Upstream vs. Downstream Oil and Gas Production: An Overview
The terms upstream and downstream oil and gas production refer to an oil or gas company's location in the supply chain. Oil and gas companies are usually divided into one of three groups, upstream, downstream, and midstream. Some companies are considered to be "integrated" because they combine the functions of two or three of the groups.
Upstream oil and gas production is conducted by companies who identify, extract, or produce raw materials. Downstream oil and gas production companies are closer to the end user or consumer.
Here's a look at upstream and downstream oil and gas production, their individual functions, and what role they play in the broader supply chain.
Upstream Oil and Gas Production
Upstream oil and gas production and operations identify deposits, drill wells, and recover raw materials from underground. They are also often called exploration and production companies. This sector also includes related services such as rig operations, feasibility studies, machinery rental, and extraction of chemical supply.
Many of those employed in this part of the industry include geologists, geophysicists, service rig operators, engineering firms, scientists, and seismic and drilling contractors. These people are able to locate and estimate reserves before any of the actual drilling activity starts.
China National Offshore Oil Corporation and Schlumberger (SLB) are examples of large companies that focus on upstream services. Many of the largest upstream operators are the major diversified oil and gas firms such as Exxon-Mobil (XOM).
Downstream Oil and Gas Production
The closer an oil and gas company is to supplying consumers with petroleum products, the further downstream it is said to be in the industry. Downstream operations are oil and gas processes that occur after the production phase to the point of sale.
This sector of the oil and gas industry—the final step in the production process—is represented by refiners of petroleum crude oil and natural gas processors, who bring usable products to end users and consumers. They also engage in the marketing and distribution of crude oil and natural gas products. Simply put, the downstream oil and gas market is anything that has to do with the post-production of crude oil and natural gas activities.
Many of the products that consumers use every day come directly from downstream production, including diesel, natural gas, gasoline, heating oil, lubricants, pesticides, pharmaceuticals, and propane.
Companies engaged in the downstream process include oil refineries, petroleum product distributors, petrochemical plants, natural gas distributors, and retail outlets. Many major downstream companies are also well diversified and engage in all levels of the production process. Examples of downstream companies include leading U.S. refiners Marathon Petroleum (MPC) and Phillips 66 (PSX). Phillips 66 was initially part of parent company ConocoPhillips (COP) until the larger oil company opted to spin off the downstream business in 2012.
[Important: Midstream operations link the upstream and downstream entities, and mostly include resource transportation and storage services for resources, such as pipelines and gathering systems.]
- Upstream and downstream oil and gas production refer to an oil or gas company's location in the supply chain.
- Upstream oil and gas production is conducted by companies who identify, extract, or produce raw materials.
- Downstream oil and gas production engages in anything related to the post-production of crude oil and natural gas activities.