The oil industry, like many others, is a fascinating but particularly convoluted phenomenon for the average secondary school student. Arguably the most important commodity in the world, and unsurprisingly the most traded, its market, dominated by large powerhouses, is worth trillions of dollars. And alongside this, it is truly a multifaceted structure that can lead someone down a rabbit hole of trying to figure out how it internally, works (me, on a Thursday evening).
In this article, we’re going to go into the fundamentals of entering this market, despite its incredibly high barriers to entry, with a hypothetical situation where YOU, are planning to start a business in it. Within the oil and gas industry, there are three main segments: Upstream, Midstream, and Downstream—companies usually specialize in one. For purposes of clarity and ‘digestability’, I’ll be delving into the ‘Upstream’ segment, to show you what a start-up firm would do at this respective stage.
Note that you’ll need initial capital in the range of tens of millions of dollars for this!
Do not try at home.
Upstream activities involve exploration and production, which is why businesses in this specialized section are also called E&P companies.
At the very beginning, before anything else, your company must start its “exploration” phase, which involves the arduous process of locating an oil reserve or two, or more. Regardless if your firm is international or not, you must gain permission from the government to explore a specific geographic area, something that is conducted either through direct negotiation or the process of bidding. The period of which this permission is granted differs depending on the country or license, and to avoid wasting individual time and effort, some international firms may choose to merge forces with other companies to execute these operations—an action which is referred to as a ‘joint venture’.
Once this authorization is obtained for the area, you will have to commence an in-depth examination of the region, with extensive research, usually costing millions of dollars—hence why you need a considerably large amount of initial capital to begin this venture. This research covers all aspects needed for drilling the oil, for instance, infrastructure and a detailed plan developed to map out potential reserves in the vicinity. This is often done through the conduction of geophysical surveys, examples being analyzing rock formations, and seismic data—or in our technologically advanced society, various mechanics to detect the presence of deposits.
Taking into account neighbouring communities that may be affected by the location, companies are also obligated to establish contact with these relevant stakeholders, to prevent potential delays later on in the scenario if a neighbouring community feels discontentment towards the process. It is around this time, after intensive research, that a large portion of companies halt their oil projects in the region, either due to the absence of reserves, or the unsuccessful attempt to locate a fruitful source. Although this can be perceived as a colossal waste of time and effort, given that the standard research phase can take around 10 years to complete, if there are no oil or gas reserves, there is no reason to continue.
So, if you were to start a company and successfully discover one, you would have already accomplished and made it past a stage most have failed and given up at. A commendable achievement indeed!
On the rare occasion that a site is deemed appropriate, the location is prepared and set up for its drilling phase. This will require the usage of drilling rigs, the type of which is dependent on the rock formations as well as the circumstance the location is under, and helps develop a well, which then can be fitted for the installation of tubing, equipment, and other components needed to bring the oil to the surface.
The duration of which oil takes to be extracted is not only entirely dependent on machinery, making this stage of oil production incredibly capital-intensive, but also dependent on the location. It has become more and more noticeable that the average depth of oil wells, which are drilled to extract the oil, has increased over time, with the average depth of 3,500 feet in 1949 jumping to the currently deepest well in the world at a staggering 40,000 feet deep, a number nearly 7 times more than the average in 2008.
After extraction comes transportation, an endeavour taken up by ‘Midstream’ companies. It should be noted here too, for your reference that transporting crude oil is not only complex but also costly. Because oil, as well as gas, are commonly found in remote locations or under the sea, the transportation method is usually executed through a pipeline or a tanker. This is often rather costly as well and adds to the list of expenses associated with oil and gas exploration.
As you can see from this article’s contents, due to the high technical requirement, cost of operation, as well as startup cost, the number of firms in the oil industry market is drastically less in comparison to other industries. Wishing you nothing but the best of luck, if you wish to start one!
