Global Information Inc. would like to present a new market research report, "Business Restructuring in International Oil Companies (IOCs) - Increasing Focus on Upstream Business With Spin-Offs and Divestitures in Downstream Operations" by GlobalData.
In 2011, several integrated oil companies (IOCs) decided to restructure business segments by spinning-off or divesting downstream assets. The primary reason for this trend was the desire among these companies to focus on upstream activities in the next five years due to the decrease in the number of oil and gas discoveries since 2010 and the depletion of conventional reserves globally. The use of advance technologies for drilling in deep sea regions where a large number of reserves have been successfully detected has further increased the need for higher capital expenditure in the upstream sector. To increase proved reserves, IOCs also decided to acquire pure-play exploration and production companies with skilled resources and expertise on deep sea regions and unconventional resources globally.
The following figure shows the upstream capital expenditure of the major integrated oil companies from 2007 to 2011.
By increasing the capital expenditure allocated to the upstream sector, IOCs have also been able to expand their exploration and production (E&P) activities in conventional as well as unconventional resources. Increasing capital expenditures in the upstream business are prompting the IOCs to restructure their business operations to unlock capital from non-core assets and invest the proceeds into upstream activities.
The IOCs need to increase capital expenditure in their upstream businesses to remain competitive with their pure-play E&P counterparts. The Reserve Replacement Ratio (RRR) of integrated companies has on average been relatively lower than the RRRs of upstream pure-play companies, over the period 2007 - 2011. The RRR helps in deciding the future prospects of a company and the number of years it will be able to sustain its current production levels with its current reserves.
The following figure shows the RRR of pure-play upstream companies and IOCs during the period 2007 - 2011.
Upstream pure-play companies recorded an average RRR of 179% during the period 2007 - 2012 against the average RRR of 132% in the case of IOCs for the same time period. These statistics suggest that the pure-play companies have been more competitive than their integrated counterparts in increasing new reserves over the last five years, which highlights the need for integrated companies to increase their focus on upstream activities. In these circumstances, some of the integrated companies have decided to spin-off their downstream activities in separate entities to increase their focus on upstream activities.
The imposition of strict environmental regulations in North America and Europe since 2010 has made downstream activities less attractive for IOCs, especially in these markets. The new environmental regulations on refining units have led many IOCs to restructure their downstream operations. In this scenario, the addition of refining capacities is expected to take place only in markets where environmental regulations are less strict, such as Asia-Pacific, the Middle East and Africa and South and Central America.
In such circumstances, there has been a considerable decline in refining capacity expansions and the number of new refineries that are planned to be constructed in markets such as North America and Europe. At the same time, there are huge refining capacity expansions planned in Asia-Pacific, the Middle East and Africa and South and Central America.
The figure below shows the planned refining capacity in different regions of the world from 2012 to 2016.
New refineries are being built in countries like China, India, Indonesia, Malaysia, Brunei Darussalam and Vietnam, as well as across the Middle East and Africa, in countries such as Iran, Iraq, Saudi Arabia, the United Arab Emirates (UAE) and Morocco. The new refineries that are planned will primarily process complex crude oil to produce quality refined products of different varieties.
In 2011, Marathon Oil Corporation and ConocoPhillips announced their plans to spin-off their upstream and downstream sector operations into separate public trading companies to help them concentrate on both the sectors equally. Marathon Oil Corporation decided to spin-off as it has been witnessing diminishing integration between its upstream and downstream operations as the majority of its oil-producing assets were located outside of the US market, where a majority of its refining operations were concentrated. ConocoPhillips, on the other hand, was witnessing an increasing need for sustained investments in its upstream business, while undertaking selective divestments in its downstream operations, for which the company felt the need to increase focus on both the businesses.
The spun-off downstream entities of Marathon Oil and ConocoPhillips will continue to be among the major downstream companies in the US in terms of refining capacity. The figure below shows the refining capacity of IOCs and Pure-play refining companies in the US:
ConocoPhillips has received regulatory approval and is awaiting the receipt from the US Internal Regulatory Service to start functioning as separate entities. The spin-off of the refining segment from ConocoPhillips is expected to start trading under the New York Stock Exchange (NYSE) by May 1, 2012 after the required approvals are received.
Global Information Inc.(GII) - specializing in market research provision for the vertical industries, GII offers expert independent recommendations of publications from hundreds of the globe's leading market research firms.