What is Downstream?
In this episode of the Oil 101 podcast series, we will discuss the fundamentals of the Downstream segment of the oil and gas industry. Key Downstream business sectors include refining, supply and trading, and marketing.
In this 8-minute podcast, we will discuss:
- What is Downstream?
- Characteristics of the Downstream segment of the oil and gas industry
- Refining and characteristics of crude oil
- Some participants in Downstream
- Consumption – the final link in the value chain
- The current global energy mix
- Marketing and retail
Listen to Midstream 101 below…
Thanks for listening to the EKT Interactive Oil and Gas Podcast Network.
Hi, and welcome to Oil 101, the podcast. My name is Doug Stetzer and I’m content and community manager for EKT Interactive.
This content is taken from our Fundamentals of Downstream ebook which is available in our free members content library. If you missed our previous episodes on upstream, and midstream, be sure to go check those out.
So, What is Downstream?
Processing, transporting and selling refined products is the business of the downstream segment of the oil and gas industry.
Key downstream business sectors include:
- Oil Refining
- Supply and Trading
- Product Marketing and Retail
The downstream industry provides thousands of petroleum 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.
Business Characteristics of the Downstream Segment
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 oil 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 can not 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.
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.
Crude oils are not uniform, but rather are mixtures of thousands of different compounds called hydrocarbons. Each component of each compound has its own size, weight, and boiling temperature
Lets talk about refining.
Refineries process crude oil into a variety of useful products through a number of different processing units using heat and pressure to separate the products. The resulting petroleum products are often classified as light, medium, or heavy.
Light products include Liquid Petroleum Gas (or LPG), Gasoline, and Naphtha, which is used as a solvent or paint thinner.
Medium products, or what are called middle distillates, include kerosene and related jet aircraft fuels as well as diesel fuel.
Heavy products include fuel oils, lubricating oils, paraffin wax, asphalt and tar, and petroleum coke.
Who are some of the key downstream participants?
Downstream participants include refining and marketing divisions of the major integrated oil companies as well as independents.
Integrated Refiners include:
Independent refiners will often have a chain of service stations to market their products. What makes them an independent is the fact that they have no upstream E&P operations.
The final link in the oil and gas value chain is consumption. At the end of the day, it is the end users or customers of oil and gas products that give them their ultimate value.
Globally, the most widely known crude oil product is gasoline. In addition to the well-known products of gasoline, jet fuel and diesel fuel, the downstream industry touches every consumer.
Further processing produces lubricants, waxes and specialty products, such as high quality oils for medicines and cosmetics.
Raw materials from the downstream are procured for the petrochemical industry as feedstock in the production of thousands of additional products such as synthetic rubber, plastics, nylon, polyesters for fabrics, fertilizers, antifreeze, pesticides and pharmaceuticals.
Natural gas products do not generally require more processing than was discussed in the podcast on midstream. Just to compare to the refined oil products, Natural gas products include:
Natural gas itself – used in electricity generation and as fuel for home heating and cooking.
Liquefied Natural Gas (LNG) – a cooled, liquefied version of natural gas used to ease shipment and storage.
Natural Gas Liquids (NGLs) – which are used as raw materials in oil refining and petrochemical manufacturing.
and Compressed natural gas – used as fuel for buses and commercial vehicles.
Consumption – Current Global Energy Mix
Let’s discuss the current global energy mix. Each region in the world has a different mix of hydrocarbon or fossil fuels needed and used to meet their total consumption.
Oil remains the leading energy source in North, South and Central America and the Middle East. Fuel products (gasoline, diesel and jet fuel) are 65% of total demand for refined products in the US and 40% of total global demand.
Alternatively, coal dominates in the Asia Pacific region while natural gas is the leading fuel in Europe and Eurasia.
As all global economies continue to expand, there will be continual balance and tradeoffs made between the fuel qualities, pricing and environmental impact of coal, oil and gas.
Marketing and Retail
Petroleum product marketing is the business of finding and supplying customers who possess either internal demand for refined fuels or distribution networks for reaching retail customers.
Direct consumers of energy products include petrochemical and industrial manufacturers, utilities, municipalities, trucking fleets, and airlines.
Other companies may possess distribution assets or brands aimed at reaching retail end users. These companies could include independent service station suppliers, motor oil products, home fuel oil supply companies, propane tank distributors, and many others.
The network of service stations, dealers, and jobber-distributors is a large franchise system similar to the fast food chains familiar to everyone. There are approximately 110,000 independent gas stations in the US.
Downstream Oil and Gas Summary
In Summary, the downstream segment of the oil and gas industry includes the refining of crude oil into consumable products and the marketing of these products to commercial or retail end users.
Downstream is a very complex, global business where profit is made from the margin between crude oil and refined products.
Gasoline, jet fuel, and diesel account for over 40% of global demand for refined products.
Thanks for listening, and we hope you’ve learned a few things about the downstream segment of the oil and gas industry.
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