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W1V3 - Actors & Challenges - Handout PDF
W1V3 - Actors & Challenges - Handout PDF
Arash Farnoosh
Due to economies of scale, this industry encourages the concentration. In simple words, it
fosters the emergence of vertically integrated companies – involved in the whole energy
chain. These are some of the largest privately-owned companies in the world, you probably
know the most famous ones such as EXXON MOBIL, BP, TOTAL and SHELL. However, there
are also many companies that focus only on one side of the business, whether upstream or
downstream. These are called “independent companies”. In the upstream, companies such
as APACHE or TULLOW concentrate their activities only in exploration & production. While
companies such as VALERO, RELIANCE or SUNOCO focus the larger part of their activities on
the downstream side of the business. In parallel, there are also service companies that
provide technical and engineering assistance to oil companies.
Another usual distinction is made between International and National entities, what we call
IOCs and NOCs. IOCs, as previously mentioned are privately owned companies; while NOCs
operate on the behalf of their home government. Yet, it doesn’t mean that they cannot
operate beyond their national frontiers.
Following E&P activities, crude oil or natural gas is available in its primary form./ Thereafter,
it has to be brought to refineries so as to be processed and transformed into products
adapted to the final consumer needs.
As oil is liquid, it can be transported simply by using the adequate means such as barges, oil
pipelines, trains or trucks. But in the case of natural gas, it is a little bit more complex:
because, for example, you have to use compressors to increase the pressure of the natural
gas inside the pipe so as to reach the final consumers.
The development of liquefied natural gas technology has made the transport of this
commodity more flexible. However, this technology does not decrease considerably the
transportation costs, except for very long distances.
You can have different margins for different locations, as refining costs diverge from one
region to the other. For example, in the markets where the refiners have access to a lower
cost of crude or lower operational expenses, the margins could become higher.
This is easily observable by looking at the regional evolution of the refining capacities in the
last 30 years. Indeed, since 1980, capacities in China have been multiplied by 7, India by 8
and the Middle East has more than doubled over the same period, whereas they have
decreased by 30% in the European Union and by 27% in Japan.
But remember that the strong growth of demand has also been a decisive factor behind this
shift towards emerging countries.
For the time being, just bear in mind that from a strictly economic point of view, the
profitability of petrochemicals is very similar to that of the refining sector. Again we are
talking about the margin, which is the difference between the value of the outgoing product
and the cost of the ingoing feedstock. The higher the margin, the better the coverage of the
costs, and consequently the higher the profitability.
Distribution
We have made the distinction between the upstream and the downstream side of the oil &
natural gas business. But they are two sides of the same coin and their linkage is very strong.
For instance, let’s look at the price history of both crude oil and gasoline in the US market
between 2000 and 2014. As you see, both prices follow the same trend and are highly
correlated during the whole period. What makes the difference between the two prices are
the refining gross margin, the marketing & distribution costs, and, of course, taxes
determined by the local regulator where the final product is actually sold.
Last, but not the least, this industry is more and more challenged by environmental and
corporate social responsibility issues. Environment is becoming the major topic in the energy
world. The oil & gas industry has to grasp this challenge by proposing the most efficient and
environmentally-friendly ways of production and processes in every step of the chain from
the well to the wheel.