Oil 101 - Introduction to Downstream Oil and Gas

Hi, and welcome to Oil 101, the podcast. My name is Doug Stetzer, and I'm content and community manager for EKT Interactive. This content is taken from our Fundamentals of Downstream ebook, which is available in our free members content library. If you missed our previous episodes on Upstream and Midstream, be sure to go check those out, and we'll include the links in the program notes.

This introduction to the downstream segment of the oil and gas industry covers downstream business characteristics, an overview of refining, including products and participants, and finally, we'll discuss end-user consumption and wholesale and retail marketing. So, what is downstream? Processing, transporting, and selling refined products made from crude oil is the business of the downstream segment of the oil and gas industry. Key downstream business sectors include oil refining, supply and trading, and product marketing, both wholesale and retail.

The downstream industry provides thousands of products to end-user customers around the globe. Many products are familiar, such as gasoline, diesel, jet fuel, heating oil, and asphalt for roads. Others are not as familiar, such as lubricants, synthetic rubber, plastic, fertilizers, and pesticides. These products are called petrochemicals.

The four key characteristics of downstream are that it is a margin business, it is very complex, It requires a global perspective and it deals with getting products to end users. So let's drill a little deeper into each of these. The downstream segment is a margin business Margin is defined as the difference between the price realized for the products produced from the crude oil and the cost of the crude oil delivered to the refinery Although the price of crude sets the absolute level of product prices, it may or may not affect refining or marketing margins.

Downstream margins tend to be reduced or squeezed when crude price increases cannot be recovered in the marketplace. On the other hand, margins tend to hold or even increase when crude prices drop and the marketplace more slowly adjusts to these lower crude oil prices. The downstream segment is extremely complex, and it includes diverse activities such as refining, petrochemicals, distribution, and marketing. A global perspective is important because of the global nature of the energy supply chain, as well as the impact of supply and demand on both feedstock and product prices.

So let's talk a little bit more about refining. Crude oils are not uniform, but rather are mixtures of thousands of different compounds called hydrocarbons. Each component of each compound has its own size, weight, and boiling temperature. Refineries convert crude oil into a variety of useful products through a number of different processing units using heat and pressure to separate the products.

The resulting petroleum products are often classified as light, medium, or heavy. Light products include liquid petroleum gas, or LPG, gasoline, and naphtha, which is used as a solvent or paint thinner. Medium products, or what are called the metal distillates, include kerosene and related jet aircraft fuels as well as diesel fuel Heavy products include fuel oils lubricating oils paraffin wax asphalt and tar and petroleum coke So who are some of the key downstream participants?

Downstream participants include refining and marketing divisions of the major integrated oil companies, as well as independents. Global integrated refiners include BP, ExxonMobil, Chevron, Shell, and Total. Major U.S.

independent refiners include Valero, Tesoro, and Sonico. Independent refiners will often have a chain of service stations to market their products. What makes them independent is the fact that they have no upstream E&P operations. This podcast episode is brought to you by EKT Interactive's Oil 101, a free introduction to oil and gas.

Within this free members-only content area, you'll find e-books on oil and gas industry fundamentals, relevant articles on key oil and gas topics, and a growing body of digital learning content. Claim your free membership and join the Oil 101 Learning Community at www.ektinteractive.com today.

The final downstream characteristic discussed today is end-user consumption. At the end of the day, it is the end-users or customers of oil and gas products that give them their ultimate value. Globally, the most widely known crude oil product is gasoline. Other fuel products are diesel, jet fuel, and marine fuel oil.

Fuel products for transportation are important because they account for 65 of global demand However in addition to these well products the downstream industry touches every consumer Further processing produces lubricants waxes and specialty products such as high-quality oils for medicines and cosmetics. Raw materials from the downstream are procured for the petrochemical industry as feedstock in the production of thousands of additional products such as synthetic rubber, plastics, nylon, polyesters for fabrics, fertilizers, antifreeze, pesticides, and pharmaceuticals.

Product marketing is the business of finding and supplying customers who possess either internal demand for refined fuels or wholesale distribution networks for reaching retail customers. Large direct consumers of energy products include petrochemical and industrial manufacturers, utilities, municipalities, trucking fleets, and airlines. Other companies may possess distribution assets or branded sites aimed at reaching retail customers. Thanks for listening, and we hope you've learned a few things about the downstream segment of the oil and gas industry.

As retail service station customers, this is the part of the industry that you actually get to see every day. If you want more information about our other Oil 101 content, go to www.ektinteractive.com and register to access our free content library.

As I mentioned earlier, we'll also be sure to include the links to the upstream and midstream modules in the program notes.