Oil 101 - Introduction to the Oil and Gas Industry
What is the difference between Upstream and Downstream in Oil and Gas?
The collapse of oil prices and subsequent layoffs in the Upstream oil and gas sector has led to an increase in people asking, “What is the difference between Upstream and Downstream?”
We have received this question from our members of our learning community, seen the question raised Linkedin discussions, and you can even see that ‘Upstream vs Downstream’ is a growing inquiry in Google searches.
You are not alone!
The oil and gas industry is like a see-saw. The low oil prices that are crushing upstream economics right now are a boon to downstream and petrochemical operations. Just look at the stock prices of upstream E&P operators (like Continental Resources) versus pure refiners (like Valero).
Yet when most people think of the oil and gas industry, they think of upstream – searching for oil, drilling wells, and getting hydrocarbons out of the ground. There is much less common knowledge about the midstream and downstream segments of the industry.
Maybe it’s just because they are more regulated and less exciting. And yes, the wildcatter holds a special place in our imaginations.
What is Upstream?
Most oil and gas companies’ business structures are segmented and organized according to business segment, assets, or function.
The upstream segment of the oil and gas business is also known as the exploration and production (E&P) sector because it encompasses activities related to searching for, recovering and producing crude oil and natural gas.
The upstream oil and gas segment is all about wells: where to locate them; how deep and how far to drill them; and how to design, construct, operate and manage them to deliver the greatest possible return on investment with the lightest, safest and smallest operational footprint.
The exploration sector involves obtaining a lease and permission to drill from the owners of onshore or offshore acreage thought to contain oil or gas, and conducting necessary geological and geophysical (G&G) surveys required to explore for (and hopefully find) economic accumulations of oil or gas.
There is always uncertainty in the geological and geophysical survey results. The only way to be sure that a prospect is favorable is to drill an exploratory well. Drilling is physically creating the “borehole” in the ground that will eventually become an oil or gas well. This work is done by rig contractors and service companies in the Oilfield Services business sector.
The production sector of the upstream segment maximizes recovery of petroleum from subsurface reservoirs. Production activities include efficiently recovering the oil and gas in a producing filed using primary, secondary and tertiary, or enhanced oil recovery (also referred to as improved oil recovery).
Plug and abandonment marks the end of the productive life of a well. That event can occur anywhere from a few years after the well is drilled to five or six decades later.
What is Downstream?
Processing, transporting and selling refined products made from crude oil is the business of the downstream segment of the oil and gas industry.
Key downstream business sectors include:
Supply and Trading
Product Marketing and Retail
The downstream industry provides thousands of products to end-user customers around the globe.
Many products are familiar such as gasoline, diesel, jet fuel, heating oil and asphalt for roads. Others are not as familiar such as lubricants, synthetic rubber, plastics, fertilizers and pesticides.
The downstream segment is a margin business. Margin is defined as the difference between the price realized for the products produced from the crude oil and the cost of the crude delivered to the refinery.
Although the price of crude sets the absolute level of product prices, it may or may not affect refining or marketing margins.
Downstream margins tend to be reduced, or squeezed, when crude price increases often cannot be recovered in the marketplace. On the other hand, margins tend to hold, or even increase, when crude prices drop and the marketplace more slowly adjusts to these lower crude prices.
We’ve all seen this in action lately!
The downstream segment includes complex and diverse activities including manufacturing, petrochemical refining, distribution, and retail. A global perspective is important because of the global nature of the energy supply chain as well as the impact of supply and demand on both feedstock and product prices.
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