Downstream

The term downstream has historically been used in the natural resources and chemicals industries, and specifically in the oil and gas industry, to refer to activities that relate to the processing of crude oil and natural gas or related petroleum products to the point where the feedstock is broken down and purified into a series of products such as aviation gas (avgas) or bitumen for roads, or petrol/gasoline for cars and trucks, or even when natural gas is used as a source material for electricity generation.

The origins are in the sense of location of the deposition of minerals in a streambed, e.g., gold-panning activities (so even older than petroleum exploration and production) where heavy minerals were deposited “down stream,” i.e., away from the water's source but originated “upstream.” It is, however, also used today to refer to bioprocesses where it refers to the purification and quality control processes for new biological materials, data transfer speeds between host servers and clients analogous to downloading, and as a term for later activities or later elements of sequencing in manufacturing and production processes.

Petrochemical products, for example bitumen, were found to have been used in Roman camps such as Uttoxeter in the United Kingdom, but until the late 19th century, interest in downstream products was based around their roles as lubricants. Much of industrial development was coal based with interest growing in petroleum, though gas was almost an inconvenience. With the dwindling of black-coal mining, which is associated with high health and safety risks, in many countries, oil and gas-based chemical production has taken over and many downstream products are in everyday use.

While upstream companies may just concentrate on the exploration and production of oil and gas, an activity still possible on a small scale of a single oil well and with limited capital, downstream activities are large scale and hugely capital intensive. Plant design, scale, and scope (integration) are all important drivers for firms to capture as much of the added value chain for bulk low-margin products such as olefin precursors used in polymers and plastics. Many of the larger companies adopted an integrated strategy from upstream to downstream activities, a strategy still in use by national oil companies such as Petrobras and [Page 537]Petronas. Indeed, ExxonMobil began life as Standard Oil of Ohio in the oil refining business—the Standard Oil companies were a cartel controlling 85 percent of the United States' oil industry and were then split into a number of companies that form the precursors of today's Western supermajors.

Downstream petrochemical activities are often split into self-explanatory areas such as bulk chemicals, fine chemicals, or fertilizers, many categories of which are traded as commodities on world markets. Key success determinants are access to cheap feedstock (upstream-generated oil and gas of the optimal quality and chemical constitution for the plants in question); other allied input costs include cheap energy and skilled labor. Plant set-up costs are high, technology is heavily protected, and there are limited numbers of world-class suppliers. However, it is the opportunity to capture added value within resource-owning host government countries that is attractive, with the result that many major downstream activities are now located closer to production sites or to major users. An example of this trend would be Saudi Arabia's development plans for further petrochemical processing and product delivery.

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