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Are We Seeing the End of Big Oil?
Hugh Pickens writes "Cyrus Sanati writes in Fortune Magazine that up until now, it has been widely accepted that being bigger was better for oil companies, but the announcement that ConocoPhillips plans to break up into two separately traded companies, separating its exploration and production unit from its refining and marketing units, took Wall Street by surprise, raising uncomfortable questions about the future of Big Oil. 'That's because the exploration side and the refining side of the oil business have little to do with one another,' writes Sanati. 'Contrary to popular belief, Big Oil has almost no control over the price of oil these days. That power squarely rests with oil-rich nations that hold most of the world's oil reserves and the Wall Street banks and hedge funds that speculate and make markets in the oil trading game. So even though ExxonMobil pumps oil, it can't guarantee that its refining unit will be able to profitably process a barrel into gasoline or heating oil.' ... 'If the ConocoPhillips story is a success for shareholders, there will be calls to break up Big Oil just in time for the annual meetings in the spring. So by this time next year, it is possible that Big Oil will go the way of Rockefeller's once gargantuan Standard Oil — with the markets, not the government, forcing a break up this time.'"
Who would need to be bigger? Seriously huge profits, and most exploration is already done. These companies have been exploring for years now for deposits. It is probably just a crafty way to hide the hordes of money they are making...
with the markets, not the government, forcing a break up this time
<sarcasm>Wait, the market is providing a better solution than the government? How is that possible?</sarcasm>
Taking guns away from the 99% gives the 1% 100% of the power.
to anyone besides investors?
What I got from the article is that one really big company is becoming two merely large companies for market purposes. How does this impact any of us down here?
I was however relieved that this wasn't another "year of the electric car" type article and it had a fair amount of substance!
Any conglomerate should be split up. It just make sense. Like modular programming does.
The output of any division of a conglomerate should be accessible to the whole market, not just the big encompassing company that holds the division.
Letting companies grow bigger and bigger only leads to near-monopolistic situations, and eventually less choice for the consumer. :)
If, for example, Apple were split into two companies, one for software, one for hardware, this would probably lead to a much richer variety of products. And, also important, more opportunities for users to tinker
If Pandora's box is destined to be opened, *I* want to be the one to open it.
Now that I know that energy prices are actually in the hands of a combination of shadowy capital funds and petro-kleptocrats, rather than 'big oil', I will definitely be sleeping better.
we do use hydrogen as fuel. It just currently brings carbon along for the ride. you want to pay extra to separate the two first? go right ahead. you can't get it for free.
WTFE!! I don't believe an ounce of the "poor little oil company" line in this story. Sell that crappy story to someone else because I'm not buying it.
Sounds like a good way to limit exposure to unexpected costs associated with drilling. Sell the crude to the refining unit at cost of production and the drilling unit accumulates no profits that would be paid out as a result of a large spill. It would just go bankrupt, sell off any equipment it owns (if it owns any at all) and reform under a new corporate charter. Profit!
exploration and production unit from its refining and marketing units, took Wall Street by surprise, raising uncomfortable questions about the future of Big Oil.
The economist podcast discussed it some last week, as they discussed their previous weeks issue. I've noticed a disturbing trend where /. bifurcated around March and now some stories are fresh but the late ones are actually going further back in time as time goes on. Wasn't this a ST:TNG plotline?
Anyway, the ominous BS makes no sense. I've been following this market for, well, decades, now, and all it boils down to is the oil majors are extremely competent at exploration and production, both directly and indirectly by financing other companies exploration and production work. The refining operations are almost meaningless now because every nation either wants to shut them down to prevent pollution (although the hypocrites still want gas for their SUVs) or they want massive overproduction capability for strategic warfare reasons. So refining is a dead market. As for the marketing units, yeah, they're real geniuses alright, look how everyone loves BP, for example.
So all it amounts to is focusing on what makes a net positive on the income statement and casting off the deadwood that is a net negative to the income statement. Its the oil industry equivalent of joe average non-IT focused business outsourcing their IT department, just like they've outsourced their electrical production and (mostly) their "business standard uniform" production and maintenance.
The reason its spun as doom and gloom, is they have no empathy and only see the effect on themselves. The marketing unit sponged off the profits of the production unit to make CNBC commercials that were beyond stupid. Now they are cast off like the debris they are, so they won't have the cash to pay to CNBC... So, MSM is going to get less advertising bucks from the oil majors. Hmm, I wonder how they feel about that? Expect some attack stories in the near future along with the doom and gloom, and then the MSM will find someone else to attack and it'll all be ignored.
"Science flies us to the moon. Religion flies us into buildings." - Victor Stenger
So "Big Oil has almost no control over the price of oil these days. That power squarely rests with oil-rich nations that hold most of the world's oil reserves" is NOT the government (actually many foreign governments) controlling the price of oil?
So the power of governments of Saudi Arabia, Venezuela, and Russia becomes a triumph of libertarian free market ideology?
Yes, in the same world where the high economic growth of the communist-run, government controlled economy of the People's Republic of China demonstrates the triumph of "economic freedom"
If your children ever found out how lame you are, they'd murder you in your sleep
To me this sounds more like "we want to get rid of the expensive geologists and engineers" than a break-up of the vertically integrated players
Its extremely important to note that one "bunch" of units was a net positive to the balance and income statements, and one "bunch" of units was a net negative or in the case of refining is floundering right around zero.
All the geologists and (most of the) Pet Eng work for the net positive group. I think their jobs are pretty safe. If anything, without the deadweight holding that group down, their salaries and bonuses are gonna rise.
Some of the pet eng guys and all of the chem eng guys work in the floundering group's refineries, which superficially looks really bad for them, but as long as people continue to buy gasoline, they're Probably pretty safe. If the rest of the company is floundering I would not expect extravagant pay increases or bonuses, but as long as you've got a bunch of cat crackers you need a catalyst engineer and that's kinda a secure lifetime job, until we stop burning gas, spraying bug spray, making plastic, etc.
I wouldn't start sending out the resumes yet.
"Science flies us to the moon. Religion flies us into buildings." - Victor Stenger
When the oil refiners and distributors have an interest in seeing the price of their inputs go down and they bid accordingly, the pressure will be for lower prices. Today, Exxon acquires leases, explores and extracts crude oil. Much of their market value (what Wall Street rewards them for) is the perceived value of their reserves. So the higher the price of crude, the better they look to investors. Meanwhile, Exxon refines and distributes products. That arm of the business is rewarded for volume times the difference between input costs and sales. So it would seem that cheaper crude would help their market share. In the final analysis, when crude prices go up, so does Exxon's share price. So currently the refining arm isn't motivated to push prices down.
The whole market is geared up to bid up crude prices. Much like the California energy crisis, everything is put onto the spot market and passed through as many speculators a possible. And much like 'sane' energy markets, once the players aren't sitting on both sides of each bid, I'd expect to see more fixed price long term crude delivery contracts. This will cut the speculators out of much of the market. This can only be good.
Have gnu, will travel.
The nationalizing trend started in the 60ies, about the time Opec formed; many countries found out they could earn much more by controlling the business directly, and in many, the private (often foreign) companies paid very little (or none) of taxes/royalties for extraction/processing/distribution/export, etc.
That was the case of Venezuela, for a hundred years, US corporations extracted the best lighter Oil and burned immense natural gas reserves and even heavier crude in the way. In 1975 the whole industry was nationalized, but it was done to benefit the foreigners and corrupt politicians of the time, because their (many decades long) permits were about the expire a few years later and the nation would not need to pay them to leave.
The current Venezuelan oil is heavier, and less valued because it needs more effort in processing, which is why Venezuela has so many (not very profitable) refineries, even in the USA.
Venezuela opened foreign private and state owned corporations the chance to form joint ventures with PDVSA to extract the heavier oil in the Orinoco belt, with the State owning a portion of shares, and higher royalties per barrel export. Only 2 US corporations left the zone when a previous deal was made void, everyone else stayed and even more came (from Asia and elsewhere).
Big state owned oil corporations are nothing new and will not go anytime soon. It is far more lucrative for most countries to have it that way. Political tensions with Venezuela are a decision of US administration, in line with their global policy for domination clashing with nationalistic positions (daring not let US corporations milk away all the profits). Nothing new and widely know outside USA for decades, if not centuries.
Artix
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