From shale to sale
The North American energy value chain
The energy industry consists of three separate but interdependent sectors, arranged like a vertical three-ring chain, with each section linked to another in descending order. The chain link at the very top of the chain is called the upstream sector; the link in the middle is called the midstream sector; and the bottom link is called the downstream sector. In the energy industry, this three-section chain is called the energy value chain, and it represents a series of activities that occur to ultimately deliver a valuable product or service to end users – the part that is most visible to us.
Uncovering the energy value chain
Source: Tortoise Capital Advisors
Beginning at the source
The energy value chain begins in the upstream segment of the energy sector, which focuses on the extraction of hydrocarbons such as crude oil and natural gas from underground reservoirs. Businesses in the upstream sector are involved primarily with exploration and production. These companies search for underground or underwater sources of crude oil and natural gas, drill exploratory wells and then drill and operate commercially viable wells.
Ancillary businesses that support the upstream sector include drilling companies, most of which are contractors hired by the oil and gas producers for a specified period of time, as well as service firms that provide exploration and drilling technologies, data management systems and field services firms that manufacture, repair and maintain equipment used in oil and natural gas drilling and extraction, and even pump manufacturers, which make the myriad pumps used in oil and natural gas extraction.
Sweet spot in the middle
The midstream sector involves the transportation, gathering, processing and storage of the oil and gas coming out of the upstream sector. Midstream businesses primarily include pipeline companies that transport energy commodities from where they are produced to growing areas of demand and consumption.
Natural gas midstream example
Source: Tortoise Capital Advisors
Pipeline companies are like toll roads for energy. They typically do not have direct commodity price exposure. Just as a toll road does not distinguish between a Bentley or a car of lesser value as long as the toll is paid, much the same can be said for the price of oil or gas moving through our nation’s pipelines. The price of transportation is not directly affected by the value of the product being transported.
Drilling for oil and natural gas
Significant investment opportunity resides in the midstream sector of the energy value chain for pipeline infrastructure. That’s because the sources of North American oil and natural gas often are located far from the densely populated areas where they are in greatest demand, making transportation of these valuable resources a critical piece of the North American energy picture.
Although the U.S. has one of the largest networks of pipelines in the world, it is not sufficient to adequately and efficiently transport these natural resources to end users. Our projection for capital investments in MLP, pipeline and related organic projects for 2016-2018 is approximately $120 billion.1
Value at the bottom
The downstream segment of the energy value chain is where oil and gas are turned into usable products delivered to end users. Downstream companies include crude oil and natural gas refineries; storage terminals and facilities that house inventories of these refined products; and the distribution networks that bring these energy products to end consumers, such as power companies and utilities.
A growing consumer in the domestic downstream segment of the value chain is the petrochemicals industry. Petrochemical companies use refined by-products of natural gas and crude oil to make many products essential to our daily lives. The petrochemicals industry also uses natural gas liquids (NGLs) and refined crude oil byproducts to create a wide range of products, including agricultural fertilizers, plastics, rubber and fabrics, among many others.
Our projection for capital investments in MLP, pipeline and related organic projects for 2016-2018 is approximately $120 billion. 1
Chained to a bright future
Fairly recent technological advances in oil and gas exploration and drilling have launched a new era in North American energy. As a result, oil and gas companies can now tap into vast resources of oil and natural gas in domestic shale that previously was not commercially viable for drilling. Robust production of oil, natural gas and natural gas liquids from this abundant shale is now driving vigorous growth in all three sectors of the North American energy value chain.
Each sector of the energy value chain contributes to the growing relevance of the U.S. as a global leader in energy production. Collectively, they are home to millions of U.S. jobs, generate billions in local, state and federal tax revenues and improve our balance of trade, in addition to reducing U.S. dependence on less-reliable foreign sources of energy.
The U.S.’s progress towards greater energy independence ― and the ability of companies across the U.S. energy sector to meet the challenges presented by a rapidly evolving energy sector ― are impressive. Meeting our significant energy demands, both now and in the future, is a heady challenge shared by companies throughout the U.S. energy value chain. And with those challenges come myriad opportunities across economic and industry sectors. Given our nation’s long history of ingenuity in applying science and technology to energy innovation, America’s energy future looks bright.
- Tortoise Capital Advisors, October 2016
The downstream segment of the energy value chain touches our lives on a daily basis – it’s where energy resources literally meet the road.