The oil and gas industry are marked by three key segments which include, upstream, midstream and downstream. This section is dedicated to expounding on what really entails the upstream segment.
The upstream segment that is going to be discussed in this lesson will include the following sections:
- Exploration and Production (E and P)
- Drilling and “Unconventional” techniques
- Business characteristics of the upstream segment
- Participants in the upstream segment
- Oil field services
Fundamentally this is the first section of the oil and gas business and it’s also referred to as the exploration and production (E&P) stage. This is because it relates to activities that are linked to the pursuit, recovery and production of crude oil and natural gas.
It can be said that this segment concerns, where to locate oil reservoirs, understanding how deep to drill for the oil, and how to design, construct, operate and manage the oil fields or wells in order to be able to return the immense investment that has been injected bearing the fact that there will be the lightest, safest and smallest operational costs.
“Upstream is concerned with oil wells”
Perhaps the segment needs to be called the exploration, drilling and production stage or EDP due to how the three components are all dependent on each other.
This is the first component of the upstream segment and it involves the following activities:
Obtaining a Lease
Its common knowledge that the law requires one to get a lease and granted permission in order to be able to search or locate where there is oil and this has to be obtained from the owner of the land or area (whether onshore or offshore).
Once that is sorted out geological and geophysical surveys are carried out in order to pick the specific first well site to be explored and the main hope of the operators is to find economically viable oil or gas deposits.
This decisive first well is referred colloquially as the “wildcat well”
It’s the physical process of literally making a hole into the ground with the key aim of finding economically viable oil and gas accumulations. This activity is essentially done by rig contractors and service companies in the oil field business sector. In a given oil well site there could be 30 to 40 different service contractors providing an array of expertise to the operator.
Oil wells can be elaborated as being either simple or complex. They can be totally vertical for several miles or just deep and horizontal. They can also take the shapes of the alphabet letters J and S providing a complex structure with various branches or laterals, emerging from the main original or “mother hole”. They are usually referred to as “deviated wells.”
This is the process where the discovery of an oil or gas accumulation deposit is commercialized. This is done through maximizing the recovering of hydrocarbons from below surface reservoirs, followed by treating them to make them marketable.
“Production involves commercializing a discovered reservoir”
The in depth specifics and coverage of exploration and production processes will be covered later.
Unconventional Oil and Gas Techniques
This refers to methods employed that shy away from the traditional vertical or complex J and S shaped deviated wells. The three techniques that are part of unconventional means of extracting oil and gas include:
- Horizontal drilling
- Hydraulic fracturing
- Subsea engineering
Let’s examine them in detail!
This has been there for quite some time but due to advancement in technology it has continued to be utilized. It involves the drilling of horizontal wells which tend to reduce the size of the drill pad footprint and thus facilitate production along the length of the reservoir. The horizontal holes can extend for several miles with recent indications showing excess of 7 miles has been achieved.
It’s also commonly referred to as fracking and it involves the process of pumping water, chemicals and sand into drilled wells under very high pressures. The result is fractures in surrounding rock formations which allow for microscopic hydrocarbons to be recovered and hydrocarbons make up oil!
Subsea (deep water) engineering
When offshore oil reservoirs are discussed it’s worth noting that some of the largest oil and gas discoveries continue to be discovered in deep sea water off the coast of Africa, South America and Mediterranean Sea. The advancement of technology has empowered this field innovations that have made production possible for economically viable oil and gas from depths in the sea exceeding 10,000 feet.
Business characteristics of Upstream Segment
The four critical aspects of the upstream segment include:
- High risk-High return segment
- Highly regulated
- Affected by global politics
- Technologically intensive
High risk-High return
Among the three segments of the oil and gas industry the upstream segment is the most complex. This therefore means it has many opportunities and thus high returns but also its marked by high risks. These high risks involve hundreds of millions of dollars plus dedication of time in terms of years before oil and gas deposits become productive especially when considering offshore deposits.
Regulations concerning oil and gas production, access to reserves, pricing and taxation and the ever strict environmental regulations characterize this segment.
Affected by global politics
Generally oil and gas is a global business which drives the global economy and thus susceptible to interference from politics emanating from oil and gas producing countries and mega companies that are involved with the business which leads to various complications
“Perhaps, upstream is the most complex segment of the three in the oil and gas business”
Technology is very dynamic and over the last decades there have been quite remarkably revolutionary technological advancements that have become part of the upstream segment but which come at a high cost thus making this segment capital intensive.
Participants in the Upstream Segment
The key players are four, who can be classified into four categories that include:
- The majors or integrated oil companies
- The National Oil Companies (NOC)
- Oil field services
Majors/Integrated Oil Companies
These companies operate assets that characterize this segment and are well known in the oil and gas business. They include the global giant companies: ExxonMobil, British Petroleum (BP) and Shell.
National Oil Companies (NOC)
These are companies that are basically owned by their respective governments around the world and deal with oil and gas. They include: PEMEX from Mexico or Saudi Aramco from Saudi Arabia.
They exist in all the three segments of the oil and gas industry. They are referred as independent because they are not integrated with the other segments. Concerning this context of the upstream segment they include: exploration and production companies that focus on only finding and producing oil and gas such as Apache and Anadarko plus many more.
Oil field Services
These are services provided by companies that provide specialized equipment, services and technical skills required for exploration, drilling, completion, testing, production and maintenance of the crude oil and gas wells. Basically they do not own the assets that contain the oil reserve or are involved in production.
“Oil field services form the infrastructure that connects E&P”