Supply Chain in Oil and Gas Industry

Classification of oil and gas industry

crude oil flows

Figure 1. Crude Oil Flows (Sahebishahemabadi, 2013)

Oil and gas industry classification can be given by 3 terms as below:

  1. Upstream: Here, oil is explored/produced.
  2. Midstream: Itis an industry where oil is stored.
  3. Downstream: Here, oil is refined.After these 3 processes oil goes to retail followed by customers.

Upstream and downstream are 2 main parts that are usually discussed because midstream is only about storage and transportation.

Oil and Gas Industry Classification

Figure 2. Oil and Gas Industry Classification

Aim of a well-functioning supply chain in petroleum industry

  • Reducing material procurement
  • Enhancing sale and manufacturing capacity
  • Achieving demand numbers
  • Quick reaction to market needs. This is done by procurement as per production gap from other sources
  • Achieving maximum production and its margin
  • Feedstock will be procured at a minimum cost. Here, yields may not be very good.
Supply chain of oil and gas industry

Figure 3. The supply chain of oil and gas industry (Naseer, 2015)

Components of supply chain 

Exploration: It consists of geological, geophysical, and seismic operations.

Production: It consists of operations like facilities engineering, production, reservoir, and drilling.

Refining: It is a difficult/advanced operation. Here, the output is marketing input.

These important operations are preplanned in the oil/gas sector.

oil and gas production

Figure 4. Typical Exploration and Production Functions (Sahebishahemabadi, 2013)

importance of supply chain

Figure 5. Importance of Supply Chain in Petroleum Industry (Naseer, 2015)

The supply chain of the oil and gas sector includes various processes such as transportation (international as well as domestic), information technology, storage control, ordering, management of materials, management of import-export section, etc. Configuration, improvement, and supervision of various operations are the most important aspects of every supply chain. SCM (Supply Chain Management) aims to provide the best service to the consumer at the minimum cost. Supply Chain may be explained by 3 industry segments:

  1. Upstream
  2. Midstream
  3. Downstream
oil and gas sectors

Figure 6. Oil and gas sectors (Davcheva, 2019)


The upstream sector is referred to as the Exploration and Production (E&P) segment. The upstream segment covers series of operations/processes that consists of exploring potential underwater/underground crude oil as well as natural gas fields. It also covers processes like exploratory wells drilling, further drilling/operating the wells that recover/bring raw natural gas/crude oil to the surface. At present, a significant shift is there. It is towards embracing unconventional gas as a component of the Upstream industry. Developments in the transportation/processing of Liquefied natural gas (LNG) are also influenced.


Figure 7. Various sectors within Upstream Segment (Davcheva, 2019)


Sometimes, the midstream sector is associated with the downstream sector. Midstream in the oil and gas industry includes processes like marketing, storage, and transportation. Transportation types may vary depending on the material/distance. For example, huge cargo ships (used for transportation across oceans) and small pipelines serving as connectors. Here, we are talking about oil and gas transportation. It may be noted that oil may be transported in its present state. For the same purpose, natural gas must be liquefied/compressed.


The downstream sector includes refining/processing/distillation/purification methods to make products suitable for use. For example, finished products, raw chemicals, fuels, etc. 

Downstream segment changes crude oil into usable chemicals, i.e. petroleum-based chemicals, gasoline, and fuel oils. Retail marketing of usable products is useful to take products from petroleum businesses to end consumers/retailers.

Supply chain in oil and gas industry 

Let us describe the supply chain in the oil and gas sector. Drilling is the first process involved in the chain. It may be offshore/onshore. It is a component of the upstream section.

First, the oil production must be offshore/onshore. After production, it moves to transport section. Then it is moved to the shore. This movement is there either by huge crude carrier or by tanker or by pipeline.

Then at terminals, there is storage in large tanks. This storage is for both oil and gas. It is known as “marine receiving and storage.” It is not necessary to have crude storage near the refinery. Its location may be anywhere.

After the storage of oil/gas, it must be taken to the manufacturing location. It is meant for the refining process. So, for the purpose of refining, it can either moved by rail wagon, pipeline, or truck. Once transported to the refinery, there is the manufacturing of products like heating oil, gasoline, fuel oil, jet fuel, and diesel. And from the refinery, usable products move to the retail distributors.

Afterward, there is another layer. Here, storage is either at the off-site storage tanks or at the terminal. From this location, it is moved to the retail station and finally to the users like us. Here, in the context of the oil and gas sector. we have described the flow path of the supply chain.

supply chain

Figure 8. Supply chain in Oil and Gas Industry

Refining supply chain

Let us start with the procurement of crude. The selection and procurement of crude depend on various things like which crude will be useful as per refinery design, market demand, and type of contract (long-term/short-term). At the refinery, advanced programming is needed for crude procurement. In the case of a long-term contract, we must decide on purchasing time. The decision of selection and purchase of crude also requires the management of the cost. Here, linear programming is used. Here, information concerning the type of crude oil as well as the properties of crude oil is also required. At the refinery, this information will be used for the processing of crude oil. After that, it moves to the transportation tanker.

Transportation operation needs scheduling. It may not happen immediately. It may take lots of time for planning. Tanker may have multiple types of crude which have to be shifted to different locations. It may have many stoppages. So, scheduling plays a significant role.

After purchasing/transportation decisions, crude moves to tank storage at the port. Storage and type of tank is a significant factor in decision making. Ships may transport and tanks may store various crude types. Crude may be of various properties/compositions.

And then from there, it is delivered to the process units of the refinery. After processing, there is tank storage again. It can be either onsite or offsite. Now again, the usable product is sent to the distribution center by either pipelines, ship, rail wagon, or truck. After that, it moves to the terminals/storage tanks. From there it reaches the depot port. From there it moves to the retail stores.

In the case of refining, if we consider a subset of the oil and gas sector, then a decision has to be taken at every step. As there are multiple variables, decisions are also multiple. Hence, at every stage, decisions have to be taken.

Refining Supply chain

Figure 9. Refining Supply chain

a typical refinery process

Figure 10. A typical Refinery Process (Sahebishahemabadi, 2013)

storage and transportation

Figure 11. Storage/transportation throughout crude oil sector (Sahebishahemabadi, 2013)

Where and what MP used on supply chain

In this part, we will discuss the types of multi-mathematical programming that can be used for various types of problems. Linear programming is often used to assess various types of crude Here, refinery configuration of crude serves as a basis. This is significant for crude procurement. Because here only quality and cost of crude are considered.
Mixed-integer programming is used in the case of the scheduling of moving the crude to the refinery port. In case, it is transportation only, then it is an application of mixed-integer or integer programming. Here, it is based on problem formulation by a refinery.
The next part is crude preparation. This serves as input to crude units. If it is crude blending, then the problem is not nonlinear. Linear programming is definitely there. In the context of crude blending, there may be various stages of linear programming.
After that, there is crude scheduling. It may be mixed integer/integer programming. For a mixed-integer problem, then the processes like the feeding to the units, the scheduling, and blending have to be combined as a single problem, which makes it more complex. Now, there is a need to segment it into smaller problems. Hence, it is possible to have a linear programming application to pure crude blending. Then you can apply the mixed-integer programming to the scheduling part.
In the context of optimization of the processing unit, the next part is production. It applies to units that are onsite. It may be hydrotreaters, vacuum distillation, and crude distillation units. Here, you may apply linear programming. For instance, crude linear programming is used. There may be advanced process control for other units. Advanced dynamic programming, as well as linear programming, may be combined and applied. The further instances are fuel oil, blending, diesel, and fuel blending for gasoline. Here, things are complex. Complexity is there for multi-blend planning as well as for single-period blending planning. It is possible to do the multi-period blending, by applying linear programming only.
Nonlinear programming may also be used. From a solution point of view, nonlinear programming is tough. Its setup is complex. But it may be applied in both cases, i.e., single-period blending as well as multi-period blending. Integer programing is applied for distribution. It is only integer programming. If you integrate it with other problem areas, it changes to mixed-integer programming. This provides some ideas for the various technologies of mathematical programming. In the context of the supply chain of refining, it may be utilized in various parts.

Mathematical Programming and Supply Chain

Figure 12. Mathematical Programming and Supply Chain Elements

Additional Resources



  1. Davcheva, M. (2019). Oil and Gas Industry Overview,, accessed on January 3, 2020.
  2. Naseer. (2015). Supply chain and logistics issues of crude oil in India,, accessed on January 3, 2020.
  3. Sahebishahemabadi, H. (2013). Strategic and Tactical Crude Oil Supply Chain: Mathematical Programming Models,, accessed on January 3, 2020.





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