The oil and gas industry is one of the oldest and largest sectors worldwide in terms of dollar value. This is because oil and gas are crucial to the global economy. They impact transportation, home cooking and heating, and electricity generation for industrial manufacturing and production. If you look forward to entering this industry, you must learn that it has complex jargon and metrics ranging from oil and gas well services to getting the products to the market.
Industry Segmentation
Oil and gas supply chains include domestic and international transportation, material handling, ordering, and inventory control, export or import facilitation, etc. As with every large industry, there must be continuous improvement of different sets of operations. And that can involve multiple parties. So is the oil and gas industry.
The industry’s supply chain is segmented into three sectors:
1. The Upstream Sector
The upstream sector is the part of the industry responsible for finding natural gas and crude oil deposits. In other terms, it’s known as the exploration and production (E&P) sector. This sector also deals with all the activities that involve oil and gas well services. They drill wells and carry out environmental studies and research analyses.
The upstream sector operates just like the water well drilling company. And it carries four major characteristics that include higher risk and higher returns. It carries higher risks because professionals must identify the wells, determine how to perform the core drilling for the analysis, design, construct, and manage all the operations. Secondly, it gets a higher return because crude oil comes with water and natural gas.
The upstream sector is highly regulated in terms of environmental pollution and also affects global politics. This is the second risk it faces. Additionally, it requires technology and capital. Upstream activities take longer than other sectors because the processes need approval and careful analysis.
In the upstream sector, there are four major groups of companies involved. They are:
- Major or integrated oil companies
- National oil companies, managed by governments
- Independents
- Oilfield services companies that offer oil and gas well services and equipment
2. The Midstream Sector
The midstream sector companies are involved in storing and transporting the raw materials to the refineries. They are characterized by trucking, shipping, and pipelines. This sector faces many regulations, especially on the well pump services and pipeline transmission. Additionally, it faces low capital risks and is highly dependent on the upstream sector.
After the oil and gas well services and pumping out of the raw materials, the midstream sector carries out three operations. They are gathering, processing, and transporting. Gathering involves collecting the crude oil, gas, and water extracted from the wells.
Crude oil is moved in a web of pipes (smaller diameter) to the central storage. On the other hand, gas cannot be stored near the well because it must be purified to remove water vapor. So, the gas is pumped in a large diameter pipe for purification. Water is removed, and depending on the quality, it’s treated for irrigation service or other uses.
Note that some water has so much salt that it cannot be used. A water mitigation company must analyze and determine whether it can be used. If the water cannot be used as a resource, it’s pumped to the subsurface to force more oil out of the reservoir.
Crude oil is later transported to the refinery by road or pipeline as the fastest way. Natural gas is stored underground until it’s ready to be shipped for market. Midstream companies can be categorized into seven. They are:
- Railroad companies
- Burge companies
- Hauling and trucking companies
- Logistics and technology companies
- Pipeline transporting companies
- Transloading companies
- Terminal operators and developers
3. The Downstream Sector
Downstream companies are the refineries and the gas stations. This sector companies remove impurities and deliver the products for public use. In downstream, crude oil and gas are converted to gasoline, jet fuel, heating oil, lubricating oil, tar, etc. Although the upstream and midstream may be directly involved in oil and gas well services, this sector only focuses on refinery and delivering products for use.
The downstream sector has unique characteristics. First, it’s a margin business with higher complexity. It must define the margin as the difference between the crude oil products and the crude oil delivered by the midstream. This creates a difference from other sectors because it has to make better calculations affecting oil and gas prices.
On the other hand, the complexity comes from a wide range of activities like cooperating with local water conditioning to treat water derived from crude oil and gas. Also, they have to distribute, wholesale, and retail. In this sector, two types of companies compete. They are integrated and independent companies. Learn more about them in the next sub-topic.
Independent and Integrated Oil and Gas Companies
Independent companies exist in all sectors. They just perform a wide range of operations in their sector of operation without getting involved in other sector functions. For instance, most upstream companies conduct drilling, oil and gas well services, and geographical study and analysis.
Independent companies in the midstream are involved in the gathering, processing, and transportation. The same applies to the downstream sector; oil companies may perform various activities, like refining and distribution.
Integrated oil and gas companies are involved in several sectors. For instance, an integrated company can carry out the oil drilling, later do the gas and crude oil delivery, and later refine and send the products to the market. Many large oil and gas companies today are integrated.
Integrated companies with separate divisions in the three stages allow complete control and efficiency. However, as a starter, you may find it hard to start an integrated company due to high capital.
Oil and Gas Production Numbers Differ
E&P companies in the upstream sector measure their oil production in barrels. One barrel is equal to 42 US. gallons and is abbreviated as bbl. You will learn that these companies describe their production in reporting as bbl per day or bbl per quarter.
A common methodology in the oil patches uses the prefix “M” to indicate 1,000. On the other hand, they have the prefix “MM” to indicate 1,000,000. As such, you will see 1,000 barrels as Mbbl and one million barrels as MMbbl. For example, an E&P company may report they have produced four Mbbl daily; that’s 400,000 barrels daily.
Gas is different from oil, although the same companies produce them. Natural gas is described in terms of cubic feet. As with oil, gas is abbreviated as cf (cubic feet), and “M” stands for 1,000, while “MM” stands for 1,000,000. So, if the company produced one million cubic feet of gas, it would be abbreviated as MMcf.
Since public companies are involved in the oil and gas well services, the revenue of the service companies is tied to the industry’s activity level. You will also learn that E&P companies describe their production as barrels of oil equivalent (BOE). They usually convert gas production into oil equivalent production to get BOE. In their calculation formula, one BOE equals 6,040 cubic feet of gas.
Another surprising fact about the E&P companies is that they report the quantity of gas and oil they still have in the ground in the same terms. These reserves value the E&P companies because they use them to make revenue and earnings predictions.
New reserves are an essential future source of revenue. That’s why companies spend a lot of resources to explore untapped reservoirs to calculate their drilling and oil and gas well services costs before the existing ones deplete.
The 3 Ps of Oil Reserves
Reserves are essential future sources of income, as explained earlier. They are crude oil or natural gasses that remain underground and are not extracted to produce fuel oil or gas. The three Ps in oil and gas reserves are proven, probable, and possible. The Ps correspond with the likelihood of successfully extracting these deposits.
- Proven reserves – it refers to the quantity of oil or gas that a company is expecting to extract from the ground. They are determined using the geological and engineering data collected through exploratory drilling or seismic testing. In this method, the physical formation is established, and fluid contacts estimate the reservoir. Fluid contacts are the natural gas, water, or oil layers in the formation. These reserves are estimated to have a 90% likelihood of getting extracted and earning company profits.
- Probable reserves
– they are crude oil or natural gas calculated to be at least 50% likely to be extracted from the ground through drilling. A combination of regulatory, technological, and economic challenges reduces the likelihood of the company getting profits, and that’s why the likelihood is reduced to 50%.
- Possible reserves – these are unproved reserves that have the likelihood of oil and gas getting extracted from the ground as 10%. These reserves can have the potential to generate profit, but the availability of equipment to estimate the volumes, regulations, and project costs can limit the process and make it nearly impossible.
Oil and Gas is the Major Industry in Energy Market
The oil and gas industry is one of the largest industries worldwide. The US. employs around 10.3 million people, and the global gas and oil market size was estimated to reach $5,870.13 billion in 2021. However, between 2019 and 2021, China was leading in oil and gas industry employment.
The industry employs a wide range of people, including the oil and gas wells services providers in the upstream sector to the transporters, and many people in manufacturing and marketing. Moreover, this industry is growing because the report shows the US, in the first two months of 2023, gas production increased to 5984 billion cubic feet from 5600 cubic feet in 2022. That was an increase of 7%.
Moreover, the oil and gas industry benefits the community with water wells. In fact, one barrel of oil can have up to 100 barrels of water that can be used after treatment.
Middle East Has the World’s Largest Oil Field
The largest oil fields in the world are located in the Middle East. Ghawar Field in Saudi Arabia is claimed to be the world’s biggest oil field, producing 5 billion barrels of oil daily. The oil field is around 3,306 sq. miles big, accounting for around a third of the oil produced in Saudi Arabia.
The middle east has employed many oil and gas industry workers and accounts for 15% of global output. However, the upstream sector has a wider range of workers since oil and gas well services are necessary for these large fields for consistent oil supply.
USA Consumes the Most Oil
Oil and gas are considered the major energy sources in the United States. They power car engines and factory machines and are also used for home heating. In 2022, the US. consumed 20.8 million barrels of petroleum daily. That’s around 7.5 billion barrels of petroleum per year.
The Energy Information Administration reports that only a small amount of crude oil is directly consumed in the states. Nearly all the crude oil is refined to produce gasoline, diesel, and heating oil. So, if you plan to start an oil company, the United States will be your best market.
Talent Shortage (Youths Are Leaving the Industry)
The oil and gas industry has faced a talent shortage since many youths between 25 and 29 years are quitting. The Middle East has the highest number of workers planning to leave the industry. The main reason is the years of an aging workforce and competition for talent with technology. The challenges of getting and retaining talents may pose future growth risks in the industry.
Another challenge that is facing the oil and gas industry is environmental pollution. Air pollution due to vehicle and factory emissions has led to campaigns for electric vehicles and solar use. This challenge led to competition, pushing many talented employees to transition careers.
Venturing into the oil and gas industry will be easier with capital. You can start at the upstream, midstream, or downstream as an independent company. Later, you can transition to an integrated oil and gas company. However, oil and gas well services will be your best career if you aim to work in the upstream sector.