What Are Upstream Operations in Crude Oil and Natural Gas?
Upstream refers to the exploration and production of crude oil and natural gas. A company that is searching for and extracting crude oil and natural gas, on land or offshore, is in the upstream business. Undertaking upstream operations typically requires large capital, and there’s no guarantee of success in finding crude oil and natural gas in every exploratory effort.
Geologists typically do the work in finding commercially viable crude oil or natural gas reservoirs and deposits on land as well as offshore. When a sizable area of reserves is discovered, the exploration company drills to tap the field for extraction of crude oil or natural gas.
A company typically extracts petroleum through the conventional method of drilling, which means tapping reservoirs of crude oil and gas vertically and controlling the flow with a wellhead. Natural gas also occurs during crude oil extraction (known as an associated gas), and is processed separately.
Another, more controversial method to extract crude oil and natural gas from below ground is hydraulic fracturing, commonly referred to as “fracking.” Water, chemicals, and sand are pumped at high pressure to break sedimentary rock formations and to extract the trapped hydrocarbons. The resulting mixture is then brought aboveground to separate crude oil and gas from the mud and rocks. While conventional drilling is vertical, fracking can extract hydrocarbons horizontally.
What Are Downstream Operations in Crude Oil and Natural Gas?
Downstream refers to the processes of refining, marketing, and eventually selling petroleum products. A company that refines crude oil and natural gas, and markets and sells the petroleum products for wholesale and retail is in the downstream business. Natural gas that is processed is typically sold directly to electric and gas utilities. Petroleum products are also kept in storage before customers take delivery.
Crude oil is refined into petroleum products such as gasoline, diesel, jet fuel, motor oil, tar, lubricants, and feedstock for plastics.
Natural gas in its raw form directly from the wellhead is full of impurities and needs to be stripped of water vapor, hydrogen sulfide, nitrogen, and other compounds. It can be processed into liquid form and also into feedstock for plastics and fertilizers.
Petroleum products can be sold directly to consumers and to large businesses. Gasoline filling stations and convenience stores selling motor oil are part of the downstream sector. Natural gas typically ends up as methane sold to electric and gas utilities.
What Are Midstream Operations?
Midstream refers to the intermediate phase between the upstream and downstream operations and involves the transportation, transmission, and storage of crude oil and natural gas. After crude oil has been extracted from the ground, it is then transported—via tankers, pipelines, railcars, trucks, or barges—to storage facilities before being delivered for downstream operations, including refining. Natural gas, however, can often be transmitted directly from the well to processing via pipelines.
A company that is involved only in upstream operations may turn to a company that focuses on midstream work to pass on crude oil and natural gas to downstream operations. The same goes for a company involved only in downstream work—it’ll seek midstream operators for sourcing crude oil and natural gas.
How Do Companies Tackle Upstream and Downstream Operations?
Some companies may focus only on upstream operations, while others may only work downstream. Some of the largest companies in the crude oil industry have the capital and resources to do both (as well as midstream), and they are referred to as integrated companies—much in the same way that a vertically integrated company is involved from manufacturing a product to selling it to the consumer.
Some of the biggest integrated companies include ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX), BP (NYSE: BP), and Royal Dutch Shell (NYSE: SHEL). Outside of the U.S., examples of state-controlled integrated companies include Saudi Aramco of Saudi Arabia, Petronas of Malaysia, and China National Petroleum Corporation.