What is the difference between Upstream and Downstream in Oil and Gas?
Watch the short ‘Upstream vs Downstream’ video below to learn more about how upstream and downstream segments of the oil and gas industry work together:
Learn more about upstream and downstream, directly from industry experts!
Our oil and gas training courses cover those industry topics that don’t change much from day to day or even year to year. These elements are the foundation for understanding the complexities and inter-connectedness of different segments in the industry.
However, there are certainly trends in oil and gas that change and are influenced by government regulations, economic trends, technological advancements, geopolitics, and other global forces.
After all, part of the fun of being in the oil and gas industry is it’s complexity and global nature!
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Here are some podcast episodes that are directly relevant to trends in upstream and downstream oil and gas including IoT in Oil and Gas, Current Trends in Refining, Offshore and Deepwater Drilling, and more.
The collapse of oil prices at the beginning of 2016 and subsequent layoffs in the upstream oil and gas 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 crushing upstream economicsare a boon to downstream and petrochemical operations. Just look at the stock prices of upstream E&P operators (like Continental Resources) versus pure downstream 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 oil and gas industry.
Maybe it’s just because they are more regulated and less exciting. And yes, the wildcatter holds a special place in our imaginations.
However, in order to be an educated member of the oil and gas industry, it is important that you invest time in understanding all of the segments of the industry – Upstream, Midstream, and Downstream – and how they all work together.
This knowledge can be the difference between being the person on the team who stays, and the one who goes when times get tough.
Oil and gas, like every other commodity-based business, is very price sensitive and is bound to experience multiple cycles throughout any single career lifespan. Within the span of my own 20 years in oil and gas, I’ve seen oil prices plummet into the single digits leading to mass layoffs and soar above $100. Technology and regulatory changes has turned the US into a major oil producer and exporter.
Things are constantly changing!
The more you know about how upstream and downstream are working together the better. Don’t be that person who thinks that what’s outside of your particular segment can’t affect you.
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.
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 segment of upstream oil and gas 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 are 4 key steps to summarize the upstream oil and gas exploration process:
- First is understanding and evaluating the geologic setting, called a play,
- Next is obtaining access to the potential reserves usually in the form of a lease,
- The third step is determining where to drill and completing a successful discovery or “wildcat” well.
- If successful, the additional hydrocarbon reserves can finally be added to the portfolio of an oil company using guidelines set by the Society of Petroleum Engineers (SPE) and the US Securities and Exchange Commission (SEC).
As you can probably imagine, the primary purpose of exploration is to discover new accumulations of hydrocarbons, called reserves.
Today the larger reserve prospects are most often located in remote areas or deep water and can be tens of thousands of feet below the surface.
Conventional oil and gas accumulations only occur under very precise geological conditions. Discovering these conditions requires a very disciplined analysis approach.
Improving exploration success through extensive seismic, logging and drilling technologies is discussed further in subsequent parts of the Exploration module.
Typical Exploration Department
An Exploration Department is usually a globally centralized function which includes the following key technical disciplines and roles:
A Geophysicist uses surface methods to measure the physical properties of the subsurface in order to detect or infer the presence, position and concentration of hydrocarbons.
An Exploration Geologist identifies exploration opportunities that will contribute to the long-term established reserves replenishment goals of the companies.
A Geologist applies scientific methods to assure that all geologic factors affecting the location, design, and construction of the exploratory well are recognized.
A Landman (in the US and Canada) is an individual who begins the process of establishing an E&P project.
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.
Today, technologies are now available for the industry to drill wells over 25,000 feet, with bottom hole temperatures exceeding 400 degrees and pressures approaching 20,000 PSI.
In both onshore and offshore operations, horizontal and deviated wells to maximize reservoir recovery are now the norm.
Oilfield Services Companies Role in Drilling
Oilfield services companies design, produce and deliver both equipment and technical services needed to drill and complete wells.
In addition to the drilling rig contractor on the well-site, there can be 30-40 different contractors doing technical services like cementing, perforating, logging, and testing.
In a separate module, we will present more depth on the OFS equipment, technologies and processes to help you understand their contributions and the way that they have become essential to overcoming industry challenges.
Once oil or gas is found with a wildcat or discovery well, the next step in adding value to reserves is to get the reservoir fluids brought to the surface, or “produce” them. After all, upstream is also called E&P!
The production segment of upstream oil and gas 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).
Economic success of a well depends in large part on how the well is completed. A successful completion must first make the optimum mechanical connection between the wellbore and the reservoir.
The easy oil and gas throughout the world has already been produced, and there are new challenges to leave as little valuable hydrocarbon resource behind as possible, over what may be a 100+ year life of a field.
During the initial stages of a well’s producing life, the fluids are kept moving as long as the natural pressure of the reservoir fluids is higher than the pressure in the wellbore.
The fluids then flow into the wellbore, up the tubing string and into a stock tank. When the formation pressure becomes insufficient to lift the fluids to the surface a lot of oil is still left behind.
Can more of this oil be recovered? Yes, using what’s known as artificial lift.
Every oil well and many gas wells will need artificial lift at some point in their producing life.
Artificial lift refers to the use of mechanical devices, or artificial methods, to increase the flow of fluids in producing oil and gas wells.
Plug and Abandonment
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.
The Production and Offshore Construction Module provides a high level overview of production operations. It introduces the offshore contractors and production service providers that assist E&P companies in efficiently producing oil and gas.
We’ll also cover well completions and key measures and drivers that influence production business operations.
Now let’s take a look at the second part of the question ‘What is the difference between upstream and downstream?’
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:
- Oil Refining
- 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.
The complete refining overview includes segments on:
- Why we refine crude oil
- A basic summary of the refining distillation process
- Historical perspective on the evolution of refining.
The complete Refining Module includes lessons on crude oil and products, refinery processes, key business drivers that impact refining profitability, and more.
Why Do We Refine Crude Oil?
Crude oil cannot be used as it occurs in nature, other than burning for fuel, which is wasteful. It must be refined to manufacture finished products such as gasoline and heating oil.
In the refinery, crude oil components can first be split by carefully applying heat to capture various parts, called fractions, within certain boiling ranges.
This is called distillation.
The quality of these initial fractions produced is not sufficient to be sold directly as petroleum products without further treatment.
Moreover, the yield of products from straight distillation of crude oil is not the same as the “demand barrel” needed for the marketplace.
Crude oil must therefore be further processed using both heat and pressure to improve qualities and meet market demand.
A large part of refinery processing is concerned with converting unwanted heavy fuel oil into marketable gasoline and diesel, using various processing methods.
Supply & Trading
What is Supply and Trading?
To help answer that question, let’s look briefly at how Chevron defines S&T on their website.
“Chevron Supply and Trading (S&T) provides a critical link between the market and Chevron’s upstream, downstream and chemicals companies.
S&T provides commercial support to Chevron’s crude oil and natural gas production operations as well as to the company’s refining and marketing network.”
Volatility and trading have always been an integral part of the oil business. In 1859, crude oil was selling for $20/bbl and two years later for only 52 cents.
Speculators would buy huge quantities of crude after an especially successful wildcat well had made the prices drop, store it in tanks and wait for the price to rise again.
JD Rockefeller realized that control of supply was the key to success in the business. His initial focus was “cooperation” (later named a monopoly) between refining, transportation and marketing.
By 1879, Standard Oil controlled 95% of oil refining in the US. He also purchased plants, warehouses, tanker cars and wagon fleets to make his company totally integrated and self-sufficient.
Petroleum Product Marketing
Marketing is the final step in the ‘Microbes to Markets’ chain that delivers useful petroleum products to end-user customers. The main business drivers of this segment are volume, market share and margin.
Worldwide, transportation fuels including gasoline, diesel, jet fuel and marine fuel oil account the largest percentage of global demand, and it is the fastest growing portion of refinery products.
In the United States, passenger cars still consume more petroleum products than any other sector. Today, the US accounts for about 44% of the world’s gasoline consumption, and transportation fuels are 65% of the US demand.
Every refiner is slightly different, but Marketing Departments are usually organized by retail and wholesale channels.
Don’t forget about Midstream!
As its name implies, the midstream oil and gas segment encompasses facilities and processes that sit between the upstream and downstream oil and gas segments.
Activities can include processing, storage and transportation of crude oil and natural gas.
In most cases, oil and gas reserves are not located in the same geographic location as refining assets and major consumption regions.
Transportation is a big part of midstream activities and can include using pipelines, trucking fleets, tanker ships, and rail cars.
The midstream segment is separated from upstream and downstream in most oil companies because it is considered a low risk, regulated type of business.
It does not fit the risk profile or asset complexity of the other segments of the oil and gas industry.
The Effect of Oil Prices
As we mentioned at the top of this article, it really was the collapse of oil prices and the effect it had on upstream that really got people’s attention.
Upstream and downstream segments react differently to oil prices. For upstream, oil prices represent revenue, money coming in. The more you can get for each barrel of oil pulled out of the ground the better.
Conversely, oil is an expense for downstream refining and petrochemical operations. These downstream operators buy oil on the open market as feedstock for their processing operations, then hope to sell products to consumers with sufficient margin to cover expenses. When oil prices rise these downstream operators have to either raise prices or allow their profit margins to be squeezed.
A good example of this is what we all see every day at the gas pump.
We hope this ‘Upstream vs Downstream’ overview has given you a some good insight into how upstream and downstream are working together, yet are affected inversely by market forces and oil prices.
Is it complex? Absolutely.
Is it fascinating? You bet!
Of course, this overview is just beginning to scratch the surface of these segments of the oil and gas industry. If you are looking to drill a little deeper, be sure to check out our free Oil 101 course.
If you are really the curious sort, you may want to get a glimpse at our premium e-learning courses. These oil and gas training courses include over 50 lessons covering the key upstream and midstream topics that you need to know about.
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