The oil and gas industry is a tough one, having to deal with issues ranging from government regulation to oil wells drying up. Compound those if your oil company’s primary goal is to actually find new reserves of oil and gas in an already well-explored world.

That search, though, is the focus of the Upstream sector, the first of the three major parts of the oil and gas industry (Upstream, Midstream, and Downstream). Today, we define what the sector is, its major tasks, problems involved, and how technology like digitalization is helping to resolve them. 

Upstream Oil and Gas – Definition and Purpose

In the oil and gas industry, the Upstream sector encompasses all the steps involved in locating potential sites for oil and gas drilling and extraction. Upstream, also called Exploration and Production (E&P), involves:

  • Obtaining land rights.
  • Creating geological surveys of underground or underwater crude oil and natural gas fields.
  • Drilling of onshore and/or offshore exploratory wells.
  • Operating those wells.

Oil companies that focus solely on Upstream are called Independents. Upstream or E&P is the earliest portion of the three-part oil and gas production process (Upstream, Midstream, and Downstream). The end-user consumer, like a car owner fueling their vehicle with gasoline or diesel, will rarely if ever deal with the sector. 

E & P in the Upstream

The Exploration stage in Upstream involves the search for vast amounts of crude oil and natural gas trapped underground either on land or under the sea. These are referred to as “reserves”. In this part of Upstream, oil and gas companies:

  • Obtain a lease and permission from the owners of onshore or offshore lands to drill.
  • Perform land surveys to help identify promising areas. The goal is to locate possible reserves and estimate the quantity before drilling. 
  • Have geologists identify if oil or natural gas is present by studying rock formations and layers of sediment.
  • Pinpoint reserve’s locations through the use of seismic methods like machinery or explosives to create seismic waves. 
  • Make exploratory and test drills. 

Once it has been determined that there appear to be reserves beneath the ground, the drilling process can begin (Production).

Many oil and gas companies contract with specialized drilling firms, paying for the crew costs, equipment like industrial tablets, and rig day rates. It is these companies which operate the wells that recover and bring the crude oil or raw natural gas to the surface.

Interestingly companies involved in Upstream are also a part of any closure of a well. The end of the productive life of a well is known as “plug and abandonment.” This occurs any time from a few years after the well is drilled to five or six decades later.

Challenges and Problems Faced in the Upstream

The Upstream sector of the oil and gas industry is considered one of the most complex and risky of the trio (Upstream, Midstream, and Downstream). Three major reasons include:

  1. High Exploration and Drilling Costs

Technology drives all aspects of the Upstream industry. It requires expensive equipment and highly skilled workers. Unfortunately, capital constraints means fewer dollars for companies to offer for both. Competitors like other oil and gas companies as well as alternative energy sources like coal, solar, and wind power put Upstream companies under increasing pressure to reduce costs and increase efficiencies to remain competitive.

  1. Site Failure and Uncertainty 

The cost of an unsuccessful exploration, such as drilling a dry well, can cost $5 million to $20 million per exploration site, and in some cases, much more. And even when a site’s successful, it can still be costly depending on the drilling depths, rock hardness, weather conditions, and distance of the site from easy transport infrastructures like roads and rail.

  1. Environmental Pressures from Nature and Regulation

Wells are located outdoors whether on land or under the seabed. Seasonal weather patterns and disruption due to severe weather events can affect production. Finally, many nations are increasingly scrutinizing greenhouse gas (GHG) emissions from oil and gas operations like in the Upstream. All these and more add to risks and associated costs.

Technological Solutions for Upstream Issues

Early oil and gas explorers relied on natural oil seeps on the surface to find sites. Developments in science and technology like using seismic imaging have made oil and gas exploration more efficient. Many Independents are considered early adopters of the more innovative drilling and production technologies. They are also more willing to make decisions and move quicker than other industry participants like major oil and gas companies.

Still, the Upstream sector is considered behind the other sectors and even other industries when it comes to being digitally enabled. Strides have been made though like:

  • Increased remote operations: complete asset control, true visit-by-exception, facility inspection, and remote maintenance support is being increasingly performed remotely thanks to advances in sensor technologies, communication and control networks, Internet of Things (IoT), and IT infrastructure controlled by industrial mini PCs.   
  • Improved equipment performance and reliability: technical staff can better spot sub optimally performing equipment or impending failures thanks to greater access to real-time asset performance data and the development of advanced analytical tools. This helps reduce maintenance expenses and the use of consumables like fuel. 
  • Creation of a “digital twin” in lieu of physical assets from oil fields to equipment. This allows companies to model scenarios to optimize everything from production to maintenance. 

Artificial intelligence (AI) and machine learning (ML) is also finding greater use in Upstream E & P. Same with predictive analytics. Companies are also delving into the growing quantum computing market, too. 

Outlook of the Upstream Oil and Gas Market

Globally, the Upstream sector of oil and gas grew from $3,560.4 billion in 2021 to $4,097.97 billion in 2022. Compound annual growth rate (CAGR) was 15.1 percent. For the US, the market is expected to record a CAGR of under 4 percent between 2020-2025. While the cost of the drilling rigs saw a drop by as much 40 percent since 2014, oil price volatility proved to have a dampening effect on resulting cost savings especially among US Upstream companies. 

Closing Comments

The huge oil and gas industry is typically divided into three major sectors: Upstream, Midstream, and Downstream. Upstream deals with finding new reserves of oil and gas and preparing them for the other two sectors. Issues from finding those reserves to climate change make Upstream the most complex of the trio.

If your company is involved in the Upstream sector, whether it’s a large oil company or an Independent, contact a representative from Cybernet today about the best industrial computer for your job.

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