"The Upstream sector is the part of the oil and natural gas industry that is responsible for finding crude oil and natural gas deposits, along with producing them. It is also known as the exploration and production or E&P sector. This part of the petroleum industry includes all activities that happen out in the field including drilling wells, Oil Fields Supplies , and mining oil sands, as well as activities that involve different environmental studies and research analysis.
Upstream Sector Characteristics
This segment of the oil and gas supply chain focuses and operates around the wells, meaning it cares about where to locate them, how deep and far to drill the wells, how to design, construct, and manage them.
The four major business characteristics that describe the upstream segment are as follows:
Carries high risk
Gives high return
Highly regulated, it is affected by global politics
Very technology and capital-intensive
The regulation of this segment, refers to the production, access to reserves, pricing & taxation, and more strict environmental regulations.
It is very typical for the upstream activities to take very long time, and require a lot of investments, especially in the initial, exploration phase.
The different sectors within the upstream segment include:
Offshore drilling
Oil sands mining
Supply and service
Manufacturing
Seismic surveys
Geological surveys
Reclamation
Exploration, (Drilling) and Production (E&P)
The exploration phase first starts with activities of the operator to obtain a lease and permission to explore, from the owner of onshore or offshore acreage that might contain oil or gas.
This also includes activities of collecting geological, geophysical and geochemical material as well as different descriptions and maps of old mineral localities. Geologists and geophysicists play a major role in this phase, because they use different methods and techniques, such as seismic surveys, satellite images, magnetometers, air guns, explosives and seismometers, in order to assess the presence of hydrocarbons or minerals.
When the potential site is confirmed, the drilling of an exploratory well begins, process that is also known as drilling wild cat. These activities need to check the physical presence of reserves, so it can decided if additional exploratory wells should be drilled in close location. This way the scientists can confirm and evaluate the entire potential of the reservoir.
Production phase includes extraction of the hydrocarbons, separating the mixture of liquid hydrocarbons, gas, water, and solids, and removing of constituents that cannot be sold. The sites used for production can often handle crude oil from more than one well.
After production, an additional phase appears called abandonment, which happens when a well lacks the potential to produce economic quantities of oil or gas, or when a production well is no longer economically viable.
Upstream Sector Companies List and Categorization
There are four major groups of companies that can be identified in the upstream sector of the oil and gas supply chain:
Majors, also known as Major or Integrated Oil companies, such as ExxonMobil, BP, Chevron and Shell. These companies can also have integrated activities down the supply chain as well.
NOC’s (National Oil companies) who are owned and managed by governments.
Independents – these companies exist in each segment, the independence comes from not being.
Oilfield services companies – These companies offer services, equipment and different technical skills related with exploring, drilling, testing, and producing oil and gas.
Midstream Oil and Gas Sector
Midstream segment in the oil and gas supply chain, includes operations that connect the upstream and downstream participants and companies. Four major groups of services are characteristic for the midstream segment are:
Processing
Storing
Transporting
Marketing
The more detailed services that fall within the midstream sector can be seen in this list:
Diversified Midstream Pipeline and Storage
Crude Oil and Refined Products Pipeline and Storage of Excess
Marine Shipping and Transportation
Natural Gas Gathering and Processing
Natural Gas Pipeline and Storage
Oil Field Services
The midstream segment is known for its low capital risk, and it can be highly regulated, especially when it comes to pipeline components. Other important things to know is that midstream asset investments are dependent on the health of the upstream; and oil and gas prices affect the demand from the downstream participants.
The high regulation mostly refers to interstate pipeline transmission and cross-border transportation. In the United States this is regulated by the Federal Energy Regulatory Commission.
Midstream Main Functions
Gathering, Processing and Transportation
First step in the midstream sector is gathering oil and gas that is produced in the upstream sector. Oil is moved through a web of pipeline, with a small diameter, directly to a central location. When it comes to gathering natural gas, the process is a little bit different, meaning the gas cannot be stored at or near the well and for that reason needs to be purified and processed to remove the water and other impurities. Once the NGL’s are separated, then they can be sent through large diameter pipelines.
Next comes the field processing, as the first phase of oil and gas processing starting in the onshore or offshore production field.
During field processing, surface units need to be installed. These facilities should do the following activities:
Measure the production rate of the oil, gas and water that is produced from the reservoir
Separate the oil, gas and water from one another
Remove impurities to prepare the crude or gas for sale or the next process
Store the Crude or gas temporarily, long enough until is ready to be moved to the next process
The above described process is known as fractionation. Fractionation by definition is the separation or removal process in which certain quantity of a mixture (gas, solid, liquid, enzymes, suspension or isotope) into a smaller quantities, called fractions, in which the composition varies.
The separated NGL’s (natural gas liquids) can be blend components in a refinery and used as fuel or feedstock in the manufacture of petrochemicals.
The treated oil and gas, after the fractionation process, should be transported through a complex network of transportation and distribution infrastructure either for storage or further processing.
When it comes to transporting crude oil, the most used and safest method is pipeline transportation. More flexible way of shipping crude oil is truck and rail, in terms of timing and close alternative locations.
For transporting natural gas, the most used method are large diameter pipelines, because natural gas flows at a much higher pressure than crude oil. LNG is natural gas that has been changed to a liquid form, so it can easier to transport it or store it.
After transportation, comes the storage as a step in the midstream activities. Storing crude oil and refined products is very different from the methods used to store natural gas.
Storing natural gas, is very demanding due to high pressure of the natural gas and for that reason is kept underground, until it is ready to be delivered to market. Common storage facilities are salt caverns, depleted gas reservoirs, and aquifers.
Crude oil and other refined products are stored using the following methods:
Field tank batteries
Product Bulk terminals
Refinery and holding tanks.
Midstream Companies List – Key Players
In the 1980s, MLP started to form in the United States, known as Midstream Limited Partnerships. These companies, as you can see below are not the large oil companies. These companies provide specific service, and the service range of the companies can vary within the list below:
Barge companies
Railroad companies
Trucking and hauling companies
Pipeline transport companies
Logistics and technology companies
Transloading companies
Terminal developers and operators
Downstream Oil and Gas Sector
The downstream sector is the last one in the oil and gas supply chain, and encapsulates the operations that take place after the production phase right to the point of sale to the end consumers. Here are included the processes of refining crude oil and distributing its byproducts (gasoline, NGL’s, diesel, jet fuel, heating oil etc.) up to the retail level and selling to end consumers.
Other products which are not that familiar are lubricants, synthetic rubber, plastics, fertilizers and pesticides. These products are called petrochemicals. The downstream sector has important role in the pharmaceutical, packaging and manufacturing industries.
Downstream Sector Characteristics
The main business characteristics about the downstream sector is that it is margin business, which has high complexity, companies should always have the global perspective in mind and it includes working with marketing and delivery of final products to retailers and end users.
When discussing about the downstream being a margin business, it defines the margin as the difference between the price of the products from the crude oil and the cost of the crude oil that is delivered to a refinery.
The complexity of this chain segments is due to the inclusion of different range of activities such as refining, petrochemicals, distribution, wholesale and retail marketing.
Key downstream sectors include:
Oil Refining,
Supply and Trading,
Product Marketing – Wholesale and Retail
Key Downstream Players
There are two type of companies that compete in the downstream sector, known as integrated companies and independents. The companies that are called integrated, are known for having business operations not only in one specific sector, but are present in both upstream and downstream segments of the oil and gas supply chain.
One of the top integrated oil companies in the downstream sector are: Exxon Mobil, Chevron, BP, Shell, and Total.
There are also companies called independents, due to the fact that they don’t have upstream, E&P operations. These independents, are independent refiners which can have different range of service activities and stations to market their products.
Famous independent downstream companies are: Andeavor (formerly Tesoro), Valero Energy Corporation, Sunoco etc.
Refining, End user consumption and Wholesale and Retail Marketing
Refining represents the processes that enable crude oil compounds, called hydrocarbons, to be broken down and separated as byproducts, with the use of heat and pressure. The byproducts or final petroleum products that have resulted from the refining process can be categorized in three major categories: Light, medium and heavy.
The light group of the chemicals, are the first ones that evaporate and usually are lately processed into liquid petroleum or naphtha. Hydrocarbons from the middle category, also known as middle distillates-produce jet fuel and kerosene while the heaviest group of hydrocarbons, form residual fuel oil.
Gasoline is the most, globally-used product of crude oil. Other widely-known fuel products that consist for more than 60% of the global demand, are the following products: diesel, jet oil and marine fuel oil.
Also other type of products, for example lubricants and waxes, are important and used in other industries such as medicine and cosmetics.
The marketing activities in the downstream segment refer to the processes of promoting, searching and supplying customers who have internal demand for refined fuel products or who have large wholesale networks that can distribute the different product to variety of retailers.