Downstream is the third and the last stage of the comprehensive oil and gas (O&G) process, with the first two being Upstream, and Midstream. Downstream is an essential process in the petroleum industry that is responsible for refining, distribution, and retails of petroleum products. All the methods which are involved in turning natural gas & oil to user-centric petroleum products come under Downstream processes.
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This segment of the O&G industry refers to any process that is required to refine, process, purify the raw crude oil or gas into a user-centric product. The downstream sector is responsible for the supply of thousands of petroleum products used by consumers worldwide. Most of the familiar petrochemical products which we use in our day-to-day life are gasoline, diesel, asphalt, plastic, rubber, fertilizers, pesticides etc. The main components of the Downstream process are Refining & Processing, Marketing & Distribution and Retail.
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Crude oil is made up of a large number of hydrocarbon molecules. The lighter molecules of gas contain Carbon atoms ranging from 1-4, whereas higher hydrocarbons might consist of 20 Carbon atoms as well. The molecules are present in varying proportion depending on the source and maturity of the organic matter. Consumers can't use crude oil directly into vehicles or machines. It needs to be refined & processed before using. Refining involved three necessary steps that are Separation, Conversion and Treatment.
In Separation, the liquid and vapours are separated into petroleum components according to the boiling point of the dissolved components known as Fractions. The lightest fractions include gasoline and liquified refinery gases; medium weight liquids include kerosene and distillates whereas heavier liquids consist of gas oils which are collected at the bottom of the distillation tower.
In Conversion, distillates and heavy liquids are processed and converted into lighter products using Catalytic Cracking. High pressure, heat and catalyst are the main components used in the cracking process. 75% of the heavy products are converted into gas, gasoline, and diesel by this process.
The last step of Treatment involves the removal of undesired components from the product, which can harm the transportation process like removal of Sulfur which is highly corrosive. Thiols are removed from Butane & Kerosene by washing & this process is known as Sweetening.
After the refining & processing of crude oil is complete, the next step is to market & distribute the products in the international market. The pricing and demand for the petroleum products may vary depending on numerous reasons like distance of transportation, political conditions and economics. Marketing involves the wholesaling and distribution of the product. Transport can be done via different types of mediums like oil tankers through roads/railways or through tanker ships. Many midstream companies play a vital role in the transportation of petroleum products to the end-users.
This is the final step in the downstream process, i.e. retailing of the end-products. A large amount of retailing is done to factories, power plants and in the transport industry where a small section of retail consists of supply to pumping stations. There are thousands of more products which are made available for the end-users like lubricants, rubber, plastic, fertilizers, pesticides, and other petrochemical products.
Define Upstream In the oil & gas sector, all the activities which are related to exploration and production of oil and natural gas are termed as Upstream activities. The operations of Oil & Gas Industry include searching for subsurface O&G deposits to drill wells for production and then transporting the produced material to refineries to convert it to a usable form and finally make it available for end-users. The whole Oil & Gas process can be classified into three main categories which are known as Upstream, Midstream and Downstream. Image Source © Kalkine Group Upstream Process Upstream is referred to as “E&P” which means Exploration & Production. Exploration involves all the activities that are involved in search of specific subsurface areas where a petroleum reservoir is located. Whereas production involves all the processes involved in bringing the found subsurface deposit of oil & natural gas to the surface using drilling techniques. The upstream operations consist of Acquisition, Exploration, Appraisal, Development, Production and Abandonment Image Source © Kalkine Group Acquisition The acquisition consists of various activities starting from the purchase of license blocks and searching for O&G deposits using multiple sophisticated techniques. Acquisition on acreage can be made by open tendering either by direct negotiation or by the farm-in process into an existing block. Exploration After the acquisition of the O&G block, various extensive surveys like gravity, magnetic, seismic are conducted to delineate the subsurface deposits of hydrocarbon. The primary step in the exploration phase is Basin Assessment which is carried out to study the area of interest. An exploratory well is drilled to assess the geological details of that area. The companies use advance modelling techniques to prepare realistic basin models and to study the basin evolution. Based on available geological and geophysical survey data and results of the analysis made on that data, a decision is made either to move further with the lease or not. The fundamental objective of this phase is to evaluate the risk and to evaluate the volume of hydrocarbons present in the reservoir. Appraisal The main objective of appraisal stage is to assess the potential and extent of reservoir better. After completion of the exploratory phase, the reservoir engineers and geologists start planning appraisal activities. More wells are drilled to reduce the uncertainty of the evaluated volume of hydrocarbon. Expected Reservoir performance is evaluated and the production forecast for the field is prepared. Development After the completion of the Appraisal phase, the economic presence of hydrocarbon is confirmed or denied. If the field contains commercial deposits of hydrocarbon, a Field Development Plan (FDP) is prepared for the phased development of the field. The objective is to deplete the reservoir in most technically significant, safest end economical manner to get optimum Return on Investment (ROI). Appropriate locations for drilling various wells are drawn based on economics & survey results to start the production in a full-fledged manner. A proper assessment for LNG site is also conducted, which requires the construction of large scale export-import, storage and transportation facilities. Production After the completion of FDP, the field is developed, multiple wells are drilled, and production starts. The field starts producing from wells in a full-fledged manner. It is the first stage in the life-cycle of a field when the extracted hydrocarbon gives the first revenue from selling the O&G. When the revenue exceeds the investment that the company made during the initial phases, the company starts getting profit. This stage can last up to 45 years, depending on the potential of field and easiness to explore the reserves. After due course of time, the rate of production starts deteriorating due to the decline in reservoir pressure. Special EOR (Enhanced Oil Recovery) techniques like steam injection, water flooding is used to regain again the declined pressure of the reservoir which is commonly known as "Maintenance" phase to enhance the production rate. Finally, after producing the commercial hydrocarbons, the well is shut and abandoned. Abandonment The gradual decrease in production rates due to the decline in reservoir pressure leads to non-economic recovery of reserves from the reservoir. When the field reaches its economic limit, the company decides to stop production from that field and abandon the operations from there. The producing wells are plugged & abandoned (P&A). The objective is to protect the future commercial zones and near freshwater zones from contamination. Decommissioning of previously installed production facilities is done as they are no longer economical. The land under the facility is reconditioned, and environmental restoration is carried out.
Integrated oil & gas companies are the ones that operate over the whole oil value chain system from oil exploration and production to shipment via tankers or pipelines and finally refining, and marketing of petroleum products. Overall operations of integrated companies are categorized into three main classes that are: Upstream Operations: This operation involves all the activities which are related to search, explore and produce the subsurface deposits of hydrocarbons; Midstream Operations: This operation involves all the activities which are involved in the primary processing and transportation of produced hydrocarbon via tankers and pipelines to the refineries for further processing. Downstream Operations: This operation deals with all the activities involved in the refining, fractionation and marketing of petrochemical products. Kalkine Group Image Understanding Integrated Approach: The foundation of integrated O&G company was started in the 1890s with the Standard Oil Trust. Standard Oil was broken into smaller independent companies in 1911 as per the Sherman Antitrust Act 1890, which prohibits the restraint of trade. Although the defenders of the company believed that the company didn't restrain the trade instead were giving a superior level of competition. The "baby Standards" that still exist are ExxonMobil and Chevron and are having operations worldwide in an integrated manner. The integrated companies are often known as Oil majors, big oil, integrated majors and super majors. As per their roles from the upstream sector to the downstream industry, these companies have large assets related to exploration, production, transportation, refining, marketing and retailing of the petroleum products. Integrated Vs Independent: An independent oil and gas organization is one that operates around just one fragment of the oil and gas industry. There are both merits and demerits of being either an independent or integrated company. Integrated companies have vertical integration, they have multiple verticals operating in different sectors like upstream, midstream and downstream. Being in touch with all verticals, an integrated oil and gas organization is in direct contact with the energy and market insights. This helps an integrated company to manage its E&P activities as per the demand of petroleum products in the market. Market evaluation of an integrated oil and gas organization can be difficult because of their lumped operation and production assets which leads to a lower market evaluation. An independent oil and gas organization with just one sort of business activity carries a more honed centre to its business movement. However, the limitation of switching operating sectors as per the prevailing market demand to stabilize the profits in horrible economic situations is an opportunity that is not present with independent companies. Kalkine Group Image How big are Super Majors? Global petroleum industry has various types of O&G companies in its fold. The ones who operate in one sub-industry, the others are oil majors and then comes the actual super majors National Oil companies who are accountable for every molecule of hydrocarbon that has been explored and consumed. It isn't easy to evaluate the market cap of an integrated company and map it on the global O&G market, as they have businesses in diverse field. To understand the massiveness of an integrated company one can, visualize that the ten largest oil super majors listed on the U.S. stock exchanges hold around one-fifth of the world's O&G production and nearly a quarter of global refining size. Source: https://www.fool.com/investing/general/2014/07/30/integrated-oil-gas-investing-essentials.aspx Oil price effect on Integrated & Independent Companies: An independent oil and gas organization may flourish or shrink on the rise or fall of oil and gas costs. In contrast, an integrated oil and gas organization frequently has less impact on price fluctuations. Dips in profits can be hedged and counterbalanced by its supporting operations either by upstream or downstream businesses. For example, if the oil prices go down in the international market, the profit margin earned by E&P companies goes down but being and integrated company, it can stock more amount of crude oil at lower prices and can lock more raw material for its downstream operation ensuring higher profit margin and counterbalancing the losses incurred in exploration & production.
The oilfield is a territory of land from where raw petroleum and natural gas is created. It can extend to numerous miles as hydrocarbon reservoirs commonly spread over a massive zone beneath the subsurface. Various oil or gas wells can be drilled in a solitary Oilfield. An Oilfield can be characterised as a surface zone which is on top of the subsurface accumulated hydrocarbon. A hydrocarbon field comprises of a reservoir in a shape that will trap hydrocarbons, and that is covered by an impermeable cap rock. Understanding Oil Field: The overall oil and gas industry is classified into three classes that are upstream, midstream and downstream businesses. Upstream deal with the exploration and production of subsurface deposited hydrocarbons whereas mid-stream is related to the transportation of extracted hydrocarbons from their place of origin to the refineries and downstream is pertaining to the processing and further marketing of petroleum products. Image Source: Kalkine Group Image Oil field is a part of upstream petroleum business as it consists of multiple wells and oil pools. The wells may be in the production stage or about to drill stage. As endless wells are operational in the oilfield, it contains associated facilities and infrastructure which are required in exploration and production. For example, oil rigs, cementing trucks, drilling mud related apparatus' etc. Across the globe there are more than 40,000 Oilfields, both onshore and offshore, the largest ones being the Ghawar Field in Saudi Arabia and the Burgan Field in Kuwait. Oil Field Infrastructure: Constructing an oil field can be a challenging task. We don't only need drilling equipment, but many associated facilities are also required like accommodation and food facility along with water and electricity for the crew working there. If the oil field lies in a very cold area, there is a requirement to keep the pipelines warm. In the absence of gas storage facilities at any remote location, the associated gas needs to be flared out so; one must require pipes, furnace and chimneys for that. As a secondary source of recovery, nodding donkeys or pumpjacks are installed to produce more from the reservoir. Oil field service companies have a long history of supporting E&P companies with an extensive global network of experienced worldwide professionals for both conventional and unconventional fields, including oil sands. The service companies provide support in planning, manufacturing, commissioning, drilling well maintenance, development and other offsite related tasks. Complications in Oil Field Set-Up: As stated in the previous section, the whole petroleum industry is divided into three sectors, and most of the companies have expertise in a particular sector of the industry making them dependent on others for other services they don't excel in. On the other hand, there are other types of companies which are known as integrated oil & gas companies which have an expertise of the entire supply chain of an O&G industry, but the numbers are limited. Frequent technological advancement to effectively extract the technically challenged subsurface deposited hydrocarbon is a critical problem for the organisation. Each company is not able to upgrade itself as per the current requirement, in each and every sector to prove its excellence, thereby creating a dependency on others. New technologies like hydraulic fracturing, tight oil exploration, horizontal drilling have dramatically increased the efficiency in the extraction of O&G. Lowering production cost is the prime objective of any company working in the extraction of hydrocarbon. Birth of Oil Field Service: Below are the most significant elements which empowered and improved oilfield service industry that accounts for most of the innovation and advanced skills over the existing pattern of an oil and gas industry. Image Source: Kalkine Group Image Economics: The specialisation of organisations in a specific service domain allows a healthy competition and technical innovation among suppliers. An in-house specialisation of all services from toe to head might not provide an innovative and cost-effective approach which may become a hurdle in the quick ascent of the petroleum technology that the industry has seen in the recent past. Capital Requirement: To excel in each and every service, the company requires a lot of capital. Many integrated oil & gas companies may manage it, but most of the companies are not able to invest the enormous amount needed to develop and excel in every field. Accountability: Third-party service suppliers seemingly consider extended responsibility and effective profit margin among service provider and receiver. Outsourcing may also lead to greater accountability of the service company in the operational risk, delays in execution and mispricing in a contract.
The complete O&G process consists of various steps, ranging from searching for subsurface deposits of petroleum, extraction, transportation of extracted material to refineries, and then finally refining it & making it available for customers. Midstream is one three crucial stages involved in the O&G processes. In the oil & gas sector, all the activities which are related to storage, processing, and transportation of oil and natural gas, are termed as Midstream activities. The complete O&G process consists of three main categories -- Upstream, Midstream and Downstream: Image Source © Kalkine Group Midstream Process: Midstream process in the O&G industry refers to actions required to store and transport the extracted crude oil or natural gas from the subsurface reservoir to refining. Raw crude oil and gas need to be processed before transportation to extract valuable NGL (Natural Gas Liquids) from it. Midstream includes transportation of the processed crude oil and natural gas from the place of origin to refineries like pumping stations, rail & truck tankers, pipelines etc. The midstream process consists of three main parts: Image Source © Kalkine Group Field Processing: The raw crude comes in a mixture form of oil, natural gas, and natural gas liquids which are flown into different types of separators. Separators can be Horizontal, Vertical or Spherical, depending on the operation, either offshore or onshore. The separator separates water and oil from the mixture. After this removal of impurities is carried out, followed by Fractionation, where Natural Gas Liquids (NGL) are extracted from produced raw crude or natural gas. These NGL's are used as a blend component in refineries and feedstock for the manufacturing of other petrochemical products. The separated water is again pumped into the disposal well, while O&G is fed into temporary storage units. Transportation: Transportation is a significant segment of the midstream process since crude oil and gas must be moved to refineries for additional refining and ensuring its availability to the consumers. The primary types of transportation of crude oil and gas incorporate pipeline, truck, rail, and tanker ships. Crude oil, gas, and natural gas liquids are shipped from the well, where they are explored, to an offsite temporary storage facility and moved to a gathering facility for refining. Whenever they are refined, the end petroleum products, for example, gasoline, LPG, diesel, and stream fuel, are made available for end-users, for example, homes, production lines, and gas stations. Pipelines are the most well-known methods for transporting crude oil and gas over significant distances since they are a relatively more secure-and-efficient medium of transportation. Tanker mounted trucks are used to move oil and gas from the place of origin to treatment facilities or from processing plants to the end-users. Despite the fact that trucks move the lowest volume of oil-based commodities, they make up for the inflexibility of different methods for oil transportation, for example, pipelines and ships. On the other hand, railways are considered as the cheapest mode of transportation. Storage: Storage facility plays a vital role in regulating the demand and supply in the market. Storage facilities include bulk terminals, refinery tanks and holding tanks to send material into pipelines, or ready to be shipped on a vessel. The large volume of hydrocarbons is stored in the storage tanks. Storage levels matter all around the world since they affect oil prices. Storage has additional significance since it ensures energy security in case of any critical situation, like COVID 19, arises and interrupts the supply. As per the International Energy Program Agreement (I.E.P. Agreement) of 1974, International Energy Agency (IEA) members are required to hold oil stocks equivalent to at least 90 days of net oil imports. Because of the high pressure of Natural gas, it is stored in depleted underground reservoirs, like salt caverns and aquifers, until it gets ready to transport to market. Nowadays, due to advancement in technology and limitations, naturally-occurring reservoirs LNG came into existence where the gas can be liquefied and stored in LNG tankers.