Oil and Gas

The oil and gas industry can be broadly classified into three segments. The upstream segment comprises exploration and production (E&P), while the downstream segment includes refining and marketing (R&M). In between, the midstream segment includes the transportation, storage, and trading. The exploration and production segment is capital intensive, soaking up 70 percent of total investment. The activity is also riddled with uncertainty with the number of failures outstripping the number of successful finds.  The downstream segment, meanwhile, is a relatively safer business with operating efficiency and energy consumption governing profitability.

Oil continues to be a major source of energy and global demand touched 78 million barrels per day (mbpd) in 2003. The five-year CAGR (compound annual growth rate) of oil demand stood at one percent. Demand for gas has surged in the last three decades, touching nearly 2600 billion cubic meters (bcm) in 2003. Its five-year CAGR stood at 2 percent. Demand varies across regions with North America accounting for almost one third of the demand for gasoline, middle distillates, fuel oil and others. Europe ranks second with 16 mbpd followed by China and Japan.

The Organization of the Petroleum Exporting Countries (OPEC) continues to exercise extraordinary control over oil production and prices. It accounts for 40 percent of production in the oil industry and is dominated by the Middle Eastern countries such as Saudi Arabia. Other exporters outside OPEC include countries such as Russia, Kazakhstan and the UK. OPEC’s reputation for stable price setting has taken a beating due to the recent run up in oil prices. 

Global refining capacity totaled nearly 83 mbpd in 2003 with both North America and Asia Pacific accounting for an identical 25 percent of global refining capacity, followed by Europe with 19 percent. Interestingly, the Middle East accounts for 30 percent of oil production, but holds only 6 percent of refining capacity.
 
The US is the biggest consumer on the planet. It is dominated by a clutch of integrated oil and gas giants such as ExxonMobil and ChevronTexaco. These oil behemoths control 14.2 percent of global oil production, 21.3 percent of domestic natural gas production, 48 percent of the domestic oil production, 50.3 percent of domestic refinery capacity and 61.8 percent of the retail gasoline market. Other major players in the industry include BP, ConocoPhillips, and Royal Dutch/Shell Group.

Currently, energy companies are prospering from high energy prices, but tightening environmental laws could make their jobs difficult.  Legislative and regulatory changes will have a significant impact on the profitability of the oil and gas sector in the coming years. The exploration and production segment will continue to be affected by policies on taxation, royalties and regulations governing the availability of property for oil and gas exploration. The refining and marketing segment is even more subject to regulation, with rules covering refinery emissions, requirements for cleaner gasoline and regulations for underground storage tanks. On one hand, deregulation will allow companies to merge and acquire at will, but on the other hand, regulations will force companies to review their operations and introduce cleaner fuels.

Consolidation has indeed redefined the oil and gas industry, which has seen several mega mergers such as Exxon-Mobil and BP-Amoco. Consolidation has been largely concentrated in North America with the main drivers for such deals being cost savings, increasing shareholder value, strengthening competitive positioning and access to technology. These deals created a new breed of bigger, stronger, integrated and more aggressive players. Refining capacity has been rationalized and concentrated, both in Europe and the USA. Each of the oilfield service sub-segments is dominated by consolidated players. With further deregulation and liberalization of the sector worldwide, more consolidation is expected, especially in Asia Pacific.

Oil and gas share a complex relationship with the economy. Economic prosperity boosts demand for oil and gas. Growth in demand comes from energy-dependent sectors such as transportation, the industrial sector, the residential segment and commercial sectors of the oil market.

Now crude oil prices have become volatile with prices having breached the USD50 per barrel mark and continuing to hover at that level. Prices have been influenced by a host of reasons: high oil demand worldwide, low inventory positions, supply snags due to political unrest in the Middle East, Venezuela and Nigeria, price pressures caused by a weaker US dollar and OPEC producing at its optimum capacity. Terrorism also makes the oil infrastructure vulnerable. Rising violence in Saudi Arabia and the war in Iraq are both examples of how terrorist activity can put pressure on the world economy by threatening the flow of oil supplies. Promises of additional supply by major oil producers and OPEC have not cooled the markets. It is difficult to estimate when crude prices will fall. What is certain, however, is that if crude oil prices continue to stay at the current level, economic growth will suffer at a global level.

Factors within the oil and gas industry that can assist global growth include strengthening upstream investment, increased adoption of new upstream technologies, better infrastructure in marketing and distribution, continued focus on cost reduction in both  upstream and downstream segments, and the geopolitical situation in major producing and consuming countries. The survival and progress of oil and gas companies will depend on how well they handle three key issues: reserve levels, cost structure and product portfolio.

Read the full Article with a single purchase – CLICK HERE