Petroleum Industry: Formation, Structure, and Supply Chain

This essay provides an overview of the petroleum industry, including the formation and origin of oil and gas, the structure and history of the industry, and the supply chain of oil and gas. It also discusses the differences between National Oil Companies, International Oil Companies, and Government-Sponsored Enterprises. The essay concludes by highlighting the need for renewable energy technologies to replace oil and gas.

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Petroleum Industry
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Table of Contents
Introduction......................................................................................................................................2
The formation and origin of oil and gas..........................................................................................3
The structure and history of oil and gas industry............................................................................3
International Oil Companies............................................................................................................4
National Oil Companies..................................................................................................................5
Government Sponsored Enterprises................................................................................................5
The supply chain of oil and gas.......................................................................................................5
Stream, Upstream, Midstream and Downstream.........................................................................6
Oil and Gas products.......................................................................................................................6
Comparison between gasoline and liquified natural gas..............................................................6
Differences...............................................................................................................................6
Conclusion.......................................................................................................................................8
References........................................................................................................................................9

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Introduction
The petroleum industry is one of the largest sectors globally in terms of dollar value since
the industry produces billions of dollars every year (Yusuf et al, 2014, pg. 537). Besides, the oil
and gas industry contribute significantly towards the national GDP of countries that house
industry. The petroleum industry involves major areas such as; upstream industry, midstream
industry and downstream industry. In this essay, I will focus more on gasoline or in other words
petrol. Gasoline is the primary petroleum product in crude oil and also its a basic material for a
wide range of chemical products such as plastics, pharmaceuticals, solvents and fertilizers. Based
on the question, on what constitutes the oil and gas supply chain, different subjects will be
handled. To begin with, we have the formation and origin of oil and gas, structure and history of
the oil and gas industry, differences between National Oil Companies, International Oil
Companies and Government-Sponsored Enterprises, and lastly the contrast in the supply chain
involved in oil and gas.
The formation and origin of oil and gas.
Through the early 1900’s, oil exploration was largely a matter of luck. Oil explorers
basically looked for either type of rock outcrops, oil seeps at the surface or other minor surface
signs that oil would be below the ground (Offshore engineering, 2016). The origin of petroleum
is still under dilemma in spite the tremendous researches conducted on the subject. There are two
theories that try to explain the origin of petroleum and they are organic and inorganic origin.
Beginning with organic origin, petroleum is said to have been formed from organic matter from
plants and animals deposited in a marine environment thereby remaining buried for million of
years under anoxic conditions. Therefore, the increase in temperature and pressure gradually
transformed the organic matter into hydrocarbons (Psac, 2018).
On the other hand, the inorganic origin suggests that hydrogen and carbon collided
together under great pressure and temperature below the earth surface hence forming gas and oil
(Walters, 2017, pg. 361). The gas and oil then seeped through porous rock and was deposited in
natural underground traps. There are different theories that describe the inorganic origin of
petroleum and they include; the volcanic theory, earthquake theory, metal carbide theory, and
serpentinization theory.

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The structure and history of oil and gas industry
The development and advancement of oil and gas has evolved over the years thereby
becoming a crucial part of the global economy today. Before the discovery of oil, coal was the
main source of industrial power. However, oil and gas replaced coal by becoming the basic
source of industrial power (Business Reference Services, 2018). Oil and gas have contributed
wholesomely throughout the world history since in the early cultures, crude oil was used as a
material for binding materials. For example, the Mesopotamians used Bitumen for lining water
canals, and building roads.
Since then, the oil and gas industry evolved and in late 19th century, the oil and gas
industry modernized. Oil merchants-built dams that collected oil over water surface by using
blankets to soak the oil. The blankets were then wringed to retrieve the oil and sold for about two
dollars per gallon (Business Reference Services, 2018). Later in the 1850’s, after the discovery
of the kerosene lamp, the first oil company in the United States was founded in 1870 by John D.
Rockefeller. The oil company known as Standard Oil Company, dominated the oil and gas
industry by controlling about 80% of the market share (Anderson Jr, 2015, pg.78).
The oil and gas industry structure is divided into five ways. To begin with, we have the
broad oil segments. This part is involved in crude oil exploration, refining of segments and
product distribution and sales segments. Secondly, we have the sectors of the petroleum
industry. They include; upstream sectors, midstream sectors, downstream sectors, pipeline
sectors and service and supply sectors. Thirdly, we have the major oil and gas companies. They
include; National Oil Companies, International Oil Companies, Operator Companies and Service
Companies. Fourthly, we have main participants in the international oil market. The main
participants include; National Oil Companies, International Oil Majors Companies, Independent
Oil Trading Companies, and non-industry speculators and financial houses. Lastly, we have oil
companies classified by sales. They include; Supermajors companies, Major companies and
independent companies.
International Oil Companies.
These refers to publicly traded corporations that primarily deal in petroleum (Harraz,
2016). Normally abbreviated as IOC’S, international oil companies date back to the late 19th
century. IOC’s are crucial in the entire oil and gas value chain since they control about 6% of the

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world oil. Also known as “Super majors”, IOC’s face depression in oil prices due to the growth
of NOC’s and also as a result of mergers and acquisitions. Most of the supermajors are deemed
as vertically integrated. This means the IOC’s specialize in various segments of the oil and gas
industry such as upstream, downstream, and marine (Harraz, 2016). However, most participate in
upstream and downstream operations and not in marine or pipeline segments. Upstream
segments of the IOC’s act as the primary income divisions. This is because the IOC’s have
developed necessary expertise over the years to locate and develop crude. Therefore, the
supermajors are crucial since the provide the services to other oil companies hence becoming
indispensable. Example of IOC’s include; ExxonMobil, Chevron, Royal Dutch Shell,
ConocoPhillips, and British Petroleum.
National Oil Companies.
NOC’s are designed as International Oil Companies however the major difference is that
IOC’s are major producers and also IOC’s release earnings reports and also have stock holders
(Harraz, 2016). However, NOC’s are been reorganized to battle against IOC’s due to two
specific reasons. One, political change. Countries with large oil reserves are slowly wrestling
away from the rights of IOC’s. For example, in the Middle East, Military dictators have come to
power due to their support of NOC’s since they promise return of income oil to the local people
rather than going to the IOC’s. The second reason is industrial progress. The oil-rich nations
have leveraged their resources for the purpose of negotiating profitable contracts with
Supermajors. The NOC’s are crucial in the oil and gas value chain since most countries control
their oil reserves (Harraz, 2016). Example of NOC’s include; Saudi Arabian Oil Company,
National Iranian Oil Company, and Qatar petroleum.
Government Sponsored Enterprises
They refer to oil enterprises completely owned and controlled by a national government.
The difference between Government Sponsored Enterprises and NOC’s even though they are
state owned is that, NOC’s can have some stakeholders however the GSE’s are fully state
owned. These enterprises are crucial since they sell physical resources to oil companies for the
purpose of generating extra revenue. In addition, the enterprises assist improving and developing
the oil industry growth hence benefitting the economy in a wider angle.

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The supply chain of oil and gas
The oil & gas supply chain revolves around extraction, delivery, pipeline and gas station.
Therefore, the supply chain is divided into three parts. They include; the upstream industry, the
midstream industry and the downstream industry.
Stream, Upstream, Midstream and Downstream
In the oil and gas industry, stream refers to the flow of operations from extraction,
processing to consumption by the end user. Upstream also known as the E&P (exploration and
production) sector, mainly involves the search for crude oil fields and the drilling of the fields for
the purpose of recovering oil and gas (Petroteq, 2018). Secondly, midstream involves the
transportation, processing and storage of the recovered oil and gas. Lastly, downstream involves
the refining of crude oil and other raw materials, commercial distribution and marketing of the
finished products in the form of diesel oil, natural gas, gasoline, kerosene, LPG (liquified
petroleum gas, lubricants, jet fuel, as well as other forms of petrochemicals to the end user
(Petroteq, 2018).
Oil and Gas products.
Comparison between gasoline and liquified natural gas
Gasoline also known as petrol is a transparent fuel used as fuel in internal combustion
engines. Gasoline is derived from crude oil between 40 degrees and 205 degrees Celsius. On the
other hand, Liquified Natural Gas (LPG) is a mixture of hydrocarbon gases used particularly in
cooking appliances as well as fuel in vehicles. Both gasoline and LNG have major differences
and similarities.
Differences.
To begin with, gasoline is a transparent fuel derived from crude oil while LNG is a
mixture of flammable hydrocarbon gases (Difference between, 2018). Besides, gasoline is only
derived from crude oil while LNG is acquired from natural gas reserves.

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Figure 1.1 LNG reserves Source: https://www.maritime-executive.com/article/Iranian-Gas-and-
LNG-Potential-Remains-Undeveloped-2014-07-29
Secondly, gasoline contains high volumes of Sulphur therefore the Sulphur must be reduced so
as to reduce harmful air pollution. On the other hand, LNG contains and emits very little Sulphur
emissions since it’s a clean fuel (Difference between, 2018). Thirdly, LNG is much cheaper than
Petrol therefore it has a better fuel economy. Lastly, gasoline releases more heat when
combusted while LNG releases less heat. Besides, due to the high demand of gasoline, its more
marketable than LNG gas but this is changing with time.

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Figure 1.2 LNG Truck Source: https://afdc.energy.gov/vehicles/how-do-lng-cars-work
Similarities.
To begin with, both gasoline and LNG are used as fuels in vehicle engines (Difference
between, 2018). Besides, gasoline runs engines smoothly but people are shifting to LNG due to
its efficiency. Secondly, both gasoline and LNG cause air pollution due to the Sulphur emissions.
Thirdly, both fuels are dependent on seasonality since more production happens during the
winter season. Producing the fuels during summer is expensive therefore, as demand increases
the cost of the fuels increase as well. Lastly, vehicles can operate with both gasoline and LNG at
the same time. This means a driver can switch from LNG to gasoline. Lastly, both fuels are
cheaper as compared to other types of fuels.
Conclusion.
The oil and gas industry still has a future but the need for clean forms of energy is taking
over. The need for the clean forms of energy including renewable sources such as solar energy,
geothermal, wind power, biofuel development, and hydroelectricity is growing tremendously.
For example, diesel and gasoline cars are being taken over by electric cars since they are much
environmentally friendly. In addition, crude oil deposits are depleting day after day. Therefore,
better renewable energy technologies will be crucial in replacing oil and gas since demand for oil
may go down. Besides, gas may overtake oil in the coming years hence becoming the largest
source of energy

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References
Anderson Jr, I.H., 2015. The Standard-Vacuum Oil Company and United States East Asian
Policy, 1933-1941 (Vol. 1315). Princeton University Press. pp. 13-89
Business Reference Services. (2018). BERA: Issue 5/6 The Oil & Gas Industry: History
(Business Reference Services, Library of Congress). [online] Available at:
https://www.loc.gov/rr/business/BERA/issue5/history.html [Accessed 10 Dec. 2018].
Difference between. (2018). Difference between Petrol and LPG | Petrol vs LPG. [online]
Available at: http://www.differencebetween.info/difference-between-petrol-and-lpg [Accessed
10 Dec. 2018].
Harraz, H. (2016). Petroleum Industry Structure. 10.13140/RG.2.1.4699.7363. Available at:
https://www.researchgate.net/publication/301838936_petroleum_industry_structure
Offshore engineering. (2016). Formation of oil and gas - Source Rock, Maturation, Migration,
Reservoir Rock. [online] Available at:
https://www.offshoreengineering.com/oil-and-gas/petroleum-geology/1-hydrocarbon-formation
[Accessed 10 Dec. 2018].
Petroteq. (2018). Oil & Gas Supply Chain. [online] Available at: https://petrobloq.com/oil-gas-
supply-chain [Accessed 10 Dec. 2018].
Psac. (2018). Industry Overview | PSAC. [online] Available at:
https://www.psac.ca/business/industry-overview/ [Accessed 10 Dec. 2018].
Walters, C.C., 2017. Origin of Petroleum. In Springer Handbook of Petroleum Technology (pp.
359-379). Springer, Cham.
Yusuf, Y.Y., Gunasekaran, A., Musa, A., Dauda, M., El-Berishy, N.M. and Cang, S., 2014. A
relational study of supply chain agility, competitiveness and business performance in the oil and
gas industry. International Journal of Production Economics, 147, pp.531-543.