With oil accounting for close to 10% of the total world’s Gross Domestic Product (GDP), the industry is crucial for the functioning of the world’s economy. With its vast presence all over the globe, the oil and gas industry has a multifaceted operational structure. There are different views on how to classify this industry based on its operations. Broadly, they can be classified into three sectors, i.e., upstream, midstream and downstream. Let us look at each of these three sectors in terms of their business activities.
The upstream sector covers business scenarios relating to exploration, development and production of crude petroleum or natural gas. It includes exploring crude oil and storing it into tanks. Supply chain activities relating to the safekeeping of crude oil or natural gas in tanks also fall under the gambit of upstream operations. The key commercial challenge of this sector lies in its endeavor to constantly search for new oil reserves and produce them in the most economical way.
Upstream is popularly known as Exploration & Production (E&P) business. E&P deals with ascertaining and enhancing the opportunities of spotting actual deposits of hydrocarbons. It also involves drilling exploratory and production wells to safely bring maximum quantities of crude oil and natural gas to storage. Upstream processes are complex because they entail deployment of multiple agencies in the field operations and are risky because they are carried out in hazardous working conditions.
Typical upstream phases are licensing, exploration, appraisal/delineation, development and production. (To learn more about appraisals, read Steps to a Successful Field Appraisal.) Upstream operations are capital intensive and directed to find unknown components of oil reserves. They involve significant financial risk of losing invested capital if the hydrocarbons are not economically viable for production operations. Therefore, oil and gas companies usually form joint ventures in their search for and development of oil fields so as to share the risk of capital deployment.
Apart from the business and operational challenges, upstream companies come under strict regulations from governments and state bodies as their operations have social and environmental risks in addition to financial losses if their operations fail. The BP oil spill in the Gulf of Mexico in 2010 is a major incident that showcases how an upstream operation failure can have a devastating impact on the environment and the bottom line.
The produced crude oil has to be shipped to refineries for further processing to generate value-added products such as liquefied petroleum gas, naphtha, gasoline, gas oil, aviation fuel, kerosene, etc. Business activities that cover the movement of crude oil from upstream storage tanks to refineries form the midstream sector operations. Crude oil is transported in bulk via supply chain methods such as vessels, pipelines and rail racks. Once crude oil is processed, the value-added products are shipped to consumers.
Bulk transportation plays a key role in this sector of the oil & gas industry. The transportation of crude oil or natural gas in bulk through vessels, pipelines, etc., requires a different skill set to handle the operations in scheduling and commercial areas. For example, the movement of products through vessels requires a contract known as a charter party agreement with the vessel operator. This agreement is of two types, i.e., spot contract or term contract. When a vessel operator makes his ships available as demanded by an annual contract for instance, it is called a term contract. The term for provision of service could be a specified period of time and the hire charges may be linked to the international hire prices published by leading pricing sources such as Platts and the International Maritime Organization.
The downstream sector covers business activities from refining the crude oil to make value-added products to marketing and selling the products to commercial and retail customers. It also involves the managing of terminals. The processes include refining planning and scheduling, terminal management, marketing, sales planning and customer billing through various channels. Gas station operations cover areas of stock management at the terminals and transportation of bulk products through trucks/racks. Finally, service station fuels management and convenience retailing covers all processes related to the management of fuels and goods at the service stations. (Read about recent changes in this sector in Mobile Tools: A Disruptive Technology for Oil & Gas Operations.)
Service station retail operations are typically called secondary distribution processes. The products are moved to gas stations from the feeder terminals mainly through tanker trucks. Managing the truck fleet efficiently through the routing process forms a core part of the retail supply chain management. Since the quantity of hydrocarbons transported through tanker trucks is small and the storage space available at the gas stations is limited, the challenges facing the supply chain planner is profound and complex. They must manage the supply network in such a way that no gas station shuts down due to a lack of product supply and at the same time ensure the tanker truck fleet is deployed efficiently through meticulous supply planning and scheduling operations. (Learn more about this part of the sector in the article Oil & Gas Retailing Secondary Distribution Processes.)
Overall, the oil and gas industry is a fascinating business but quite challenging especially if it is an integrated oil company that has operations extending from upstream to retail and trading operations. Oil companies manage multifaceted business situations not only from their intricate business operations, but also from external factors such as world geopolitical situations and regulatory and environmental conditions.