Essay On Value Chain And Stakeholders In Oil And Gas: Diesel Fuel And Natural Gas Fertilizers.

Using two products of your choice (see below for examples of Natural Gas and Petroleum products), discuss the journey of your chosen two products from formation of the raw substance through to the end user’s consumption. The two products discussed must come from a petroleum and/or natural gas background. Your report must include: 
1. The route of your products through the oil and gas industry sectors and the key differences between the two routes.

2. Assess the role of each, if any, by International Oil Companies (IOCs), National Oil Companies (NOCs) and Government agencies on the route of the products chosen from point 1.

3. Two factors that may affect the demand and supply of these products, including seasonality. 

The Oil and Gas Industry Value Chain

The oil and gas industry is one of the oldest industries in the world. Oil and gas have been used for thousands of years for lighting purposes. The first successful oil well was drilled by Edwin Drake in 1859 for the purpose of finding more oil (Devold 2013, P. 1). Since then, the industry has been growing rapidly with the advancement in technology. Currently, various products can be produced from oil and natural gas. The report discusses the value chain of diesel fuels and natural gas fertilizers. Diesel fuel is produced from crude oil in petroleum refineries and is usually used as fuel oil for motor vehicles. Fertilizers, on the other hand, are used for agricultural purposes. Natural gas is the primary hydrocarbon feedstock for the production of ammonia which is then converted into urea as fertilizer.

The oil and gas industry is sub-divided into three main sectors, namely: upstream, midstream and downstream.

The first stage in the value chain of both products is upstream. This mainly involves the extraction of raw materials which are natural gas for fertilizers and crude oil for the diesel fuels. According to Haderer (2013), the upstream is usually referred to as the exploration and production sector. Oil and gas occur underground. The first step is exploration, which involves the search for potential oil and gas deposits in the ground or underwater fields. At this stage, a series of surveys with extensive geological mapping through advanced techniques such as passive seismic, reflective seismic, magnetic and gravity surveys are done to identify a potential hydrocarbon bearing rock (Devold 2013, P. 4). Once identified, reservoir characterization is done to determine its production capacity. It is worth noting that natural gas can be produced either on its own or alongside oil production.  Drilling is done to bring both natural gas and oil to the surface. Once drilled, the product is passed through a gas oil separation plant (GOSP) for the purpose of processing into clean marketable products (Mitchell, Marcel, & Beth, 2012). Oil drilling is done in two ways; onshore and offshore production (Devold 2013). Onshore drilling applies when the oil reservoirs are on dry land. Offshore drilling, on the other hand, extracts crude oil from reservoirs that are under the ocean (Devold, 2013). Once extracted, the crude oil is taken to gathering centres for cleaning, whereby, impurities such as water, sand, and salt are removed (Haderer 2013, p. 30). It is at this point that natural gas is separated from the crude oil. The next stage is the midstream.  

The midstream sector mainly involves processing, transportation, and storage of crude oil and natural gas in bulk. For the fertilizers whose primary raw material is the natural gas; at this stage, the gas is transmitted through pipelines for processing (Melton, Hudson & Ladislaw 2015, p. 2).  The processing removes any impurities that are present in the natural gas to meet the required standards for transportation through pipelines and large tankers (Melton, Hudson & Ladislaw 2015, p. 2). The process involves separation of different hydrocarbons and fluids from the natural gas to produce the specified quality for transportation through a pipeline or large tankers (Kendrickoil, 2015). Whatever is produced from these plants, mainly the natural gas liquids such as ammonia, forms the primary raw material for the manufacture of fertilizer.

Midstream

Crude oil, on the other hand, is transported through pipelines and other transportation systems from the production sites to refineries for the manufacture of various products such as the diesel fuels. The final product of crude oil is realized at this stage. Crude oil is refined to produce diesel fuels through fractional distillation (Kendrickoil, 2015). Crude oil is heated to over 400 degrees Celsius at which the liquid turns into vapour. This vapour then goes to a fractional distillation tower where it cools as it rises above the tower (Kendrickoil, 2015). At a particular point, the hydrocarbon chains change into a liquid state.  As vapour rises, hydrocarbons with shorter chains start to liquefy. As the cooling process continues while the vapour rises up the tower, different distillates are produced at different temperatures. When the vapour temperatures reach about 300 degrees Celsius, diesel fuels start to emerge which is then collected into holding tanks, ready for distribution to the market.   

At this stage, both natural gas and diesel fuels have been produced and are ready to be distributed through various distribution channels to the end user. Diesel fuels are distributed and sold to the end users. One of the major players in this sector is the Shell Oil Company.  However; the natural gas is the raw material for the manufacture of fertilizers. To produce fertilizers, the natural gas is taken to a petrochemical plant. The feedstock for fertilizers is synthesis gas. Ammonia is used to manufacture nitrogen fertilizers, and in the process, natural gas is used as the source of hydrogen for the production of ammonia through the Harber-Bosch process (Shepstone 2014, p. 1). Once ammonia is produced, it is reacted with carbon dioxide gas to form urea through an exothermic reaction (Nzic, 2017). The final product of this process forms the fertilizer which is then packed and distributed to the end user.   

The oil and gas industry comprises of multiple stakeholders who play different roles in the value chain.

International Oil Companies operate in all sectors of the oil and gas industry. At the upstream stage, International Oil Companies have the role of ensuring that exploration is effectively done and new reservoirs are found to meet the demand. They are responsible for market assessment, risk aversion and ensuring that they adhere to the set regulations. Between 2000 and 2011, it was reported that the global production of oil and gas products exceeded the reserves replacement growth (Al-Fattah 2013, p. 4). It is the duty of IOCs to provide technology for the exploration of more oil and gas fields in the most technically challenging regions (Al-Fattah, 2013). The IOCs deal with the issue of reserves replacement shortfall by engaging in mergers and acquisitions aimed at increasing the number of reserves at low costs. The IOCs also supervises the transportation and transmissions systems to reduce risks and ensure products reach the end user safely.    

National Oil Companies are involved in all sectors of the industry. In the manufacture of fertilizers and diesel oils, NOCs usually protect the business interests of the country (Leis, McCreery, & Gay, 2012).  They are responsible for the investigation and proposing new and more efficient upstream, midstream and downstream ventures (Leis, McCreery, & Gay, 2012). National Oil Companies ensure that fertilizers and diesel fuels produced meet both local and international standards. They are also responsible for administering contracts to all interested companies. At the downstream level, NOCs ensure that the diesel fuels and fertilizers produced are of high quality and affordable. Additionally, the NOCs are responsible for the development of expertise in the country for the industry.    

Downstream

Government agencies oversee the whole process from raw material to finished products. Their main goal is to ensure that petroleum laws, regulations, and guidelines are adhered to by all companies involved in the oil and gas industry (Ekhato, 2013). The GAs determine the competency of enterprises in the three sectors and offer licenses. Before drilling and production of the oil and gas are done, the exploration companies must be licensed to carry out the venture. Government agencies monitor operations right from the drilling sites through the production plants to the distribution stations of both fertilizers and diesel fuels. The government agencies ensure that all players in the industry conform to the national and international practices of health safety and environmental regulations from the upstream to the downstream sector (Ford, Steen & Verreynne, 2014). They are responsible for providing permits, leases, and licences to all oil and gas companies in their respective nations (Ford, Steen & Verreynne, 2014).  

The retail price of diesel fuels and fertilizers is a function of the availability of raw material and the cost of production. One of the factors that affect the demand and supply of diesel fuels and fertilizers is economic growth (U.S. Energy Information Administration, 2016). When the economy is growing, the demand for industrial and commercial goods and services increases which, in turn, increases demand for diesel fuels and natural gas. Diesel fuels are essential in the industrial sector, in particular for driving machines. Food manufacturing industries rely on agricultural products which require the application of fertilizers during planting. When demand for agricultural products increases, the demand for fertilizers increases as well.    

Seasonality also affects the demand and supply of diesel fuels and fertilizers. During winter, for instance, the demand for heating oil increases which, in turn, causes an increase in demand for diesel fuels since they are produced at the same time (U.S. Energy Information Administration, 2017). Natural gas demand also increases during cold season since many customers consume it for heating purposes. The growing demand for natural gas, a feedstock for the production of fertilizer, causes a decrease in the supply of fertilizers due to insufficient raw materials. During hot season, the demand for air conditioning in the power sector increases which, in turn, leads to an increase in demand for natural gas (U.S. Energy Information Administration, 2016). This further reduces the supply of natural gas to the fertilizer manufacturing plants.        

Conclusion

The oil and gas industry plays a significant role in the global economy. Crude oil and natural gas are critical raw materials for the manufacture of diesel fuels and fertilizers respectively. The value chain of fertilizer and diesel fuels differ at the midstream sector. Crude oil is refined in the midstream and transported to the downstream for marketing and distribution. Fertilizers are manufactured in the downstream sector from natural gas distributed to the end user. Economic growth and change in seasons a significant impact on the supply and demand of oil and gas products. The NOCs, IOCs, and GAs ensure that products reach the customers safe and in high quality.

List of References

Al-Fattah, S.M., 2013. The Role of National and International Oil Companies in the Petroleum Industry.

Devold, H., 2013. Oil and gas production handbook: an introduction to oil and gas production. Lulu. com.

Ekhato, O.S., 2013. Environmental protection in the oil and gas industry in Nigeria: the roles of governmental agencies. International energy law review

Ford, J.A., Steen, J. and Verreynne, M.L., 2014. How environmental regulations affect innovation in the Australian oil and gas industry: going beyond the Porter Hypothesis. Journal of Cleaner Production, 84, pp.204-213.

Haderer, M., 2013. An Introduction to the Oil Industry & OPE [Online]. Available at: [Accessed 09 April 2017]

Kendrickoil. 2015. How Is Diesel Fuel Made From Crude Oil?  [Online]. Available at: https://www.kendrickoil.com/how-is-diesel-fuel-made-from-crude-oil/. [Accessed 09 April 2017]

Leis, J., McCreery, J., and Gay, J.C., 2012. National oil companies reshape the playing field. Boston: Bain and Co., October, 10.

Mitchell, J., Marcel, V. and Beth M., 2012. What next for the oil and gas industry?. Chatham House.

Nzic, 2017. AMMONIA AND UREA PRODUCTION [Online]. Available at: https://nzic.org.nz/ChemProcesses/production/1A.pdf. Accessed 09 April 2017

Shepstone, T.  October 13, 2014. Fertilizer Made with Natural Gas Is Lifting Our World [Online]. Available at:  https://naturalgasnow.org/fertilizer-made-natural-gas-lifting-world/. Accessed 09 April 2017

U.S. Energy Information Administration, August 29, 2016. Factors Affecting Natural Gas Prices [Online]. Available at: https://www.eia.gov/energyexplained/index.cfm?page=natural_gas_factors_affecting_prices. [Accessed 09 April 2017] 

U.S. Energy Information Administration, February 6, 2017. Factors Affecting Diesel Prices [Online]. Available at: https://www.eia.gov/energyexplained/index.cfm?page=diesel_factors_affecting_prices. [Accessed 09 April 2017]