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How the Petroleum Industry is Divided Into the Upstream, Midstream and Downstream Sectors

Published 9/22/2012

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At some point, ancient dead plants and animals are refined into a valuable liquid that is then pumped into over one billion cars. This entire process is divided into three sectors: upstream, midstream and downstream.

What is the Upstream Sector?

Upstream is the part of the oil production process that focuses on locating and recovering crude oil and natural gas. Those in the upstream sector are focused on locating underground and underwater oil fields.

How Oil Fields are Located?

These oil fields are located by drilling exploratory wells. There are many parts of the world that are known for having large oil reserves. Geologists are used to determine which areas have the right conditions for an oil trap. The surface rocks and terrain, as well as the shallow drilling, can help the geologist predict if there is oil in the particular location. Other ways that geologists an locate oil include the use of gravity meters to detect small differences in the gravitational field of the Earth. There are electronic noses known as sniffers that can smell hydrocarbons. Finally, the most common approach is to use shockwaves through the rock and interpret these shockwaves to determine if there is oil.

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What Risks are Involved?

The upstream segment of the petroleum sector can have profits that are less predictable. There is no guarantee that oil will be successfully located. Also, care must be taken to search for and drill for oil in an environmentally sound manner.

Legal Considerations

There are many legal considerations that are factored into the oil drilling preparation process, including the purchasing of necessary permits and leases, an assessment of the potential environmental impact and titles and right-of-way accesses.

Preparing to Drill

The site for oil drilling must be prepared before the process can begin. There must be a source of water – natural or manmade – that is nearby the drilling site. The drilling company must also dig a reserve pit.

The Oil Rig

There are various oil rig systems that are used to extract oil from within the Earth. The most distinctive part of the oil rig is the Derrick, which is the structure that holds the drilling apparatus. Some of the more sophisticated equipment is located underground. The methods by which oil drilling is conducted change periodically as new technologies are developed and as new environmental standards are set forth.

What Businesses are Involved in This Sector?

Businesses sometimes provide consulting services to companies that search for and drill for oil to provide them with advice on how to drill in such a way that does not negatively impact the environment. Another part of the upstream sector is that of drilling. Many industries not only construct wells for drilling, but also develop glycotic acid, which is used for cleaning and descaling.

What is the Midstream Sector?

When oil is drilled from a location where it is originally discovered, the oil must be stored, marketed and transported. This aspect of petroleum production is known as midstream. Petroleum is marketed as a commodity at this point.

The point where upstream ends and midstream begins is at the gathering system. This system collects wet natural gas and petroleum and begins the transportation process to the gas processing plant. While some gas processing occurs near the point where the gasoline is extracted, in other cases, the midstream process involves the transportation of wet gasoline through pipelines. In many cases, midstream is considered a part of the downstream process.

In some of the largest distribution networks, enormous cargo ships are responsible for transporting oil across multiple oceans.

The Storage of Petroleum

One of the most important aspects of the midstream sector is the storage of gasoline, which helps ensure a stable supply of gasoline. The U.S. has a strategic petroleum reserve that is tapped into in the event that current oil supplies run short and lead to rising petroleum prices. This stockpile has about 570 million barrels of crude oil that is kept in underground caverns. These reserves could be considered either a part of the upstream or midstream sector, since the oil has already been located and simply needs to be drilled.

What is the Downstream Sector?

The downstream sector focuses on the process of refining crude oil to create different products, including gasoline, petroleum gas, jet fuel and diesel fuel. Additionally, there are numerous products that are not fuels at all, including pesticides, antifreeze, synthetic rubber, plastics and pharmaceuticals. All of these products are created and distributed through the downstream sector.

How is Gasoline Produced?

One of the most common products, gasoline, is made in a refinery. Crude oil is refined into one of several crude oil products, including gasoline. Gasoline is created through a process of fractional distillation. The oil is boiled using hot steam. Much of the crude oil is evaporated and the leftover crude oil is sent to the distillation column.

Selling the Gasoline

The gasoline is often sent to a gas station. Some of these gas stations are owned and operated by the oil companies themselves. However, they only make up a small percentage of the total industry. The majority of the gasoline in the United States is sold by branded independent retailers. According to the Association for Convenience & Petroleum Retailing, 55 percent of the gasoline industry are made up of these retailers. The gas stations have to pay a surcharge per gallon for relationships that they have with specific refineries. However, doing so will help make sure that the refinery has a more secure source of gasoline.

Less than 5 percent are run by the oil company. The rest are sold by unbranded independent retailers who do not pay the marketing surcharge. Refiners usually have contracts with the branded independent retailers and have a certain number of gallons that help them meet their contracts. The gasoline that they sell to the unbranded independent retailers are not a part of the contract.

While some large unbranded retailers purchase gasoline from retailers whom they have contracts with, other gasoline stations purchase their gas off the open market.

How the Gasoline Gets There

The gasoline will either be transported to the gasoline retailer by a jobber or the gasoline company will purchase its own fleet of trucks that will transport the gasoline to their gas stations. The jobbers usually work for multiple retailers.

Prices can go up or down based on various market forces. When retailers anticipate that prices will oscillate, they sometimes purchase futures that will guarantee that they will have specific prices for a delivery at a specific date.

The process of producing gasoline is a long, complicated and expensive process. However, the process is also very necessary and lucrative, since most of the world is powered by petroleum.

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