With so many companies listed as part of the oil industry, it is almost inevitable to confuse their roles. When most people think of “oil companies,” they think of the exploration and production part of the industry—people looking for deposits and drilling wells. In this article, we will explore two other important oil companies—service companies and refineries—and their unique features.
- The petroleum sector is vital to providing energy and petroleum products to the world.
- The industry is mainly divided into upstream, midstream and downstream activities, including professional companies and integrated companies.
- In addition, there are oil service companies that provide auxiliary support to junior oil companies.
Upstream, midstream and downstream
The petroleum industry is divided into three stages:
Upstream companies mainly deal with the exploration and initial production phases of the oil and gas industry. Oil and gas exploration is an important part of the upstream plate. Petroleum exploration requires very complex technology, and the technologies that can be used for petroleum exploration are developing rapidly. Usually, exploration starts in high-potential areas with resources, which is usually due to the local geology and known oil reserves nearby. In high-potential areas, complete further exploration to delineate resources. The techniques used in geophysical and geochemical analysis include induced polarization (IP) surveys, drilling and analysis, electric currents, etc. In the exploration phase, the goal is to locate and estimate the potential of the resource.
If an area shows the potential for holding resources, exploratory wells will be drilled to test the resources. In the oil and gas field, test drilling is an important part of the exploration phase. If the exploratory well is successful, the next step is to build the well and extract resources. Upstream companies also operate oil wells that bring crude oil or natural gas to the surface.
Midstream activities include processing, storage, transportation and marketing of oil, natural gas and natural gas liquids. Midstream activities occur after the upstream stage and continue to the end of sales. Many oil and gas companies are considered integrated because they can combine upstream, midstream, and downstream activities as part of their overall operations.
Because these countries have large private oil pipelines and storage facilities, it is more common for midstream industries to designate the oil industry in the United States and Canada than in other parts of the world.
Downstream operations are the process of converting oil and natural gas into finished products. These include refining crude oil into gasoline, natural gas liquids, diesel and various other energy sources. The closer an oil and gas company is to the process of providing petroleum products to consumers, the further the company is said to be downstream. The downstream process is the process that provides the most products that are closely related to consumers, and is also the oil and gas industry that people can most contact with. Some of these products include liquefied natural gas, gasoline, heating oil, synthetic rubber, plastics, lubricants, antifreeze, fertilizers and pesticides.
Downstream industries also play a key role in other sectors and industries of the economy, and it may not be obvious to some people, including the medical field. Downstream processes have a great impact on some products and equipment that medical professionals need and use. Likewise, the downstream process plays a key role in the agricultural sector because it is related to pesticides and fertilizers and the fuel needed for agricultural equipment.
Petroleum Service Company
The service company works in all stages of production. These companies are Halliburton (HAL) and Baker Hughes (BHI). They provide services such as engineering, fluid transportation, maintenance, geological surveying, and non-destructive testing. Although oil service companies work at all stages, they make the most money when upstream production is booming. In the midstream and downstream, oil service companies see fixed income, which can be seen through the trough of upstream activities, but upstream activities are a huge driver of income. This is because they have new businesses to enter and new projects to bid on.
Oil refining is a purely downstream function, although many companies engaged in oil refining have midstream or even upstream production. This integrated approach to oil production allows companies such as Exxon Mobil (XOM), Shell (RDS.A) and Chevron (CVX) to move oil from exploration to sale. The refining business is actually hurt by high prices because our demand for many petroleum products, including natural gas, is price sensitive. However, when oil prices fall, selling value-added products becomes more profitable.
There are some more pure refining companies, such as Marathon Petroleum Company (MPC), CVR Energy Company (CVI) and Valero Energy Company (VLO). These companies enjoy lower energy prices and benefit from increased US production because crude oil cannot be exported; only refined products can. This means that refineries can use the entire shale oil supply, and as new supplies increase, their input costs have fallen.
One area where service companies and refiners agree is to create more pipeline capacity and transportation. Refineries need more pipelines to reduce the cost of transporting oil by truck or rail. Service companies want more pipelines because they make money during the design and laying phases, and get stable income from maintenance and testing.
Oil service companies and refineries both play important roles in the oil industry, but they tend to make more profits in the opposite market. When high demand for crude oil drives exploration and production, oil service companies make money. Refineries make money when the demand for fuel and value-added petroleum products is high, and they don’t mind when crude oil prices go down. Both provide compelling investment opportunities, depending on the location of crude oil prices.