Energy: Oil and Gas Companies

This is mostly a collection a snippets I lifted from S&P's industry analysis of the oil and gas industry. Interesting things to note are the differences between sweet and sour crudes - sweet crudes have much lower sulfur contents and are thus easier to refine (especially as the EPA is in the process of decreasing the acceptable sulfur contents in refined gas). Also - oil is fungible; a production disruption in one OPEC country will increase global prices even though that OPEC country probably primarily supplied a specific region or country.

Industry Summary
The oil and gas business has three major segments: exploration and production of oil and natural gas (the upstream); the transportation, storage, and trading of crude oil, refined products, and natural gas (the midstream); and refining and marketing of crude oil (the downstream). Participants include integrated oil and gas companies, and pure-play companies in various areas, including exploration and production, midstream services, refining and marketing, and oilfield services and drilling.

Many integrated oil and gas companies also make and sell petrochemicals.

Saudi Aramco, owned by Saudi Arabia, is that nation's primary source of income and is estimated to be the largest oil and gas company in the world. The largest publicly owned firms - BP PLC, Chevron Corp., ConocoPhillips, Exxon Mobil Corp., Royal Dutch Shell PLC, and Total SA - are known as the "supermajors." Each has a market capitalization of $100 billion or more.

Large integrated oil and gas companies - typically with market capitalization of less than $100 billion - are known as the "majors." They explore for and develop oil and natural gas worldwide, but their refining and marketing operations are generally focused on their local markets. Major integrated oils based in the United States include Hess Corp. (formerly Amerada Hess) and Marathon Oil Corp; in Western Europe, the majors include Eni SpA, Repsol YPF SA, and StatoilHydro ASA; and in Latin America, the majors include (Petrobras).

Independent exploration and production companies
Exploration and production companies are often referred to as independents because their "upstream" operations are not integrated with "downstream" operations such as refining or petrochemical production. Most such firms were spun off from larger corporations, including railroads (Burlington Resources Inc., acquired by ConocoPhillips on March 31, 2006, and Union Pacific Resources Group Inc.), integrated oil and gas companies (Kerr-McGee Corp., acquired by Anadarko Petroleum Corp. on August 10, 2006), pipeline companies (Anadarko Petroleum Corp.), or utilities (Houston Exploration Co.). A number of companies originated in a single field and grew by acquiring smaller competitors or individual properties from larger competitors; among them are Devon Energy Corp., Apache Corp., and Pioneer Natural Resources Co.

Independents with oil and gas reserves predominantly in the Americas tend to have higher cost profiles than their international counterparts, because the American continent is a geographically mature region with many fields in the late stages of their lives. In many cases, these independents bought their properties from the international integrated oils, which were focused on higher-return operations abroad.

However, the independent exploration and production companies in the North American natural gas sector are cost-competitive, due to tight supply and demand conditions and a lack of competition from cheaper imports. Thus, they are key players in North American natural gas.

Midstream services companies
Services provided to oil and gas producers by the midstream firms include transportation, storage, and trading of oil, natural gas, and refined products. Many of these companies are structured as limited partnerships, which confer tax advantages for their unit holders. Major independent participants include El Paso Corp., Enterprise Products Partners LP, and Kinder Morgan Energy Partners LP.

Refining and marketing companies
These firms refine and sell crude oil products such as gasoline, jet fuel, heating oil, motor oil, and various lubricants. The largest independent US refining and marketing companies have market values of less than $50 billion. These companies included Valero Energy Corp. (13% of US refining nameplate capacity), Sunoco Inc. (5.2%), PDV America Inc. (private; 4.7%), Koch Industries Inc. (private; 4.5%), Motiva Enterprises LLC (private; 4.4%), and Tesoro Corp. (3.3%), according to data as of January 2007 (latest available) from the Energy Information Administration (EIA), an agency of the US Department of Energy (DOE).

UPSTREAM OPERATIONS: THE EXPLORATION AND PRODUCTION PROCESS

The process of exploring for, developing, and producing oil and gas reserves involves several steps, which generally take several years to complete. Some of the major steps are described below.

Exploration
The first step in the production process involves the search for oil and natural gas by geologists and geophysicists. Once hydrocarbon accumulations are found, subsurface conditions are investigated using seismological or other techniques to construct subsurface maps of the reservoir.

Drilling and logging
Although the exploration process yields much data concerning the potential presence of oil and natural gas, the only way to know for sure is to drill a test well (also known as an exploratory well).

As a company drills exploratory wells, it performs tests on the formations penetrated. The data gathered through such tests, including detailed physical properties of the formation, are used to evaluate whether commercial amounts of oil and/or natural gas are present. The process of obtaining and recording information pertaining to downhole conditions is known as logging.

If commercial amounts of oil and/or natural gas are found in a test well, the process moves to the completion stage.

Completion
If a well is determined to contain commercial quantities of oil and/or natural gas, it must be "completed" before production can begin. In other words, one or more flow paths must be constructed for the hydrocarbons to travel between the reservoir and the Earth's surface.

Casing - steel pipe - is used to line the raw hole made by the bit in the formations. This lining keeps the hole from caving in, and once cemented, keeps fluids from migrating to another formation. Tubing, also made of steel, is the pipe through which the oil and/or natural gas flows to the surface. Together, casing and tubing typically represent the second largest expense of drilling and equipping a well, after payments to contract drillers.

Lifting
Several different methods are used to bring (or lift) oil and/or natural gas to the surface. The appropriate method depends on whether oil and/or natural gas are being produced and on the formation's characteristics. Due to the heavy, viscous nature of crude oil, most producing oil wells require some kind of artificial lifting system. A small percentage of completed oil wells flow freely without any stimulus at first because of built-up pressure in the reservoir. By comparison, natural gas is much lighter, and many gas wells are produced by the natural pressure gradient throughout the formation.

There are three stages of lifting, which require different mechanical systems. During primary recovery, oil is pushed to the surface using pumps and the reservoir's natural pressure. Secondary recovery involves driving out oil by stimulation, usually through the injection of water or natural gas. Methods of tertiary (or enhanced) recovery include injecting carbon dioxide, steam, or chemicals into a formation. Fire flooding, or combustion, may also be used to increase the flow.

MIDSTREAM OPERATIONS: TRANSPORTATION AND STORAGE

Once extracted, crude oil must be moved from the wellhead to the refinery. Since crude oil and refined products are liquids, they can be transported internationally in barges or tankers. On land, crude oil and refined products are usually transported by pipeline, truck, or rail.

In contrast, natural gas usually moves via pipeline from the producer to the gatherer or transmission company, and then to the distributor. Gas gatherers are primarily engaged in the collection of natural gas at the wellhead from producers or from field lines for delivery to a natural gas processing plant or some central point; they also provide compression, dehydration, and/or treating services.

Gas transmission companies convey the natural gas from the region where it is produced to the region where it is to be consumed. Occasionally, economics permitting, natural gas is liquefied (to make liquefied natural gas, or LNG) and transported internationally in LNG tankers.

In addition, gases from various sources may be converted into synthetic liquid hydrocarbons. Companies involved in synthetic fuels include Rentech Inc., Sasol Ltd., Chevron, ExxonMobil, BP, Royal Dutch Shell, and Syntroleum Corp.

In the United States, interstate oil and natural gas pipelines are federally regulated (by the Federal Energy Regulatory Commission, or FERC), while intrastate pipelines are regulated by the individual states. The tanker industry remains an unregulated global market.

Tankers
Most crude oil is transported internationally in ships called tankers. Tanker companies provide transportation services to oil companies and traders, as well as to government agencies. According to the Institute of Shipping Economics and Logistics (ISL), a research and consulting firm, as of March 2007, the global tanker fleet (ships of 300 gross tonnes, or gt, and over) consisted of 10,824 vessels with a total carrying capacity (tonnage) of 411 million deadweight tonnes (dwt). In terms of dwt, the total tanker fleet increased 6.1% over 2006, whereby the net gain (i.e., the tonnage balance between tonnage additions, or newbuilds, and tanker demolitions) stood at 24.5 million dwt (21.6 million dwt for oil tankers, 0.3 million dwt for chemical tankers, and 2.6 million dwt for liquid gas tankers).

The world shipping arena is determined by only a few shipping countries with a strong regional focus on Europe and Asia. According to ISL, as of July 1, 2007, the top 10 leading shipping nations (Greece, Japan, Germany, the People's Republic of China, Norway, the US, Hong Kong (SAR), the Republic of Korea, Singapore, and the UK) controlled 68.7% of the total world merchant fleet tonnage (ships of 1,000 gt and over). As of July 2006, according to E.A. Gibson Shipbrokers Ltd. (a shipbrokering service), ownership within the shipping industry was highly fragmented: oil companies owned less than 6% of the world tanker fleet and tonnage; independent ship owners collectively controlled about 79%, and government oil and shipping companies owned the rest.

An important characteristic that affects the supply of tankers is their age. Environmental laws impose higher operating costs on tankers more than 25 years of age, resulting in increased scrapping of older vessels. While a large amount of newbuilds during the past five years changed the age profile of the tanker fleet, there continues to be a considerable number of single hull tankers that must be phased out of the world fleet by the end of 2015.

According to data from ISL, as of January 2007, about 27% of total oil tanker fleet tonnage was comprised of single hull tankers (around 1,695 single hull tankers with 102.9 million dwt). As of March 2007, the average age of the global tanker fleet was about 22.4 years, versus 17.3 years the prior year. As of January 2007, the total order book stood at 2,466 tankers, or 57.4 million compensated gross tonne (or cgt; where cgt = A * gt ** B; A represents the influence of ship type, and B is the influence of ship size), an increase of 37.2% from 2006. About 16 million cgt is due for delivery before 2008, 17.9 cgt will be available in 2008, and 23.6 cgt in 2009 or later.

Pipelines and storage
There are two main types of pipeline systems: trunk pipelines, usually eight to 24 inches in diameter, which transport oil and natural gas between regional markets; and gathering pipelines, usually two to six inches in diameter, which transport oil and natural gas from the wellhead to the trunk pipelines. Pipelines are owned by major oil companies, as well as by smaller independent operators. North American pipeline companies include Kinder Morgan Inc., Enbridge Inc., and TransCanada Pipelines Ltd.

Storage is an essential function of an efficient and reliable pipeline network because it provides a means to manage fluctuations in supply and demand. Storage facilities include bulk terminals, refinery tanks, pipeline tanks, barges, tankers, and inland ship bunkers. Oil companies and governments usually hold crude oil and refined product inventories. Other downstream users, such as gas stations and fuel oil dealers, may also hold refined products.

Natural gas storage in the United States usually is held in salt caverns, with inventories built up between April and October (the storage injection season), in order to meet additional demand during the peak November-through-March period (the storage withdrawal season).

Emergency reserves
Since the mid-1990s, refineries have focused on maximizing profits and minimizing costs, allowing their inventories to drop to "just-in-time" levels. We believe these lower inventory levels may have induced stockpiling by the US government and by smaller private businesses further down the supply chain, in order to provide a buffer of capacity against unexpected shortages.

* Strategic Petroleum Reserve (SPR). The US government established the SPR in December 1975, when President Gerald Ford signed the Energy Policy and Conservation Act. The SPR has been authorized to hold a petroleum reserve of up to one billion barrels. Maintained by the federal government, it is to be used in case of a severe supply disruption that threatens national security. According to comments made in August 2004 by US Vice President Dick Cheney, a severe US supply disruption might be defined as a loss of at least five million to six million barrels per day (b/d).

To store the reserve oil, the US government currently has four salt caverns along the Gulf of Mexico coast that can hold about 700 million barrels of petroleum liquids (around 70% of the authorized total). As of December 14, 2007, the SPR held about 695.6 million barrels (99% of current capacity). The Energy Policy Act of 2005, signed by President Bush in August 2005, authorized the Secretary of Energy to expand the SPR to a one billion barrel capacity; it also provided guidance to the secretary in choosing appropriate site(s) to enable the SPR to be filled to this capacity.

With the maximum additions to the SPR averaging around 210,000 b/d (about 1% of total US consumption of oil and 0.3% of global consumption), additions to the SPR are relatively small compared with the market and should have a negligible impact on oil prices, in our opinion. The SPR has a maximum drawdown capability of 4.3 million b/d for 90 days. Drawdown declines progressively to 1.2 million b/d after 150 days; after 180 days, the rate drops significantly.

DOWNSTREAM OPERATIONS: REFINING AND MARKETING

Crude oil is a complex mixture of hydrocarbons, which may be characterized by their molecular weight distribution and separated according to their boiling point ranges. Crude oil is typically classified as light, medium, or heavy according to its crude density, which is typically measured by API Gravity (see the "Glossary" section of this Survey for details). The refining of crude oil creates a variety of final products. The process typically starts with the crude distillation tower, where crude oil is vaporized at high temperatures and pressures so that various components can be drawn off as their boiling points are reached. Products obtained in this manner are known as distillates.

Lighter-weight products (known as light ends) vaporize at lower temperatures and are drawn off from the top of the tower. Medium-weight products (light, medium, and heavy gas oils) vaporize at moderate temperatures and are drawn off from the side of the tower. Heavyweight products (heavy ends) are withdrawn from the bottom of the tower. Additional processing is sometimes required to crack the heavyweight products into lighter-weight products or to create other products.

Once refined, oil products are sold to customers by wholesale and retail distributors. Wholesale distributors, such as distributors of motor fuel and/or heating oil, sell fuel oil to retail gasoline stations and industrial users. They tend to be privately owned and are often family businesses passed from one generation to the next. Retail distributors include retail gasoline stations and convenience stores (c-stores). Although the c-store chain Casey's General Stores Inc. is publicly held, most US c-store chains are privately held companies, such as 7-Eleven Inc., Wawa Inc., Sheetz Inc., and Pilot Travel Centers LLC; the latter is 50% owned by privately held Pilot Corp. and 50% owned by Marathon Petroleum Co. LLC (formerly Marathon Ashland Petroleum, a subsidiary of publicly traded Marathon Oil Corp.).

According to data from National Petroleum News (NPN), the National Association of Convenience Stores, and Trade Dimensions, a provider of retail data, motor gasoline sales rose 18% to $405.8 billion in 2006, yielding a gross fuel profit margin of 5.5% (versus 6.9% in 2005). In-store sales of food and other merchandise increased 8.3% to $163.6 billion in 2006 and yielded an in-store gross profit margin of 29.9% (versus 29.7%), for a total c-store sales growth rate of 15% to $569.4 billion (71% motor fuels, 29% in-store) and a combined gross profit margin of 12.3% (versus 13.5%). As a result, only 29% of the c-store's gross profit was sourced from motor fuels during 2006 (compared with 28% in 2005; latest available).

Gasoline marketing
Oil industry marketing involves selling refined products to customers. While the US gasoline market is unregulated, different marketing methods exist for each of the many products that come out of the refinery. Our focus is on the retail marketing of gasoline, the refinery's main output.

According to NPN, US retail gasoline locations, both branded and unbranded, are owned and operated in four different ways: lessee/dealer operated (company-owned, and leased to an independent dealer); open dealer (branded station owned by dealer); salary operated (company-owned and -operated); and commission operated (company-owned stores run by an independent operator on a commission basis, usually based on gasoline volumes).

Gasoline may be sold directly by refiners to a retail gasoline station bearing the company's name and emblem. Gas stations provide the refiners with outlets for their products. Refiners also sell their branded products to independent dealers, which own their stations and sell branded gasoline and other products from one or more oil companies. The independent dealers generally purchase their gasoline either directly from the refiner or through a wholesale marketer, which contracts with a particular refiner to sell its gasoline at wholesale.

Another method of selling gasoline is through independent dealers. These retail gasoline locations purchase motor fuel from a variety of sources, including major oil companies (used by 79% of retail gasoline stations in 2006, according to NPN), large independent refiners (55%), small refiners (26%), spot market (22%), non-refiners (46%), and refineries owned by the retail gas stations (4%). They sell this gas through their own unbranded stations as a "no-frills" fuel, generally for a few cents per gallon less than brand-name gasolines. Today's independent marketers are generally c-stores operating their own gasoline pumps. The c-store has evolved further in recent years, as branded fast-food restaurants have combined operations with them.

OPEC WIELDS WORLDWIDE POWER

The Organization of the Petroleum Exporting Countries (OPEC) is a cartel formed by nations that are substantial net exporters of oil. Founded in September 1960 by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela, OPEC currently has 13 member countries and is headquartered in Vienna, Austria. The cartel has stated objectives: to coordinate and unify the petroleum policies of its member countries; to safeguard its members' individual and collective interests; to stabilize the price of oil; to provide an efficient, economic, and regulated petroleum supply to oil-consuming nations; and to provide a fair return on capital to those investing in the petroleum industry.

Algeria:
12.20 billion barrels (0.92% of the world's proved oil reserves)
159.0 trillion cubic feet (Tcf) of proved natural gas reserves (2.6% of the world's proved gas reserves)
Algeria's crude oil production during 2007 averaged 1.36 million b/d, up slightly from 1.35 million b/d in 2006. Algeria is an important exporter of oil and natural gas to European markets.

Angola:
9.04 billion barrels (0.68% of the world's proved oil reserves)
9.53 Tcf of proved natural gas reserves (0.2% of the world's proved gas reserves)
Angola's crude oil production during 2007 averaged 1.70 million b/d, up from 1.41 million b/d in 2006. Angola exports crude oil primarily to China, the US, Europe, and Latin America. The majority of natural gas produced in Angola is either flared or used in oil recovery.

Ecuador
4.52 billion barrels (0.34% of the world's proved oil reserves)
345 billion cubic feet (Bcf) of natural gas reserves
Ecuador's crude oil production during 2007 averaged 500,000 b/d, down slightly from 535,000 b/d in 2006. Ecuador is one of Latin America's largest exporters of crude oil, sending about half of its crude oil exports to the US, with the remainder split between Latin America and Asia.

Indonesia
4.37 billion barrels (0.33% of the world's proved oil reserves)
93.90 Tcf (1.52% of the world's total)
Although Indonesia's crude oil production declined to 0.84 million b/d in 2007, from 0.89 million b/d in 2006, it remains a substantial global oil producer and is one of the world's largest exporters of LNG.

Iran
10% of the world's proved oil reserves, or about 138.40 billion barrels
15% of global proved natural gas reserves, or 948.2 Tcf
In 2007, the country's crude oil production averaged 3.92 million b/d, up from 3.89 million b/d in 2006.

Iraq
115.0 billion barrels of oil (8.6% of the world's proved oil reserves),
111.9 Tcf (1.8%) of proved natural gas
The country's production averaged about 2.08 million b/d of crude oil during 2007, up from 1.90 million b/d during 2006.

Kuwait
101.5 billion barrels (7.6% of the world's proved oil reserves)
55.5 Tcf (0.90% of the world's proved natural gas reserves)
Kuwait's crude oil production (including its half of Neutral Zone production) averaged 2.16 million b/d in 2007, down from 2.21 million b/d in 2006. Along with Saudi Arabia and the United Arab Emirates, Kuwait is one of the few oil-producing countries with a significant excess of oil production capacity.

Libya
41.46 billion barrels (3.1% of the world's proved oil reserves)
50.1 Tcf (0.81% of the world's proved natural gas reserves)
Libya's production of crude oil averaged 1.70 million b/d in 2007, about flat with 1.71 million b/d in 2006. Libya is a major oil exporter, particularly to Europe.

Nigeria
36.22 billion barrels (2.7% of the world's proved oil reserves)
183.99 Tcf (3.0%) of proved natural gas reserves
Nigeria is one of the world's largest oil exporters and is a major supplier to Western Europe and the United States. Its crude oil production averaged 2.17 million b/d in 2007, down from 2.22 million b/d in 2006.

Qatar
15.21 billion barrels of proved oil reserves (1.14% of the world's total)
905.3 Tcf (15%) of proved reserves
Qatar's crude oil production averaged 0.80 million b/d in 2007, down from 0.82 million b/d in 2006.

Saudi Arabia
264.3 billion barrels, as of January 2008, or 20% of the world's proved oil reserves
252.6 Tcf (about 4.1% of the world's proved gas reserves)
Saudi Arabia produced an average of 8.43 million b/d of crude oil (including half of the Neutral Zone's production) in 2007, versus 8.93 million b/d in 2006. From January through November 2006, Saudi Arabia supplied the United States with about 1.4 million b/d of crude oil, or 14% of US imports during that period.

United Arab Emirates
97.6 billion barrels of proved oil reserves (7.4% of the world's total)
214 Tcf of natural gas (3.5%)
Crude oil production averaged 2.51 million b/d in 2007, down from 2.62 million b/d in 2006. The federation also exported significant amounts of LNG.

Venezuela
87.04 billion barrels of proved oil reserves (6.5% of the world's proved oil reserves)
166.3 Tcf (2.7% of the world's proved gas reserves)
Venezuelan crude oil production averaged 2.39 million b/d in 2007, down from 2.56 million b/d in 2006.

The obvious big gap in OPEC is Russia:

Russia
Russia produces approximately 10 million bpd, and exports about 70% of that. The true size of its reserves appear to be unknown as Russian oil companies are constantly re-forecasting. It might be as high as 150 billion barrels though.

Misc. Industry facts

85.54 million barrels per day is the production capacity as of 2007.

While the supermajor oils and other publicly traded oils (major international oil companies, or IOCs) have built up considerable cash, there appears to be reduced opportunities for upstream investment going forward: these major oils lack access to large oil and gas reserves and face increased competition from state-owned firms, or national oil companies (NOCs). As a result, the long-term upstream growth options of these publicly traded oils are limited, versus emerging majors with some state ownership that are willing to take greater risks for smaller rewards.

A key conclusion of Victor's study - On Measuring the Performance of National Oil Companies (NOCs) - was that the IOCs were one-third better at converting oil reserves into actual production than their NOC counterparts.

These supermajors are also among the industry leaders based on refinery distillation capacity (as shown in the "World's Top 20 Oil Companies" table), as is major oil company Chevron, in the No. 12 position. (Majors are the next largest publicly traded integrated oil companies, with capitalizations of less than $100 billion.)

Global demand for refined petroleum products continues to rise. In addition, we have seen a global movement toward low-sulfur motor fuels, reflecting tightened fuel specifications for sulfur content in North America and Europe, and emerging import fuel sulfur specifications in the eastern Mediterranean, the Middle East, and India. We believe that, because of these changes, the demand for low-sulfur (sweet) crude oils has increased and is outpacing available sweet crude reserves, thus driving up the price of sweet crude oils.

With the global demand for these motor fuels rising faster than additions to refining capacity, we believe that those refiners with the ability to process heavy crude oils laden with impurities such as sulfur (sour crudes) will benefit from large crude oil price discounts until substantial new complex refining capacity comes onstream from 2010-12.

In 1911, the US Supreme Court ruled that John D. Rockefeller's Standard Oil Trust - a holding company with near-absolute monopolies in the drilling, refining, transport, and sale of petroleum - represented a restraint of trade. The court's order to break up the company produced 34 separate companies, including Standard Oil Co. of New Jersey (which later became Exxon) and Standard Oil Co. of New York (later known as Mobil). However, in recent years, much of the Rockefeller monolith has been reassembled.

Sharp drops in oil prices throughout 1998 precipitated the wave of consolidation. This development sent major oil companies scrambling to cut costs in order to remain profitable or minimize losses. The promise of merger synergies exerted a strong appeal, and the rush to unite was on.

Renewables
Most of the supermajors, such as BP, Chevron, Royal Dutch Shell, and Total, are building renewable energy businesses with a long-term view. BP Alternative Energy was launched in 2005, with a focus on solar power, wind, and hydrogen power.

With Chevron's acquisition of Unocal in 2005, the company became one of the largest renewable energy producers in the world. Shell Renewables was established in 1997 and is now one of five core businesses for Royal Dutch Shell - with a focus on wind and solar photovoltaics, but it is also involved in biofuels, geothermal, and hydrogen. Since 1983, Total has been investing in renewables, such as solar and wind power, through its 35% stake in Total Energie. ExxonMobil is investing in renewable research, such as the Global Climate and Energy Project.