Oil & Gas Upstream - What are the Different Projects?

Any good prospector will know to leave no stone unturned. In upstream, it's more like leave no stone untapped. Oil and gas are stored inside rock formations in reservoirs called deposits. Getting it out is the job of the upstream operators. Each deposit will be explored, developed, and produced until it's depleted. This is the deposit's life cycle. At any given deposit, a given operator can take on any number of activities over this life cycle, sometimes running the entire thing, sometimes coming in at a later stage, and sometimes starting it but exiting the project early, handing the deposit off to a different operator. What work the operator chooses to take on at a given deposit constitutes a distinct project. Given the diversity of hydrocarbon deposits and the number of steps in the process, there is a tremendous diversity in the various types of upstream projects an operator might take on, each with different risk-reward trade-offs. The name of the game in upstream is managing a profitable project portfolio over both the short and long term. We'll get to the ROI discussion later, but let's start with a more basic question. What are the types of projects upstream operators are involved in? We can define a given project by a few factors. The first factor is the output. What hydrocarbons are being produced? Natural gas or crude oil? And if crude, what type of crude oil? Crude is a crude term. There's a wide variance in the makeup and quality of the crude oil found across deposits. In practice, nearly all deposits are a mix of both oil and gas. The natural gas extracted from crude oil deposits is called associated gas, and the crude oil extracted with natural gas deposits is called condensate. Condensate is formed during the extraction process itself, when larger hydrocarbon molecules condense into liquid form and separate from the gas. Condensate is a high-value output. It's more energy-dense than natural gas, but not as heavy and hard to refine as other crude oils. Operators aim for a mix of both oil and gas dominant projects. This diversifies their revenue streams, since oil and gas trade at different prices in different markets. The other three factors relate to what it takes to produce. The how. For one, location, location, location. Onshore or offshore? Offshore projects are almost always more complex and costly, given the additional requirements for infrastructure and safety precautions. Another is the required drilling method, conventional versus unconventional drilling. Conventional means drilling straight down, aka vertical drilling, which works for more standard rock formations, ones that are both porous, they contain pores full of hydrocarbons, and permeable, the pores are well connected so that the hydrocarbons can flow to the surface. Unconventional drilling methods are required to tackle more difficult deposits, for example shale, which is not very permeable. Hydrocarbons will not flow well without creating fractures between pores, hence the use of the unconventional method fracking. Horizontal drilling and oil sands extraction are other unconventional methods discussed further in our foundational oil and gas primer. A final factor is the maturity of the deposit. Tapping into new, untouched deposits means starting from the beginning. This is called a greenfield project. Greenfield projects tend to be the most risky. Getting to production can take longer or be costlier than planned, and the oil or gas volumes or quality can be lower than expected. Most new projects today, however, are not starting at new deposits, they're expanding or improving on existing ones. These are called brownfield projects. For example, older wells and facilities may already exist, and additional wells can be drilled, or new infrastructure, like additional pipelines, can be installed. What do these projects have in common? They'll all require substantial capital. As an upstream operator, optimizing the project portfolio means making capital allocation decisions across an array of possible opportunities. This will come down to project ROI, which we'll discuss in a later chapter. For now, let's review the life cycle of a given project in more detail.