What is Upstream?
In this first episode of the Oil 101 podcast series, we will discuss the fundamentals of the Upstream segment of the oil and gas industry. Upstream is all about the wells, but first you have to figure out where to drill.
In this 12-minute podcast, we will discuss:
- What is Upstream Oil and Gas?
- Risks in Upstream
- Exploration and Production (E&P)
- Unconventional Techniques and Resources
- Main players in Upstream
- Oilfield Services
Listen to Upstream 101 below…
Thanks for listening to the EKT Interactive Oil and Gas Podcast Network.
- Oil 101 – A Free Introduction to Oil and Gas
- List of National Oil Companies (NOCs) – Wikipedia
- The Frackers – a great book on the development of US unconventional production
Oil 101: Introduction to Upstream
The first lesson in our ‘Microbes to Market’ coverage will be discussing the Upstream segment of the oil and gas industry.
This content was taken from our Fundamentals of Upstream ebook, which is available in the free members content library at www.ektinteractive.com.
This Upstream overview includes segments on:
- Exploration and Production, or E&P
- Drilling and “unconventional” techniques
- Upstream business characteristics
- Players and participants in Upstream
- Oilfield Services
So, What is Upstream?
Most oil and gas companies’ business structures are organized according to business segment, assets, or function.
The upstream oil and gas segment is also known as exploration and production, or E&P because it encompasses activities related to searching for, recovering, and producing crude oil and natural gas.
Upstream 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.
In fact, the E&P sector should probably be called the EDP sector – because “you can’t find oil if you don’t drill wells.”
Obtaining the Lease
Let’s start with exploration which involves the operator obtaining a lease and permission to drill from the owner of onshore or offshore acreage thought to contain oil or gas.
Then the operator must conduct geological and geophysical surveys to select the first well site to explore for, and hopefully find, economic accumulations of oil or gas.
This well is often called a “wildcat well.”
Drilling is physically creating the “borehole” in the ground that will eventually become a productive oil or gas well.
This work is typically done by rig contractors and service companies in the Oilfield Services business sector. On a wellsite, there can be as many as 30-40 different service contractors providing expertise to the operator.
Wells can be relatively simple or unbelievably complex. Wells can totally vertical for miles or both deep and horizontal.
There are also highly complex “J” and “S” configured wells with numerous branches, or laterals, emanating from the original, or “mother”, hole. These are called “deviated wells.”
Finally, let’s discuss production, where reserves are “converted to cash” by maximizing the recovery of hydrocarbons from subsurface reservoirs. Essentially, production is efficiently bringing the hydrocarbons to the surface and treating them as needed to make them marketable.
So that’s the basics of E&P. We will drill deeper into each of these operations in the complete Oil 101 course at a later date. Now, let’s talk about unconventional resources, clearly the hottest topic in oil and gas over the last decade.
Unconventional Future of Oil and Gas
Unconventional resources are defined as any resource extracted, or produced, by any method other than the traditional vertical or slightly deviated well.
The three main sources of technological breakthroughs that have made unconventional developments profitable include:
Horizontal drilling is not new, but the technology has matured quickly. Horizontal wells reduce the size of the drill pad footprint and enable production along the length of a reservoir. Today, some horizontal sections can exceed 7 miles!
Hydraulic fracturing, or fracking, is the process of injecting water, chemicals, and sand into wells under very high pressures. The resulting fractures in surrounding rock formations allows for microscopic hydrocarbons to be recovered.
Even with all of the talk and public awareness of shale, some of the largest oil and gas discoveries continue to be found in deep water off the coasts of Africa, South America and the Gulf of Mexico. Recently a very large discovery was made in the Mediterranean of the coast of Egypt.
Deepwater subsea engineering innovations have made production economic from water depths exceeding 10,000 ft.
Upstream Business Characteristics
It is important to note that there are four key business characteristics of upstream. It is a high risk, high return segment, it is highly regulated, it is impacted by global politics, and it is very technology intensive.
The upstream industry is arguably the most complex of all the oil and gas business sectors. There are many risks and unknowns in the exploration process. Often hundreds of millions of dollars and many years are spent before an oil and gas field becomes productive, especially offshore..
The upstream segment is regulated in terms of production, access to reserves, pricing and taxation, and more and more stringent environmental regulations.
Upstream is a global business. Politics between producing nations and major oil companies can be very complicated.
Finally, as we’ve seen in the last decade with developments of unconventional prospects, upstream is extremely technology, and thus capital, intensive.
Who are the Players?
The four main categories of participants in the upstream sector are the Majors, the NOC’s, Independents, and Oilfield Services companies.
Major Oil Companies, also called Integrated Oil Companies also operate assets in other segments of the industry.
These companies include the prominent global brands that you are familiar with including ExxonMobil, BP, Chevron and Shell.
National Oil Companies are those industry participants owned and managed by governments around the world. These include Saudi Aramco in Saudi Arabia, PEMEX in Mexico, and many others. We’ll include a link to a list of all the NOC’s in the program notes to this podcast.
Independents exist in each segment of oil and gas. What makes them independent is that they are not integrated into other segments. Independents in the Upstream are those E&P companies that concentrate solely on finding and producing oil and gas.
Examples include Apache and Anadarko, but there are many others.
Oilfield Services companies are an important and often misunderstood part of upstream operations.
This sector includes those companies that provide the specialized equipment, services and technical skills needed for exploring, drilling, completing, testing, producing and maintaining crude oil and natural gas wells.
Oilfield services and supply companies do not typically produce oil and gas or own the assets that contain hydrocarbon reserves.
As we mentioned earlier, at a typical wellsite, there could be 30 or more different oilfield service companies handling the mechanical, technical and analytic operations needed to successfully drill and complete the well.