Upstream, Midstream and Downstream: Key Terms in Oil & Gas Industry

The oil and gas industry is a cornerstone of the global economy, supplying the energy that powers industries, transportation, and households worldwide. Recently, oil prices fell on Wednesday due to an unexpected build in U.S. inventories and ongoing concerns over high U.S. interest rates. This marked the fourth consecutive session of declines, driven by demand, reduced Middle East tensions, and waning optimism about China's economic recovery. Brent crude futures for July fell 0.6% to $82.40 per barrel, while WTI crude futures dropped 0.7% to $78.13 per barrel.

This industry is crucial for meeting current energy demands and significantly influences economic policies, geopolitical strategies, and environmental initiatives. The journey of petroleum products from their raw state to consumer-ready forms involves a complex and interconnected series of processes categorised into three main sectors: upstream, midstream, and downstream. Understanding these sectors is essential for investors navigating the industry’s unique challenges and opportunities. Each sector operates under different economic conditions and risk profiles, making comprehensive knowledge crucial for effective risk management and diversification.

Upstream activities involve exploring and producing crude oil and natural gas. Exploration includes acquiring land rights, conducting geological surveys, and drilling exploratory wells, which is high-risk and costly. Production covers extraction via drilling or fracking, relying heavily on advanced technology, electronics, and automation. Companies like  Sasol Limited, Shell PLC and BP PLC, Exxon Mobil Corporation and Harbour Energy PLC are prominent in upstream operations.

• Midstream operations encompass raw materials' transportation and initial processing from upstream activities to refineries. This includes separating oil, natural gas, and natural gas liquids and storing them for further refining and consumer distribution. Midstream activities are less volatile and benefit from long-term contracts, providing more stability. Notable players in this sector include American-listed partnerships like Enterprise Products Partners LP, Energy Transfer LP, and MPLX LP.

• Downstream activities involve refining and processing crude oil and natural gas into consumer-ready products such as gasoline, kerosene, and diesel. This involves fractional distillation and complex chemical processing. Sasol Limited, Shell PLC,  and BP PLC are prominent companies in the downstream sector and are investing in initiatives to lower greenhouse gas emissions, aligning with global sustainability trends.

Renewable energy and carbon capture technologies are increasingly integrated into the petroleum industry's upstream, midstream, and downstream sectors to reduce environmental impact and align with sustainability goals. This transformation pushes companies to adopt cleaner practices and reduce their carbon footprint by integrating solar, wind, and other renewable sources to power operations across exploration, production, transportation, and refining stages. Additionally, the industry is investing in biofuels and synthetic fuels, aligning with global decarbonisation trends.

Notably, Shell PLC announced its exit from South Africa, where it will divest its South African downstream operations a move that aligns with its 2024 Energy Transition Strategy. Companies like Sasol Limited, BP PLC, and the above mented mentioned American-listed partnerships have all been investing in renewable energy. Meanwhile, upstream giants Exxon Mobil Corporation and Harbour Energy are focusing on carbon capture, aligning with sustainability trends. Exchange traded notes (ETNs) are debt instruments on exchanges, giving investors access to diverse assets for portfolio diversification and performance enhancement. The Standard Bank Brent Crude Oil ETN is tied to Brent Crude Oil prices.

Conclusion 

Understanding the journey of petroleum products through these sectors is crucial for investors. Each sector operates under different economic conditions and risks: upstream (exploration and production) is highly influenced by crude oil prices and geopolitical factors; midstream (transportation and storage) offers more stability with long-term contracts; and downstream (refining and marketing) is driven by consumer demand and regulatory changes.

Investors can diversify their portfolios by investing in companies spanning these sectors. Sasol Limited, BP PLC, and Shell PLC also invest in renewables, while Exxon Mobil Corporation and Harbour Energy are involved in carbon capture. This sector-specific knowledge enables investors to balance risk and growth potential effectively.

Comprehending the complexities of the upstream, midstream, and downstream sectors and the strategic moves of major companies is vital for making informed investment decisions in the dynamic oil and gas industry.