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.
Business Characteristics of the downstream oil and gas segment
The downstream oil and gas segment, as shown in the Business Characteristics diagram, 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.
Related Oil and Gas Learning Resources:
The downstream oil and gas 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.
Oil Refining – Products and Participants
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.
Refineries process crude 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 and heavy, and include:
- Liquid petroleum gas (LPG)
- Gasoline (or petrol)
- Naphtha is used as a solvent or paint thinner.
Medium Products – Middle Distillates
- Kerosene and related jet aircraft fuels
- Diesel fuel
- Fuel oils
- Lubricating oils
- Paraffin wax
- Asphalt and tar
- Petroleum coke
- Irving Oil (Canada)
- Petroplus Holdings (Europe)
- ERG Petroli (Italy)
Independent refiners will often have a chain of service stations to market their products. What makes them independent is the fact that they have no E&P operations
Consumption – The Final Step in Adding Value
The final link in the oil and gas value chain is consumption. 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. Other well-known crude oil products include:
- Distillate fuel oil for both home heating and diesel fuel,
- Kerosene-type jet fuel
- Liquefied refinery gases
- Residual fuel oil (heavy oils used as fuels in industry, marine transportation and electric power generation)
- Asphalt for roads
Natural gas products include the following:
- 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) – used as raw materials in oil refining and petrochemical manufacturing.
- Compressed natural gas – used as fuel for buses and commercial vehicles.
Consumption – Little Known Products
In addition to the well-known products of gasoline, jet fuel, and diesel fuel, the downstream industry touches every consumer. Additional 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.
Consumption – Current Global Energy Mix
As the chart from BP indicates, each region in the world currently 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 the 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
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 stations 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
The downstream 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.