Pennsylvania in 1859 and the Spindletop discovery in Texas in 1901 set the stage for the new oil economy, but it would be years before the distinction of “sweet and sour crude” or “heavy and light crude”, were determined.

Liquid petroleum pumped from oil wells is called “crude” or “crude oil.” At the molecular level, crude oil is composed predominantly of carbon, which can make up as much of 87% of the material. Hydrogen is another major component that makes up as much as 13% of crude oil. Other components that are found in crude in varying amounts include oxygen, sulfur, nitrogen, and helium.

Benchmarks

The petroleum industry often uses references to “Geographical Locations” in order to descriptively classify crude oils. This is due to the fact that oil from different geographical locations will naturally have its own very unique properties. These oils vary dramatically from one another when it comes to their viscosity, volatility, and toxicity.

Research indicates there are approximately 161 different blends in total traded on the market these days, and they are classified by geography. There are three different types of primary benchmarks, namely: North America’s West Texas Intermediate crude (WTI) {light (WTI) }, North Sea Brent Crude (Brent), and OPEC basket used by OPEC (ORB), Other well-known blends include: Dubai and Oman or {Oman (sour)}. Tapis Crude (which is traded in Singapore), Bonny Light (used in Nigeria), Mexico’s Isthmus, and Maya.

Crude oil sweet and sour

Figure 1 : Relationship between density and sulfur content of various Crude Oil Benchmarks quality types (OPEC, 2011)Crude Oil quality by types © Hassan Harraz 2016

Crude Oil Classifications

The petroleum industry often names crude based on the oil’s geographical source, for example, “West Texas Intermediate.” Crude oil is also classified based on physical characteristics and chemical composition, and these qualities are described with terms such as “sweet,” “sour,” “light,” and “heavy.” Crude oil varies in price, usefulness, and environmental impact.

“Sweet” Crude vs. “Sour” Crude Oil

Crude oil with low sulfur content is classified as “sweet.” When the total sulfur level in the oil is more than 0.5% the oil is called “sour”. This distinction between sour and sweet crude is important because it affects the cost of refining the oil. In turn, this makes the more costly sour crude less efficient as a source of energy production, decreasing its demand from commodity investors. In an effort to reduce their total processing costs, sour crude producers often seek to refine sour crude into heavy oil products such as diesel and fuel oil (as opposed to gasoline).

Sweet crude oil is not only a metaphor for sweet crude as the oil posses a sweet taste. In the nineteenth century, prospectors, or roughnecks, would taste and smell the raw product as it was extracted to judge its relative sulfur content. If the oil tasted vaguely sweet and had a pleasant smell, it was low in sulfur.

Another factor contributing to the relatively high cost of sour crude production is that it requires stabilization before being transported by oil tankers. This is due to the fact that sour crude contains relatively high quantities of hydrogen sulfide gas which must be reduced prior to transportation.

Sour Crude Oil in Oklahoma
Sour crude oil production is mostly found in Southern Oklahoma, in more shallow formations, and one example of this is in the Sho-Vel-Tum field in Carter and Stephens Counties.

Sour Crude Oil around the World
Sour crude is produced largely in Venezuela, Colombia, Ecuador, the Canadian province of Alberta, the Gulf of Mexico, Alaska, Saudi Arabia and other parts of the Middle East.

“Light” Crude vs. “Heavy” Crude Oil

Crude’s classification as either “light” or “heavy” depends on the oil’s relative density, based on the American Petroleum Institute (API) Gravity. This measurement reflects how light or heavy a crude oil is compared to water. If an oil’s API Gravity is greater than 10, it is lighter than water and will float on it. If an oil’s API Gravity is less than 10, it is heavier than water and will sink.

Lighter crude is less expensive to produce. It has a higher percentage of light hydrocarbons that can be recovered with simple distillation at a refinery.

Heavy crude can’t be produced, transported, and refined by conventional methods because it has high concentrations of sulfur and several metals, particularly nickel and vanadium. Heavy crude has density approaching, or even exceeding, that of water. Heavy crude oil is also known as “tar sands” because of its high bitumen content.

With simple distillation, heavier crude oil produces more lower-valued products, compared to the simple distillation of light crude. Heavy crude requires extra refining to produce more valuable and in-demand products.

How Distillation Impacts Price

Crude oil’s value comes from its ability to be refined and turned into products ranging from asphalt and gasoline to lighter fluid and natural gas—along with a variety of essential elements such as sulfur and nitrogen. Petroleum products are also key components in the manufacturing of medicines, chemicals, and plastics.

These products are all produced through processing or refining, and the less processing necessary, the more valuable the crude becomes. When one type of crude oil is cheaper than another crude, that’s often because it will take more work to create a desirable product out of the cheaper crude.

Simple distillation—or first-level refinement—of different crude oils produces different results. For example, the U.S. benchmark crude oil, West Texas Intermediate (WTI), has a relatively high natural yield of desirable end-products, including gasoline. The processing of WTI also yields about one-third “residuum,” a residual by-product that must be either reprocessed or sold at a discount. In contrast, the simple distillation of Saudi Arabia’s Arabian Light, the historical benchmark crude, yields almost half “residuum.” This difference gives WTI a higher premium.

The lighter the oil, the more of the desirable products it produces through distillation at a range of temperatures. The lowest distillation temperatures produce products such as liquid petroleum gases (LPG), naphtha, and so-called “straight run” gasoline. In the middle range of distillation temperatures, the refinery produces jet fuel, home heating oil, and diesel fuel.

At the highest distillation temperatures—over 1,000 degrees Fahrenheit—the heaviest products are produced, including residuum or residual fuel oil, which can be used for lubricants. To maximize the output of more desirable products, refineries commonly reprocess the heaviest products into lighter products.

4 Classifications of Toxicity

“Toxicity” refers to how harmful an oil might be to humans, other living organisms, and the environment. Generally speaking, the lighter the oil, the easier it will spread around and permeate through surfaces, making it potentially more toxic for the environment. Because of the constant potential of spills, the Environmental Protection Agency has classified crude oil in four categories that reflect how the oil would behave in spills and its aftermath:

Class A: Because they are light and highly liquid, these clear and volatile oils can spread quickly on impervious surfaces and in water. Their odor is strong, and they evaporate quickly, emitting volatiles. Usually flammable, these oils also penetrate porous surfaces, such as dirt and sand, and may remain in areas into which they seep. Humans, fish, and other forms of plant and animal life face the danger of toxicity from Class A oils.

Class B: Considered less toxic than Class A, these oils are generally non-sticky, but instead feel waxy or oily. The warmer they get, the more likely Class B oils soak into surfaces—making them potentially hard to remove. When volatile components of Class B oils evaporate, the result can be a Class C or D residue. Class B includes medium to heavy oils.

Class C: These heavy, tarry oils, which include residual fuel oils and medium to heavy crudes, are slow to seep into porous solids and are not highly toxic. However, Class C oils are difficult to flush away. They also sink in water, adding the potential of smothering or drowning wildlife.

Class D: Non-fluid, thick oils are comparatively non-toxic and don’t seep into porous surfaces. Mostly black or dark brown, Class D oils tend to dissolve and cover surfaces when they get hot, which makes them hard to clean up. Heavy crude oils, such as the bitumen found in tar sands, fall into this class.

Historical Look at the Price of Oil – from MarketWatch

The formerly unthinkable drop in oil prices below $0 a barrel on April 20, 2020, and is still reverberating through financial markets, as supply overwhelms demand destroyed by the coronavirus pandemic, forcing some energy companies into possible bankruptcy as storage reaches maximum capacity.

Indeed, the now-defunct May West Texas Intermediate crude plunged into negative territory to start the week in a history-making event that saw, the front-month contract, at the time, settle at negative $37.63 a barrel before recovering some of that in the following session.

That jaunt into negative territory had never happened before that period and prices remain at still about the lowest level since the late 1990s, researchers at Deutsche Bank thought it would be interesting to look at oil prices over the past 150 years.

Strategists Jim Reid and Nick Burns did so with straightforward charts published April 22 that shows both the nominal price of oil since 1870 and the cost of crude in real, or inflation-adjusted, terms in U.S. dollars (see chart below):

“ In nominal terms, it’s not a surprise to see that, over the 150 years for which we have data, there’s never been a negative price print before,” wrote Reid and Burns.

“This is stunning as it basically says that a barrel of oil earlier this week was effectively cheaper than it was in 1870. A period over which US inflation has risen +2870% and the S&P 500 +31746505% in total return terms,” the analysts wrote.

 

Compiled and Published by GIB KNIGHT

Gib Knight is a private oil and gas investor and consultant, providing clients advanced analytics and building innovative visual business intelligence solutions to visualize the results, across a broad spectrum of regulatory filings and production data in Oklahoma and Texas. He is the founder of OklahomaMinerals.com, an online resource designed for mineral owners in Oklahoma.

Sources: 

The Basics of Crude Oil Classification, WENDY LYONS SUNSHINE

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