With so many firms labeled as being in the oil industry, it’s virtually impossible not to get their positions mixed up. Most people associate “oil company” with the exploration and production side of the industry—the folks who identify resources and drill wells. In this post, we’ll look at two different sorts of oil corporations: service companies and refiners, and what distinguishes them.
- The oil industry is critical to the world’s supply of energy and petroleum products.
- The industry is divided into three sections: upstream, midstream, and downstream operations, including both specialized and integrated companies.
- There are other oil service businesses that offer auxiliary assistance to main oil corporations.
Upstream, Midstream, and Downstream
The oil industry is split into three phases:
Upstream companies are largely involved in the exploration and early production phases of the oil and gas sector. Exploration for oil and gas is an essential aspect of the upstream economy. Petroleum exploration requires very advanced procedures, and petroleum exploration technology is continually evolving. Exploration often begins in a region with a high potential to contain a resource, typically owing to local geology and proven nearby petroleum resources. Further exploration is carried out in a high-potential location to define a resource. Techniques used in geophysical and geochemical analysis include induced polarization (IP) surveys, drilling and assaying, electrical currents, and so on. The purpose of the exploration phase is to find and evaluate the potential of a resource.
If an area seems to have the potential for a resource, exploratory wells are dug to test the resource. Test drilling is an essential part of the exploration process in the oil and gas industry. If the exploratory well is successful, the next stage is to build wells and extract the resource. The wells that carry crude oil or natural gas to the surface are also operated by upstream firms.
Midstream operations include oil, natural gas, and natural gas liquids processing, storage, transportation, and marketing. The midstream operations occur after the upstream phase and continue till the point of sale. Because of their capacity to mix upstream, middle, and downstream activities as part of their overall operations, many oil and gas businesses are called integrated.
Because of the extensive privately-owned oil pipelines and storage facilities in these nations, the midstream sector classification is far more prominent in the oil industry in the United States and Canada than in the rest of the globe.
The procedures involved in transforming oil and gas into final products are referred to as downstream operations. Refining crude oil into gasoline, natural gas liquids, diesel, and a number of other energy sources is one of them. The closer an oil and gas firm is to the process of supplying petroleum products to customers, the farther downstream the company is considered to be. The downstream process produces the most goods that are intimately related to customers, and it is the sector of the oil and gas business that people can most easily connect to. Liquefied natural gas, gasoline, heating oil, synthetic rubber, plastics, lubricants, antifreeze, fertilizers, and insecticides are some of these items.
The downstream industry also plays an important part in areas and industries of the economy that may not be evident to others, such as the medical profession. Some of the materials and equipment required and utilized by medical professionals are heavily influenced by the downstream process. Similarly, the downstream process is important in the agriculture industry due to its connection to herbicides and fertilizers, as well as the fuel required for farming equipment.
Oil Service Firms
Service firms are involved in all stages of manufacturing. These are companies like as Halliburton (HAL) and Baker Hughes (BHI).They provide engineering, fluid transportation, maintenance, geological surveying, non-destructive testing, and other services. Although they operate in all stages, oil service companies earn the greatest money when upstream production is high. Midstream and downstream oil service organizations receive consistent income that may carry them through troughs in upstream activity, although upstream activity is a major generator of revenue. This is because they are getting new business and new projects to bid on.
Although many of the organizations involved in oil refining include midstream and even upstream production, it is a primarily downstream operation. This integrated strategy to oil production enables businesses such as Exxon (XOM), Shell (RDS.A), and Chevron (CVX) to move oil from discovery to sale. Because human demand for many petroleum products, including gas, is price sensitive, high prices actually affect the refining side of the company. When oil prices fall, however, selling value-added goods becomes more lucrative.
Marathon Petroleum Corporation (MPC), CVR Energy Inc (CVI), and Valero Energy Corp are examples of pure refining bets (VLO).These firms gain from decreased energy costs and increased US output since crude oil cannot be exported; only refined goods can. This implies that refiners now have access to the whole shale oil supply, and their input costs have decreased as a result of the increased supply.
One area where service firms and refiners agree is the need for increased pipeline capacity and transportation. Refiners want additional pipeline to keep the cost of transporting oil by truck or rail as low as possible. Service firms desire additional pipeline because they profit from the design and laying phases, as well as from maintenance and testing.
The Bottom Line
Both oil service firms and refiners play vital roles in the oil sector, yet they earn more in opposing markets. Oil service companies profit when there is a significant demand for crude oil, which drives exploration and production. Refiners profit when there is a large demand for gasoline and value-added petroleum products, and they don’t mind if the price of crude falls. Depending on where the price of crude stands, each offers an attractive investment opportunity.
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