DEFINITION of Christmas Tree (oil and gas)
The Christmas tree is a piece of equipment that provides flow control on a producing oil or gas well. Christmas trees are a vertical assembly of valves with gauges and chokes that allow for adjustments in flow control as well as injections to stimulate production. Christmas trees are so-called because the collection of components can resemble a Christmas tree if you have the right amount of imagination. The valves that comprise some of the decorations on the Christmas tree are opened when the oil or gas well is ready to produce and the processing and storage facilities are ready to receive. The other decorations are devices that facilitate pressure relief, monitoring and chemical injection.
BREAKING DOWN Christmas Tree (oil and gas)
Christmas trees are used in oil exploration and production in surface and underwater oil and gas wells. Christmas trees on surface wells are also known as surface trees, as they connect to the wellhead that is visible on the surface of a well. Christmas trees used in offshore drilling and extraction are called subsea trees. Subsea trees can be vertical or horizontal based on how the master valves – the valves set on the flow path and capable of closing off production – are designed. Subsea trees have even less of a resemblance to a Christmas tree, but the name persists out of tradition.
The Wellhead Versus the Christmas Tree
The Christmas tree is sometimes confused for the wellhead of an oil well. The Christmas tree sits atop the wellhead, but it is a separate piece of equipment. There is no Christmas tree on the wellhead during drilling operations. Instead a blowout prevention device sits atop the wellhead as the well is drilled and casing/tubing strings are inserted. When the well is moved to production, the Christmas tree is affixed for flow control. So the wellhead is present from the start whereas the Christmas tree is an additional piece of equipment that comes into play when the well moves from drilling to production.
Christmas Trees and Technical Terms
For most investors, knowing the definition of a Christmas tree will not change their approach to oil and gas companies. Investors mainly focus on universal company metrics like return on invested capital (ROIC) and earnings before depreciation, interest, taxes and amortization (EBITA). Beyond this, oil and gas investors can quickly master concepts like proven and probable reserves and net acres. So there is questionable value in consuming too much of the technical information around oil and gas production. That said, for investors that want to specialize in oil and gas investing, mastering the vocabulary is part of the process as most of the information is highly technical once you move beyond the basic public filings.