The Three Oil and Gas Energy Markets: What Is Downstream?
The oil industry is one of the largest and most varied industries in the world. There are a huge number of logistics and phases which must be undertaken for potential oil sites to be found, then for oil to be pumped, shipped, processed, and sold. Since this is such a long process and since there are so many different companies and smaller industries that rely on different parts of the process, it is very common for the oil industry to be classified into three sectors: Upstream, Midstream, and Downstream. This makes it easier for people to understand and also easier for the various parts to be discussed. The Upstream sector involves the initial discovery and pumping of oil. The Midstream sector involves the transportation and shipping of oil. The last stage of the process, the Downstream sector, involves the actual processing, and selling and distribution of natural gas and oil based products.
In this article we will be discussing the final step in this three sector process: the Downstream phase. As a sidenote of explanation the three sector system of classification is occasionally replaced by a two sector classification system. Under such models the two sectors are Upstream and Downstream, with everything traditionally thought of as belonging to Midstream lumped with Downstream. This article will inform you about the Downstream sector, but you should also read the article on “What Is Midstream” and be aware that at times you may come across these two phases lumped together.
The Downstream sector of the oil industry is actually the one that provides the closest connection to everyday consumers. As such it is also perhaps the easiest of the three for many people to relate to. In the Downstream sector crude oil arrives at processing plants where it is refined and eventually turned into various products which will then be sold and distributed.
Some of the products commonly associated with the Downstream sector include:
- Liquified Petroleum Gas (LPG)
- Liquefied Natural Gas (LNG)
- Diesel Oil
- Jet Fuel
- Heating Oil
- Other Fuel Oils
- Synthetic Rubber
- Petroleum Coke
As indicated above the distribution of natural gas is also one of the fundamental attributes of the Downstream sector. The term “natural gas” is probably one that is common to most people; however, it is often not fully understood just what natural gas is. Natural gas is a mixture of methane with other hydrocarbon gases. It is flammable and as the name implies it occurs naturally in underground sites, often in close proximity with petroleum.
Due to its flammable nature, natural gas plays a very important role as both a heating source and also in the production of electricity. Natural gas can also be processed to play a role in the transportation industry and in the production of fertilizer.
Though the term “natural” may lead people to assume that the gas is in its natural state by the time it reaches homes and other final locations, this is not correct. Before it can be used, natural gas must be processed to remove water and other impurities. In fact this is very much where the Downstream phase does its work since it is in this sector that natural gas in rendered usable and then distributed.
Liquefied Natural Gas
Liquefied natural gas is natural gas that has been condensed and liquefied. This is typically done to make the transport and storage easier. For instance, liquefied natural gas takes up a volume of about 1/600th that of regular natural gas. Thus it is much more efficient to transport and store in its liquid form. This is especially true when it needs to travel over areas where pipelines do not exist. However, in order to accomplish the liquefaction process the natural gas must be exposed to very cold temperatures, typically about −260 °F. It must also be stored in cryogenic tanks. These requirements make it expensive and therefore not cost effective in a lot of commercial settings. Once the liquefied natural gas reaches its destination it will typically be converted back to gas.
One thing that many people do not realize is that while the Downstream sector is one of the three fundamental parts of the oil industry, by extension this sector also provides a major role in quite a few other industries and areas of life as well. This is because the products refined and produced go on to be used in ways that may not seem intuitive at first glance. For instance, it is obvious to most people that the fuel produced in this sector will be crucial for the transportation industry and the power industry. However, what may be less readily obvious is that the Downstream sector also influences industries such the medical industry through the role it plays in the production of pharmaceuticals and medical equipment.
In addition, the Downstream sector produces plastics which are one of the most pervasive materials in just about every industry. In fact the majority of goods from all industries will use plastics in their packaging or manufacturing.
The agricultural industry is also affected by the Downstream sector. As stated above natural gas plays a big role in the production of fertilizers. Pesticides are also produced with the aide of the oil industry. Finally the farm equipment itself is likely to run on the fuel produced in the Downstream sector.
The Downstream sector must also deal with an array of challenges in terms of distribution, transportation, and other logistics. The processed natural gas and oil products must be transported to the various places where it will be sold, used, or redistributed. This will typically involve the use of conventional transportation methods such as trucking, rail shipment, or boat shipment. However, because of the unique nature of natural gas it is also very common for it to be transported using an extensive network of pipelines.
As is obvious from the list of goods above, as well as the other topics discussed in this article, the products created in the Downstream sector are products nearly everyone in developed nations will come into contact with daily. They make up the fabric of our society and without their ready availability our quality of life would be drastically different. The number of jobs created by this industry is also very considerable and in that way the Downstream sector has an even greater role to play in the economy. All these reasons combined add up to make the Downstream sector an extremely important part of everyday life.