Global Oil and Gas Industry

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Nov 24, 2024

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Global Oil and Gas Industry 1 Global Oil and Gas Industry Industry characteristics: capital investment decisions long term in nature need for scale (sufficient capital for major upstream projects) very capital intensive partnerships utilized to manage risk and provide large amounts of capital Industry characteristics: IOCs ExxonMobil*, BP*, Shell*, Chevron*, Total (France), ENI (Italy), ConocoPhillips global reach superior tech portfolio risk management extensive government relations ** result of merger of firms known as the Seven Sisters Other industry issues heavy governmental involvement many risks but, arguably, IOCs have learned to manage risk (IOC stock price betas near 1.0) financial performance is about average across all industries, but cyclical NOCs and GSEs play by different rules (state capitalism) environmental issues have huge impact on industry industry has poor reputation in most developed world countries hydrocarbons are a finite resource? Peak Oil Issues disagreement/debate on if/when we will/have already reached peak

Global Oil and Gas Industry 2 oil and gas reserves determined by complex combination of tech, price, and politics Professor’s Frecka’s realization regarding petroleum usage peak oil is a secondary issue Industry characteristics: competitive advantage upstream producer of crude is a price taker upstream producers who can control their costs and become the most efficient are the most profitable efficiency involves a variety of factors including tech, cost control, safe operations, and effective processes Among IOCs, ExxonMobil, and BP tend to be the most efficient ExxonMobil financial highlights earnings return on capital capital expenditure upstream $15.8B 10.1% $12.3B downstream $2.1B 6.7% $2.1B chemical $7.8B 23.6% $2.2B Oil equivalent production: 2.29 million barrels per day Refinery throughput: 3.95 million barrels per day Midstream Operations trading transportation and storage tankers pipelines storage - bulk terminals, refinery tanks, pipeline tanks, barges, tankers, inland ship bunkers, natural gas stored in salt caverns US Strategic Petroleum Reserve - about 695 million barrels - how many days supply

Global Oil and Gas Industry 3 Downstream competition Refining petrol profitability depends on efficiency and cost contrl difficulty in controlling major cost (crude) and market sets price on major products In recent years, tight supply situation in US has improved profit margins, but, due to above factors, refining highly cyclical Chemicals some commodity products compete on cost speciality products compete on differentiation and have higher margins Retailing profit only a few cents per gallon added convenience stores bc profit margins on beer and soft drinks are higher than on fuels challenge is competition from other retailers Industry structure and new entrant threat significant barriers to entry - capital, access to reserves, license to operate, right partners, tech, highly skilled workforce Competition from NOCs moving away from traditional home markets Gazprom (Russia) recent discussions with Nigeria CNPC (China) searching the world for access to crude Reliance (Indian company) built world’s largest refinery in Gujarat New entrants a threat to established players Need nonlinear thinking and challenges to conventional wisdom as in any industry Vertical Integration

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Global Oil and Gas Industry 4 IOCs compete in all major segments of the industry from exploration to retail; very few industries have this degree of vertical integration Reasons for Vertical Integration to control risks, to protect against cyclicality in multiple segments of the industry due to potential synergies co-locating refinery and chemical plants shared managerial processes across multiple segments tech linkages across segments use to enter new markets financial management skills captive suppliers have no incentives to innovate too much complexity and lack of skills to run multiple businesses (focus on what you do best) internal transactions are subject to disputes about transfer pricing the market is more efficient than internal transacting Dutch Disease first coined in 1977 by the Economist in reference to decline in the mfg sector in the Netherlands after the discovery of a large natural gas field in 1959 phenomenon that arises when exploitation in the exporting of natural resources leads to an appreciation in the value of the currency of a country thus making its exports less competitive internationally

Global Oil and Gas Industry 5 an increase in revenues from natural resources pushes the value of a nation’s currency higher compared to other countries directly impacts the trade balance of that country as exports seem comparatively more expensive and thus less competitive out of all the sectors this has the greatest impact on the mfg sector Dutch Disease aka Curse of Oil paradox where countries with an abundance of natural resources, like minerals and fuels, tend to have less economic growth and worse development outcomes than countries without also called the reversed Midas touch Dutch Disease generalized encourages “rent seeking” behavior - most important business becomes getting a share of the government’s oil revenue “Entrepreneurship, innovation, hard work, and the development of a competitively-oriented economy –all these are casualties of the system. The economy becomes inflexible, losing its ability to adapt and change. Instead, as the edifice of the state-controlled economy grows, so do subsidies, controls, regulation, bureaucracy, grand projects, micromanagement –and corruption.” (Yergin, the Quest, p. 108) Nigeria facts population, 174million (2013), most populated country in Africa and 7th most populated in world Democracy modeled after the US but much political instability - 5 constitutions and 7 coups since independence in 1960 Islamic north and Christian south Large OPEC exporter (formerly much to US) Oil production security a difficult problem - theft, violence, pipeline interruptions, etc. Up to $10B per year stolen Ethnic violence between north and south with 100s killed

Global Oil and Gas Industry 6 Gangs of young men wage war with rival gangs, fueled by drugs, alcohol, demonic initiations and occult superstitions Poverty a serious problem Dutch Disease in Nigeria Former vibrant agricultural sector collapsed and now a net importer of food Effective and dedicated civil service, legacy of colonial rule, has weakened, contributing to poor governance Oil revenue stolen and squandered on a massive scale Huge steel complex, built in 1970s, has yet to produce any steel Population doubled between 1970 and 2000, yet per capita income declined Norway - Blessing of Oil population 5million world’s largest sovereign wealth fund: $1.3 trillion ($260,000 per citizen) owns 1.5% of all stocks in the world profits from high taxes on oil and gas company drilling off the coast; govt also owns 67% stake in NOC Statoil Free education, free healthcare, retire at age 65 at 80% of income Still has large proved reserves of oil and gas Industry Future industry restructuring has been common and is expected to continue what will be the future actions of the NOCs (eg acquire or become publicly traded companies?) what are the sources of long run sustainable advantage in an industry where most products produced are commodities and eventually, alternative fuel sources will replace combusted hydrocarbons

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Global Oil and Gas Industry 7

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