In terms of actual dollars, the oil and gas industry is one of the largest in the world, accounting for roughly $3.3 trillion in annual revenue worldwide. As Ferrari Energy explains, oil and gas are crucial to ensuring that the world runs as it does today.
Oil is an integral part of the economic framework of just about every country. The world’s leading oil and gas producers rely on it to fuel their economy.
The industry as a whole can be quite confusing for people who aren’t “insiders” or who haven’t invested in it before. Ferrari Energy explains the basics of the complicated industry below.
Step One: The Material is Discovered
The first step in the lifecycle of the oil and gas industry is what’s known as “upstream.” This industry segment includes companies involved in finding and collecting natural gas and oil from reservoirs in the earth.
These companies spend lots of time and money searching for reservoirs hidden below the earth’s surface. Once they discover a viable reservoir, they contract with a drilling company to extract the materials from the earth. This can be done in many ways, including fracturing, straight drilling, cementing, and casing, to name a few.
Because of what they do, they’re often referred to as E&P companies or exploration and production. In the investment world, there is a lot of risk in the investment in upstream companies.
Step Two: The Material is Shipped
Once the E&P companies have the raw materials, they must ship them to be processed for use. This is referred to as “midstream.”
Businesses involved in the midstream aspect of the industry are responsible for transporting the raw natural gas and oil extracted from the earth to refineries where they can be processed into usable products.
Midstream companies are involved in trucking and shipping, storing, and pipelines. There are a lot of regulations involved in this aspect of the lifecycle, especially when the materials are being transported via pipeline.
In the investment world, the success of midstream companies relies considerably on upstream companies and on contracts they can secure for projects such as pipelines.
Step Three: The Material is Refined
The final stage of the lifecycle is known as “downstream.” Businesses here are refineries that take the raw materials and turn them into something that can be used.
Everyday products produced in this stage include gasoline for vehicles, oil for heating, asphalt, and jet fuel. Downstream companies must remove the impurities the raw materials have so the public can use the gas and oil.
In the investment world, this is where the least amount of risk lies, though again, downstream businesses are ultimately reliant on the success of both upstream and midstream businesses.
The production of natural gas is most often described in cubic feet terms. The most common abbreviation used is MMCF, or 1 million cubic feet of natural gas. However, investors may also see it as BOE, or barrels of oil equivalent, especially by E&P companies.
The E&P companies will report on the reserves of both natural gas and oil they have. This represents the amount of the raw materials they own, but that hasn’t been extracted from the earth just yet. These reserves are typically what investors use to value an E&P company and predict their future earnings and revenue.
Oil is simply measured in barrels or bbl. One barrel of oil is the equivalent of 42 gallons. But, as Ferrari Energy explains, investors will often see oil be described in terms of its production per day or per quarter.
Again, investors typically use the oil reserves an E&P company has to set a current value and predict its future performance.