Midstream Oil and Gas

The NatResPro community is a place for people of all knowledge levels to discuss important energy topics. Upstream, midstream and downstream are important distinctions within the oil and gas industry. Since this is the first post in the midstream category, we thought that we'd kick it off with a discussion of the basics. Later on, we expect to have in-depth discussions of current numbers, trends and logistics. For now, we can offer outsiders and new entrants some insights.

This post will have a series of common questions and answers so that visitors can scroll past the things that they know, and get to something new. More experienced midstream workers can add comments in the thread below to expand upon the initial post, and fill any gaps.

What does midstream mean in the context of the oil and gas industry?

I remember when I first got to grips with the oil industry, I got mixed up between upstream and downstream. The way that helped me understand and remember the concept was to imagine a river, and realise that the spring or source was like an oil rig, where the natural resource comes out of the ground. The river eventually gets to the ocean, where I imagined mass consumers and industry. upstream is near the source, downstream is close to the market.

Midstream is the stream itself, the transportation and storage routes. This is slightly different from the regular meaning of midstream, which means 'an intermediate stage of a process' or which could mean the middle of the river.

What are the components of a midstream operation?

Saying, 'it's the transportation section' isn't a complete enough answer from a practical point of view. That was a conceptual explanation, to help make the distinction. In this section, there's a simple list of steps in the process.

The Midstream segment of the oil and gas industry:

  • Gathers (collects) oil and gas from the production of the well. At the oilfield, they start field processing. This involves measuring what comes out of the well, and the removal of water, gas and impurities.
  • Transports crude oil, natural gas liquids (NGLs), fractionates and natural gas.
  • Refines, treats and processes the raw hydrocarbons into commercial products. The separation process is called fractionation.
  • Stores all of these hydrocarbons at the different stages of refinery and production in bulk terminals, refinery tanks and holding tanks.
  • Conducts wholesale marketing of the raw hydrocarbons and the refined products.

To use another analogy to help you to remember these facets of the midstream oil and gas industry, imagine a clothing product cycle. The cotton fields would be upstream. The stores that sell the clothes are downstream. All of the transportation of cotton, the factory, and then the warehouse and wholesale is all midstream.

What are the main assets owned by midstream companies?

Mainly, transportation and storage assets and equipment are the hallmarks of midstream companies via:

  • Pipelines
  • Transmition lines
  • Trucks
  • Rail
  • Terminals
  • Tankers
  • Towboats
  • barges

Is the midstream part a good business model?

We all know how the oil and gas industry is prone to booms and busts. Its estimated that 700,000+ people lost their jobs during the recent crash (2014-2017). The upstream, downstream and midstream sectors have completely different risk and reward profiles.

By far the most volatile is the upstream (exploration and production) segment. Drilling projects are hugely expensive, and a large change in the oil price can instantly affect profitability. For example, if a project is estimated to have a recovery rate of $50 per barrel, $100 Bbl. oil is great, $40 oil means that money is lost day after day. It's even more complicated than this because we have capital expenditure (CAPEX) and operating expenditure (OPEX). If the capital to drill and complete a well has already been sunk into a project, the OPEX can mean that the well is still profitable in the short to medium term. The price of oil, and more importantly future expectations have a major impact on project viability and future investment decisions (FIDs).

In contrast, global demand for oil and gas products has increased slightly, every year, for decades. The charts look remarkably stable. Stability is good for planning and organisation. Downstream, global demand marches on, and if raw crude doubles, we see gradual increases at the petrol pumps, but no mass layoffs.

Midstream is even more stable than downstream, since the transportation, processing, storage and marketing goes on, regardless of the price of oil. The midstream sector is stable, predictable, and highly regulated. In this regard, midstream companies are more like utility companies, with slow and steady dividends.

What challenges do midstream companies face?

The main two issues are related to new pipelines and accidents. Wherever pipelines are planned, local residents complain, and activists tend to protest. In developing countries, pipelines, refineries and storage facilities attract terrorists and pirates. Whole oil tankers get boarded by pirates, and either a ransom is paid, or sometimes contents are drained.

Dealing with the processing of hydrocarbons has it's own dangers, due to the flammable nature. Terrorists and pirates aside, great care needs to be made in the servicing of equipment and the proper observance of operating procedures.

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