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Thomas Kivisto Discusses Midstream Oil and Gas
Midstream oil and gas refers to the process of transporting natural gas and petroleum from their points of extraction to a refinery or, says Thomas Kivisto of San Clemente, California, in the case of natural gas, directly to a field where it will be used. The midstream sector is reliant on two main types of product:
Although the transportation networks for this type of product have been around for much longer than those designed specifically for oil, there are currently more pipelines transporting natural gas than carrying crude oil. This usually surprises people who hear about how much more money can be made by producing and selling crude rather than natural gas. However, many commodity markets worldwide use natural gas as their primary fuel, which has caused its demand to increase much more quickly than crude oil over the last few decades. As a result, many pipelines are being built around the world for this type of transport.
Newer to the transportation network than natural gas, crude oil began making its way across land via railroad tank cars in small quantities starting in the early 1900s. However, due to widespread demand and higher profit margins, it wasn't until much later that pipeline construction began on a large scale. Today there are thousands of miles of pipeline dedicated solely to moving crude oil across North America alone.
What makes midstream companies unique is how they operate their businesses. The vast majority own very little if not none of the equipment they use to move products along their paths; rather, they contract with specialized companies to provide the necessary tools.
What Are The Steps in The Midstream Value Chain?
According to Thomas Kivisto, the midstream value chain has four main components: gathering, transportation, storage, and distribution.
This is the process of extracting the product from its original location to a transfer point that will be moved via pipeline. This can be done using a well on land or at sea (in which case the product will usually first need to be separated from water), says Thomas Kivisto, or by receiving shipments via tanker truck or railroad tank car if already separated at another facility.
Once gathered, the next step is moving it through pipelines designed specifically for this purpose. These lines vary greatly in capacity depending on their specific use; common sizes range from several inches in diameter for natural gas streams up to several feet for crude oil and other liquid petroleum sources.
Because demand can vary greatly across different areas depending on how much product they receive from pipelines and where one of the most important components after transportation is storage. This allows companies to stock up on inventory when prices are low, says Thomas Kivisto, so that they will have something to sell later at a higher price. It also allows them to take advantage of arbitrage opportunities should other areas sell their products at lower rates than the storage facility.
Once stored in large quantities, midstream companies will then distribute these supplies directly into smaller lines (termed gathering lines) which run off of larger ones and deliver the fuel right to its final destination. This can be to homes and businesses for use as power or heat or to other companies involved in the midstream sector, such as oil and gas producers who rely on these products for their purposes.
How Do Midstream Companies Make Money?
Midstream companies make money in a variety of ways depending on their specific business. For some, the majority comes from the fees they charge to transport products via their pipelines; for others, it can vary greatly. Some receive capital injections from investors in return for partial ownership of the company itself.
As mentioned above, midstream companies that provide transportation services allow producers and other end users direct access to markets without building out their infrastructure. This is because oil and gas are heavy and very dense compared to natural gas, meaning that an expensive process involving heating is required before it can be transported via pipeline. Because of this fact, many areas discovered after production had already begun elsewhere tend not to produce these materials.
Because midstream companies have to obtain or develop large capital reserves to build out their pipelines, many are publicly traded so that investors can purchase a stake of the profits for directly injecting money into the equation. While some may charge fees based on how much product is being moved at any given time, others charge flat rates regardless of use or amount transported.
When Do Midstream Companies Generate Revenue?
Midstream companies like those that provide storage services generate revenue through strictly business-to-business (B2B) transactions, selling products and services directly to other businesses using them instead of B2C transactions with end consumers themselves. For these types of businesses, it is more common to find revenue coming in during three main times of the year:
1. During the winter, when usage is typically higher than at other times due to colder weather.
2. When demand for these products decreases, many producers will store up inventory to sell them at a later date when prices are higher (called capitalizing).
3. Due to the arbitrage opportunities between different regions, companies may choose to purchase supplies under-priced and then move them elsewhere where they can be sold for more than their original source.
The end goal for all midstream companies is not necessarily generating revenue but rather investing it back into separate divisions or subsidiaries. This allows them even further growth in the future; only once this has been accomplished does shareholder value increase.
This article does not necessarily reflect the opinions of the editors or the management of EconoTimes