Downstream

The downstream, in turn, denotes the commercialization of petroleum products, referring to operations after the production phase — that is, oil refining and retailing, and the distribution of refined products.

In this sense, the downstream industry connotes the commercialization of the Crude Oil and/or refined products. It also encompasses the pricing mechanism used by the markets

Crude oil is sold on the global market and its price is determined by a range of factors most notably the API (the density of crude oil in relation to the density of water). These pricing regimes are used mainly in Futures markets and Forward Markets

Image illustrating classification of different crude oil grades and their prices

(Image courtesy of Extractives Baraza 2017)

Other types of crude oil e.g. Bonny Light from Nigeria are bought and sold on the basis of differentials to these marker crudes:
These differentials exist/change because of:

  • Location
  • Quality
  • Supply and demand for the grade: Seasonality and Refiner's value
  • Perception
  • Minimal 'speculation'

Physical Trading of Crude Oil
Crude oil may be traded physically i.e. taken to a port and sold based on the International Commercial Terms (Incoterms). Incoterms define the physical, practical and documentary obligation with regards to the oil and define when risk passes and when title to the good passes:

  • FOB- Free on Board: Buyer takes the title at origin, and will assume all costs after that point. Volume is measured at origin.
  • CIF- Cost, Insurance and Freight: The price the buyer pays includes insurance and freight. The volume is measured at origin. The buyer takes responsibility for in-transit product losses.
  • CFR- Cost and Freight: The price includes the cost of the goods, loading, and freight to the named Destination Port. This does not include unloading charges. e.g. CFR Rotterdam.
  • DES- Delivered Ex-Ship: seller to deliver goods to a buyer at an agreed port of arrival. The seller remains responsible for the goods until they are delivered.

There are two levels of pricing; Regional or Individual as explained


Regional or Country Price

  • Gas price indexed to oil price: this is the case in Japan, where imported LNG is indexed to crude (JCC)
  • Gas-to-Gas Competition:

This is the case in North America where there is open access market-based rates.

In the USA various indices are used to value gas; The Henry Hub Monthly index is the biggest indices, additionally Daily Spot Markets and NYMEX Futures Markets are considered.
In the UK, the price is set by a virtual trading point and the Heren Index.

  • Regulated: the price of gas is regulated by the state for instance in Nigeria and Indonesia.

Individual Customer Pricing

  • Impact on gas price of transportation and Local Distribution Services: Gas price depends on where the consumer takes delivery. At the wellhead it is cheapest, along the pipeline the cost is higher and from a distribution company, it is most expensive.
  • Buyer affordability: the price of gas is determined by the price of the end product and project economics e.g. fertiliser vs electricity

Kenya does not use LNG to produce electricity.

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