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Know the Value Chain in Oil Industry!

From crayons to jet fuel, refined petroleum has myriad uses in the modern economy.

While we’ve all seen images of the dark crude oil gushing forth from the earth (remember the Beverley Hillbillies?), end users typically use oil in a very different form.Gasoline, for example, is nearly entirely clear.

Oil refining is the process that takes us from crude oil to refined finished products. Oil refining and distribution represents the “downstream” piece of the oil value chain, where crude oil that has been located and extracted is refined (i.e., enhanced or blended with additives) for consumer use and ultimately shipped to airports, power plants, and, of course, gas stations, where it is ultimately consumed by end users.


Oil refining can either be part and parcel of integrated oil & gas operation (like Exxon Mobil (XOM) or ChevronTexaco (CVX), both of which own assets throughout the oil value chain) or can occur independently.

It is the Downstream however, where SAP actually takes over (i.e., the major part).


It is very easy to appreciate the beauty of the product as and when you go on learning to use it. But it is even better if one has a fair idea of Business (it is not as easy as going to a petrol bunk and getting our tanks full) and then gets down to using it and that is what this Blog exactly attempts to do.It is not possible to give all what is required to understand the business but nevertheless this Blog presents an overview of the IS OIL Value chain in General and downstream in particular.


Any typical OIL Value Chain looks like this:



The value Chain majorly has three components:

1.      Upstream

2.      Midstream

3.      Downstream


Upstream: This portion Includes Exploration and Production activities, hence also referred as E&P sector.

Midstream: This portion processes, stores, markets and transports commodities including crude oil & natural gas.

Downstream: This portion of the chain includes oil refineries, petrochemical plants, petroleum products distributors, retail outlets and natural gas distribution companies.



Everything post refining till the end comes within Downstream which is what we are going to have a close look at. This is how a detailed view of Downstream looks like:



It all starts just after Refinery from where we receive refined oil. The next challenge is to transport it to Depots. The only method used for it is Pipeline for its obvious advantages (would require a separate blog to explain why Pipeline and challenges in using a pipeline for transportation). Once these are received at the Petroleum Depots, these are sent to Retail Outlets or the normal Petrol Bunks from where customers can receive it.


Having seen the flow of actual oil through the Value Chain it is as important to understand the flow of information in the value chain as it is the information that helps the suppliers achieve the best possible service levels. The following figure gives an idea on the information flow:



As expected, information flow almost retraces the goods flow path. The consumption by end customer (Retail Stations) help the system have an estimate of demand. Depending on the demand forecast the distribution plan is made as to what to store where in how much quantity which in turn determines what should be manufactured and where. Having this information it translates back to amount of production/procurement required at a particular site/plant.


Overall the downstream petroleum sector is quite complex and highly competitive. Each petroleum product in each regional market reacts to a different set of supply/demand and transportation pressures. Refiners must balance a number of competing factors in deciding what type of crude oil to process, what kind of equipment to investment in and what range of products to manufacture. These decisions are also influenced by the need to operate in a sustainable and environmentally responsible manner. The viability of the industry depends on its ability to earn an acceptable rate of return for its investors in a marketplace where prices are set by international (wholesale) and local (retail) markets. 

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    • HI Nathan,

      Thanks for your encouraging comments, i would surely try to come up with blogs, mentioned by you, as soon as possible.


  • Appreciate your excellent work Abhi !

    After reading your blog, I am able to appreciate more on the value chain in the Oil industry.

    There should not be a second thought to say that the value and wealth that is created through Oil industry has been creating new dynamics and significant influence on the world markets.With these volatile oil prices ,investors are increasingly shaping trends in financial markets and their influence is likely to continue to grow over the next few years.

    Hope to see even more blogs from you 😉

  • Hi Abhi,

    Its very good…

    I am an SD Consultant trying to learn IS-OIl..
    It gives me the idea about OIL industry Process.

    Thanks a lot

  • Hi Abhishek,

    I need some advice with regards to the sales of natural gas, crude and other oil products. 

    How the sales of these products can be handled in SAP using SD module(without using IS-Oil)?

    How these products are usually sold? What will be the sales UoM? Are they chanelled through the pipeline to customer? What is the typical sales process flow for gas and for oil products? Will there be any returns?

    What determines whether a delivery document is needed and whether post goods issue needs to be done for oil and gas products?