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Most oil and gas companies’ business structures are segmented and organized according to business segment, assets, or function.
The upstream segment of the 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 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.
As its name implies, the midstream segment encompasses facilities and processes that sit between the upstream and downstream segments.
These 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.
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, 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.
There are 4 key steps to summarize the 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 we discuss in our lesson on Exploration, the first step in adding value is to locating the oil and gas reservoirs that are often far below the surface, and in deeper offshore prospects.
Even with the latest seismic technology and computer modeling, many characteristics of a prospect remain unknown until an exploratory or “wildcat” well is drilled.
Repeating from that lesson, “you can’t find oil if you don’t drill wells.”
The Production 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.
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!
Natural gas, like crude oil and coal, is a mixture of hydrocarbon compounds which are multiple combinations of carbon and hydrogen atoms.
The principal components of natural gas as it comes from the reservoir are methane and ethane with varying amounts of heavier hydrocarbons that can include propane, butane and pentane.
Natural gas has the cleanest combustion profile of all the fossil fuels.
Unlike coal or oil, combustion of natural gas releases very small amounts of sulfur dioxide and nitrogen oxides, and virtually no ash or particulate matter.
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.
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.”
As Chevron noted, S&T supports many operations within an integrated company.
However, we will focus on downstream S&T decisions that are focused on the supply and logistics network that bring the crude to and take products away from a specific refinery.
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.