Upstream vs. Downstream Oil and Gas Operations: What's the Difference?

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Upstream oil and gas operations find and extract crude oil and natural gas. Downstream operations turn those raw materials into usable products and sell them to end users. The difference is position in the supply chain: upstream sits at the start, near the well, and downstream sits at the end, near the customer. A third segment, midstream, connects the two by moving and storing the resources in between.

What Upstream Operations Involve

Upstream is often called exploration and production (E&P). Companies in this segment identify where oil or gas deposits lie, assess whether extraction is feasible, drill wells and recover the raw material from underground or beneath the seabed.

The segment also includes the service businesses that make this work possible: rig operations, feasibility studies, machinery rental and the supply of chemicals used in extraction. The workforce reflects the technical nature of the job: geologists, geophysicists, engineers, scientists, service rig operators, and seismic and drilling contractors.

China National Offshore Oil Corp. and SLB (formerly Schlumberger) are examples of large companies focused on upstream activity, with SLB on the services side. National oil companies, including those of the member states of the Organization of the Petroleum Exporting Countries (OPEC), control much of the world’s crude production.

What Downstream Operations Involve

Downstream work begins after production and continues to the point of sale. Refineries convert crude oil into fuels and other products. Petrochemical plants make feedstocks for plastics and other materials. Distributors and retail outlets get the finished goods to consumers and businesses.

Products marketed downstream include gasoline, diesel, heating oil, lubricants, propane and natural gas, along with petroleum-derived inputs for goods such as pesticides and pharmaceuticals. Marathon Petroleum and Phillips 66, two major U.S. refiners, are typical downstream companies. A gas station, a propane supplier and a natural gas utility delivering to homes are all downstream as well.

Following One Barrel Through the Chain

Imagine a hypothetical barrel of crude. A geologist’s survey identifies a promising formation, a drilling contractor bores the well, and the producer brings the oil to the surface: all upstream. A gathering system and pipeline carry the crude to a storage terminal and on to a refinery: midstream. The refinery splits it into gasoline, diesel and other products, which trucks deliver to retail stations where drivers fill their tanks: downstream.

How the Two Segments Earn Money

The position in the chain shapes what drives each business. An upstream producer sells a commodity, so its revenue rises and falls largely with the market price of oil and gas, and it carries the cost and uncertainty of exploration, including wells that may not pay off. A refiner buys crude as an input and sells products, so its results depend mainly on the gap between what it pays for crude and what it receives for fuel, not on the crude price alone. Midstream operators that charge fees for transport and storage depend more on the volumes moving through their systems.

Where the Simple Split Breaks Down

Integrated companies. Shell, Chevron, ExxonMobil and BP drill wells, run refineries and sell fuel, sometimes through branded stations licensed to franchisees. ExxonMobil, for example, is a major upstream operator, but calling it an “upstream company” ignores its refining and marketing arms. Analysts usually break such firms into segments, as in a business valuation of a diversified energy company.

Processing in the middle. Some processing, such as preparing natural gas for pipeline transport, is generally grouped with midstream rather than downstream, so not every plant is a downstream asset.

Context outside oil and gas. In general business usage, “upstream” means suppliers and earlier production steps, while “downstream” means activities closer to the customer. The oil and gas definitions are a specific application of that broader idea.

The Bottom Line

Investors and analysts comparing energy companies need to know where each one sits in the supply chain, because that position shapes what drives its earnings. A producer rides commodity prices and exploration risk, a refiner lives on margins, and a fee-based midstream operator depends on volumes. For integrated companies, judging each segment separately gives a clearer picture than a single label.