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Oil and gas production: A step by step guide

What is oil and gas production, how is it done, and what equipment is needed? Learn how companies produce oil and gas effectively and the steps involved

Oil and gas are two of the most widely used resources today. As such, it is important to understand how they are converted from raw material to usable product. Here, we cover the 3 stages of oil and gas production, as well as innovations in the oil and gas industry.

Table of contents

1. What is oil and gas production?

2. The 3 stages of oil and gas production

3. Upstream oil and gas

4. Midstream oil and gas

5. Downstream oil and gas

6. What are integrated oil and gas companies?

7. New oil and gas technologies

What is oil and gas production?

Companies in the oil industry extract crude oil and natural gas from naturally occurring oil and gas deposits in the earth, which they then transform into petroleum products ready for consumer use. Oil and gas production is the name for this process.

There are many steps involved when producing oil and gas. First, companies identify extraction sites, then they extract resources. After that, the natural oil and gas are refined into usable products, which are distributed to consumers.

The industry is one of the most important sectors in any economy, since so much currently depends on a country’s oil and gas supply. Whether it is transportation, electricity, or heating, oil and gas are at the center of countless everyday amenities. In March of 2022, President Joe Biden declared that the United States would release several million barrels of oil into the market to combat rising prices.

Though oil and gas are vital resources that enable many day-to-day activities, they can also cause harm to the earth. Additionally, they are non-renewable. Both of these are reasons why the industry has been reexamining itself in recent years.

The 3 stages of oil and gas production

The long process of converting oil and gas to petroleum is broadly categorized in three stages. And each of these has a different set of businesses associated with it. The three stages of oil and gas production are::

  • Upstream oil and gas
  • Midstream oil and gas
  • Downstream oil and gas

Upstream, midstream, and downstream oil and gas are all comprised of distinct businesses, which work together to bring finished goods into a market.

Upstream oil and gas

The first step in oil and gas production is conducted by upstream oil and gas companies. Businesses involved in this stage are responsible for locating and extracting natural resources. When searching for places to drill, oil and gas companies are looking for hydrocarbons present in rock formations. Those hydrocarbons become crude oil and natural gas when exposed to high temperatures and pressure inside the earth.

Oil reserves are evaluated via the three Ps; these are “proven”, “probable”, and “possible”. A given location is classified according to one of the three Ps based on how likely companies are to find oil there. “Proven” reserves have a 90% chance of leading to oil and gas production, “probable” reserves have a 50% chance, and “possible” reserves have only a 10% likelihood of containing usable resources.

Once a location is chosen, extraction can begin. Oil and gas companies first need to drill at the site, and determine whether natural resources are present. If drilling does not reveal enough hydrocarbons, then the earth is refilled and the site is abandoned.

On the other hand, if preliminary drilling uncovers an oil and gas supply, the extraction continues. To finish extracting hydrocarbons, oil and gas companies construct wells at the site. These wells have to be maintained until the extraction process has finished.

Workers on an oil site

Midstream oil and gas

After extraction has finished, midstream oil and gas companies can do their work. Midstream businesses are usually seen as “safe” because they are relatively low-risk.

This stage of the production process is primarily transportation-focused. Businesses in this sector are responsible for making sure raw materials arrive at oil refineries without any problems.

Oil and gas which have yet to be refined are usually transported either via tanker or pipeline to a refinery. Tankers travel over water routes and pipelines are installed underground. Transportation of natural gas and oil is heavily regulated in the United States.That’s because unsafely transporting these resources can lead to spills and pollution.

Midstream oil and gas also includes processing and storage functions. Field processing begins at the extraction site, and this is where:

  • The production rate for the reservoir is measured.
  • Oil, gas, and water are separated from one another.
  • Impurities in the raw materials are removed.
  • Once field processing is complete, the oil and gas are ready to be transported, and are stored on-site until they ship. While oil can be stored above ground, natural gas must be kept underground because of its high pressure.

    Downstream oil and gas

    In the final stage of oil and gas production, downstream businesses focus on converting essentially unusable crude oil into petroleum. This process is known as refining.

    Refining is done through application of several other processes. A process called hydrotreating is used to further remove undesirable elements from raw materials. Molecules are broken into fragments via cracking, and the gasses that result are used in rubber and plastics. Oil and gas are turned into gasoline through the use of alkylation and reforming.

    Refining is so complex because crude oil is not uniform. Far from it; different oils are mixtures of thousands of different hydrocarbons. Each hydrocarbon has a different weight, size, and boiling temperature. That means there is no one process fits all approach.

    The end of any oil and gas production process is distribution after the raw materials have been refined into usable goods. These goods are sold both to individual consumers and to other businesses. For example, refineries typically sell gasoline to gas stations, and methane is commonly sold to utility companies.

    Downstream companies are also in charge of marketing the finished goods that they create. That is one of the primary reasons downstream oil and gas is the stage most familiar to the average person. Oil refineries also tend to be located in more populated areas, so that the finished products are easier to distribute.

    What are integrated oil and gas companies?

    While the oil and gas industry is traditionally separated into upstream, midstream, and downstream business, there are companies that handle every stage of the process. These are known as integrated oil and gas companies.

    Integrated companies are commonly those with more access to resources than their counterparts, since there is a high barrier to entry into the oil and gas industry. One reason integrated oil and gas companies are less common is antitrust legislation.

    The first integrated company was J.D. Rockefeller’s Standard Oil in 1870. The reason Rockefeller created a single company responsible for every stage of the process was to reduce inefficiency, and thus offer finished oil and gas products at lower prices. Standard Oil was broken up into several smaller businesses in 1911 in accordance with antitrust legislation, which is intended to make sure single companies do not corner entire markets or form monopolies.

    A second reason that integrated oil and gas companies are expected to become less common is sustainability. In the face of climate change and regulations placed on all types of industries, oil and gas business models are changing.

    Many major oil and gas companies, like BP and Exxon Mobil, have committed to significant reductions in their environmental impact. Efforts to reduce carbon emissions in the industry include:

    • Reducing waste
    • Avoiding hazardous leaks and spills
    • Lowering water usage
    • Ensuring safe working conditions
    • Using fewer rare nonrenewable resources in oil and gas production

    When companies reduce waste and resource consumption, they also reduce operation costs. Recycling resources reduces spending. Consumers are also seeking out low-carbon solutions, meaning that businesses which want long-term success need to start lowering their carbon emissions now.

    An inforgraphic breaking down the 3 stages of oil and gas production

    Sustainability in oil and gas

    Various things are driving this push towards sustainable operations. As mentioned, climate concerns have prompted greater regulation within and between countries. And climate change has led to more disasters centered around oil and gas production sites. Flooding in the Gulf of Mexico and wildfires in California are just two examples of incidents leading to the destruction of oil refineries.

    Oil spills are shockingly common, with 2,179 occurring across 3 states in 2020 alone. These spills cause pollution and harmful chemicals to leach into the surrounding area. Toxins are regularly deposited into rivers as a result of oil and gas production.

    Regular consumers are among those putting pressure on the industry to change. As communities feel the negative effects of nearby oil and gas production, they are showing less support for fossil fuels. Over 12 million people in the U.S. live within half a mile of oil and gas sites, meaning they are exposed to pollution on a daily basis.

    In addition to pressure from governments, oil and gas companies face pressure from their stakeholders to adopt more sustainable practices. Investors are conscious of the negative press and controversy that the fossil fuel industry attracts every time there is an incident, and conscious of the fact that these incidents are increasing in both frequency and severity.

    Oil and gas investors are paying more attention to prospective partners’ ESG (environmental, social, and governance) goals when deciding who to fund. The CEO of BlackRock investments, which manages trillions of dollars in total assets and around $300 billion in oil and gas, expressed that they would be voting against company executives who are not committing to sustainability. The industry is moving towards a Greater reliance on renewable resources

    Another way that oil and gas companies refusing to adopt sustainable measures lose money is on prospective talent. Younger generations in general are more concerned about the environment, and oil and gas workers are no exception. In the U.S., 70% of fossil fuel employees say their futures in oil and gas depend on their company’s environmental practices

    The good news for these businesses is that new technologies have made improving sustainability easier. Said innovations make the process more efficient, which means less waste and more informed decision-making.

    New oil and gas technologies

    Oil and gas production has only gotten more efficient over time thanks to the continuing development of technology. Where prior innovations like hydraulic fracturing were mechanical improvements that made raw material physically easier to extract, today’s innovations are primarily in the realm of smart technology and data collection.

    Use of artificial intelligence is helping oil and gas companies manage their resources more effectively, discover and select new oil reserves, and make decisions based on available data. AI chatbots like Nesh are able to use data to suggest solutions.

    Various businesses have developed robotics and automated solutions to help handle routine or potentially dangerous tasks. This improves efficiency and worker safety. Robotic inspection of drilling sites and refineries is faster than the human equivalent.

    3D modeling technology makes site assessment easier for engineers and simulates the effect operations will have on the environment. This helps businesses figure out how to get the most resources out of a given reservoir, and how to do so safely.

    Various technologies comprise the Internet of Things (IoT), which oil and gas companies use in a variety of ways, including improving worker safety, speeding up tasks, and monitoring remote areas. This increased monitoring capacity lets businesses keep an eye on their equipment and alerts them whenever a problem arises.

    You can easily measure the effectiveness of any new technologies by conducting regular inspections with Lumiform. Make sure all your equipment is working, all safety regulations are followed, and save yourself time in the process.

    Propane tanks on a truck

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