Oil industry executives appearing Tuesday at the World Petroleum Congress in Doha, Qatar.

DOHA, Qatar (CNNMoney) — Just three years after fears of an energy supply shortage, executives of the world’s leading oil companies now foresee a bonanza of oil and natural gas on the horizon.

First Published: December 6, 2011: 11:32 AM ET

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BP’s Wytch Farm oil well in Poole, England

August 5, 2011: 5:00 AM ET

Splitting up energy giants may make sense while oil prices are as high as they are today, but it may not be worth the organizational headache for Big Oil to break apart.

By Shelley DuBois, writer-reporter

With major players like ConocoPhillips (COP) and Marathon (MRO) splitting up, industry leaders and the market are starting to question the model of the huge, integrated oil company that handles every portion of the business, from plumbing crude out of the ground to selling it at the gas tank.

But just because the Big Oil’s big business model is being questioned — and rightfully so — doesn’t mean it’s going anywhere.

A few days ago, Fortune pointed out that many big oil companies are undervalued. Splitting them, in theory, could be worth billions of dollars to shareholders. But Big Oil companies need to consider many more factors than short-term shareholder perks before making such drastic decisions. Some may go for it, deciding to opt out of the integrated, one-stop-oil-shop model. But despite the changes major petroleum companies may experience, oil will likely stay Big with a capital B.

When it makes sense to be big, and when it doesn’t

Within the industry, different parts of oil companies are descried as sections of a river: upstream, midstream and downstream. A typical Big Oil company owns the whole river. Upstream involves looking for new wells, drilling them, and pumping crude out of the ground. Midstream means the transportation of new oil by ship routes and pipelines. Then you hit downstream, which is all about processing the product. Downstream assets include refineries, which distill crude into different chemicals, including gasoline. Gas stations, and other retail operations, are also downstream.

Big profits happen upstream. It pays well and pays quickly to strike oil, but companies have to spend a lot of money up front to explore new sites and then drill them.

When oil prices are low, it makes sense to have a hand in the refining and retail businesses, since both provide a steady stream of money that can fund searching for new wells and drilling. So when oil prices dipped during 1980s, then stayed low through the early 1990s, it spurred a mega-merger trend among major oil companies. Hence, we currently have companies like ExxonMobil, BpAmaco, and ConocoPhillips.

That model failed ConocoPhillips, which announced on July 14 that it will spin off its downstream division by the first half of 2012. The market reacted well to the announcement, and share prices of Conoco jumped 7.5% at the news, but the gap faded by the end of the trading day, closing at 1.6% higher than the opening price. Conoco’s breakup comes on the heels of Marathon’s announcement in January that it would undergo a similar split. The market loved it — the company’s share price rose 30% after the announcement.

The success of these sales generated speculation that other big oil companies may follow suit. The refining business is volatile, and may be more trouble than its worth, some argue. Also, many “integrated” companies aren’t actually integrated in practice, says Phillip Weiss, a senior energy analyst with Argus Research Group.  ”Generally integrated oil companies do not refine the oil they produce, instead it goes to wherever is closest,” he says.

That was the case with Conoco, and many analysts are starting to look to BP (BP) as the next in line for a split. The company needs to refresh its strategy. Its stock is undervalued, many analysts say. One J.P. Morgan analyst argued that a BP split could unlock $100 billion worth of value for shareholders.

But BP probably won’t split. Not that the integrated model is ideal. It isn’t. But it’s very hard to cut a giant in half. “The integrated model isn’t what it used to be and it may not be necessary,” says Weiss, ” but if you have it, it may not be easy to get rid of it.”

Why Marathon and Conoco are exceptions

Marathon and Conoco were in better positions to split than other companies. Marathon in particular is different: while many oil and gas companies are shucking their refining businesses in America, Gary Heminger, CEO of Marathon’s downstream spinoff Marathon Petroleum, believes the company will have an advantage in the market.

“Our strategy was that diesel sales around the globe are going to outpace gasoline, so we did something different,” Heminger told Fortune.

Instead of cutting off refineries, Marathon is upgrading them to produce a higher percentage of diesel than its competitors, which Heminger hopes will help the company meet growing demand in the global market.

Conoco, on the other hand, will probably focus the bulk of its business on oil exploration and drilling. But Conoco’s also in a slightly different spot than other super majors, Weiss says. “Conoco’s not as large as Chevron (CVX), Exxon (XOM), BP or Shell (RDSA). Sitting where it did, it probably was better positioned to make a run at doing this than larger companies.”

In the wake of these splits, Big Oil companies will be looking at their assets to trim extra flab. But they’ve already been doing this. Chevron announced plans to sell several downstream assets this year, including a major refinery in Ireland. And Shell has trimmed its refining capacity by 40% over the last 12 years.

Since many major oil companies are looking to get rid of assets downstream, it can be tough to find buyers. That’s why Conoco’s spinoff makes sense, says Weiss, because it’s better for shareholders to create a standalone refining company then sell downstream assets too cheaply.

Breaking up is hard to do

As anyone who has ended a relationship will tell you, breaking up can be brutal, even when it’s the right call. “The complexity of de-integrating these companies is massive.” says Alan Thomson, a Houston-based senior partner at The Boston Consulting Group.

You have to untangle shared departments, he says, such as environmental safety and finance. That’s why it does not make sense for a company like Exxon to split. “ExxonMobil has always been the quintessentially integrated company,” Thomson says. “They still very much manage that supply chain from crude to customer.”

Also, profit growth in refining may be slow in the U.S. and Europe, but having that ability can be an advantage in other places. “If you have aspirations in participating in China, being able to offer a full range of technologies and capabilities is still … very attractive,” Thomson says.

As the price of oil fluctuates, as it is wont to do, oil companies will mutate to profit most. Some will shrink and split. But for others, the best course of action will be to stay big.  It all depends on whether the price of oil will stay high enough to warrant the headache of breaking apart the giants. Companies that split are banking that the price of petroleum to stay high. But if there’s any guaranteed uncertainty in this business, it’s the price of oil.

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When Tony Hayward took over BP in 2007 – after the oil giant had experienced a series of calamitous accidents – he vowed that safety would be his top priority. So how did he come to preside over one of the worst industrial disasters in history? A Fortune investigation reveals a saga of hubris, ambition, and a safety philosophy that focused too much on spilled coffee and not enough on drilling disasters.

Interview by Shelley DuBois December 15, 2010: 3:25 PM ET

FORTUNE — Slowly but surely, the energy landscape in America and around the globe is changing. Crude is still king, but oil and gas companies are increasingly folding in more and different assets.

Shell (RDSA), for example, has purchased and developed tons of natural gas assets, even though the commodity sells for cheap in the current market. To get some insight into Big Oil’s strategy for the future of energy, Fortune spoke with President of Shell Oil Company, Marvin Odum. Odum filled us in on the long-term natural gas outlook, drilling in the Gulf after BP (BP) muddied the industry’s reputation and why Shell feels like oil sands are cleaner than you think.

Fortune: Energy as we know it is changing, how will Shell adapt?

Odum: One of the interesting things about our portfolio is that Shell, by 2012, will actually produce more gas than it does oil. And that’s done with intent. We see increased demand for gas. Economies around the world are growing, and we see gas as being a big part of the solution with a lower environmental impact.

But isn’t it a problem that natural gas is so cheap?

There is a degree of drilling in the system right now that’s oriented towards maintaining acreage for longer-term development–so there’s additional production that doesn’t look economically rational. A rational market would hold off from drilling some of those wells, but instead you get this aberration of drilling to hold acreage for a longer-term position. But I do think we’ll see that play out certainly over the next two years, if not the next 18 months.

How?

Put yourself on the consumer side of this: if you have a choice between building a coal-fired power plant or natural gas-fired power plant, part of what you’re going to want to know is what’s going to happen to natural gas in the future. With all of the resources that have been identified now across North America, consumers have confidence that not only will the supply be there, but also there will be a dampened volatility of natural gas price. And that’s helping natural gas.

So the cheap price of natural gas now could help the industry long term?

It’s not just the current low prices, it’s actually being able to look at the magnitude of these resources and imagining their development over time.

What about exporting liquefied natural gas?

When it comes to the skills and the technology around liquefied natural gas, we’re well-placed if not the best placed company in terms of bringing the solution to that equation. As this market continues to develop, if the right thing is for this resource to leave the continent, we’re in a good place to do that.

And you’re actually working on turning liquids into gas, right?

Gas to liquids a step further beyond an LNG project. We’re moving into Qatar, which will be by far the worlds’ largest gas to liquids facility with some proprietary technology. Qatar has the largest gas provinces in the world, and the ability to take part of that stream, which will have a different market than natural gas, was a natural step for us.

Any interest in drilling in deepwater?

Deepwater continues to be an important area for us. We’ve made a number of significant discoveries, and are anxious to get back to the Gulf of Mexico.

Has the BP spill affected your goal of getting back to the Gulf?

Absolutely. I’ll start with the obvious statement, which is that most people lost faith in the industry as a results of that event. The trust that was there had been built up over many decades, but it’s something that we have to rebuild. I personally have spent a lot of time over this last year to basically be present to answer questions and work directly with the oil spill commission and the regulator. It did a lot of damage to the industry.

You’re in charge of prioritizing Shell’s exploration assets–how do you choose which ones to develop?

You have to be looking forward in what most people would think of as the distant future to think about how the energy mix for the world is going to be changing over decades. There are near term, mid-term, and long term aspects of that. You have to be able to think across a number of different time scales that really matter for this business.

You’ve added oil sands to Shell’s portfolio too. That’s a controversial play right now.

I think the thing about the oil sands that needs more public conversation is that it carries the heavy burden of being detrimental from an environmental perspective. The bottom line is that from an emissions standpoint, these resources are about 5-15 percent more CO2 intensive than the equivalent amount of crude.

So we–Shell and our partners–are now pursuing a carbon capture and storage project with government leaders in Canada. My point is, yes, it’s a higher energy intensive research to develop, but we’re in parallel working on the elements to reduce emissions and increase efficiency.

We see the criticality of the resource and say that this is an important place to be. We also recognize that further development of the oil sands will come with further development of environmental technology. I clearly don’t like it when it appears that things we do don’t hang together well. But that just requires the opportunity to have the full conversation. 

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From Wikipedia, the free encyclopedia
Revision as of 19:16, 24 December 2007

Number 1: Wal-Mart Stores

Number 2: Royal Dutch Shell

Number 3: Exxon Mobil

Number 4: BP

Number 5: Toyota Motor

RANKINGS FOR FIRST 100

By Aaron Smith, CNNMoney.com staff writerJuly 1, 2010: 12:20 PM ET

NEW YORK (CNNMoney.com) — BP’s stock price has fallen far enough for the oil company to become an attractive takeover target for its biggest rivals, according to industry analysts.

BP’s (BP) stock finished at $28.88 Wednesday, a plunge of more than 50% from its close of $60.09 on April 19, the day before its leased oil rig, the Deepwater Horizon, exploded and sank in the Gulf of Mexico.

Fred Lucas of JPMorgan believes that investors have overdone it, making the stock an attractive value for buyers — including other companies.

“In theory, either Exxon Mobil or RD Shell could consider a bid for BP,” wrote Lucas in a note to investors. “We focus on these two names because they have similar business models and similar global asset structures. They also bear the lowest political risk to a potential combination with BP.”

Lucas said that his idea of a proposed takeover of BP was “prompted by the gap between the current market value of BP and the intrinsic value that we see in BP.”

Another oil industry analyst, Douglas Youngson of Arbuthnot Securities, told CNNMoney last month that if BP’s stock dropped below $30 a share, it would become an attractive takeover target.

“If the share price continues to fall, other companies may see this for the bargain it will be,” said Youngson on June 2, when BP’s stock closed at $37.66.

Of the various big players in the oil industry — including Gazprom and PetroChina (PTR) — Lucas believes that ExxonMobil (XOM, Fortune 500) is in the best position to be the acquirer.

He wrote that Exxon Mobil “has the largest rating advantage and strongest balance sheet,” providing it with enough cash to handle the deal.

“Exxon Mobil has also proven its ability to integrate a very large transaction successfully — its merger with Mobil was a resounding success,” added Lucas. “RD Shell has no large-scale merger integration experience.”

Gazprom wouldn’t be a contender because of a “low stock market rating,” he said, while PetroChina “would encounter major political barriers given its controlling shareholder – the Chinese government.”

BP has been purging itself of cash to try and fix the environmental and economic aftermath of the disaster.

The company said it has paid out $2.65 billion for the clean-up, and another $130 million on 41,000 claims from workers and business owners who lost their livelihoods in the wake of the spill. More than 80,000 claims have been submitted so far. Bowing to pressure from the U.S. government, BP has put $20 billion in escrow to cover damages.

Lucas figures that the leak will stop sometime in July, meaning a finite cap to the liabilities. So this might be a good time for Exxon Mobil to swoop in, especially since the oil giant has had its own experiences with catastrophic oil spills.

Before BP’s environmental disaster in the Gulf, Exxon had the dubious distinction of causing the nation’s worst oil spill, when the Exxon Valdez oil tanker ran aground off the coast of Alaska in 1989.

“In many respects, an accurate valuation of BP today depends less on a valuation of its assets, but more on an accurate value of its potential liabilities,” wrote Lucas. “Who knows better how to price potential clean-up costs and associated civil claims than Exxon Mobil?”

Spokesmen for BP and RD Shell declined to comment on this story. Exxon Mobil did not respond to messages from CNNMoney.com.

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Essar, which plans to have a refining capacity of one million barrels a day, is in talks to buy three European refineries from Royal Dutch Shell PLC. In July, Essar acquired a 50% stake in 80,000-barrel-a-day Mombasa- based Kenya Petroleum Refineries Ltd. from Shell, Chevron Corp. and BP PLC.