What Kind of Assets Do Oil Companies Have?
Oil company assets are classified in three main divisions: upstream, midstream and downstream. Upstream operations are the exploration for oil and gas and the appraisal, development and production of any discovery, and most oil companies do not own equipment for upstream activities; they hire contractors to perform services such as geophysical surveys, well drilling and geological and environmental studies. Midstream assets are linked to the initial processing, storage and transportation of oil and gas. Crude oil refining into products such as gasoline, kerosene and diesel is a downstream activity, as is the product distribution to and marketing by a retail network.
The United States is the only country in which private individuals can own the mineral rights to subsurface oil and gas. The sale, lease and exploitation of these oil and gas assets are private business matters subject to taxation, which is why the U.S. has numerous small oil companies working overwhelmingly in the upstream sector. The federal government owns mineral rights beneath the Outer Continental Shelf (OCS). In all other countries the state -- namely, the crown estate in the case of a monarchy like Britain and British Commonwealth countries like Canada -- or the treasury in the case of a republic, owns all of the oil and gas mineral rights.
In the United States, oil and gas mineral rights are upstream assets that can be traded. An exploration lease (also called license and concession) is granted by a mineral rights owner or a government to an oil company over a specific area and for a fixed period. In return, the company performs exploration work such as geophysical surveys and drilling. This lease or license is also an asset than can be traded in whole or in part.
Discovered oil or gas reserves in the ground are the main upstream assets. Reserves are classified as proved, probable or possible depending on the certainty with which their size has been estimated. Outside of the United States, small companies -- including U.S. companies -- specialize in acquiring a lease or license to explore an area and then sell a large share of it to a larger oil company. In return, the buyer finances the smaller company's work obligations on the license.
Midstream assets include initial processing, storage and transportation facilities. The initial processing usually involves the stripping out of natural gas from crude oil at plants close to the oil field. Storage tanks for oil or gas can be located on land or at sea. Offshore storage tanks can be concrete storage tanks resting on the sea floor or large floating tankers moored to the sea floor. Transportation facilities are pipelines, trucks, barges and tankers carrying crude oil and gas from producing fields and initial processing plants to oil refineries.
Larger oil companies that have diversified into other energy sectors such as electricity may own power generation plants that also classify as midstream assets. Small companies are rarely involved in midstream activities other than holding a small percentage -- 2 to 10 percent -- interest in pipelines connected to their upstream assets.
Downstream assets are oil refineries and associated storage facilities for refined products and the refined product distribution and marketing networks. Such networks are pipelines, trucks, tankers or barges that carry the refined products and the retail network of gas stations where they are sold. Many oil companies also have gas assets. These are natural gas liquefaction plants, natural gas pipelines and gas distribution pipelines to domestic, commercial and industrial end users. Small oil companies mostly hold franchises on gas stations or own local bottled gas distribution networks.
Asset valuation in the oil industry depends on several factors. The values of oil and gas reserves in the ground depends on the capital investment and operating costs required to produce them, as well as prevailing oil and gas prices. A heavy, high-sulfur crude oil is less valuable than a sweet (low-sulfur), light crude because the latter is easier to process. The United States allows oil companies to value their oil and gas inventories with the last in first out (LIFO) method. This assumes that the last oil and gas produced is the first to be sold. The difference between the acquisition price and the sale price may generate either a taxable profit or loss for the company.