It’s not rocket science: no matter the industry, the margin between cost and revenue will heavily influence a company’s profitability. But while some basic cost and revenue drivers remain the same throughout all industries, each industry has a few different players with their own nuances.
For example, cost and revenue drivers vary slightly within the upstream, midstream, and downstream oil and gas sectors, as their functions are different within the industry.
No matter where your business lies within the gas and oil industry stream, better decision-making begins with better intelligence. DTN Refined Fuels Demand helps companies monitor the delicate balance between supply and demand in today’s petroleum markets, keeping them profitable despite volatile conditions.
Of course, staying profitable takes more than data. Businesses need to understand the unique cost and revenue drivers at work in their sector. The following article defines the costs and revenue drivers in the upstream, midstream, and downstream sectors of the oil and gas industry.
Upstream oil and gas
The terms “upstream,” “midstream,” and “downstream” refer to where companies are in relation to the end customer. As such, “upstream” oil and gas companies are the farthest away from the end product, as they are responsible for extracting crude oil.
Extracting oil is no small job. The first step is to find the oil itself. This step requires a heavy up-front investment with no promise of a return. This process often requires “exploratory” drilling, i.e., drilling deep into the earth that may or may not yield a usable result. Geologists, physicists, mechanical engineers, and software engineers all must work together to discover a profitable source of crude. Unfortunately, those professionals don’t come cheap. Thus, the upstream portion of the petroleum business bears the greatest cost.
Even if a viable source of crude is found, before a well can even be drilled and used, a long and expensive process must be followed, including the costs of securing appropriate permits and leasing the necessary land to start operations.
Once all proper authorizations are in place, the site needs to be prepared for work, wells need to be drilled, workers need to be paid, and infrastructure needs to be regularly maintained or repaired. These costs quickly add up for upstream companies.
Of course, to make a profit, upstream companies sell the crude oil they produce. But their incomes are significantly impacted by the movement of oil and gas prices. Put simply, the revenue an oil producer makes boils down to the difference between the cost of production and the price at which they can sell their product.
Midstream oil and gas
Midstream companies deal with the processing, transportation, and storage of oil as it moves from upstream to downstream. For example, before crude oil can be further refined into usable products, it needs to be transported to a facility to be processed and separated into different hydrocarbons and then stored until ready to be refined by downstream companies.
Transporting oil is the most expensive part of midstream operations. For example, one cost for midstream companies is building and maintaining the pipelines used to transport oil from the oilfield to the necessary facilities.
Pipelines, tanker ships, or trucks might be used to transport the oil from the well to the gathering tanks to the blending facility to the storage tank. In a way, this makes midstream companies affected by the cost of gas as well, as both marine vessels and tanker trucks require their own unique, refined fuel products to function.
As a general rule, companies involved in the transportation of crude oil make more money the farther the oil needs to travel, charging a fee corresponding to the distance each barrel of oil travels along the pipeline. In some instances where oil crosses state lines, government agencies may apply tariffs.
There are often commodity-based revenues for midstream companies as well. When these companies process the crude oil into its different hydrocarbons, they can profit from the price difference between what they paid for the incoming product and the price of the processed fuel.
Downstream oil and gas
The downstream oil and gas sector further processes the crude oil into refined products like gasoline, diesel, jet fuel; in order to sell to consumers. These downstream partners often sell the finished product to wholesalers who use it themselves or distribute it to the individual consumer.
Running a refinery is not cheap. These large facilities are expensive to build and need costly machinery to run. And once the refineries are up and running, operational costs such as electricity and gas, plus regular maintenance and repair, add to the cost.
In addition to purchasing crude oil, there are catalysts and other chemicals purchased for the refining process. Plus, in large plants that run 24/7 and may process as much as 600,000 barrels daily, staffing and oversight expenses are a major contributing factor as well.
Like upstream companies, the downstream oil and gas sector’s revenues are largely commodity-based, meaning they are affected by the price of crude oil on the market. But because of their position and role in the industry, they tend to be less affected by market volatility than the upstream sector.
For example, while the price of refined products often follows the price of crude oil, they hold a higher value, and any drop in prices for refined products is usually delayed. This means that when oil prices decline, downstream companies are able to take advantage by buying crude oil and raw materials at a lower price while still selling their refined products at a higher price, as determined by their market.
Protect your revenues with DTN
With so many factors having an effect on your bottom line, maintaining profitability is a constant challenge, especially in times of economic uncertainty. For businesses in the downstream oil and gas sector, having access to unbiased market insights is essential for success.
DTN Refined Fuels Demand provides you with a comprehensive data feed, one that is customized to your location and specific business needs. With easily integrated data, reliable information, and accurate market insights, you can make more confident business decisions and maximize market opportunities.
Learn more about how DTN products can help you streamline your business today.