Upstream oil and gas refers to the first stage of the energy supply chain: finding hydrocarbon reserves underground or beneath the ocean floor, drilling wells to reach them, and extracting the crude oil or natural gas to the surface. It’s everything that happens before oil and gas get transported to a refinery. The sector is also called “exploration and production,” or E&P for short, and it represents the largest share of capital spending in the entire oil and gas industry, with global upstream investment projected at around $420 billion in 2025.
How Upstream Fits Into the Bigger Picture
The oil and gas industry is split into three segments. Upstream extracts the raw feedstocks. Midstream moves and stores those feedstocks, handling pipelines, tanker ships, and storage terminals. Downstream processes crude oil and natural gas into finished products like gasoline, diesel, jet fuel, and the petrochemicals used to make plastics and fertilizers.
The handoff from upstream to midstream happens once oil or gas leaves the production facility. At a well site, groups of wells are connected by carbon steel tubing that sends raw oil and gas to a nearby processing facility, where the product is treated with heat and chemicals to separate oil, gas, and water. Once that initial processing is done and the product enters a pipeline or storage system, it’s in midstream territory.
Exploration: Finding the Oil
Before anyone drills, companies need to figure out where hydrocarbons are likely trapped underground. This exploration phase uses several geophysical methods, but seismic surveying is by far the most important and most widely used. The basic idea: a mechanical energy source generates sound waves that travel down through rock layers, bounce off boundaries between different formations, and return to the surface where sensitive instruments record them. On land, the energy source is typically a seismic vibrator truck. At sea, it’s an air gun towed behind a vessel.
By measuring how long the waves take to return and how their speed changes, geologists can map the structure of underground rock layers in detail. Under the right conditions, seismic data can even indicate whether a formation contains hydrocarbons. A technique called AVO analysis (amplitude variation with offset) detects changes in wave strength at layer boundaries, which can reveal differences in rock type, fluid content, and the presence of pressurized gas zones. This helps companies estimate not just where a reservoir sits, but how far it extends and what it might contain.
Other methods play supporting roles. Gravity surveys measure tiny variations in Earth’s gravitational pull, which can indicate denser or lighter rock formations below. Magnetic surveys detect variations in the planet’s magnetic field caused by certain minerals. Electrical and electromagnetic methods measure how easily current flows through subsurface rock, since oil-bearing formations conduct electricity differently than water-saturated ones. None of these are as precise as seismic, but they help narrow down targets before a company commits to the expense of a full seismic survey.
Drilling: Reaching the Reservoir
Once a promising site is identified, drilling begins. The approach depends heavily on whether the target is onshore or offshore, and how deep the reservoir sits.
Onshore Drilling
Onshore wells are drilled vertically or horizontally to reach subsurface reservoirs. Horizontal drilling has become especially common: a well starts vertically, then gradually curves to run sideways through a thin reservoir layer, exposing far more rock to the wellbore than a vertical hole ever could. This is the technique that made tight oil and shale gas production viable. Modern onshore operations increasingly use automated drilling systems that rely on algorithms and sensors to control equipment, adjust parameters, and optimize performance in real time. Some sites now deploy unmanned drilling rigs and robotic drilling arms, reducing the number of workers needed in hazardous environments.
Offshore Drilling
Offshore operations are more complex and expensive. The type of rig depends on water depth. Jack-up rigs, which stand on legs lowered to the seafloor, work in shallower waters. Semi-submersible rigs float on massive pontoons and are anchored or dynamically positioned for deeper water. Drillships are fully mobile vessels equipped with drilling equipment, used for the deepest wells in remote locations.
In deepwater settings, subsea drilling systems allow operators to work remotely. Wellheads, blowout preventers, and production equipment are installed directly on the seabed, controlled from a platform or vessel above. Remotely operated vehicles (ROVs), essentially underwater robots with manipulator arms and sensors, perform inspections, maintenance, and well interventions at extreme depths where divers can’t safely work.
Production: Getting Oil and Gas to the Surface
Drilling a well is only the beginning. Production is the ongoing process of extracting hydrocarbons and managing the reservoir over years or decades. In the early life of a well, natural pressure underground may push oil and gas to the surface on its own. As that pressure drops, operators use artificial lift methods like pump jacks (the familiar “nodding donkey” machines dotting oil fields) or inject water and gas back into the formation to maintain pressure and push more oil toward the wellbore.
Hydraulic fracturing, commonly called fracking, is a production technique used in tight rock formations where oil and gas don’t flow easily. High-pressure fluid is pumped into the well to crack the surrounding rock, creating a network of fractures that allows hydrocarbons to seep toward the wellbore. Combined with horizontal drilling, fracking has unlocked vast reserves that were previously uneconomical, particularly in U.S. shale formations.
Digital technology is reshaping how companies manage production. Digital twins, virtual replicas of physical wells and reservoirs, integrate real-time data from sensors embedded in wells and equipment. Combined with artificial intelligence, these models help operators optimize well placement, improve drilling penetration rates, reduce downtime, and plan long-term field development to maximize the return on their investment. Internet-connected sensors placed downhole can now transmit data on pressure, temperature, and flow rates continuously, giving engineers a live picture of what’s happening thousands of feet underground.
The Environmental Footprint
Upstream operations are a major source of methane emissions, a potent greenhouse gas. The International Energy Agency estimates that fossil fuel production and use released close to 120 million tonnes of methane in 2023. The amount of methane lost globally from fossil fuel operations that year totaled 170 billion cubic meters, more than Qatar’s entire natural gas production.
Performance varies enormously by country. Norway and the Netherlands have the lowest methane emission intensities, meaning they leak the least methane per unit of oil and gas produced. Saudi Arabia and the UAE also score relatively well. At the other end, Turkmenistan and Venezuela have the highest intensities. The best-performing countries score more than 100 times better than the worst. This wide gap suggests that much of the leaking is preventable with better equipment and monitoring.
The energy sector accounts for more than a third of all human-caused methane emissions, and reducing leaks from upstream operations is considered one of the fastest, most cost-effective ways to cut greenhouse gas output in the near term. Many of these emissions come from routine venting, faulty equipment, and incomplete flaring at well sites, all of which can be addressed with existing technology.
Economics of the Upstream Sector
Upstream is the most capital-intensive and highest-risk segment of the oil and gas industry. Exploration alone can cost hundreds of millions of dollars with no guarantee of finding commercially viable reserves. A single deepwater exploration well can cost $100 million or more. Even after discovery, developing a field to the point of production requires massive upfront investment in drilling, infrastructure, and processing facilities, with payback stretching over years.
Global upstream investment is projected at around $420 billion in 2025, down roughly 6% from the prior year according to the IEA. Some of the largest spending cuts are hitting light tight oil production in the United States, where operators are responding to price signals and investor pressure for capital discipline. The upstream sector’s fortunes are tied directly to commodity prices: when oil trades high, companies invest more in exploration and new wells. When prices fall, rigs go idle and projects get shelved.
This boom-and-bust cycle makes upstream the most volatile part of the industry. Midstream and downstream companies earn relatively stable fees for transporting and refining, but upstream producers absorb the full impact of price swings. That risk is also why upstream offers the highest potential returns when things go well.