The oil and gas industry is one of the world’s most valuable, with projected global revenue of $5 trillion by 2022.
Oil is a foundational component of the international economic system, with far-reaching effects on fields as diverse as transportation, home heating and power generation, and the construction industry.
The oil and gas industry has its own particular language and measures, which can be confusing to outside investors.
This primer aims to demystify the oil and gas industry by demystifying important concepts and providing a common language for measuring performance.
KEY POINTS
- Upstream, midstream, and downstream are the three divisions that make up the oil and gas market.
- The upstream sector, often known as exploration and production (E&P), is responsible for locating reservoirs and initiating well construction.
- Transportation from the wells to the refineries is the responsibility of the midstream firms.
- The downstream companies are the ones in charge of processing and selling the final goods.
- To extract oil and gas, E&P corporations hire drilling companies on contract.
- Construction and upkeep of well sites are two of the many services provided by well-servicing firms.
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Hydrocarbons
Crude oil and natural gas are two forms of hydrocarbons that are present in the earth’s crust as naturally occurring compounds. Compression of fossilized plant and animal remnants in sedimentary rocks including sandstone, limestone, and shale yields these organic raw materials.
Sedimentary rock was formed when sediments accumulated in former bodies of water. The rotting carcasses of plants and animals were incorporated into the developing rock when sediment layers were deposited on the ocean floor.
After being subjected to a precise combination of heat and pressure deep under the earth’s crust, the organic material turns into oil and gas.
Since oil and gas have a lower density than water, they are able to rise to the surface of the earth via percolating through porous sedimentary rock.
An oil and gas reservoir is generated when hydrocarbons are encased in less permeable cap rock. Our crude oil and natural gas come from these underground reservoirs.
By penetrating the cap rock and entering the reservoir, hydrocarbons can be extracted and delivered to the surface.
A productive oil or gas well can be built and the hydrocarbons pumped to the surface once the drill bit reaches the reservoir.
When drilling operations turn up insufficient hydrocarbons for commercial extraction, the resulting well is called “dry” and is usually abandoned.
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Upstream, Midstream, and Downstream
Upstream, midstream, and downstream are the three main divisions of the oil and gas business.
Upstream
Companies in the upstream sector are those that conduct exploration and production of hydrocarbons.
These companies explore the globe in search of mineral deposits, and then use drilling equipment to recover the raw materials. Exploration and production firms are commonly abbreviated as “E&P” for short.
Upstream operations are technologically intensive, lengthy (it takes time to discover and drill), and fraught with danger due to the large capital and investment costs involved.
Almost every item on an E&P company’s income statement or cash flow statement is tied to making oil and gas.
Drilling equipment and personnel are not often owned or employed by E&P businesses.
Instead, E&P firms rely on the services of contract drilling companies, which often base their fees on the number of hours they spend performing services for a client.
Unlike E&P firms, drillers do not make money from oil and gas production themselves. After a well has been drilled, it takes a lot of work to get it producing and keep it producing.
Logging, cementing, casing, perforating, fracturing, and maintenance are all examples of well service. Thus, oil drilling and oil servicing are two distinct segments of the oil and gas sector.
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