Understanding the Midstream Phase in the Modern Oil and Gas Sector

Gordon Scott has over two decades of experience as an investor and technical analyst and holds the Chartered Market Technician (CMT) designation.

What Does Midstream Mean?

Midstream refers to a vital stage in the oil and gas industry that encompasses the processing, storage, transportation, and marketing of oil, natural gas, and natural gas liquids.

The industry is typically divided into three segments: upstream (exploration and production of raw crude oil and natural gas), midstream (handling and moving the raw materials), and downstream (refining crude oil into finished products like gasoline, diesel, and jet fuel). Many leading oil corporations today operate across all these segments and are known as integrated oil companies.

Essential Insights

• Midstream activities serve as the link between upstream production and downstream refining.
• These operations focus on the storage, processing, and transportation of petroleum products.
• Companies specializing in tanker shipping, pipeline management, and storage facilities are key players in the midstream sector.

Exploring Midstream Operations

Globally, midstream functions are often combined with other phases of oil and gas operations. These activities follow the upstream production stage and extend through to the final sale of products. Many oil and gas companies integrate upstream, midstream, and downstream operations into a seamless business model.

The midstream sector is particularly prominent in North America, especially the United States and Canada, due to the prevalence of privately-owned pipelines and storage infrastructure. For instance, the Keystone Pipeline System, operational since 2010 and owned by TransCanada Corporation, exemplifies large-scale midstream infrastructure. Other dedicated midstream firms include Oasis Midstream Partners, Sanchez Midstream Partners, Hess Midstream, Magellan Midstream Partners, and EQT Midstream Partners. The distinct classification of crude oil transportation and storage in the U.S. underpins the existence of a standalone midstream industry.

Real-World Midstream Example

Magellan Midstream Partners highlights on their website that they manage five marine storage terminals situated along coastal waterways, offering around 26 million barrels of combined storage capacity, plus an additional one million barrels through their Texas Frontera, LLC joint venture. These terminals provide essential services such as distribution, storage, blending, inventory control, and additive injection, catering to refiners, marketers, traders, and end-users of petroleum products. These services are critical in bridging the gap between upstream extraction and downstream refining, defining the midstream sector's role.

In contrast, European oil operations often integrate crude transportation and storage within the upstream segment. Major European oil companies like Shell and BP typically consolidate production and transportation expenses in their financial reports. Additionally, many European pipelines are government-owned or operated by state-controlled oil transportation entities, which diminishes the separation of midstream as an independent segment within the oil production chain.

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