What Are Downstream Operations?
Let me tell you directly: downstream operations are the processes that turn oil and gas into the finished products you use every day. This includes refining crude oil into gasoline, natural gas liquids, diesel, and various other energy sources. The closer a company gets to delivering petroleum products to consumers like you, the further downstream it's considered.
Key Takeaways
You should know that downstream operations focus on converting oil and gas into their final forms. In the oil and gas industry, operations divide into upstream, midstream, and downstream. These downstream activities also appear in fields like medicine and agriculture. Companies in this sector are the ones nearest to customers. And remember, an oversupply of crude from upstream can actually help downstream firms.
Understanding Downstream Operations
Most big oil companies, such as ExxonMobil, are integrated, meaning they handle upstream exploration and production alongside downstream work. You can break down oil and gas operations into upstream, midstream, and downstream. Refining and distribution fall under downstream, while transportation and storage are midstream.
Downstream companies provide the direct connection to users like you. After upstream discovery and extraction, midstream handles shipping and transport. Then downstream takes over with refining, marketing, distribution, and sales.
Importantly, downstream categories cover oil refining, supply and trading, plus product marketing and retail.
Types of Downstream Operations
The downstream process delivers products you recognize most, making it the relatable part of the oil and gas industry. Think liquefied natural gas, gasoline, heating oil, synthetic rubber, plastics, lubricants, antifreeze, fertilizers, and pesticides.
It also impacts other areas you might not expect, like medicine, where downstream influences products and equipment for professionals. In agriculture, it provides pesticides, fertilizers, and fuel for equipment.
Downstream vs. Upstream
The main difference between downstream and upstream is the stage in getting crude oil to you, the consumer. Upstream covers exploration, discovery, drilling, and extraction—also known as the exploration and production sector. Downstream, as I've described, handles everything after production up to the sale.
Here's a tip for you: the closer a company is to supplying petroleum products to consumers, the more downstream it is.
Example of Downstream Operations
While low oil prices hurt upstream and integrated companies, they boost downstream ones. When crude prices drop quickly, refined product prices lag due to steady demand, widening refining margins. But rising oil prices can shrink those margins.
Take ABC Inc., a refiner processing West Texas Intermediate crude into gasoline. Gasoline demand varies seasonally, sometimes leading to low margins or losses, like in winter when OPEC cuts production.
Suppose gasoline is $2.50 per gallon or $105 per barrel, and WTI is $95 per barrel— that's a $10 margin. The next year, if gasoline stays at $2.50 but WTI drops to $50 due to oversupply, the margin jumps to $55. This doesn't include other costs; it's based on the crack spread, which only factors crude costs.
Downstream FAQs
In software development, downstream means designing tools for existing applications, while upstream involves source code like bug fixes.
In telecommunications, downstream data flows from the network or provider to you, like downloading a video.
Downstream marketing targets short-term sales with ads, social media, and direct tactics, unlike long-term upstream strategies for new products.
In biology, downstream processing purifies biosynthetic products from natural sources like animal or plant tissue.
The Bottom Line
In the oil and gas world, downstream is the part closest to you, the consumer, who uses oil for cars, engines, and daily needs. Even though many companies are integrated, downstream specifically means refining, marketing, distributing, and selling the oil.
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