5.2 oil company strategies from 1970 to the present

Since 1970, the world oil and gas industry has beentransformed by a series of massive shifts in theeconomic, political and technological environment.Adapting to these external forces has involvedmajor changes in the strategies of the oil and gascompanies. The impact of these changes isindicated by a comparison of the leadingcompanies in the industry in 1970 and in 2004(Table 1). In 1970, the industry was dominated bythe Seven Sisters,1 the leading US andEuropean-based petroleum companies thatpioneered the development of the industry for mostof the Twentieth century. Five of the sisters wereAmerican: Exxon (then, Standard Oil New Jersey),Mobil, Chevron (then, Standard Oil California),Texaco, and Gulf Oil; the remaining two wereEuropean: Royal Dutch/Shell Group, theAnglo-Dutch joint venture, and British Petroleum(BP). US dominance of the ranks of the leading oilcompanies also extended beyond the Seven Sisters;twelve of the twenty largest oil companies were USdomiciled. It is notable that all of the non-UScompanies (except Royal Dutch/Shell Group,PetroFina, and Nippon Oil) were either wholly orpartly publicly owned. All the leading companiesin 1970 were vertically integrated and had aninternational spread of activities. The exceptionwas Nippon Oil whose main activities weredownstream and within Japan.

By 2004, the Seven Sisters had been reducedto four: ExxonMobil, Royal Dutch/Shell Group,BP and Chevron Texaco. These four had beenjoined by Total (which had merged with ElfAquitaine and PetroFina) and ConocoPhillips tocreate a leading group of six ‘supermajors’. But,despite the continued dominance of a small groupof integrated, western-based majors, the top-20 listof 2004 had changed greatly over the preceding

three-and-a-half decades. The most notable changehas been the widening international diversity ofthe leading companies. The newcomers to theranks of the major oil and gas companies wereprimarily state-owned companies that were basedeither in major petroleum producing countries(Pemex of Mexico, Statoil of Norway, PDVSA ofVenezuela, Gazprom of Russia) or in majorconsumer countries (China Petroleum & Chemicaland PetroChina of China, SK Corporation ofSouth Korea, Indian Oil of India). Indeed, our listgrossly understates the importance of the nationaloil companies from several oil producingcountries because they do not publish financialaccounts. On the basis of their estimated revenues,Saudi Aramco and National Iranian OilCorporation would certainly be included in ourtop-20 for 2004.

5.2.1 Driving forcesof industry change

Political factorsThe most important factor causing change in

the structure of the industry and the strategies ofthe oil and gas companies has been the changinginternational political environment. The end of the1960s and beginning of the 1970s saw growingrecognition by the oil producing countries of theeconomic and political power that their ownershipof oil reserves conferred. Although theOrganization of Petroleum Exporting Countries

301VOLUME IV / HYDROCARBONS: ECONOMICS, POLICIES AND LEGISLATION

5.2

Oil company strategiesfrom 1970 to the present

1 The term Seven Sisters was coined by Enrico Matteithe founder of the Italian energy company, Eni, and waspopularized by Anthony Sampson in his book The SevenSisters (1975).

(OPEC) was founded in 1960, it was therenegotiations of oil concessions by Libya in 1970and Iran in 1971, followed by the Arab-Israeli warof 1973, that put in place the conditions forOPEC’s escalation of oil prices in 1973-1974.

The power and assertiveness of the oilproducing countries were also evident in a moreaggressive approach to the international oil majors.From the 1960s onwards (earlier in the case ofIran), many of the producer countries nationalizedthe oil and gas subsidiaries and joint ventureswithin their boundaries, thereby creating nationaloil and gas companies responsible for exploitingthe countries’ hydrocarbon assets and making dealswith western oil companies (Table 2). The desire of

the producer countries to appropriate a larger shareof the value of their hydrocarbon resources wassimply a manifestation of political assertivenessand economic development goals of the developingworld and the non-aligned countries. New oilproducing countries in the developed world(notably, Norway and the UK) were just as keen tomaximize so that they could exploit their reservesfor the maximum benefit of their nations.Auctioning of exploration and production licenses,participation agreements, and new petroleum taxeswere not limited to the politically-aggressiveOPEC countries. Some of the most ambitious andfar-reaching attempts by producer countries toappropriate the returns to petroleum resources were

302 ENCYCLOPAEDIA OF HYDROCARBONS

KEY ACTORS IN THE HYDROCARBONS INDUSTRY AND COMPANY STRATEGIES

Table 1. The world’s top-20 oil and gas companies ranked by sales (1970 and 2004)

* Estimated.** Total was then called Compagnie Française des Pétroles.Sources: Company annual reports; «Fortune» and «Forbes», 1970 and 2004.

CompanySales

in 2004 (109 $)Company

Salesin 1970 (109 $)

BP (UK) 285.1 Exxon (US) 16.6

Royal Dutch/Shell Group(Netherlands/UK)

265.2Royal Dutch/Shell Group(Netherlands/UK)

10.8

ExxonMobil (US) 264.0 Mobil (US) 7.3

ChevronTexaco (US) 142.9 Texaco (US) 6.3

Total (France) 131.6 Gulf Oil (US) 5.4

ConocoPhillips (US) 118.7 Chevron (US) 4.2

Eni (Italy) 79.3 British Petroleum (UK) 4.1

Pemex (Mexico) 70.0 Amoco (US) 3.7

Valero Energy (US) 54.6 Atlantic Richfield (US) 2.7

Statoil (Norway) 50.1 Phillips Petroleum (US) 2.3

China Petroleum & Chemical (China) 49.8 Sun Oil (US) 1.9

Repsol-YPF (Spain) 48.0 Eni (Italy) 1.8

Marathon Oil (US) 45.1 Unocal (US) 1.8

PDVSA (Venezuela) 42.6* Elf Aquitaine (France) 1.5

PetroChina (China) 36.7 PetroFina (Belgium) 1.3

SK Corp (South Korea) 33.8 Continental Oil (US) 1.3

Petrobras (Brazil) 33.1 Getty Oil (US) 1.2

Nippon Oil (Japan) 30.4 Nippon Oil (Japan) 1.0

Gazprom (Russia) 28.9 Total** (France) 0.9

Indian Oil (India) 26.1 Petrobras (Brazil) 0.9

established by the Norwegian and Britishgovernments in relation to North Sea oil.

However, the new-found power of OPEC did littleto ensure price stability. A central issue of the period1970-2005 was the increased volatility of the price ofcrude oil. If the first oil shock was the result of thepower of OPEC, the second oil shock, which followedthe Iranian revolution of 1979, demonstrated thepower of world markets to respond to shifts in worldsupply. Since the early 1980s, crude hit lows of $8 abarrel in 1986 and $10 in 1998, and highs of $31 in1990 (following the invasion of Kuwait) and $60 in2005 (Verleger, 1991).

The second political force for change was thecollapse of communism and the wave of liberalizationwhich opened many major oil and gas producingcountries to inward investment, which led to theprivatization of many previously state-owned oil andgas companies, and encouraged globalization bymany domestically-focused energy companies.

CompetitionThe increasingly competitive structure of the

oil industry was apparent from the decliningposition of the major oil companies over theperiod. Until the early 1970s, the world oil industrywas dominated by a small group of major,integrated oil companies, the above-mentionedSeven Sisters. The smallness of this group and the

closeness of their relationships (four of them wereformer members of the Standard Oil Trust)encouraged ‘conscious parallelism’ in theircompetitive behaviour. After 1970, the SevenSisters lost their dominant position within theindustry; during 1973-1987, their share of worldcrude oil production fell from 29.3% to 7.1%, andtheir share of world refinery capacity fell from25.5% to 17.0% (Verleger, 1991). This decline wasa result of two key factors. First, the nationalizationof a large part of the majors’ oil assets after 1972.Second, the expansion of smaller players includingstate-owned oil producers (some formed from thenationalized oil assets of the majors), anddomestically-based oil companies (e.g. ElfAquitaine, Nippon Oil, Neste, and Repsol) whichgrew internationally. The result was a decrease inboth the economic and political power of the oilmajors.

Competitive pressures were exacerbated by theemergence of excess capacity. The two oil shocksdepressed demand for oil products by encouragingenergy conservation and the substitution ofalternative energy sources for oil. The oil intensityof the US economy2 halved over the period 1970 to


OIL COMPANY STRATEGIES FROM 1970 TO THE PRESENT

2 Measured in Btu (British thermal unit) perconstant-price dollar of GNP.

Table 2. The establishment of national oil companies by OPEC countries (Tetreault, 1985)

* In 1974 the Saudi government acquired majority ownership of Aramco which, in 1988, became Saudi Aramco.

Country Company Date established

Algeria SONATRACH 1963

Ecuador CEPE 1972

Gabon PetroGab 1979

Indonesia Pertamina 1971

Iran National Iranian Oil Corp. 1951

Iraq Iraqi National Oil Corp. 1964

Kuwait Kuwait Petroleum Corp. 1976

Libya NOC 1968-1970

Nigeria Nigerian National Petroleum Corp. 1977

Qatar QGPC 1974

Saudi Arabia* Petromin 1962

United Arab Emirates ADNOC 1971

Venezuela PDVSA 1975

1990. On the supply side, the world crude oilsupply capacity increased due to expandedexploration efforts and new exploration andproduction techniques. Excess refining capacitywas exacerbated by refinery investment by manyoil producing countries. The result was excesscapacity throughout the industry’s value chain.

TechnologyThe physical challenges of offshore

exploration and production (E&P) andtransporting natural gas to consumer countries; theeconomic incentives for utilizing heavy crudesand converting heavier into lighter distillates; andthe technological opportunities made available byadvances in science and information technologyresulted in unprecedented innovation in petroleumtechnology. The complexity and costs of the newtechnologies have had many implications, such asthe outsourcing of many technical activities bymajor oil and gas companies. By the beginning ofthe Twenty-first century, some of the mostimportant players in the industry were theengineering and oilfield service companies, suchas Schlumberger, Halliburton, Baker Hughes, andKerr McGee.

The investment costs of major projectsincreased massively. Developing a major oil or gasfield, or building a pipeline, refinery, or a majornatural gas liquefaction complex each involvedmulti-billion dollar investment expenditures.Inevitably, joint ventures and other forms ofcollaboration became more important.

5.2.2 The oil and gas majors:the traditional model

By 1970, the world’s leading oil companies hadachieved a configuration of strategy, structure andmanagement systems that, for most of them, wasthe culmination of more than half a century ofdevelopment. In terms of strategy, the crucialfeatures of the majors were their immense size,vertical integration, and global spread. Despite thedifferent origins of the companies – Exxon (asStandard Oil) had its origins in refining, Shellbegan in transportation and trading, while RoyalDutch, Texaco, and BP began in E&P – thecompanies’ strategies had converged around acommon business model. All were integratedvertically from initial exploration right through tothe retailing of refined products. The central logichere was to limit risk by maximizingself-sufficiency (thus, downstream activities

provided the secure outlets for the companies’risky E&P investments). Most intermediate stepswere also managed internally: the companiesprovided most of their own engineering andoilfield services, and were some of the world’slargest shipowners. All of the majors hadestablished important petrochemical businesses.

Economies of scale, together with verticalintegration and international expansion, meant thatthe oil majors were some of the world’s largestindustrial corporations. In 1970, seven out of thetwenty biggest US companies (ranked by sales)were oil companies, a higher representation thanany other industry. Indeed, during the 1970s, theoil majors achieved their maximum size in terms ofnumbers of employees. From the end of the 1970s,the majors began to shrink in terms of numbersemployed (Table 3).

A key feature of the companies’ organizationwas their high degree of centralization, unusual forcompanies of their size and diversity of productsand activities. All the companies possesseddivisionalized structures, typically based upon acombination of geographical, functional activity,and product grouping. Yet, compared to otherindustrial corporations, they had been slow toadopt multidivisional structures (Chandler, 1962)and continued to retain an unusual proportion ofdecision making at headquarters level.

Centralization reflected the highlyinterdependent activities of the oil companies. Theconventional multidivisional form with itsseparation of strategic and operational decisionmaking was not feasible for the oil majors becauseof the close interrelationships, both verticallybetween their main businesses (exploration,production, refining, and distribution/marketing),and horizontally between their various finalproducts. Although most companies adopted aregional divisionalization, geographically,decentralization was limited by the need tocoordinate the flows of crude oil from the producercountries to downstream activities in the consumercountries. These coordination needs resulted in theoil majors developing highly sophisticated,administratively-planned economic systems.Rather than operational management beingdecentralized to the divisions, corporateheadquarters were responsible not just for strategicdecision making and resource allocation, but alsooperational planning.

The administrative planning model, whichcharacterized the oil majors, emphasizedmanagement’s role in optimizing coordinationwithin an essentially closed system. High levels of



vertical integration insulated each oil companyfrom the volatility and uncertainty of intermediatemarkets. This insulation from market uncertaintyechoed the central theme of J.K. Galbraith’s Newindustrial state (1968). Where capital investmentsare large and long-lived, big competitive integratedcorporations wielding substantial market powerprovide insulation against the risks of competitionand fickle markets. The management of suchorganizations is technocratic, requiring forecasting,planning and coordination, supported bysophisticated information systems and scientificdecision making.

The problem for the oil companies, and forGalbraith’s theory, was that the companies wereunable to suppress and control the market forceswhich their administrative systems were intendedto supplant. As a result of increased competition,increased market volatility, and major economicand political shocks, the structure and managementsystems of the oil companies were subject toincreasing strain. Accelerating external changerendered centralized decision making increasinglyinefficient; the hierarchical systems facedinformation overload, and organizational reactiontimes were too slow to meet the requirements fordynamic efficiency in fast-moving externalenvironments.

The result was a quest for structures andsystems which would be capable of respondingquickly to external change, would foster

opportunism and an entrepreneurial drive for profitbut, at the same time, would permit planning andinvesting for long-term development.

5.2.3 Diversification and the quest for reserves(1974-1984)

The first oil shock of 1973-1974 undermined theadministrative planning model of the oil majors intwo ways. First, they lost traditional control of themarkets for oil to a new player, OPEC. Second,they lost a major part of their hydrocarbon reservesas a result of nationalization by producergovernments. Their responses to the newconditions were, first, to maintain their vertically-integrated structures by seeking reserves in newlocations, and second, to seek new sources ofgrowth through diversification (Grant and Cibin,1996).

The quest for oilThe new status of the oil majors as buyers of

oil increased their determination to restore verticalbalance. During the latter half of the 1970s,upstream investment grew substantially, especiallyin the politically-secure oil fields of the North Seaand Alaska’s North Slope. Exploration wasexpanded in both mature oil producing regions andextended to frontier regions – primarily the Irish



Table 3. Employment among the oil companies in different years (numbers of employees)

* ExxonMobil.** Including Amoco and Arco.*** ChevronTexaco.Source: Company annual reports; «Fortune Global 500», 1970-2004.

1970 1980 1985 1990 2000 2004

Exxon 143,000 176,615 146,000 104,000 106,000* 85,800*

Mobil 75,600 81,500 71,100 67,300 – –

Royal Dutch/Shell Group 158,000 161,000 142,000 137,000 128,000 114,500

BP 105,000 118,200 129,450 116,750 112,150** 102,900**

Amoco 47,551 56,401 48,545 54,524 – –

Atlantic Richfield (Arco) 31,300 53,400 31,300 27,300 – –

Eni 76,000 128,000 129,000 82,700 80,178 70,948

Texaco 73,734 66,745 54,481 39,199 19,011 –

Chevron 44,610 40,218 60,845 54,208 36,490 67,569***

Sea, South China Sea, Gulf of Mexico, the offshoreareas of West Africa and Australasia. Table 4 showsthe growth in upstream investment after the oilshocks of 1973-1974 and 1979-1980. Greaterupstream investment was partly responsible for thecompanies’ convergence towards a more similarspread of international activities. Expanding NorthAmerican investment was a strategic priority forthe two European oil companies, while the moststrongly US-focused companies, notably Amocoand Atlantic Richfield, increasingly sought oiloverseas.

Yet, despite increased exploration and largediscoveries in the North Sea, Alaska, andelsewhere, the pre-1973 situation was irretrievable.By 1975, the international oil and gas majorssupplied less than one half of their total oilrequirements from their own reserves, theremainder had to be purchased from thenewly-powerful national production companies.

Diversification Sharply higher oil prices and the sluggish

global economy of the late 1970s and early 1980s

meant near stagnant demand for oil and oilproducts, and the emergence of excess capacity atmost stages in the companies’ value chains.Nevertheless, the oil majors remained committedto growth and, fuelled by strong cash flows fromhigher oil prices, turned to diversification as themajor source of growth.

In 1970, the companies were almost whollyspecialized in oil, gas, and petrochemicals. By1984, broadly similar patterns of diversificationhad taken them into alternative energy sources(primarily coal, but also solar power, nuclearenergy, and non-conventional hydrocarbons suchas tar sands and oil shales) and minerals such asnon-ferrous metals, phosphates, sulphur, andcement. Other areas of diversification wereprimarily a consequence of the desire to exploitinternally-developed technologies andmanagement capabilities, e.g. BP and Amocoanimal feed businesses, Shell’s detergentsbusiness, Exxon and Texaco in electricitygeneration. Amoco, Atlantic Richfield, BP, Exxon,Shell, and Texaco formed venture capitalsubsidiaries with the purpose of bringing to



Table 4. Average annual capital expenditures on oil and gas businessesby selected companies, 1970-2004 (106 $)

* Combined data for ExxonMobil after 1995.** Combined data for BP, Amoco and Arco after 1995.*** Combined data for Chevron and Texaco after 1999.Source: Company financial accounts.

1970-1973 1974-1978 1979-1982 1983-1986 1987-1990 1991-1994 1995-1999 2000-2004

Exxon* upstream 981 3,040 6,371 6,955 4,870 6,322 8,016 10,005downstream 897 1,114 1,365 1,264 1,438 1,660 2,664 2,508

Mobil * upstream 426 863 2,106 1,548 1,208 1,214 – –downstream 557 502 832 811 726 1,104 – –

Shell upstream 470 1,477 4,507 4,052 3,215 4,677 6,377 8,516downstream 1,083 1,006 2,296 1,541 2,486 2,551 2,614 3,108

BP** upstream 306 780 3,387 2,974 2,401 3,620 4,998 10,118downstream 430 422 696 961 886 937 1,421 4,830

Amoco** upstream 595 1,206 2,258 2,567 2,390 2,956 – –downstream 242 289 563 542 451 548 – –

Arco** upstream 232 678 2,210 2,877 1,559 2,380 – –downstream 267 591 433 286 556 545 – –

Chevron*** upstream 302 889 2,560 2,712 1,805 1,663 3,386 6,505downstream 413 678 1,132 803 731 662 908 1,180

Texaco*** upstream 673 927 1,560 1,467 1,295 1,544 2,318 –downstream 433 416 567 826 604 588 864 –

Eni upstream 332 981 2,104 2,150 2,531 2,431 2,992 4,808downstream 145 246 368 260 628 501 544 596

market internally-developed technologies andacquiring small, technology-based, newcompanies. Several companies diversified morewidely: Exxon and BP into informationtechnology, Mobil into retailing (MontgomeryWard) and packaging. Table 5 shows thediversification of several leading oil and gasmajors.

5.2.4 Internal restructuring for efficiency andflexibility (1985-1994)

Changing corporate goalsDuring the 1980s, the major oil and gas

companies came under increasing pressure. Afterreaching a peak in 1981, oil prices followed asharp downward trend and industry profitsdeclined in tandem (Al-Chalabi, 1991).

Between 1985 and 1994, almost all themajors announced significant restructuringinitiatives which involved extensive assetdivestments, employment reductions, andreformulation of their business strategies. A keytrigger was the precipitous decline in oil pricesin 1986 when increased production by SaudiArabia resulted in oil prices falling below $9 abarrel. The result was a fundamental questioningby the oil majors of their strategies andorganizational structures.

At the root of these restructuring initiatives wasthe companies’ affirmation of profitability andshareholder return as their primary goals. Duringthe 1970s, statements of corporate goals hadplaced emphasis on growth and operational goalssuch as replacing reserves, expandinggeographically, and improving efficiency andtechnological progress. During the 1980s, thesegoals became subsidiary to profit and return toshareholders. The following statements weretypical:• “Our primary goal is to improve both the

short-term and the long-term value of yourinvestment” (Mobil, 1987).

• “Our aim over recent years has been, andremains, to achieve the maximum return fromour assets” (BP, 1988).

• “We are acutely aware that you expect toreceive a fully competitive return on yourinvestment […] and that’s what we intend todeliver. Our standard […] is to become not onlyone of the most admired companies in theindustry, but also one of the most valuable tostockholders” (Texaco, 1989).

• “The Company gives the highest priority toimproving financial results and the return on itsstockholders’ investment” (Chevron, 1989).The quest for improved returns to shareholders

provided the unifying theme behind the strategicand organizational changes of 1985-1994. A clearindication of the reorientation of corporate goalsfrom growth to shareholder value creation was theintroduction of share repurchases designed toincrease earnings per share by reducing the numberof outstanding shares. As in other aspects ofrestructuring, Exxon was the leader. Between 1984and 1986 alone, Exxon spent $6 billion on sharerepurchases. All the other majors introducedsimilar initiatives; instead of excess cash flowinginto diversification, the companies gave it back totheir shareholders.

From diversification to focusThe most prominent aspect of strategic change

during the mid and late 1980s was widespreaddivestment of ‘non-core’ businesses. By 1990, theleading oil companies had almost entirely divestedthe diversifications of the earlier period. First to gowere the almost entirely unsuccessful, unrelateddiversifications such as Exxon’s Office Systemsventure, Mobil’s foray into general retailing, BP’sdalliance with software and telecommunications,even Eni (by far the most diversified of the leadingoil and gas majors) began to shed some of itsdiversified businesses.

Then came divestment of most of the majordiversifications into related sectors. In particular,all the majors sold off their metal miningsubsidiaries. By the beginning of the 1990s, onlyShell had a major metals’ mining business (itdivested Billiton in 1993). By 1994, the only oneof the majors with substantial interests outside ofenergy and chemicals was Elf Aquitaine with its‘health and beauty’ business (pharmaceuticals andcosmetics). Some companies went even furtherwith their determination to ‘refocus on corebusinesses’ (both Arco and Texaco divested majorparts of their chemical businesses, raising thequestion of whether the technical linkages betweenpetroleum refining and petrochemicals weresufficient to justify the majors’ continuedinvolvement in chemicals).

The companies also redefined their scope inrelation to their geographical spread of activities.Downstream, all the companies narrowed theirgeographical spread. By 1990, not one of thecompanies was marketing in all 50 states of theUS, and most had refocused their Europeanoperations, withdrawing from countries where their





Table 5. Diversification by Shell, Exxon, Mobil and BP (1974-1984)

Source: Company annual reports.

ROYAL DUTCH/SHELL GROUP

1974 NV Billiton, metal and minerals exploration and production company, acquired 1975 Additional investments in gas-cooled nuclear reactors1976 Seaway coal acquired for $ 123 million

Coal gasification plant built in GermanyScallop Coal established in New York to trade coal

1977 Crows Nest Industries (coal producer) acquired1979 Forestry investments in New Zealand and Chile

EXXON

1975 Exxon Nuclear International formed1977 Exxon Minerals USA and Exxon Minerals International formed1979 Reliance Electric Co. acquired for $ 1.2 billion1980 Exxon Office Systems and Exxon Information Systems formed1981 US$ 2.5 billion electricity generation project in Hong Kong started

16% of American Solar King (solar energy) acquired1984 Coal production begins at Cerrejon, Columbia

MOBIL

1974 Acquires Marcor for $ 883 million – parent of Montgomery Ward (retailing) and Container Corp.1975 Invests in coal mining and real estate1977 Mt. Olive and Staunton Coal Company acquired for $ 47.5million1978 W.F. Hall Printing acquired for $ 50.5 million

Electro-Phos Corporation (phosphorous refining) and Rexene Styrenics acquired.Real estate investments in Hong Kong.

1980 Acquisition of companies producing plastics, phosphorous, and fertilizers.Alternative energy investments include methanol (New Zealand), oil shale plant (Utah), uranium processing plant(US), and coal-to-liquids plant (Kentucky)

1982 Mobil Diversified Businesses established to operate non-petroleum, non-chemical businesses1983 Begins coal projects in Australia and Indonesia.

Acquires Baggies plastic bag company from Colgate-Palmolive1984 Acquires can coating business from DuPont

BRITISH PETROLEUM

1976 Forms BP Nutrition Ltd (proteins & animal feed)Forms Sonarmarine Ltd (underwater surveying)

1977 Acquires 50% of Clutha Development (Australian coal mining)1978 Acquires R. McBride Ltd (engineering & construction)

Acquires Bakelite Xylonite Ltd (plastics) from Union Carbide1979 Acquires 25% of Ruhrgas (gas refining & distribution in Germany)1980 Acquires Selection Trust Ltd (global metals mining)1981 Acquires Systems Control Inc. (computer systems)

Acquires Kennecott Corp. for US$ 1,77 million (by Sohio)Acquires Verdugt NV (specialty chemicals)Establishes BP Detergents InternationalAcquires 49% of Brascan Resoursos (tin)Acquires 49% of Olympic Dam project (metals mining in Australia)Takes 49% in Mercury Communications (telecom)

1983 Acquires NANTA (Spanish animal feed company)1984 Acquires NORIA/UFAC (French animal feed company).

Establishes BP Energy Management (energy management systems)

market share was below 10%. A similar trendoccurred upstream. During the late 1980s and early1990s, most of the companies reduced the numberof countries where they conducted exploration andproduction in order to achieve better economies inthe use of infrastructure and knowledge.

Chevron’s description of its approach torefocusing is typical: “[We] have taken a criticallook at our asset deployment to determine howeach of our businesses fits into the corporation’sstrategic plans. As a result, we have pulled out ofseveral geographic areas and businesses in order toconcentrate our resources where we have acompetitive advantage. And the process continues.We are now disposing of our agriculturalchemicals, fertilizer and certain mineralsbusinesses. Almost $400 million of marginal USproducing properties have been sold, and we planto continue selling such properties in 1991”(Chevron, 1990).

Among all the companies, strategy wasincreasingly driven by rigorous financial analysisof return on capital and impact on shareholderwealth. BP described its flexible approach toportfolio management active asset management.Former Chief Executive Officer (CEO), PeterWalters, described the approach as follows: “Weseek to ensure that our operations satisfy thecriteria of selective excellence: that is being amongthe very best; and critical mass, which meansbeing of sufficient size to compete strongly in themarket [...] Within our strategic criteria, wecontinually review all of BP’s activities –hydrocarbon based or otherwise. If certainoperations are worth more for particular reasons toothers than to ourselves, or if they no longer fulfillour requirements and show little prospect of doingso, we are prepared to withdraw from or sell them.Active asset management is convenient businessshorthand for this strategy”. (BP, 1988).

BP’s sale of its minerals business illustrated thenew line of thinking: “These major developmentswill both enhance and protect the value of yourcompany by helping BP to re-focus increasingly onits central or ‘core’ businesses [...] Why are wemaking this divestment, when BP Minerals isgenerating good profits? [...] Having acquired,nurtured and developed the minerals business overseveral years, we projected forward the increase incommodity prices. Against these projections, weare receiving from RTZ a net value which, weconsider, is a very positive reflection of futureearnings. Not only are we getting a good price, weare raising money for better opportunities in otherbusinesses” (BP, 1988).

The quest for efficiencyReorientation of strategies around shareholder

value goals also meant increased emphasis on costefficiency. Exxon was the most explicit inexpressing its intention to become the “mostefficient competitor in each of our businesses, inoil and gas, in chemicals, and in every otheractivity” (Exxon, 1983).

Traditionally, efficiency was associated withstatic efficiency, i.e. the exploitation of scaleeconomies in refineries, ships, distributionnetworks, and other indivisible capital items,together with operational planning of productflows to optimize refinery scheduling andminimize inventories and transport costs. Underunstable market conditions, dynamic efficiencybecame increasingly important, i.e. adjustingcapacity to demand, adjusting the mix of inputsand outputs to changing price differentials, andgenerally minimizing costs through maximizingflexibility and responsiveness. Cost reductionmeasures included:• Capacity adjustment through closure of

refineries, storage capacity, and retail fillingstations, and the sale and scrapping of oiltankers (Table 6).

• Reducing overhead costs, especially cuts inmiddle management and headquartersactivities. At several companies, reductions incorporate-level employees were achieved. AtBP, more than 2,500 head office employeeswere cut from 3,000 to 380 (in addition, afurther 700 in corporate services were relocatedaway from head office). In all, 1,150 corporatelevel jobs were eliminated. At Exxon,headquarters staff was reduced from 1,500 to300. These economies were often accompaniedwith relocation of companies’ head offices:Exxon moved from New York to Dallas, Texas;Mobil from New York to Fairfax, Virginia; BPmoved twice within London, while Shell soldoff more than half of its London Shell Centre.

• Developing and deploying cost-reducingtechnology. Despite increased parsimony incapital investment, there was a substantialincrease in expenditure on the development andacquisition of new technologies that couldlower capital costs and increase operationalefficiency. Computer-aided seismic analysisand reservoir modelling, light-weight drillingplatforms, new drilling techniques (includinghorizontal and directional drilling), andenhanced oil recovery techniques, substantiallyreduced reserve replacement costs during the1980s and early 1990s.



• Increasing flexibility and responsiveness wasalso a source of cost advantage. Flexibilityinvolved technical improvement to refineriesand outsourcing many activities and functions.

Aligning business strategy with resources and capabilities

Increased competitive pressure, together with astronger focus on profitability, encouraged a majorreorientation of the basis of company strategy.Rather than imitating one another’s strategicinitiatives, the emphasis of strategy shifted towardsthe pursuit of competitive advantage which,inevitably, meant the exploitation of differences inendowments of resources and capabilities.

Exploitation of distinctive resources andcapabilities included the following: • Mobil combined its strong marketing

orientation and its traditional technicalstrengths in lubricants to develop its worldwidelubricants business. In its petrochemicalbusiness, Mobil exploited its marketing andproduct management capabilities to integrateinto fabricated plastic products.

• While most of the majors were selling off theirmature US fields, Texaco’s strengths inenhanced recovery techniques encouraged it tofocus upon their exploitation.

• Arco utilized its two key strengths of low-costAlaskan oil and strong marketing orientation toincrease its market share on the West Coast ofthe US by a retail strategy oriented around price

leadership in gasoline, and differentiationthrough offering a wide range of products andfast-food catering at its service stations.

• Exxon relied upon its massive financial andengineering strengths.

• Eni utilized its expertise at relationshipmanagement in complex political situations tonegotiate deals with North African countries,the Soviet Union and the post-Soviet states, andto build on its natural gas expertise to create avertically-integrated natural gas major.

• BP, with its long history of discovering‘elephants’ (very large oilfields), focused onexploring for major new fields in frontierregions and also being a ‘strategic innovator’,i.e a first mover in identifying and initiatingmajor strategic shifts in the oil industry.

5.2.5 Changes in organizationalstructure

Changes in strategy were accompanied by changesin organizational structure. The principal changesin organizational structure and managementsystems over the period included the following:

Changes in divisional structure. Changes indivisional structures were of two types: first, thecompanies moved increasingly from ageographically-based to a sector-based divisionalstructure; second, they reduced the number ofdivisions reporting directly to headquarters. By



Table 6. Capacity reduction by the oil companies during the 1980s (Cibin and Grant, 1996)

* The data show changes in capacity from the start of the first mentioned year to the end of the last mentioned year.** Change in number of vessels.*** North America only.

Change in operablerefining capacity*

Change in deadweighttonnage of tanker fleet*

Change in no.of retail outlets*

Exxon (1982-1987) �28% �58% �24%

Royal Dutch/Shell Group (1981-1986) �33% �54%** �16%

BP (1982-1986) �27% �63% �18%

Mobil (1986-1988) �1% �18% �30%

Texaco (1986-1989) �36% �12% �65%***

Chevron (1986-1989) �33% �28% �28%

Amoco (1986-1990) �5% �21% �19%

Arco (1985-1987) �63% �13% �55%

1991, the predominant organizational form was acorporate headquarters with three principaloperating divisions: upstream, downstream, andchemicals. However, there was significantvariation within our sample: Exxon maintained ageographical structure with Exxon USA, distinctfrom Exxon International and Imperial Oil ofCanada; Texaco’s structure was also partlygeographical; while the Royal Dutch/Shell Group(which comprised over 200 national subsidiaries)was uniquely decentralized.

The tendency for the companies to reorganizeinto fewer divisions was a result of the divestmentof diversified activities between 1985 and 1990,the transfer of many service and coordinationfunctions from the corporate headquarters to thedivisional level, and the desire to reduceadministrative overheads wherever possible. Theshift from a geographically-defined divisionalstructure towards a divisional structure definedaround groups of products is consistent with thetrends observed for other diversified, multinationalcompanies (Stopford and Wells, 1972).

Vertical de-integration. The traditionallycentralized structures of the companies were aconsequence of vertical integration: so long as oilproduction, transportation, refining, anddistribution needed to be coordinated, headquartersretained an important role in operational planning.With the development of efficient markets for oiland oil products, and increased volatility withinthese markets, the transactions costs ofintermediate markets fell, while the costs ofinternal transfer rose. Shell was the first companyto free its refineries from the requirement topurchase oil from within the group. Between 1984and 1988, all the sample members grantedoperational autonomy to their upstream anddownstream divisions, placing internal transactionson to an arms-length basis. Upstream divisionswere encouraged to sell oil to whichever customersoffered the best prices, while downstream divisionswere encouraged to buy oil from the lowest costsources.

By the mid-1980s, the oil majors wereemerging as major players on the spot and futuresmarkets for crude and refined products. All thesample members established oil trading divisions,whose function was to serve the transactions needsof the production and manufacturing divisions, andeven to trade for profit in the oil markets. Of thetotal crude purchased by Shell InternationalTrading Group in 1994, 65% was from outside theShell group and 45% of sales were to third parties.Texaco Trading and Transportation not only

serviced Texaco’s internal needs, but it alsoengaged in substantial third party trading and by1988, it was purchasing 9% of all US producedcrude oil.

The new logic was articulated by BP: “Asignificant feature of the oil industry in recentyears has been the trend towards deintegration, orseparation of upstream crude production fromdownstream refining and marketing. Each part ofthe oil business then stands on its own, so allowingits performance to be measured against the value ofits products in the international market. Oneconsequence of this has been the developmentwithin the industry of a much clearer picture of thetrue costs and profitability of the downstream oiloperations” (BP, 1983).

Changes in management systems. New strategyand structures also involved changes in the systemswith which companies were managed. Inparticular:• The leading majors dismantled their

centralized, forecast-driven systems ofcorporate planning in favour of less-formalizedand more performance-oriented approaches tostrategy making that was increasingly focusedupon the business divisions. These changesinvolved the dismantling or downsizing ofcorporate planning departments and thetransfer of strategy-making responsibilities toline managers.

• Decentralization. Less vertical integrationpermitted greater decentralization of decisionmaking. Decentralization involved devolutionof decision making from corporate to divisionallevels and from divisions to individual businessunits. The objectives were to speed up decisionmaking, to encourage entrepreneurship andinitiative, and to reduce costs.

• Delayering. Decentralization of decisionmaking typically involves the stripping out oflayers of authority. At Texaco, the number oflayers of hierarchy between the CEO (ChiefExecutive Officer) and first-line supervisorswas reduced from 14 in 1987 to 6 or 7 in 1990.The CEO reported: “A dynamic new companyis emerging from Texaco’s restructuring. In theoffice and in the field, Texaco people are beingchallenged to perform, to be creative, tobecome entrepreneurs in the true sense of theword. And they are responding. Working in adecentralized company, talented and motivatedpeople on the front lines of Texaco’s businessesare taking the calculated and informed risksthat lead to better profitability” (Texaco, 1988).At Amoco, decentralization was more radical:



the company’s main divisions (upstream,downstream, chemicals) were broken up into 17separate businesses, each of which reporteddirectly to the corporate headquarters.

• Financial control and performancemanagement. All the companies placed greateremphasis on budgetary control and short andmedium-term performance targets. The newemphasis reflected the increased priority givento profitability and financial accountability ofeach division and business unit. The newemphasis was reinforced through increased useof profit bonuses and stock options toincentivize senior managers. Thus, Texacoidentified itself as an “entrepreneurialoperation with bottom-line accountability”. Itsnewly decentralized structure meant monitoringeach division on a monthly basis with “thebottom line reviewed at the end of each year”.One analyst commented: “Texaco employeesare being encouraged to change thebureaucratic mindset, typical of large oilcompanies, and take risks as an entrepreneurwould” (Texaco [...], 1989). Increased financialaccountability also meant increased pressure onmanagers to meet demanding profit targets. AsExxon Chemical’s President, EugeneMcBarayer, observed: “I feel my neck is in thenoose. If I don’t deliver, they’ll get someoneelse in here who will”.3

5.2.6 Consolidation: the wave of mergers (1995-2002)

Mergers and acquisitions pre-1998Mergers and acquisitions had long been a

central feature of the corporate strategies of theleading oil and gas majors. Several of the leadingmajors had been created through mergers: Mobilwas created from the merger of Standard Oil ofNew York (Socony) with the Vacuum OilCompany; Atlantic Richfield was formed from themerger of Richfield Oil Corporation and AtlanticRefining Company; Eni was created from themerger of Agip, Snam and several other Italianenergy companies; Royal Dutch/Shell Group was ajoint-venture between Royal Dutch Petroleum andShell.

During the late 1970s and 1980s, the majorsused acquisitions as a means of diversifying into anumber of new industry sectors. From the mid1980s, acquisitions were mainly horizontal, i.e., theacquisition targets were mainly other oil and gascompanies where the motives for acquisition were

primarily to build critical mass in existing markets,to expand geographical scope, and to acquirehydrocarbon reserves. Significant acquisitionsincluded: a) Chevron’s purchase of Gulf Oil(1984); b) Texaco’s purchase of Getty Oil (1984);c) BP and Royal Dutch/Shell Group’s purchase ofthe outstanding shares of their US affiliates Sohio(1987) and Shell Oil (1984), respectively; d ) BP’sacquisition of Lear Petroleum and Britoil in 1988and Burmah Oil in 1989; e) Amoco’s purchase ofDome Petroleum (1987).

The creation of the ‘supermajors’During the mid-1990s, excess capacity and

depressed profit margins were creating pressuresfor mergers at the downstream level. In October1996, Shell, Texaco, and Star Enterprise (a jointventure between Texaco and Saudi Aramco)announced the merger of their downstreambusinesses within the US to create America’slargest refining and marketing company. Similarpressures were apparent in Europe where BP andMobil merged their downstream businesses into asingle joint venture.

However, the critical event that triggeredmergers and acquisitions on a much larger scalewas BP’s merger with Amoco (which was quicklyfollowed by its acquisition of Arco, one of thesmallest of the international majors). BP’s actionssent a shock wave throughout the industry. Theoutcome was a series of mergers and acquisitionsthat represented the most rapid period ofconsolidation that the oil and gas industry hadexperienced since the growth of Standard Oilduring the 1980s.

The most significant of the new wave ofmergers was Exxon and Mobil’s announcement ofa merger agreement towards the end of 1998. Thiswas the biggest merger in history and created theworld’s biggest industrial corporation. It was aclear indication to the other leading oil and gascompanies that the mergers were moving into twodivisions: the ‘supermajors’ represented byExxonMobil, BP-Amoco-Arco, and RoyalDutch/Shell Group, and the others (Table 7).

The benefits of sizeWhile stock markets rewarded these mergers

and acquisitions with higher valuation ratios, theextent of real economic benefits was unclear. Theprimary motivation appeared to be the desire for



3 For further discussion of restructuring by the majors,see R. Cibin and R.M. Grant, 1996.

growth, particularly when low oil prices werereducing revenues.4

Once the merger wave began, it wassustained by companies’ fear of being relegatedto ‘second division’ status within the industry.The positive stock market reaction to themergers was surprising, given that many studiesacross other industries show that only a smallminority of mergers achieve measurable gains,such as higher productivity, profits or shareprices, over the long term. The answer lies in theenormous capital costs and risks inherent in theexploration and production of oil. Moreoveronly well-capitalized firms that are big enoughto afford the time, money and risk required toplay in this poker game can hope to thrive. As aresult of the stakes being so high, finding that‘elephant’ of an oilfield has become theindustry’s obsession.

The arguments in favour of size werearticulated by Thierry Desmarest, chairman ofTotal and architect of the mergers with PetroFinaand Elf Aquitaine. He argued that: “In the future,the very large, major oil and gas companies will bethe best positioned to successfully meet thenecessary demands which will be made on our

industry. It will be their substantial size that willgive them: • The necessary financial strength to carry out

large projects.• The command of leading-edge technologies

and management skills.• Adequate negotiating power with governments.• The indispensable resilience and flexibility to

changing environments.• The patience and long-term vision to develop

major projects that will require major advancesin technology or market development”(Desmarest, 2002).

Desmarest offered the following as examples ofthe increasing size of project being undertaken byTotal: a) the $2.5 billion Elgin-Franklin field inthe North Sea; b) the $4.3 billion Sincor projectin Venezuela for converting extra-heavy crudeinto low-sulphur synthetic crude; c) the $2.6billion Girassol oilfield project in 1,350 metres ofwater off Angola; d ) the $2 billion developmentof the South Pars gas field in Iran.Desmarest also referred to the ability to spread



4 In December 1998, crude prices fell below 10 $/bbl.

Table 7. Major mergers and acquisitions in the oil and gas industry, 1998-2002(only includes acquisitions of companies with revenues exceeding $ 1 billion)


Leading oiland gas companies, 1995

Revenues in 1995(109 $)

Date mergedLeading oil

and gas companies, 2002Revenues in 2002

(109 $)

Exxon 123.92 ExxonMobil Corp. 182.47Mobil 75.37 1999

Royal Dutch/Shell Group 109.87 Royal Dutch/Shell Group 179.43Enterprise Oil 1.18 2002

British Petroleum 56.00 BP Amoco 178.72Amoco 28.34 1998Arco 15.82 2000

Chevron 31.32 ChevronTexaco 92.04Texaco 35.55 2001

Total 27.70 Total 96.94PetroFina n.a. 1999Elf Aquitaine n.a. 2000

Conoco 14.70 ConocoPhillips 58.38Philips Petroleum 13.37 2002Tosco n.a. 2001

Eni 35.92 Eni 46.33

Repsol 20.96 Repsol-YPF 34.50YPF 4.97 1999

risks through undertaking multiple large projects indifferent regions of the world. Thus, in LiquefiedNatural Gas (LNG), Total had invested in fiveplants located in Indonesia, Nigeria, Qatar, andAbu Dhabi. Another benefit of size is the greateropportunities for learning that arise from pursuingmultiple projects. The more projects of a similartype that a company undertakes (e.g. deep seadrilling in North Sea, Gulf of Mexico, and offshoreWest Africa), the greater the scope for learning,

innovation, and sharing of best practices. Theincreased size and risk associated with majorupstream projects is indicated by Shell’s experiencewith its massive Sakhalin-2 offshore gas project offthe coast of Siberia. By 2005, the estimated cost ofthe project had risen to $20 billion, a cost over-runof $10 billion (Shell [...], 2005).

In general, however, evidence of significanteconomies of scale associated with being a‘supermajor’ rather than a ‘major’ is hard to find.



Table 8. The world’s biggest listed oil and gas companies, 2004(ranked by stock market value, $109)

Company Country Sales Profits AssetsMarket

capitalization

Exxon Mobil US 263.99 25.33 195.26 405.25

BP UK 285.06 15.73 191.11 231.88

Royal Dutch/Shell Group Netherlands/UK 265.19 18.54 193.83 221.49

Total France 131.64 8.84 98.69 151.13

ChevronTexaco US 142.90 13.33 93.21 131.52

PetroChina China 36.70 8.41 64.23 111.03

Eni Italy 79.31 9.89 82.25 104.71

ConocoPhillips US 118.72 8.13 92.86 76.54

Gazprom Russia 28.88 5.84 90.29 69.90

Petrobras Brazil 33.11 6.15 46.43 48.38

China Petroleum & Chemical China 49.75 2.61 48.16 44.97

Schlumberger Netherlands 11.61 1.22 16.04 44.42

Statoil Group Norway 50.06 4.11 40.91 39.44

Repsol-YPF Spain 48.00 2.54 46.68 33.32

EnCana Canada 10.93 2.52 24.11 30.75

Surgutneftegas Oil Russia 7.67 0.66 18.32 29.76

Lukoil Holding Russia 23.14 3.87 26.46 28.52

Oil & Natural Gas India 9.78 2.16 19.18 27.86

BG Group UK 7.83 1.74 16.49 27.80

Occidental Petroleum US 11.51 2.57 21.39 27.74

CNOOC Hong Kong/China 4.96 1.40 8.88 23.83

Devon Energy US 9.19 2.19 29.74 22.65

Apache US 5.33 1.67 15.50 20.59

Halliburton US 20.47 0.98 15.80 19.41

Burlington Resources US 5.62 1.53 15.74 19.25

Source: «Fortune», 2004; Hoovers.com.

Downstream, there are substantial cost and marketpower advantages associated with market share inindividual national and regional markets, but fewscale economies at the global level. Upstream, sizeincreases bargaining power and allows for thespreading of risk, but the main scale economiesrelate mainly to the utilization of infrastructurewhich is specific to particular regions andhydrocarbon basins.

5.2.7 Current directions in strategy

The oil and gas companies in 2005Tables 8 and 9 show the leading players in the

world oil and gas sector in 2004 and 2003,

respectively. Table 8 ranks the biggest stock marketlisted companies. However, it is important torecognize that some of the world’s biggest and mostimportant oil and gas companies are state-ownedproduction companies. Many of these do not publishcomprehensive accounts; however, their importanceis evident from operational data. Table 9 shows theworld’s biggest oil and gas companies in terms ofreserves; the majority are state-owned National OilCompanies (NOCs). Despite the fact thatExxonMobil, Shell, and BP are among the world’sbiggest corporations, in terms of reserves (and alsocrude oil production), they are overshadowed by theleading NOCs: ExxonMobil’s reserves are aboutone-tenth of those of the National Iranian OilCompany and smaller than those of Pemex, theMexican national oil company.



Table 9. The world’s top-20 oil and gas companies ranked by reserves, 2003

*Yukos was taken into government control during 2005.Source: «Petroleum Intelligence Weekly», 2003.

Company Country State ownership (%) Reserves ($ 109/bbl)

Saudi Aramco Saudi Arabia 100 249

NIOC Iran 100 126

INOC Iraq 100 115

KPC Kuwait 100 99

PDVSA Venezuela 100 78

Adnoc United Arab Emirates 100 55

Libya NOC Libya 100 23

NNPC Nigeria 100 21

Pemex Mexico 100 16

Lukoil Russia 8 16

Gazprom Russia 73 14

ExxonMobil US 0 13

Yukos Russia * 12

PetroChina China 90 11

Qatar Petroleum Qatar 100 11

Sonatrach Algeria 100 11

BP UK 0 10

Petrobras Brazil 32 10

ChevronTexaco US 0 9

Total France 0 7

The presence of two very different types ofenterprises in the oil and gas sector results in whatThe Economist describes as a “fundamentalperversity” of the oil business: “Oil is the onlyindustry in which the best and largest assets (in thiscase, oil and gas reserves) are not in the hands ofthe most efficient and best-capitalized firms (thewestern majors), but of national oil companies.Two-thirds of the world’s oil reserves are found inthe Persian Gulf, where foreign firms are mostlyunwelcome. Exxon may hold the highest stockvaluation among listed firms, but it is dwarfed bySaudi Arabia’s unlisted Aramco, whose oil reservesare 20 times larger, and off-limits to foreigners”.As we shall see, this asymmetry is central to thestrategic predicament facing the oil and gas majors.

As Table 8 shows, the international majors andthe NOCs are not the only significant players in theworld petroleum industry. A key feature of theindustry’s evolution since the days of dominationby the Seven Sisters has been an increasingdiversity in the types of companies in the industry.Independent upstream companies such as Apache,Devon Energy and Burlington Resources havegained an increasingly important role. Many ofthese independents have been pioneers indiscovering and developing oil and gas reserves infrontier regions. Vertical specialization is alsoevident in other stages of the value chain.Schlumberger and Halliburton specialize in

providing technology and oilfield services,especially drilling, to oil and gas companies.Downstream specialists (refiners and distributors)tend to be smaller and geographically focused.

Other new players on the international sceneare the downstream gas companies. Despite thebankruptcy of the ill-fated Enron, a number ofother gas marketing and distribution companies(notably, British Gas, Gaz de France and Eon) havebackward integrated into E&P and also expandedinternationally. Fig. 1 shows the principal strategicgroups of different types of company in the oil andgas industry in terms of their positioning withregard to vertical scope and geographical scope.Thus, while the supermajors have activities that gofrom exploration through to retailing and span theglobe, other companies operate in just a fewvertical activities and are concentrated primarily ina single country.

Corporate performanceOne of the most notable features of the oil and

gas industry has been its strong financialperformance. During the period 2002-2004, theindustry has been particularly profitable, with mostof the majors earning a return on equity that has been more than double their cost of equity(Table 10).

The recent profitability of the oil companieshas, of course, been the result of high prices for oil



refining andmarketingcompanies

(e.g. SK, Reliance,Cepsa,

Nippon Oil)

nationalpetroleum companies

(e.g. Gazprom,Saudi Aramco, PDVSA,

Pemex,Kuwait Petroleum)

downstream gas companies (e.g. BG, Gaz de France,

E.ON AG)

internationalupstream companies

(e.g. Burlington, Apache,EnCana)

majors(e.g. Eni, Repsol,

Petrobras)

integrated

specialized

national geographical scope global

vert

ical

sco

pe

service companies(e.g. Schlumberger,

Halliburton)

supermajors(e.g. Exxon, Shell, BP, Chevron,

Total, ConocoPhillips)

Fig. 1. Strategic groups within the world petroleum industry.

and gas. However, if we view the industry’sfinancial performance over the past 20 years, wefind that profitability (whether measured as returnon equity, return on capital employed, or return onsales) has been significantly above the average forother industry sectors. It is a tribute to thecompanies’ strategies that since the mid-1980s,profits for most of the companies have remainedpositive even during periods of depressed oil prices(e.g. the late 1990s). This points to theeffectiveness of restructuring, downsizing, and newtechnologies in cutting costs and refocusing thecompanies around their most profitable businessactivities.

The primary source of profitability has beenexploration and production (high oil prices during2003-2005 have further boosted the high returnstraditionally associated with upstream activities).By contrast, downstream has been unprofitable formost of the past three decades (the result of excesscapacity and fierce price competition amongcommodity products). During 2000-2005, theeconomics of the downstream sector have beentransformed: a worldwide shortage of refiningcapacity has boosted refining margins, whereasretailing specialist service stations are increasinglybeing transformed into convenience stores offeringa diversified range of goods and services.

Current strategiesThe oil and gas sector is one of the few

industries where the major products supplied bythe industry have remained virtually unchangedover many decades. The emphasis of competition,therefore, is on accessing sources of oil and gasand achieving efficiency in extraction, transport,processing and distribution. The strategic priorities

of the oil and gas majors have remained much thesame over the past two decades and have beencommon to all the leading companies. Inparticular, the primary driving force behindcorporate strategy (the quest for hydrocarbonreserves) remains the same.

However, while the primary strategic goalremains the same, the way it is pursued haschanged. The growing importance of gas,relationships with producer countries and theirNOCs, the changing basis for competitiveadvantage, the growing role of technology andother forms of knowledge have each influenced thecompanies’ strategic thinking. Let us address someof the main trends in the strategies of thepetroleum majors.

The quest for reservesRising oil prices since 2000 have revived the

age-old fear of exhaustion of the world’s petroleumreserves. In 2004, the IEA (International EnergyAgency) estimated that the world will need tospend $3 trillion over the next 25 years in order tomeet expected global oil demand. Almost one-halfof new production would come from existingreserves, the remainder from enhanced recovery,from new discoveries and from non-conventionalsources. For the majors, their crucial challenge isthat much of their production comes from largefields in North America (notably, Alaska and theGulf of Mexico) and the North Sea. Theseremnants of the first great wave of non-OPECexploration are now in decline.

As a result, the majors are pursuing othernon-OPEC sources of oil such as West Africa, theCaspian, Russia, and the deep waters off Brazil.Their biggest hopes, however, are pinned on



Table 10. Financial performance of the international oil and gas majors (2002-2004)


CompanySales ($ 109) Net income ($ 109) Return

on equity(average, %)2004 2003 2002 2004 2003 2002

BP 285.1

ExxonMobil 270.8 213.2 182.5 25.33 21.51 11.46 21.1

Royal Dutch/Shell 268.7 201.7 179.4 18.18 12.61 9.58 18.0

Total 152.6 131.6 107.7 11.96 9.07 6.25 23.4

ChevronTexaco 148.0 112.9 92.0 13.33 7.23 1.13 17.7

ConocoPhillips 121.7 99.5 58.4 8.13 4.74 �0.30 10.9

Eni 74.2 64.7 50.3 9.05 7.74 5.49 21.7

Russia, which opened up to private investment inoil under Boris El’tsin and saw a surge ininvestment and production. However, exploitingthese sources of oil is difficult, either because ofthe technical challenges involved, or because thecountries concerned have become less welcomingof Western investment. For example, the Russiangovernment has banned majority foreignparticipation in many new natural-resourceconcessions.

Other oil producing countries, both OPEC andnon-OPEC, have also become less accessible to theWestern majors. After international liberalizationduring the 1980s and 1990s, countries in LatinAmerica and the Middle East have placedincreasing restrictions on foreign energycompanies. We seem to be observing a period ofrenewed ‘resource nationalism’ by producercountries.

Another dimension of resource nationalism is agrowing international role of NOCs. During the1980s, Saudi Aramco, Kuwait Petroleum, andPDVSA established downstream operations in theUnited States and Europe. During recent years, theoil and gas companies of Russia, India and Chinahave become prominent international players. Withthe help of oil-service companies such asHalliburton and Schlumberger, the NOCs haveaccess to modern technologies and are lessinterested in partnerships with the Western majors.Increasingly, NOCs are competing with the oil andgas majors for concessions overseas. The takeoverbattle between Chevron and CNOOC for control ofUnocal during 2005 illustrated this trend.

Strategies towards the development of the natural gas sector

Another big growth area for the majors isnatural gas. For most of Twentieth century, gas hadbeen regarded as worthless and was flared ratherthan exploited. “Find gas once and you’re forgiven;find it twice and you’re fired”, industry wisdomonce dictated. From the 1980s onwards, gasbecame increasingly important to the petroleummajors. In 1982, gas consumption (in oil equivalentterms) amounted to 15.8% of oil consumption, by1992 the figure was 56.9%, while in 2002, gasconsumption had reached 74% that of oil. Gas’sadvantages lay both in cost (historically, at least30% cheaper than oil), its environmentalfriendliness, and its availability. If the Twentiethcentury was the ‘age of oil’, the Twenty-firstcentury has been declared the ‘era of gas’ by someobservers. The most rapid source of consumptiongrowth has been the rapid expansion in the

construction of gas-fired power plants between1990 and 2002.

The challenge for the oil majors has beenbringing their gas reserves to market. Gas is muchmore difficult to transport than oil; it must eitherbe transported by pipeline or liquefied, and thecapital costs of exploiting gas fields that are distantfrom major markets are immense. Between 2000and 2005, a number of major gas pipeline projectshave been initiated: Eni’s Bluestream andGreenstream pipelines bringing gas from Russiaand Libya; the 3,300 km Nabucco pipeline thatwill bring gas from the Caspian to central Europe;and the 5,000 km Alaskan pipeline project. Hugeinvestments in gas liquification plants have beenmade in Qatar, Nigeria, Indonesia and several othercountries. Because gas is less transportable thanoil, international markets for gas have notdeveloped to the same extent that they have forcrude oil. The implication is that verticalintegration strategies have been very different foroil and gas.

Vertical integration strategiesAs already noted in the Section 5.2.5, a crucial

feature of the strategies of the petroleum majorsduring the 1980s and 1990s was a dismantling ofthe vertical integrated structures that had beencentral features of the traditional model of theinternational oil major. There were two aspects ofvertical de-integration. First, the companiesincreasingly dissolved close operational linkagesbetween their vertically-related businesses. Second,the companies became increasingly selective overthe vertical stages in which they participated. Thus,most firms outsourced oilfield services, marinetransportation, information technology, and severalsold off their chemicals businesses. Nevertheless,all the majors maintained their presence inexploration, production, refining, and marketing(even if the emphasis was increasingly on theupstream businesses and little attempt was made toensure close upstream-downstream coordination).

The loose-linked vertical integration in oil wasinadequate to manage the majors’ gas businesses.Effective exploitation of their upstream gasreserves required investment in transport, storage,liquification, distribution and marketing. Increasedinvolvement in downstream activities wasfacilitated by the liberalization of wholesale andretail gas markets during the 1990s. Shell, Exxon,Mobil, and Total were especially prominent inforging vertically-integrated gas strategies, thoughnone of them achieved the same degree of forwardintegration in gas as Eni, which was unique among



the majors to the extent that it had be founded upongas rather than oil.

The logic of vertical integration in natural gastook the majors beyond gas. By 2005, all themajors were significant players in electricitygeneration. For example, at the end of 2004,ExxonMobil owned a generating capacity of 3,700 MW and had almost $2 billion invested in itspower activities. For Shell too, power generationand marketing had been a growth business, thoughin April 2005, Shell announced the sale of itsIntergen power generation joint venture withBechtel to a private equity group.

Technology and knowledge managementThe quest for reserves has taken the

petroleum majors to the Arctic and the depths ofthe ocean. It has encouraged the companies todevelop enhanced recovery techniques in orderto extend the lives of mature fields. It hasresulted in the production of synthetic crudesfrom sulphur-heavy petroleum, from coal, andfrom tar sands and oil shale. Gas-to-liquidstechnologies are being deployed to producegasoline from natural gas.

The result has been increased dependence bythe companies upon technology. However, theremarkable improvements in efficiency and in thecapabilities of the oil and gas majors are notsimply due to the application of scientificknowledge whose origins are in the researchlaboratory. The enhanced technical and operationalcapabilities of the companies are the result ofgreater attention, not just to scientific knowledge,but to knowledge more generally.

By 2005, all the leading Western oil and gascompanies had adopted some form of knowledgemanagement programme. The companies’enthusiasm for knowledge management resultedfrom a recognition that oil and gas was aknowledge-based business and that competitiveadvantage depended upon a company’s ability toexploit knowledge more effectively than itscompetitors. Some of the most striking advances inknowledge management were in informationtechnology. Web-based technology, distributedcomputing, and internet/intranet connections havetransformed collaboration and decision making inthe industry, especially in upstream. The oil servicecompanies (notably, Schlumberger andHalliburton) have been in the vanguard of applyingadvanced database management systems,interactive software, and advanced modellingsystems to E&P activities (drilling, in particular).However, the greatest challenges of technology-

based knowledge management are at the humaninterface. The amounts of data generated and thesophistication of software for analyzing it outstripthe human capacity to process it. Attempts toby-pass the human interface using artificialintelligence (‘intelligent drills’, ‘smart oilfields’)have proved disappointing. Hence, the key thrust ofcurrent developments is improving the connectionsbetween people and information through improvedportal design, better search engines, greaterstandardization, taxonomy redesign and improvedinformation quality.

Attempts to improve the sharing and utilizationof experiential, ‘tacit’ knowledge have been evenmore important than information management.Communities of practice, informal groups ofemployees doing similar jobs or engaged in similaractivities that share their know-how and assist inproblem solving have all been particularly useful.More generally, the majors reported considerablesavings in costs and time from measures thatfacilitated individuals’ knowledge sharing.

Encouraging sharing and utilization ofknowledge may require significant changes in theway in which companies are organized andmanaged. Under chairman John Browne, BP hasgone further than any other oil and gas company inestablishing organizational learning as a centraltheme of its corporate strategy: “Learning is at theheart of a company’s ability to adapt to a rapidlychanging environment. It is the key to being ableboth to identify opportunities that others might notsee and to exploit those opportunities rapidly andfully. This means that in order to generateextraordinary value for shareholders, a companyhas to learn better than its competitors and applythat knowledge throughout its businesses faster andmore widely than they do. The way we see it,anyone in the organization who is not directlyaccountable for making a profit should be involvedin creating and distributing knowledge that thecompany can use to make a profit” (Browne andProkesh, 1997).

Key elements of BP’s creation of a learningorganization were:• Virtual teams: collaborative knowledge sharing

between employees with similar interests acrossthe company.

• Peer assist: meetings and workshops whereemployees not directly involved in a project arebrought together to review progress, solveproblems, and recommend further areas ofinvestigation.

• After action reviews: a process adopted fromthe US army involving discussion and review of



project successes and failures with a view todrawing conclusions about future projects.

5.2.8 Adapting to an uncertainfuture

The evidence of the past is that the oil and gasmajors make the most rapid and effective changeswhen they are under pressure, in particular, whentheir bottom lines are hit by falling energy prices.One of the dangers of the present era of high pricesand wide margins is that it provides little incentivefor change.

Yet, the majors face tremendous uncertaintiesabout their future roles. Whatever the future courseof oil prices, the fundamental reality is that thecompanies are dependent for their livelihood onfinding new petroleum reserves. Given thedifficulties of replacing non-OPEC reserves, it isinevitable that the OPEC countries will account fora growing share of world production. In thesecountries, the presence of NOCs limits the accessof the Western majors to petroleum reserves. Evenin some of the major non-OPEC producers, Russiain particular, the trend is towards protectionism andthe creation of ‘national champions’ such asGazprom. China and India, whose importance isthat they potentially represent the world’s twobiggest energy consumers, also appear to favourthe development of home-grown energycompanies.

One avenue for the Western majors to pursue isto concentrate increasingly upon natural gasbecause it is capital and technology-intensive,giving them an advantage over the NOCs. The kindof large, complex project where the Westernmajors can offer the necessary financial,technological and geopolitical resources andcapabilities is exemplified by the Shell-ledSakhalin-2 project. This involves developing amajor sub-sea Russian gas field, liquefying the gas,then shipping the LNG to both Japan and China.LNG will also be shipped to California via a newLNG regasification terminal in Mexico.

Following a similar rationale, another approachwould be for the majors to redefine theirrelationship with the NOCs, i.e. increasingly actingas partners where their primary role is providingtechnical and commercial expertise and offeringaccess to Western markets. However, one problemis that the oil and gas majors have increasinglyoutsourced technology, especially upstream. As aresult, the technological leaders in exploration andproduction, and the oil-service companies,

Schlumberger particularly, have taken the lead.Over the past ten years, the majors have reducedtheir research and development spending as apercentage of sales. Shell’s research anddevelopment fell from $701 million in 1998 to$553 million in 2004. This represents a decline inresearch and development spending as a proportionof sales from 0.58% to 0.21%. Hence, one of thekey risks facing the majors is that they arebypassed; the natural combination ofcomplementary resources and capabilities is theNOCs with their vast hydrocarbon reserves and theoil-service companies with their technicalexpertise. It seems likely that, in order to gainaccess to petroleum reserves in the producercountries, the majors will increasingly have tocreate partnerships with NOCs and commit tocomprehensive, integrated development schemescombining transport, processing, petrochemicalsand power.

References

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Robert GrantGeorgetown University

Washington, D.C., USA



5.2 oil company strategies from 1970 to the present

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