Oil and gas value chain

1                                  Oil and gas value chain

The oil and gas value chain starts with searching for potential underground or underwater oil and gas fields and ends with providing products to end consumers. The different sections of the oil and gas value chain are:

·         Upstream

·         Midstream

·         Downstream

The upstream, midstream and downstream sectors are described below. The figures below provides an overview of the Oil & Gas Value Chain.

Figure 1‑1: Oil and gas value chain

Figure 1‑2: Gas value chain

Figure 1‑3: Gas value chain

1.1                  Upstream, midstream and downstream parts of the value chain

Figure 1‑4: Upstream, midstream and downstream parts of the value chain

1.1.1                      Upstream

The oil and gas industry is usually divided into three major sectors: upstream, midstream and downstream. The upstream oil sector is also commonly known as the exploration and production (E&P) sector.

The upstream sector includes the searching for potential underground or underwater crude oil and natural gas fields, drilling of exploratory wells, and subsequently drilling and operating the wells that recover and bring the crude oil and/or raw natural gas to the surface.

With the development of methods for extracting methane from coal seams, there has been a significant shift toward including unconventional gas as a part of the upstream sector, and corresponding developments in liquefied natural gas (LNG) processing and transport.

1.1.2                      Midstream

Midstream operations are sometimes classified within the downstream sector, but these operations compose a separate and discrete sector of the petroleum industry. Midstream service providers apply technological solutions to improve efficiency during midstream processes. Technology can be used during compression of fuels to ease flow through pipelines; to better detect leaks in pipelines; and to automate communications for better pipeline and equipment monitoring. 

Midstream operations and processes include the following:

1.      Gathering

The gathering process employs narrow, low-pressure pipelines to connect oil- and gas-producing wells to larger, long-haul pipelines or processing facilities.

The first consideration in gas gathering is the proportion of liquid which will flow with the gas. If this is high, gas flow becomes impeded by slugs of liquid and special facilities must be installed for its collection and separation. These problems may be serious in hilly country or offshore environments with deep seabed trenches.

The other major considerations are functions of pressure, temperature, or their interaction. High pressure is generally desirable since it can be used to drive the gas to a more distant location. However, excess pressure may need dissipating, in which case heaters may also be required to counteract the accompanying chilling effect which could result in hydrate temperatures will generate the need for special facilities to overcome metal expansion.

2.      Processing/refining

Processing and refining operations turn crude oil and gas into marketable products. In the case of crude oil, these products include heating oil, gasoline for use in vehicles, jet fuel, and diesel oil. Oil refining processes include distillation, vacuum distillation, catalytic reforming, catalytic cracking, alkylation, isomerisation, hydro-treating.

Natural gas processing includes compression; glycol dehydration; amine treating; separating the product into pipeline-quality natural gas and a stream of mixed natural gas liquids; and fractionation, which separates the stream of mixed natural gas liquids into its components. The fractionation process yields ethane, propane, butane, isobutane, and natural gasoline.

Figure 1‑5: Schematic flow diagram illustrating process route and ultimate products of produced oil and gas

3.      Gas treatment

Gas treatment is to remove undesirable components and to separate the well stream into saleable gas and petroleum liquid, recovering the maximum amounts of each at the lowest possible cost. The individual steps will typically include:

a.       Separation: in vessels designed to slow the passage of liquid to allow gravity to separate the well stream into gaseous, liquid and solid components. Stage separation allows the collection of individual LPG and condensate streams if present in sufficient quantity.

b.      Filtration: in separators designed to remove small liquid and / or solid particles using a series of perforated cylinder baffles with fabric and fibreglass coverings.

c.       dehydration: in vessels where the gas is either bubbled through a liquid such as glycol or passed through a bed of granulated solid material such as silica-gel, both of which have an affinity for water and which can be easily regenerated for cyclical use.

d.      Acid gas removal: Acid gas removal refers to an industrial gas purification procedure used to remove hydrogen sulfide (H₂S) and carbon dioxide (CO₂) from mineral resources. Acid gas removal involves the use of aqueous solutions (amines) that react with the existing mixture. This practice is vital because hydrogen sulfide promotes corrosion of any metal process vessel it is housed or transported in. Acid gas removal may also be known as gas sweetening, amine scrubbing or amine gas treatment.

e.       BTU Control: necessary as increasing amounts of C₂+ components are removed from the stream, leaving predominantly methane which may fall below the contractual specification for heating value. In these situations, it may be necessary to limit such extractions or blend with other, richer gases.

f.        Compression: to enable gas to flow, by enhancing inherent well head pressure or simply to counteract friction through long pipelines.

4.      Transportation

Oil and gas are transported to processing facilities, and from there to end users, by pipeline, tanker/barge, truck, and rail. Pipelines are the most economical transportation method and are most suited to movement across longer distances, for example, across continents. Tankers and barges are also employed for long-distance, often international transport. Rail and truck can also be used for longer distances but are most cost-effective for shorter routes.

5.      Storage

Midstream service providers provide storage facilities at terminals throughout the oil and gas distribution systems. These facilities are most often located near refining and processing facilities and are connected to pipeline systems to facilitate shipment when product demand must be met. While petroleum products are held in storage tanks, natural gas tends to be stored in underground facilities, such as salt dome caverns and depleted reservoirs.

1.1.3                      Downstream

The downstream sector involves the refining of petroleum crude oil and the processing of raw natural gas. It includes the selling and distribution of processed natural gas and the products derived from petroleum crude oil such as liquefied petroleum gas (LPG), gasoline (or petrol), jet fuel, diesel oil, other fuel oils, petroleum asphalt and petroleum coke.
The downstream sector includes petroleum refineries, petroleum product distribution, retail outlets and natural gas distribution companies.

1.1.3.1                Marketing

Marketing is defined as the performance of business activities that direct the flow of goods and services from producer to consumer in order to satisfy customers and accomplish the firm’s objective.

Marketing of petroleum products involves distribution to Bulk Distribution Companies (BDCs) and Oil Marketing Companies (OMCs) such as GOIL, BOST, Shell, Total and all other local distribution/marketing companies, who then distribute the product to consumers.

For descriptive and analytical purposes, it is often convenient to categorise uses of natural gas in terms of four main markets- domestic (or household), commercial, industrial (including chemical feedstock uses) and power generation. The definition of these four markets is generally self-explanatory, with the exception of the commercial sector. This is something of miscellany-covering schools, hospitals, offices, shops, hotels and the like.

Channel through which natural gas are marketed includes:

·         Domestic market

·         Commercial market

·         Industrial market

·         Chemical feedstock – fertilizer production,

·         Export

·         Power generation

The consumption of total gas demand by market sector varies enormously between different countries and geographical regions. This reflects a large number of factors such as population density, climate, stage of industrial developments and national energy policy, as well as the price and availability of alternative fuels. For example, in countries such as UK, where as much as 70% of natural gas is supplied to the domestic and commercial sector. Elsewhere in Western Europe and in the USA, the industrial market is relatively more important. Power generation generally still accounts for a minor portion of the total gas market in these countries, but this appears set to change in countries as diverse as Italy, Portugal, the UK, and the US. In Japan, and Ghana, by contrast, power generation is already by far the most important end-use sector. Ghana uses natural gas mainly as a fuel for cooking, transport, power generation and industry.

1.1.3.1.1      Domestic market

 The three major uses of natural gas in residential premises are cooking, water heating, and space heating. In much of the developed world, it is supplied through pipes to homes, where it is used for many purposes including ranges and ovens, gas-heated clothes dryers, heating/cooling, and central heating. Heaters in homes and other buildings may include boilers, furnaces, and water heaters.

1.1.3.1.2      Commercial market

Commercial uses of natural gas are very similar to residential uses. The commercial sector includes public and private enterprises, like office buildings, schools, churches, hotels, restaurants, and government buildings. The main uses of natural gas in this sector include space-heating, water heating, and cooling. For restaurants and other establishments that require cooking facilities, natural gas is a popular choice to fulfil these needs. Another technological innovation brought about is combined heating and power (CHP) and combined cooling, heating and power (CCHP) systems, which are used in commercial settings to increase energy efficiency. These integrated systems are able to use energy that is normally lost as heat. For example, heat that is released from natural gas powered electricity generators can be harnessed to run space or water heaters, or commercial boilers. Using this normally wasted energy can dramatically improve energy efficiency.

1.1.3.1.3      Industrial market

Turning now to the industrial market, it is convenient to consider the sector in terms of four principal categories as discussed below.

1.      There are certain direct process or space heating applications for gas which require a high quality, high value fuel. This may be a matter of requiring clean energy (eg. No sulphur content), or perhaps of needing controllable point-of-use heat which cannot be provided by coal, for example.  This high grade, high value uses for gas are often referred to as “premium” applications.

2.      There are other industrial energy applications where only a low-grade source of heat is required. This includes the raising of steam, for which lower value fuels such as heavy fuel oil or coal are generally sufficient. To distinguish this part of the market from the higher value applications for gas, it is often referred to as “non-premium”.

3.      A specific application of gas which has somewhat special characteristics is the on-site production of combined heat and power (CHP).  Effectively, gas – based CHP is an alternative to purchasing (high value) electricity from the public grid and raising steam on-site with (low value) heavy fuel oil or coal. In this sense, CHP is something of a “hybrid” between premium and non-premium usage.

4.      The fourth category to be considered is the non-energy use of natural gas a feedstock for ammonia or methanol production. There is often no other economically attractive feedstock and the alternative to gas-based production may well be to purchase the chemical end product on the open market.

Since each of the four categories set out above has its own characteristics, we consider them separately in turn below.

As outlined above, the premium applications for natural gas in the industrial sector mainly comprise direct process use and space/water heating.  In light industries, the space and water heating requirements may dominate, but in more energy-intensive sectors (steel, food processing, ceramics, chemicals, etc.) the process load is much more important.

Given relatively high cost of alternative fuels (e.g. Gas oil and especially electricity), the market value of gas is higher than in the non-premium industrial sub-sector. On the other hand, consumers bulk purchase requirements and (as regards electricity) relatively flat load curves enable them to obtain much lower prices than domestic or commercial users. Consumers who can use LPG (propane or butane) are often able to obtain very attractive prices in today’s oil market conditions. Thus gas market values tend to lie between those of the domestic/commercial markets and those in the non-premium industrial market, but can be quite variable across industrial customers of different sizes and types. In some cases, (eg. Food processing and firing of ceramics) there can also be a product quality premium value of natural gas, as compared with other fuels.

“Premium” industrial consumers can vary enormously in size, from small workshops taking only several thousand therms per year to major energy-intensive businesses consuming 100million therms or more across several sites. In developed gas markets the average premium industrial customer may be quite small- e.g. 100-200,000 therms pa- while the average size in new gas markets (e.g. Nigeria or the middle east) tends to be many times greater.

Seasonal load factors (average daily consumption divided by peak daily consumption) also vary from perhaps 60% in a developed industrial market with significant space heating demand to around 80-90% where process users dominate and space heating requirements are not significant.

In many countries, most larger industrial customers tend to be supplied from medium pressure (e.g. Regional) transmission grids, although some very large users may be connected direct to the high pressure system. In some older gas industries with long-standing local networks inherited from town gas days (e.g. UK and Germany), however, a significant proportion of industrial customers may be connected to the distribution system.

Partly because they are often served direct from the transmission system and partly because of relatively high load factors, “premium” industrial customers are typically much cheaper to supply than domestic or commercial gas users.

1.1.3.1.4      Gas export market

Countries with large recoverable gas reserves relative to their potential domestic market are likely to consider export market options. This applies, for example, to current exporters such a s Norway, Algeria, Indonesia, and Canada as well as to prospective future exporters such as Oman, Venezuela and Mozambique.

There are essentially two options open to potential exporters – namely pipeline exports and liquefied natural gas (LNG).  The pipeline option is technically most straightforward and is clearly the most appropriate for land routes. By the use of large pipes diameters (eg. 56”). Gas can even be moved in large volumes over very long distances (eg. West Siberia to western Europe, Nigeria to Ghana) in a reasonably economic manner. Technological developments allow subsea pipelines (eg. Trans-Mediterranean, between Tunisia and Italy) to be constructed in fairly deep waters. High operating pressures such as 200bar for the Norwegian Zeepipe) can be used to keep down the unit costs of subsea pipeline transportation. Subsea pipelines are however very expensive and are not economically attractive over extremely long distances.

1.1.3.1.5      New markets for natural gas

To complete the discussion of gas market options, we now review briefly some of the emerging markets for gas which are not currently significant but which may be so in the future.

1.      Compressed natural gas (CNG) as an automotive fuel.

2.      Processes have also been developed to convert methane to gasoline, and thus to substitute conventional oil-derived fuel. Recent experience with the SASOL Mossgas plant in South Africa suggests that this is not economic at today’s fuel prices unless a country possesses very large gas reserves relative to the potential market – which mean a low opportunity cost of gas feedstock.

3.      The third possible new market for gas is fuel cells – equivalent to a large battery – which are alternative to conventional power generation. Phosphoric Acid Fuel Cells (PAFCs) are the best developed technology but Molten Carbonate Fuel Cells (MCFCs) have a higher efficiency potential and both could be “fuelled” by natural gas. The big advantages of fuel cells are their high efficiency (especially MCFCs) and benign environmental impact (no emissions of SO₂ or CO₂). However, their commercial viability remains to be proven – especially as regards the capital cost of large-scale facilities and the cost/frequency of fuel stack replacement.