Who Moved my Oil

If you had to take a guess at the companies that were involved in the chain of operations, from the oil field, to the fuel that you filled into your car, what would it be? Most people tend to associate the petroleum industry with one of the Supermajors: BP plc. (formerly British Petroleum), ExxonMobil, Royal Dutch Shell, Chevron Corporation, Total S.A. and possibly ConocoPhillips.

Big Oil is definitely big. The Supermajors are not only the world’s largest public oil companies; they are also the world’s largest corporations.

Company 2011 Revenue ($ Billions) 2011 Profits ($ Billion)
Royal Dutch Shell

484.5

30.92

ExxonMobil

452.9

41.06

BP

386.5

25.70

Sinopec

375.2

9.45

China National Petroleum

352.3

16.32

Chevron

245.6

26.90

ConocoPhillips

237.2

12.44

Total S.A.

231.6

17.07

Source: Fortune Global 500

However, the annual revenues and profits of publicly traded companies is only a part of the picture as far as the oil industry is concerned.

Image

Source: Wikipedia

State owned firms dominate the industry. Most of these firms are fully owned and privately held by the respective states and do not need to declare their revenues or earnings.  However, in terms of oil and gas reserves, state owned National Oil Companies (NOCs) clearly dwarf the Supermajors. NOCs control over 80% of the World’s oil and gas reserves. In terms of reserves, Exxon is the 11th largest oil and gas company in the world.

NOCs are also the world’s largest producers of oil. In 2011, PetroChina announced that its oil production had topped that of ExxonMobil. PetroChina produced 2.43 million barrels of oil per day in 2011, whereas Exxon’s production was 2.3 million daily barrels. However, Saudi Aramco, which produced 7.9 million daily barrels of oil in 2011, dwarfed both these giants.

Image

Source: The Economist

The origins of the first state owned firms lies in the 50s and 60s, when the petro-states started nationalizing their oil resources by creating NOCs to take charge of their reserves. The Supermajors were still needed for their technical expertise, capital and skill at managing large projects. Most oil projects took the form of joint ventures between NOCs and the Supermajors. However, over time, the NOCs have become more technically advanced and competent at managing their own projects.

More importantly, state firms from China and South Korea, which do not control their own domestic reserves, have also started competing with the Supermajors via acquisitions to obtain technology, as well as access to oil and gas fields and drilling licenses. On July 23rd China National Offshore Oil Corporation, CNOOC announced a $15 billion deal to buy Nexen, a Canadian energy firm with big holdings in tar sands and expertise in drilling for shale gas. Last year, it had announced a $2.2 billion deal with Chesapeake Energy through which it acquired assets in South Texas shale deposits and agreed to finance most of Chesapeake’s drilling costs. These deals are of strategic importance to China. They provide China with access to foreign oil reserves, as well as the necessary technical expertise to access its own domestic shale gas reserves.

The Supermajors are also facing competition from firms that provide Oil Field Services (OFS). OFS firms provide the equipment and services used in the exploration for and extraction of Oil. The sector can be broadly divided into:

  • Technology solution providers such as FMC that sell products or kits.
  • Drilling contractors such as Transocean that own and lease out rigs to companies.
  • Oilfield services providers that carry out most of the tasks involved in finding and extracting oil. Schlumberger, Halliburton, Baker Hughes and Weatherford international dominate this subsector.

OFS started growing as a sector in the 1980s when the oil companies decided to outsource drilling operations. At that time, the easy availability of oil resulted in relatively low margins on drilling operations. Since the 1990s, the tightening oil market has driven demand for new technologies for exploration and extraction of oil. The big service companies invest heavily in R&D. Schlumberger, which earned profits of $5 billion on revenues of $40 billion in 2011, invests roughly $1 billion annually on R&D. That is roughly the same as the R&D expenditure of Exxon. Technologies and techniques such as 3D seismology and directional drilling, developed by OFS firms, are the mainstay of the modern oil industry.

The dependence on new technologies is also likely to grow. Global production from mature oil fields is falling by between 2% and 6% annually. The dwindling supply and increasing demand for oil means that the oil companies are more and more dependent on OFS firms for the technology and services to extract oil from increasingly inaccessible reserves and remote locations.

The OFS firms have also played a role in reducing the dependence of the NOCs on the Supermajors for technical and managerial expertise. NOCs can now manage projects themselves and hire all the technical help they require directly from OFS firms. This can extend to the extent of risk sharing between the NOCs and the service firms, just as in joint ventures between oil companies. Schlumberger agrees to some amount of payment for performance on big contracts. Others, such as Petrofac, are taking small equity stakes in exploration projects.

So, overall, a number of other players are replacing the Supermajors. As far as owning reserves is concerned NOCs have claimed the best acreage in most of the old oilfields. The large OFS firms are the leaders as far as technical expertise at drilling and extraction is concerned. In spite of the Supermajors’ expertise at exploratory activities, smaller oil majors such as Tullow, Carin and Andarko are proving to be more capable at the task of discovering new reserves.

However, in spite of their diminishing role, Supermajors are obviously still a major part of the industry. Even technically advanced NOCs like Kuwait Oil and Saudi Aramco still depend on the Supermajors for downstream activities such as refining. New petro-states such as Uganda and Ghana do not have the capital, technology or managerial skills required to exploit their oil resources, and would prefer to deal with firms that have a reliable track record of successfully funding and managing big projects. OFS firms such as Schlumberger claim that they do not intend to own reserves. In addition, they do not have the finances to manage the risk associated with large exploration projects. Thus the Supermajors are the only players who can mobilize the technical expertise required to find and extract oil from harsh environments such as the Arctic, and deep oceans and from unconventional sources such as oil sands. Supermajors also have an advantage over smaller firms in the biggest capital-intensive projects such as the large Liquefied Natural Gas (LNG) projects managed by Shell in Australia, and Total in Russia.

In spite of their ever-increasing profits, it is fair to say that life has become a lot more difficult for the Supermajors. The industry has become move diversified and complex. A number of state-owned and private players are playing a large role in moving the oil.

-by Anubhav Bhattacharjee

Anubhav is a PGP-1 student at IIM, Ahmedabad and currently a member of the Consult Club here. He graduated from the Indian Institute of Technology, Madras in 2012

Note – A typographical error in the post was corrected on 28th August 2012. The profits quoted from Fortune 500 are in $ Billion and not $ Million. 

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3 thoughts on “Who Moved my Oil

  1. Check your numbers dude. The profits have been understated by 1000 times. For instance, “ExxonMobil announced today that it earned a total profit of $41 billion in 2011. The 2011 profit equals $112 million per day or $78,000 per minute of 2011. This huge profit is similar to its earnings of $41 billion to $46 billion from 2005 to 2008 (in 2011 dollars). ExxonMobil made the four “largest annual profits” of all time during these four years, according to USA Today”. While your figures show profits as 41 million !!!!!!!

  2. Its an insightful piece of information, that Supermajors are losing to NOCs. Thats mainly because of the huge reserve estimation in middle east in past few decades. Though I dont consider that the operators are facing competition from OFS as they provide services on contract basis to these operators only. Schlumberger never forayed into the E&P business because of its domain expertise into providing advanced technological services to Supermajors and NOC. They are highly dependent on the preferences and needs quoted by these Supermajors in their field development plan. Also we cannot compare the R&D costs of operators and service providers because on one hand where operators’ R&D cost implies analysing techniques to profitably extract the reserves out, OFS aim at bringing innovations in their products to facilitate operators to maximize the reserve output.

  3. The heading of the article draws your attention and the momentum is kept up by the natural flow from one aspect of the petroleum industry to the other. Figures are interspersed with facts across geographies to provide a comprehensive picture of the industry in a lucid manner.

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