Midstream companies primarily generate revenue by providing essential infrastructure and services that connect energy production (upstream) with consumption (downstream). Their business model largely relies on fee-based arrangements for transporting, processing, and storing hydrocarbons, which significantly limits their direct exposure to volatile commodity prices.
Core Revenue Streams
Midstream companies earn money by charging fees for various services necessary to move oil, natural gas, and natural gas liquids (NGLs) from the wellhead to refineries or end-users. These services are crucial for the energy supply chain.
1. Gathering and Processing Fees
Before crude oil and natural gas can be transported long distances or used, they often need to be gathered from multiple wells and processed to remove impurities and separate valuable components.
- Gathering: Midstream companies collect raw natural gas and crude oil from numerous individual wells through a network of smaller pipelines, bringing it to central processing facilities. They charge fees per unit (e.g., per barrel or per MCF) for this collection service.
- Processing: Natural gas, for instance, often contains impurities like water, sulfur, and other non-hydrocarbon elements, as well as valuable natural gas liquids (NGLs) such as ethane, propane, and butane. Processing plants remove these impurities and separate the NGLs from the "dry" natural gas. Fees are charged for the volume of gas processed or NGLs extracted.
2. Transportation Fees (Tariffs)
The backbone of midstream revenue comes from transporting hydrocarbons through vast pipeline networks.
- Pipelines: Companies charge a tariff (a regulated fee) for moving oil, natural gas, or NGLs through their pipelines. These fees are typically based on the volume transported and the distance covered. For example, a midstream company might charge a specific rate per barrel of oil or per thousand cubic feet (MCF) of natural gas moved over a certain segment of pipeline.
- Other Transportation Methods: While pipelines are dominant, midstream companies may also earn revenue from operating rail cars, barges, or trucks for transport, particularly in areas lacking pipeline infrastructure or for specific products.
3. Storage Fees
Storing crude oil, refined products, natural gas, and NGLs in tanks, caverns, or underground facilities provides flexibility and ensures supply during peak demand or market fluctuations.
- Storage Services: Midstream companies offer storage capacity to producers, refiners, and marketers. They earn fees based on the volume stored and the duration of storage. This service is particularly valuable for managing inventory and optimizing market timing.
4. Other Services
Some midstream companies also engage in:
- Fractionation: Separating mixed NGL streams into individual components (ethane, propane, butane, natural gasoline) for specialized industrial uses. Fees are charged per unit of NGLs fractionated.
- Marketing and Trading: While less common for pure fee-based models, some midstream players might also buy and sell commodities to optimize asset utilization or capture price differentials, generating additional revenue.
Business Model Stability: The Fee-Based Advantage
A significant characteristic of the midstream business model, contributing to its stability, is the prevalence of fee-based contracts. These contracts are structured so that midstream companies receive a predetermined fee for each unit of product they gather, treat, process, and/or transport, regardless of the fluctuating market price of the underlying commodity.
For example, a large portion of midstream operations, including nearly all liquids contracts and a vast majority of natural gas agreements, are fee-based. This structure minimizes the direct exposure to commodity price volatility, providing a more predictable and stable revenue stream compared to exploration and production (upstream) companies, which are directly impacted by oil and gas price swings.
Summary of Midstream Revenue Generation
Here's a breakdown of how midstream companies make money:
| Revenue Stream | Description | Primary Basis of Earning | Limiting Commodity Price Exposure |
|---|---|---|---|
| Gathering Services | Collecting raw hydrocarbons from wells via smaller pipelines. | Fee per unit (e.g., barrel, MCF) | Yes |
| Processing Services | Removing impurities and separating NGLs from natural gas. | Fee per unit processed or extracted | Yes |
| Transportation Fees | Moving oil, gas, and NGLs through pipelines (tariffs), rail, or truck. | Fee per unit volume per distance | Yes |
| Storage Fees | Storing hydrocarbons in facilities. | Fee per unit volume per time stored | Yes |
| Fractionation Fees | Separating mixed NGLs into individual components. | Fee per unit fractionated | Yes |
By focusing on these essential, volume-driven services, midstream companies play a vital role in the energy sector, ensuring the efficient and reliable delivery of energy products while maintaining relatively stable financial performance due to their fee-based contractual arrangements.
