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Friday, October 5, 2018

Impact of crude oil prices on oil companies

Companies like HPCL, BPCL, IOCL etc. comes under downstream sector of oil and gas industry while ONGC, OIL etc. comes under upstream sector.

Now let's understand what's the difference between upstream and downstream sector of oil and gas industry.

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

The downstream sector commonly refers to the refining of petroleum crude oil and the processing and purifying of raw natural gas, as well as the marketing and distribution of products derived from crude oil and natural gas. The downstream sector reaches consumers through products such as gasoline or petrol, kerosene, jet fuel, diesel oil, heating oil, fuel oils, lubricants, waxes, asphalt, natural gas, and liquefied petroleum gas (LPG) as well as hundreds of petrochemicals.

The midstream sector involves the transportation (by pipeline, rail, barge, oil tanker or truck), storage, and wholesale marketing of crude or refined petroleum products. Pipelines and other transport systems can be used to move crude oil from production sites to refineries and deliver the various refined products to downstream distributors. Natural gas pipeline networks aggregate gas from natural gas purification plants and deliver it to downstream customers, such as local utilities.The midstream sector may also include natural gas processing plants that purify the raw natural gas as well as removing and producing elemental sulfur and natural gas liquids (NGL) as finished end-products.

When we say the oil price goes up, we mean the prices of crude oil goes up. As the crude oil is the final product of the upstream companies (ONGC) which will now be sold at higher prices, the upstream companies will make profit but on the other side, for downstream companies (HPCL) , crude oil is a raw-material which now they will have to buy at higher price and their final selling products are various refined products like petrol, diesel etc. The prices of these refined products may not necessarily increase by the same proportion as of the crude oil. As a result, the downstream companies starts loosing money.

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