Framing Capital Asset Development Projects in O&G: Upstream vs. Downstream

Both upstream and downstream petroleum business segments involve capital asset development projects, which are regularly developed and implemented in a stage-gate decision process (or in a "waterfall methodology"). But there are important aspects and differences we have to consider to frame capital projects in these business segments. From the project management perspective, and adopting a "high altitude positioning", herein we discuss some of the aspects that affects the way upstream and downstream projects should be framed due to its contrasting business focus and key drivers.

Upstream - A Capex & Schedule Driven Business Segment:

• Focus: Exploration, discovery, and production of crude oil and natural gas. Incorporate and monetize petroleum reserves production potential.
• Key Drivers: Capital expenditure (Capex) and project schedule are paramount. Information on reserves and petroleum potential constitute the key input for the business. Delays translate directly to lost revenue potential, it a clearly declining business once the revenues at the start are higher. The producing assets usually last for 20 to 25 years maximum.
• Main Framing Steps: Geological & Reservoir Evaluation: Thoroughly assess the target resource potential, size, and recovery challenges. Concept Selection & Feasibility Study: Evaluate various development options based on technical feasibility, economic viability, and regulatory compliance. Available technology is key in conceiving and defining a competitive asset. Field Development Planning: Define the detailed scope of work, timeline, budget, and required resources for infrastructure like wells, platforms, and pipelines. Procurement strategy is a key topic. Contracting & Procurement: Select vendors and negotiate contracts for equipment, materials, and construction services. Project Execution & Commissioning: Execute the project phases like construction, wells drilling and completion, gathering systems installations, oil and gas export pipelines installations, and testing and commissioning to bring the asset online. Several other activities do exist. Production & Optimization: Continuously monitor and optimize production to maximize recovery and cash flow. In the long term revitalization opportunities will be considered and new projects will arise.

Downstream - An Opex & Margin Driven Business Segment:

• Focus: Refining crude oil and natural gas into usable products like gasoline, diesel, and petrochemicals. The objective is to add value to petroleum by processing and producing oil and gas by-products.
• Key Drivers: Operating expenditure (Opex) and profit margins are critical. Feedstock is crude oil, from which the profit margin arises. Cost efficiencies and product sales prices directly impact profitability. The producing asset will last for several decades.
• Main Framing Steps:Market Analysis & Demand Forecasting: Analyze market trends, product demand, and competitor landscape to identify viable crude oil sources and oil and gas by-products opportunities. Technology Selection & Process Design: Choose refining technologies and engineering processes that optimize product yield, quality, and cost-efficiency. Decide on partnering with technology firms is definitive a key aspect in this business. Facility Design & Engineering: Design and engineer the refinery units, storage tanks, and associated infrastructure. Construction & Commissioning: Construct the facility and ensure proper equipment installation, safety and functionality. Operation & Optimization: Continuously monitor and optimize operations to minimize costs, maximize product quality, and maintain safety and environmental compliance. Product Marketing & Sales: Develop marketing strategies and sales channels to sell refined products at competitive prices and secure market share. Logistic is a critical success factor for competitiveness.

Key Differences:

• Project drivers: Upstream prioritizes Capex and schedule adherence to minimize lost production time, while downstream focuses on Opex optimization and maximizing profit margins.
• Market dependence: Upstream projects depend heavily on finding resources and fluctuating commodity prices, while downstream projects are more tied to consumer demand and refining margins.
• Project phases: Upstream projects involve extensive exploration, field development, and production phases, while downstream projects focus on facility construction, operation, and product marketing.
• Success metrics: Upstream success is measured by discovered resources, production volumes, and project completion within budget and schedule. Downstream success is measured by operational efficiency, profit margins, and market share.

For sure this is a limited proposition once it focus in the main differences between this two business segments of the oil and gas industry (remember: "high altitude positioning").

Important to notice that midstream was not discussed. Midstream plays an important role in defining competitiveness for the whole oil and gas industry, it bridges upstream to downstream, playing an important role in defining competitiveness for the whole industry.

Therefore, herein follows a limited discussion on the general frameworks and key aspects to be considered when defining methodologies, team design, governance, and other critical factors in framing the capital projects for upstream and downstream. Specific projects within each segment have nuances. Important aspects as per cost of capital, risks involved, strategies, geography, logistics, and others key factors do affect the approach in framing capital projects in these two segments.

Understanding these key differences in framing upstream and downstream capital projects, project managers, asset owners and, mainly sponsors, can tailor the approach (governance included) to achieve optimal outcomes from capital asset development projects in either upstream and downstream petroleum sectors and, by choosing adequately, improve the probabilities of generating the so desired end-benefits of capital projects: the return on investment.