The Revenue Act of 1987 stipulated that MLPs must generate 90% of their income from natural resource activities, real estate, or commodities. Natural resource activities include a number of energy related businesses (e.g., energy exploration, mining, etc.). However, most MLPs are currently involved in what is called the “midstream” portion of the energy business. For the most part, processes which occur between the source of a commodity (e.g., natural gas or petroleum) and its endpoint are within the scope of midstream activities. This includes the transportation (pipelines), storage, and processing of these resources. Midstream operations are the middle portion of the commodity chain, which is comprised of the upstream, midstream, and downstream segments.
Commodity Supply Chain
Upstream
The upstream segment, sometimes referred to as Exploration & Production (E&P), generally includes searching for and extracting natural gas or petroleum at the “wellhead” (the source of the commodity). This also entails building, operating, and maintaining wells which bring the commodity to the surface so it can be transported and further refined. While most MLPs operate in the midstream space, some also exist in the E&P space.
Midstream
MLPs engage primarily in what are called “midstream” oil & gas activities. These include:
Gathering
Once extracted from the well, crude oil or raw natural gas must be moved via low pressure pipelines to plants where they can be further processed. These materials often contain many impurities (some extremely corrosive and dangerous) which must be removed before being delivered to customers.
Dehydration & Treating of Natural Gas
Natural Gas taken from the wellhead sometimes contains water, which can cause problems with pipeline pressure or be corrosive. Dehydration removes water from saturated natural gas so it can be safely transported to end markets. Similarly, gas can also contain impurities such as carbon dioxide which must be extracted via a chemical treatment procedure in order to be viable.
Gas Processing & Fractionation
Processing of natural gas involves separation of the gas after dehydration and treating have taken place. The processed gas becomes separated into higher quality gas for transport and a mixture of natural gas liquids. These liquids are subsequently separated again during fractionation into distinct products such as propane, which can be used in other petrochemical products.
Oil & Natural Gas Storage
Gas storage facilities enable local distribution companies to smooth supply and demand in winter and summer months. Because customer demand is typically higher in the winter, surplus gas from summer months can be stored and used during colder months if additional supply is needed. Likewise, oil terminals provide long or short term storage services for users. They are usually located near refineries or sea ports to allow easy access to tankers.
Transportation
Per the Energy Information Administration (EIA), the US natural gas pipeline system contains more than 210 pipeline systems, and approximately 300,000 miles of transmission pipeline. In addition, there are over 30,000 miles of crude oil gathering pipeline and about 55,000 miles of larger crude oil trunk lines. These pipelines form the backbone of our transport infrastructure, and are the primary method of delivering upstream commodities to downstream refineries and end markets.
Downstream
Downstream generally refers to retail or wholesale end users and, in the scope of oil, refineries where crude oil is delivered.