Oil & Gas Industry Overview
Executive Summary
Key Takeaways
- ✓ The oil and gas value chain divides into four structurally distinct segments, upstream, midstream, downstream and LNG, each with different revenue mechanics, asset lives and risk drivers.
- ✓ Upstream is defined by a depleting reserve base and production decline; midstream and downstream operate effectively non-depleting physical assets whose economics are driven by contracted volume and margin instead.
- ✓ LNG sits across the boundary, combining upstream-style reserve dependency with long-term offtake contracts and capital-intensive liquefaction infrastructure.
- ✓ Correctly identifying which segment, or combination of segments, an asset or company sits in is the first modelling decision, since applying an upstream-style decline curve to a midstream tariff asset, or vice versa, produces a structurally wrong model regardless of formula accuracy.
- ✓ Integrated companies span multiple segments simultaneously, and their consolidated model must respect each segment's own internal mechanics rather than applying a single blended approach across all of them.
Objective¶
This guide sets out the industry structure that underlies every model built anywhere in the oil and gas value chain, within Oil & Gas Financial Modelling.
The Four-Segment Structure¶
Upstream. Exploration and production of crude oil and natural gas from a finite, depleting reserve base. Revenue and debt capacity are modelled from a production decline curve rather than a steady-state or growth forecast. See Upstream Financial Models.
Midstream. Gathering, transport (pipelines), processing and storage of produced hydrocarbons. Assets are effectively non-depleting, and revenue is typically driven by contracted throughput, tariffs, or take-or-pay arrangements, closer in structure to conventional infrastructure than to upstream. See Midstream Financial Models.
Downstream. Refining of crude oil into refined products and petrochemical manufacturing. Revenue and margin are driven by refining spreads and utilization rather than reserve depletion. See Downstream Financial Models.
LNG. Liquefaction of natural gas for shipping, combining an upstream-style depleting gas reserve base with capital-intensive liquefaction infrastructure and long-term offtake contract structures. See LNG Financial Models.
Why Segment Identification Comes First¶
A model's structural approach should follow directly from which segment the underlying asset sits in. An upstream asset's revenue capacity depletes over its production life and must be modelled against a decline curve tied to the underlying reserve report; a midstream pipeline's revenue capacity does not deplete in the same way and is instead bounded by contracted throughput volumes and tariff terms; a downstream refinery's revenue capacity is bounded by nameplate processing capacity and driven by the margin between crude input cost and refined product output prices. Applying any one segment's structural logic to another, treating a pipeline's contracted revenue as if it were a depleting reserve stream, for instance, produces a model that is internally consistent but structurally wrong for the asset it represents.
Integrated Companies Span Multiple Segments¶
International oil companies and national oil companies frequently operate across all four segments simultaneously. A consolidated model for an integrated company should build each segment on its own correct structural basis, upstream decline economics, midstream contracted throughput, downstream refining margin, LNG offtake economics, and then consolidate the segment-level outputs, rather than applying one blended modelling approach across the whole enterprise. See Integrated Energy Company Models for how this consolidation is typically structured.
Common Structuring Errors¶
Applying a decline curve to a non-depleting midstream or downstream asset. Pipeline and refinery capacity does not deplete the way a reservoir does; modelling it as though it did understates the asset's true long-run revenue capacity.
Modelling midstream contracted revenue as if it were merchant, uncontracted revenue. Take-or-pay and tolling structures provide revenue certainty a merchant volume assumption does not reflect, and conflating the two misstates both revenue reliability and financeability.
Treating LNG purely as an upstream or purely as a midstream asset. LNG requires both a credible reserve-depletion basis for the feed gas and a credible offtake-contract and liquefaction-capacity basis for the plant; omitting either half produces an incomplete model.
Continue Reading¶
Related Pillars¶
Related Technical Guides¶
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Frequently Asked Questions
What are the four main segments of the oil and gas industry?
Upstream (exploration and production), midstream (transport, gathering, processing and storage), downstream (refining and petrochemicals), and LNG (liquefaction, shipping and regasification), each with distinct revenue mechanics and financial modelling requirements.
Why can't the same financial model structure be used across all four segments?
Because the segments' underlying economics are fundamentally different. Upstream output depletes from a finite reserve base on a decline curve; midstream and downstream assets are effectively non-depleting and are driven by contracted throughput, tariffs or refining margins instead. Applying one segment's structure to another produces a model that misrepresents the underlying business.
Where does LNG fit in this structure?
LNG sits across the upstream/midstream boundary, depending on a depleting gas reserve base upstream while also requiring capital-intensive liquefaction infrastructure and long-term offtake contracts more typical of midstream and downstream modelling.
What is the first modelling decision a financial modeller should make in oil and gas?
Correctly identifying which segment, or combination of segments, the asset or company being modelled actually sits in, since that determines whether reserve-depletion mechanics, contracted throughput mechanics, or margin-based mechanics are the appropriate structural basis for the model.
How does an integrated energy company's model differ from a single-segment model?
An integrated company's model must respect each segment's own internal mechanics, upstream decline curves, midstream tariffs, downstream margins, individually and then consolidate them, rather than applying a single blended modelling approach across the whole company.
Related Articles
Oil & Gas Financial Modelling
Oil and gas financial modelling is the practice of building financial models across the four structurally distinct segments of the hydrocarbon value chain, upstream exploration and production, midstream transport and processing, downstream refining and petrochemicals, and LNG, each governed by different revenue mechanics, contract structures and risk drivers. This page is the hub for the Knowledge Centre's oil and gas financial modelling content: industry structure and segment definitions, the financial KPIs the sector is measured against, the investment lifecycle from exploration through decommissioning, and how this domain builds toward asset and project-level models, commercial and investment analysis, and governance and assurance practice as it expands.
Upstream Financial Models
Upstream financial models project revenue and debt capacity from a depleting reserve base using a production decline curve rather than a steady-state or growth volume forecast common to most other industries. This guide sets out how upstream models are structured around exploration and production economics, reserve categories, decline mechanics, fiscal terms, and the reserve-based lending structures that finance the segment, the foundational technical grounding this domain's asset-level and commercial analysis content builds on.
Midstream Financial Models
Midstream financial models cover the gathering, transport, processing and storage of produced hydrocarbons, assets that are effectively non-depleting and whose revenue is instead driven by contracted throughput volumes, regulated or negotiated tariffs, and take-or-pay commitments. This guide sets out how midstream models are structured, the contract mechanics that determine revenue certainty, and why the segment is modelled closer to conventional project finance infrastructure than to upstream reserve depletion.
Downstream Financial Models
Downstream financial models cover refining and petrochemical manufacturing, where revenue and margin are driven by the spread between crude oil or feedstock input cost and refined product or petrochemical output prices, combined with plant utilization and complexity. This guide sets out how downstream models are structured around crack spread economics, capacity and turnaround planning, and product yield, and why the segment's modelling risk centres on margin volatility rather than reserve or volume risk.
LNG Financial Models
LNG financial models sit across the upstream and midstream boundary, depending on a depleting natural gas reserve base for feed gas while also requiring capital-intensive liquefaction infrastructure and long-term offtake sale and purchase agreements to underpin financing. This guide sets out how LNG models are structured around liquefaction train capacity, offtake pricing mechanisms, shipping and regasification economics, and the specific risks, boil-off, price indexation mismatch, and offtake counterparty concentration, that distinguish LNG from both pure upstream and pure midstream modelling.
Integrated Energy Company Models
Integrated energy companies, international majors and national oil companies, operate across upstream, midstream, downstream and, frequently, petrochemicals simultaneously. This guide sets out how a consolidated model for an integrated company should build each segment on its own correct structural basis before consolidating, why segment-level reporting is preserved for capital allocation and valuation purposes, and how integration provides a degree of natural commodity price diversification a single-segment company does not have.