# Understanding Upstream Oil & Gas: Exploration and Production Explained

## What Is Upstream?

Upstream in the oil and gas industry refers to the crucial stages of exploration and production, where companies identify oil and gas reserves and then extract these resources. This phase includes activities like land surveys, drilling operations, and the use of technology to locate hydrocarbons. The upstream sector is the first step before the midstream and downstream stages, which handle transportation, refining, and distribution.

### Key Takeaways

*   Upstream in the oil and gas industry involves exploration, drilling, and extraction of crude oil and natural gas.
*   The upstream sector is also known as the exploration and production (E&P) sector.
*   Midstream follows upstream, focusing on the transportation of oil and gas to refineries.
*   Companies integrated across the upstream, midstream, and downstream segments are known as integrated oil companies.
*   Geologists and geophysicists are key professionals in the upstream sector, using techniques like seismology to locate oil and gas reserves.

![Upstream: The exploration and production stages in the oil and gas industry.](https://www.investopedia.com/thmb/PHMSWzH745mW3A4-HIlQqWxToww=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/upstream.asp-FINAL-1-1-142c7cfb1dae4e74bf3cd69abd8686b9.png)

*— Investopedia / Joules Garcia*

## Exploring the Upstream Sector

The upstream sector of the oil and gas industry includes all the steps involved from the preliminary exploration through the extraction of the resource. Upstream companies can be involved in all the steps of this phase of the life cycle of the oil and gas industry, or they may only be involved in part of the upstream sector.

Another name for the upstream oil sector, which is actually more representative of what occurs in this stage of development of an oil asset and/or natural gas asset, is the [exploration and production](https://www.investopedia.com/terms/e/exploration-production-company.asp) (E&P) sector. The E&P segment is the earliest portion of the oil and gas production process. Companies within this segment are primarily focused on locating and extracting commodities from the earth.

The exploration stage involves the search for [hydrocarbons](https://www.investopedia.com/terms/h/hydrocarbon.asp), which are the primary components of petroleum and natural gas. Land surveys are performed to help identify the areas that are the most promising. The goal is to locate specific minerals underground in order to estimate the amount of oil and gas reserves before drilling. Geologists study rock formations and soil layers to see if oil or natural gas is present.

The process can involve seismology, which uses substantial vibrations as a result of machinery or explosives to create seismic waves. How the seismic waves interact with a reservoir containing oil and gas helps to pinpoint the reservoir's location. Once it has been determined that there appear to be reserves beneath the ground, the test drilling process can begin.

> **Tip**
>
> Upstream companies measure oil production in barrels. One barrel, usually abbreviated as bbl, is equal to 42 U.S. gallons. Companies often describe production in terms of bbl per day or bbl per quarter.

## Key Steps in Oil Exploration

Oil and gas exploration is an important part of the upstream sector. [Petroleum](https://www.investopedia.com/terms/p/petroleum.asp) exploration requires very sophisticated techniques, and the technology available for petroleum exploration is rapidly advancing.

Exploration usually starts in areas with high potential, often due to local geology and nearby petroleum deposits. In a high-potential area, further exploration is completed to delineate a resource. The geophysical and geochemical analysis is done using techniques including induced polarization (IP) surveys, drilling and [assaying](https://www.investopedia.com/terms/a/assay.asp), electrical currents, and so on.

The goal in exploration is to locate and estimate resource potential. If an area seems promising, exploratory wells are drilled. In the oil and gas sector, test drilling is an important component of the exploration phase. In the event that the exploratory well is successful, the next step is to construct wells and extract the resource. Upstream companies also operate the wells that bring the crude oil or natural gas to the surface.

> **Important**
>
> Rig count and utilization rates are economic indicators of the amount of activity happening in the United States at any given time.

## Transition from Upstream to Midstream and Downstream

Once the resource has been extracted, the upstream part of the business is over. [Midstream](https://www.investopedia.com/terms/m/midstream.asp) companies gather the raw resource and transport the resource via pipeline, railway, or tanker truck to refineries. Refineries are the [downstream](https://www.investopedia.com/terms/d/downstream.asp) phase of the oil and gas industry. They process the raw [crude oil](https://www.investopedia.com/terms/c/crude-oil.asp) into their end petroleum products. They also sell and distribute natural gas and the products that are derived from crude oil.

### Midstream

Midstream is a term used to describe one of the three major stages of oil and gas industry operations. Midstream activities include the processing, storing, transporting, and marketing of oil, natural gas, and [natural gas liquids](https://www.investopedia.com/terms/n/natural-gas-liquids.asp). Midstream companies focus on the storage and transportation of oil and natural gas through pipelines. Midstream companies deliver the reserves to companies involved in the final stage of production, called downstream.

### Downstream

Companies in the downstream sector are those that provide the closest link to everyday users. Downstream operations are the processes involved in converting oil and gas into the finished product. These include refining crude oil into gasoline, [natural gas liquids](https://www.investopedia.com/terms/n/natural-gas-liquids.asp), diesel, and a variety of other energy sources. The closer an oil and gas company is to the process of providing consumers with petroleum products, the further downstream the company is said to be.

## Examples of Upstream Companies

Upstream oil and gas production and operations identify deposits, drill wells, and recover raw materials from underground and are involved in exploration and extraction. Many of those employed in the upstream part of the industry include geologists, geophysicists, service rig operators, engineering firms, scientists, and seismic and drilling contractors.

China National Offshore Oil Corporation and Schlumberger ([SLB](https://www.investopedia.com/markets/quote?tvwidgetsymbol=slb)) are examples of large companies that focus on upstream services.

Today, most of the global oil giants have both upstream and downstream activities and are known as [integrated oil companies](https://www.investopedia.com/terms/i/integrated-oil-gas-company.asp). Many of the largest upstream operators today are therefore major diversified oil and gas firms, such as Exxon-Mobil ([XOM](https://www.investopedia.com/markets/quote?tvwidgetsymbol=xom)) and Chevron ([CVX](https://www.investopedia.com/markets/quote?tvwidgetsymbol=cvx)).

## What Does Upstream Mean in the Oil and Gas Industry?

Upstream refers to the initial phases of oil and gas production, involving exploration, drilling, and extraction of crude oil and natural gas.

## What Is the Difference Between Upstream and Downstream?

While upstream entails the initial phases of oil and gas production, downstream encompasses the final phases including refining and distribution of finished products like gasoline to consumers. In general, the farther a part of the process is from the end-user consumer, the more upstream it is.

## What Are the Three Sectors of the Oil and Gas Industry?

In addition to upstream and downstream, the midstream sector is involved with the transportation of oil and gas extracted from the earth via pipelines, ships, trucks, or trains to the refineries.

## What Are Examples of Upstream Companies?

The upstream sector involves companies that search for deposits of oil or gas (exploration) and then its extraction through drilling or other methods. Upstream also includes related services companies such as those dealing in rig operations, feasibility studies, machinery rental, and extraction of chemical supply.

## Is a Refinery Upstream or Downstream?

A refinery is considered to be downstream.

## The Bottom Line

Upstream operations in the oil and gas industry involve the critical initial stages of exploration and production. These processes are fundamental to finding and extracting hydrocarbons, which form the basis for the entire oil and gas supply chain. Companies in this sector engage in activities ranging from geological surveys to test drilling, all with the goal of securing and extracting reserves efficiently.

Understanding these activities is essential for anyone looking to grasp the complexities of the oil and gas industry and the roles various companies play. An interconnected ecosystem follows, with midstream focusing on transportation and downstream on refining and distribution, ultimately bringing petroleum products to consumers. As the industry evolves, advanced technologies and integrated oil companies continue to shape how upstream operations are conducted.

> **Article Sources**
>
> 1.  Library of Congress. "[Upstream: Production and Exploration](https://guides.loc.gov/oil-and-gas-industry/upstream)."