With so many companies listed as part of the oil sector, confusing their roles is almost inevitable. When most people think of “oil company”, they imagine the exploration and production part of the industry – the people who find deposits and drill wells. In this article, we’ll explore two other important types of oil companies – service companies and refiners – and what makes them unique.
Key points to remember
- The petroleum sector is crucial in supplying the world with energy and petroleum products.
- The industry is mainly segmented into upstream, midstream and downstream activities, with specialized and integrated companies.
- Additionally, there are oil service companies that provide ancillary support to primary oil companies.
Upstream, intermediate and downstream
The oil industry is divided into three phases:
Upstream The companies primarily deal with the exploration and early production stages of the oil and gas industry. Oil and gas exploration is an important part of the upstream sector. Oil exploration requires very sophisticated techniques, and the technology available for oil exploration is advancing rapidly. Normally, exploration begins in an area that has high potential to hold a resource, usually due to local geology and known oil deposits nearby. In an area with high potential, further exploration is carried out to delineate a resource. Geophysical and geochemical analysis is carried out using techniques such as induced polarization (IP) surveys, drilling and test, electric currents, etc. In the exploration phase, the goal is to locate and estimate the potential of a resource.
If an area has the potential to host a resource, exploration wells are drilled to test the resource. In the oil and gas sector, test drilling is an important component of the exploration phase. In the event that the exploration well is successful, the next step is to construct wells and extract the resource. Upstream companies also operate the wells that bring crude oil or natural gas to the surface.
Half-way activities include the processing, storage, transportation and marketing of petroleum, natural gas and natural gas liquids. Intermediate activities take place after the upstream phase and up to the final point of sale. Many oil and gas companies are considered integrated because of their ability to combine upstream, midstream and downstream activities as part of their overall operations.
The midstream industry designation is much more common in the petroleum industry in the United States and Canada than in the rest of the world due to the large private pipelines and storage facilities in these countries.
Downstream operations are the processes involved in converting oil and gas into a finished product. These include refining crude oil into gasoline, natural gas liquids, diesel and a variety of other energy sources. The closer an oil and gas company is to the process of supplying consumers with petroleum products, the further downstream it is said to be. The downstream process is the one that delivers the most closely related products to consumers, and it is the part of the oil and gas industry that people can relate to the most. Some of these products include liquefied natural gas, gasoline, fuel oil, synthetic rubber, plastics, lubricants, antifreeze, fertilizers and pesticides.
The downstream industry also plays a key role in other sectors and industries in the economy that are not necessarily obvious to some, including the medical field. The downstream process has a great influence on some of the products and equipment needed and used by healthcare professionals. Likewise, the downstream process plays a key role in agricultural sector because of its relationship to pesticides and fertilizers, as well as fuel for farm equipment.
Oil service companies
Service companies are involved in all phases of production. These are companies like Halliburton (HAL) and Baker Hughes (BHI). They provide services such as engineering, transportation of fluids, maintenance, geological surveys, non-destructive testing, etc. Although they work on all phases, oil service companies make the most money when they upstream production is booming. On the half-way and downstream, oil service companies are seeing steady revenue which can see them through declines in upstream activity, but it is upstream activity that is a huge driver of revenue. This is because they have new business coming up and new projects to bid on.
Petroleum refining is a purely downstream function, although many companies that do so have midstream and even upstream production. This integrated approach to oil production allows companies like Exxon (XOM), Shell (RDS.A), and chevron (CLC) to move oil from exploration to sale. The refining side of the business is actually affected by high prices, as our demand for many petroleum products, including gas, is price sensitive. However, when oil prices fall, selling value-added products becomes more profitable.
There are purer refining deposits, such as Marathon Petroleum Corporation (MPC), CVR Energy Inc, (LCI), and Valero Energy Corp (VLO). These companies benefit from lower energy prices and benefit from stronger US production because crude cannot be exported; only refined products can be. This means that refiners have the entire supply of shale oil and their input costs have fallen with the new supply.
One area that service companies and refiners agree on is creating more pipeline and transportation capacity. Refiners want more pipelines to reduce the cost of transporting oil by truck or rail. Service companies want more pipelines because they make money in the design and laying phases, and have a stable income from maintenance and testing.
Oil service companies and refiners both play an important role in the oil industry, but they tend to profit more from opposing markets. Oil service companies make money when strong demand for crude oil drives exploration and production. Refiners make money when demand for fuel and value-added petroleum products is high, and they don’t mind when the price of crude drops. Both offer an attractive investment opportunity, depending on the level of the crude price.
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