Oil Industry

 


Global Value Chains
 

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Project by:

Corbin Page

Kristen Stortz

Wes Kuser

Coreena Taylor

Global Value Chains

The oil industry has three levels: upstream, midstream, and downstream which encompass the main segments in the supply chain. The upstream level includes the exploration, drilling, and production of crude oil and the midstream level includes the transportation and trading of crude oil to refineries. The downstream level refers to the refining of crude oil into finished product, the storage of crude oil, and the distribution and marketing of crude oil to wholesalers and retailers.

Source: www.dwasolutions.com/images/OilSupplyChain.jpg

Although the overall production of oil is driven by global demand, the value chain is producer-driven and many of the companies are vertically integrated and have control over every level in the chain. Integrated oil companies are the largest and most profitable companies in the industry, and outside of the United States they are either publicly or nationally owned. The largest oil company in the world, Saudi Aramco, is nationally owned and is Saudi Arabia’s primary source of income. There are six major publicly owned integrated public companies: ExxonMobil, Royal Dutch Shell, BP, Chevron, Total S.A., and ConocoPhillips that are referred to as the “supermajors” which monopolize the market.

The table below shows how the formation of the supermajors has occurred within the past decade through large mergers that have restructured the industry. The mergers have allowed the companies to reduce expenses and become more competitive in the industry through increasing their market share. Conoco merged with Phillips Petroleum in 2002 to create ConocoPhillips, with an estimated refining capacity of 2.6 million barrels per day. The company is now the largest refiner in the United States, and there are three other supermajors that have a significant market share in refinery.

Mergers Concentrate the U.S. Oil Refinery Industry: Changes in Control of Market Share 1993 to 2005

Company

Market Share

ConocoPhillips-Tosco-Burlington Resources

12.8%

Valero-Ultramar-Diamond Shamrock-Orion Refining-Premcor-TPI

12.6%

ExxonMobil-Chalmette

11.7%

Shell-Motiva-Equilon-Pennzoil-Quaker State-Deer Park

9.3%

BP

8.5%

Top 5 in 2005

54.8%

ChevronTexaco-Unocal

5.8%

Sunoco

5.7%

Marathon

5.6%

Citgo-PDV

5.0%

Koch-Flint Hills

4.5%

Top 10 in 2005

81.4%

Company

Market

Share

Chevron

9.1%

Exxon

6.6%

Amoco

6.5%

Texaco-Star Enterprise

6.2%

Mobil

6.0%

Top 5 in 1993

34.5%

Shell

4.9%

BP

4.4%

Citgo (PDV)/Lyondell

4.2%

Arco/Lyondell

3.8%

Marathon

3.8%

Top 10 in 1993

55.6%

Source: Compiled by Public Citizen’s Energy Program from www.citizen.org/cmep corporate annual reports and U.S. Energy Information Administration Data

The recent trend in the industry is for companies to merge to expand their upstream levels instead of their downstream levels. There is less of an emphasis on increasing refinery capacity, and companies are now focused more on the exploration and production segments of the value chain. For example, in 2006 ConocoPhillips acquired Burlington Resources in order to expand its oil reserves. Another supermajor, Chevron, also recently acquired an upstream producer Unocal Corp. to replace its declining reserves. According to an energy research firm, John S. Herold Inc., worldwide upstream capital spending was $277 billion in 2005. This represented an increase of 31% from the previous year and most of the additional spending was focused on exploration and development

 

In 1999, Exxon and Mobil merged in a deal worth about $88 billion, and ExxonMobil is now the largest publicly owned company in the industry. As of April 2007, the company has the highest revenue in comparison to the other supermajors and integrated, public companies. (link to revenue ranking) In addition, ExxonMobil has the highest net income in the industry. In 2006, ExxonMobil posted the largest annual profit in history ever earned by a U.S. company of $39.5 billion which surpassed its own previous record set in 2005. (link to profit chart) The company with the second highest revenue in the industry, Royal Dutch Shell, also reported a record profit in 2006.

 

Although these public integrated companies have been very successful in the industry, they are facing increased competition from national companies. In the rankings of the top 20 oil companies in 2005 shown below, ExxonMobil was ranked second after Saudi Aramco, and there were four other nationally owned companies in Venezuela, Iran, Mexico, and China that were ranked in the top 10. It is also evident in this table that the national companies located in Saudi Arabia, Venezuela, Iran, Kuwait, and the UAE have access to significantly more oil reserves then any of the top ranked public companies. For example, Saudi Aramco has reserves equivalent to over twenty times those of ExxonMobil. This gives the national companies a competitive advantage because they are able to extract oil from conventional sources. The supermajors now have to develop new technology and turn to expensive sources of oil supply where extraction is more difficult.

World’s Top 20 Oil Companies — 2005

However, this table also shows that even though the national companies have more reserves, they do not have as much refinery capacity as some of the publicly integrated companies like ExxonMobil and Royal Dutch Shell. ExxonMobil had the highest refining capacity and also the highest product sales in comparison to all the other top ranked companies in the industry.

 

 

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