relative efficiency and performance in the integrated oil … · · 2009-07-08relative efficiency...

Grupo de Economia da Energia

Relative Efficiency and Performance in

the Integrated Oil and Gas Industry

Roberto Pougy Ferreira da Cunha

Edmar Luiz Fagundes de Almeida, PhD

Mariana Iooty de Paiva Dias, PhD

Energy Economics Group, Institute of Economics, Federal University of Rio de Janeiro

Avenida Pasteur 250, Sala 123 – Urca, 22295-900 - Rio de Janeiro, RJ Brazil

Phone: +55 21 3873-5269, Fax: +55 21 2541-8148, [email protected]


Relative Efficiency and Performance in the Integrated Oil & Gas Industry

Ferreira da Cunha, Almeida and Iooty (2009)

32nd IAEE International Conf

June 24th 2009

Introduction – The integrated oil and industry

International oil & gas industry constitute a peculiar study case for Industrial Organization

Five main reasons:

– Oil is the most widely consumed energy source in the world (about 40% of the total)

– Entire industrial sectors depend fundamentally on this resource

– Economies of many countries influenced by its price dynamics and physical availability

– Trading values of other sources of energy directly correlated to the price of oil

– Oil represents a political factor of primary importance in international relations

Source: Clô (2000)





June 24th 2009

General basic economic conditions affecting oil supply

– Ultra-high capital intensity and risk environment

– High scale and scope economies Vertically integrated companies

– Increasing plant specificities


Industry can be divided into NOCs and IOCs

– NOCs of several types, generally with legal protections over national oil reserves

– IOCs said to detain best technologies, being the ones capable of exploring complex projects

Integrated IOCs can be divided into majors and super majors

– Formerly referred to as seven sisters

– Currently the super majors are BP, Chevron, ConocoPhillips, ExxonMobil, RD Shell and Total





June 24th 2009

Source: BP Statistical Review 2008






June 24th 2009

The 2003-2007 period

– Rapidly increasing prices, culminating in a huge drop during the 2008 financial markets crisis

– Large profits margins registered for the period

In this historical context:

– Do super majors display similar productivity levels in average?

– Are the ones with higher productivity levels attaining highest performance indicators?

How do oil companies respond to raising oil prices efficiency-wise?

– Did their productivity vary due to high oil prices?

– Constantly increasing prices would have eased pressures for productive efficiency?

Hypothesis: efficiency, in terms of productivity, is a weak determinant of overall performance

Motivations





June 24th 2009

In order to test our hypothesis we will

1. Model production spaces for the upstream and downstream segments

2. Gather data on inputs and outputs quantities for the period

3. Gather data and apply Data Envelopment Analysis for efficiency assessment

4. Use Malmquist Indexes to assess changes in productivities

5. Analyze the correlation between relative efficiency and performance

Sources: Ramos-Real et al (2008), Hawdon (2003)

Proposed Plan of Action





June 24th 2009

1.Introduction – The integrated oil and gas industry

2.Data and model choice

3.Results

4.Conclusions

Presentation Summary





June 24th 2009

Exploration DEA Data and Model Choice

Exploration segment model

– Input: Year's number of completed exploratory drillings

– Outputs: Year's number of completed productive exploratory wells

Increase in proved reserves due to extensions and discoveries (MMbbls)

– Output oriented

– Variable returns to scale (VRS)

Firm 2007 2006 2005 2004 2003

BP 10,65 2,91 3,31 10,59 35,61

Chevron 0,65 1,73 2,56 2,05 3,37

ConocoPhillips 2,79 2,57 2,40 2,07 1,54

ExxonMobil 5,09 5,64 5,11 4,69 9,56

RD Shell 1,31 2,14 7,04 2,82 7,76

Total 3,91 5,57 2,86 19,84 29,53Millions of barrels added to reserves per drilled well

Firm 2007 2006 2005 2004 2003

BP 0,70 0,60 0,68 0,63 0,69

Chevron 0,76 0,71 0,74 0,70 0,68

ConocoPhillips 0,81 0,66 0,73 0,69 0,72

ExxonMobil 0,54 0,64 0,65 0,58 0,58

RD Shell 0,79 0,79 0,69 0,62 0,65

Total 0,58 0,58 0,56 0,64 0,65Success rate in well drilling activities





June 24th 2009

Production segment model

– Inputs: Proved reserves at previous year-end (MMbbls)

Year's total net productive oil wells

– Outputs: Year's total oil production (MMbbls)

– Output oriented


Production DEA Data and Model Choice

Firm 2007 2006 2005 2004 2003

BP 0,09 0,09 0,09 0,09 0,08

Chevron 0,08 0,08 0,08 0,07 0,08

ConocoPhillips 0,08 0,08 0,08 0,07 0,07

ExxonMobil 0,10 0,11 0,09 0,08 0,08

RD Shell 0,16 0,15 0,15 0,14 0,13

Total 0,09 0,08 0,08 0,08 0,08% of Previous Year-end Proved Reserves Produced

Firm 2007 2006 2005 2004 2003

BP 64,16 65,94 60,44 59,29 54,21

Chevron 14,53 14,58 13,47 16,12 15,94

ConocoPhillips 66,14 66,65 70,70 58,99 43,85

ExxonMobil 47,58 48,48 44,54 41,14 38,02

RD Shell 60,99 64,44 65,97 72,95 78,35

Total 437,3 417,5 439,5 492,9 474,5Thousands of Barrels Produced per Well





June 24th 2009

Refining segment model

– Inputs: Refining Capacity (Mb/d)

Refining Throughputs (Mb/d)

– Outputs: Refined Product Sales Volume (Mb/d)

– Output oriented


Refining DEA Data and Model Choice

Firm 2007 2006 2005 2004 2003

BP 1,37 1,37 1,39 1,23 1,16

Chevron 1,65 1,63 1,70 1,75 1,73

ConocoPhillips 1,25 1,23 1,27 1,23 1,21

ExxonMobil 1,13 1,13 1,17 1,17 1,15

RD Shell 0,98 0,99 1,03 1,01 0,99

Total 0,90 0,89 0,87 0,91 0,90Refined Products Sales / Refining Capacity

Firm 2007 2006 2005 2004 2003

BP 1,79 1,76 1,64 1,34 1,28

Chevron 1,90 1,82 1,98 1,98 1,88

ConocoPhillips 1,31 1,34 1,39 1,29 1,26

ExxonMobil 1,27 1,29 1,31 1,31 1,32

RD Shell 1,10 1,11 1,11 1,09 1,08

Total 1,01 0,98 0,98 0,98 0,98Refined Product Sales / Refinery Throughput





June 24th 2009

Performance Indicators

Return over Assets (RoA), 03-07

– Equal to year’s net income over year’s total assets

– Measures the ratio of a company’s profit by its ability to create them

– Ideal to compare company’s within the same industry

Profit Margin (PM), 03-07

– Equal to year’s net income over year’s total revenue

– Measures the relative capacity of minimizing total costs

Return over Equity (RoE), 03-07

– Equal to year’s net income over year’s total equity

– Normalizes year’s profits by a measure of a company’s value





June 24th 2009

Financial DEA Data and Model Choice

Financial performance model

– Inputs: Total assets (US$)

Total revenue (US$)

– Outputs: Net income (US$)

– Output oriented


Firm 2007 2006 2005 2004 2003

BP 0,09 0,10 0,11 0,09 0,07

Chevron 0,13 0,13 0,11 0,14 0,09

ConocoPhillips 0,07 0,09 0,13 0,09 0,06

ExxonMobil 0,17 0,18 0,17 0,19 0,15

RD Shell 0,12 0,11 0,12 0,10 0,07

Total 0,12 0,12 0,12 0,11 0,09Return over Assets

Firm 2007 2006 2005 2004 2003

BP 0,07 0,08 0,09 0,07 0,06

Chevron 0,08 0,08 0,07 0,09 0,06

ConocoPhillips 0,06 0,08 0,07 0,06 0,05

ExxonMobil 0,10 0,10 0,10 0,12 0,10

RD Shell 0,09 0,08 0,09 0,07 0,06

Total 0,09 0,08 0,09 0,08 0,07Profit Margin





June 24th 2009



3.Results

4.Conclusions






June 24th 2009

Exploration Segment

Firm CRS te VRS te Eff Chg Tech Chg TFP Chg

BP 1 1 1 0.96 0.96

Chevron 0.948 0.955 0.998 1.025 1.023

ConocoPhillips 1 1 1 1.03 1.03

ExxonMobil 0.809 1 0.971 1.022 0.993

RD Shell 0.906 0.908 1.018 0.983 1.001

Total 0.965 1 0.934 0.854 0.798

mean 0.938 0.977 0.987 0.977 0.964

Time Period 2003-2007

Inputs Year's Number of Completed Exploratory Wells Drillings

OutputsYear's Number of Completed Productive Exploratory Wells

Increase in Proved Reserves due to Extensions and Discoveries

Orientation Input Oriented

Scale VRS





June 24th 2009

Exploration Segment





June 24th 2009

Production Segment


BP 0.656 0.877 1.026 1.002 1.028

Chevron 0.594 0.776 0.967 1.054 1.019

ConocoPhillips 0.578 1.000 1.038 1.003 1.041

ExxonMobil 0.632 0.915 1.022 1.024 1.046

RD Shell 1.000 1.000 1.000 1.027 1.027

Total 1.000 1.000 1.000 0.991 0.991

mean 0.743 0.928 1.009 1.016 1.025


InputsYear's Total Oil Production

Proved Reserves at Previous Year-end

Outputs Year's Total Net Productive Oil Wells

Orientation Output Oriented

Scale VRS





June 24th 2009

Production Segment





June 24th 2009

Refining Segment


BP 0.683 0.827 1.084 0.992 1.075

Chevron 1.000 1.000 1.000 0.996 0.996

ConocoPhillips 0.699 0.699 1.021 0.988 1.009

ExxonMobil 0.703 1.000 0.993 0.998 0.991

RD Shell 0.576 0.766 1.007 0.990 0.997

Total 0.524 0.582 1.011 0.988 0.999

mean 0.697 0.812 1.019 0.992 1.011


InputsRefined Product Sales Volume

Refining Capacity

Outputs Refinery Throughput


Scale VRS





June 24th 2009

Refining Segment





June 24th 2009

Performance Assessment


BP 0.631 0.689 1.037 0.994 1.031

Chevron 0.627 1.000 1.077 1.025 1.104

ConocoPhillips 0.439 1.000 1.085 1.014 1.101

ExxonMobil 1.000 1.000 1.000 1.015 1.015

RD Shell 0.601 0.657 1.104 0.995 1.098

Total 0.654 1.000 1.068 0.998 1.066

mean 0.659 0.891 1.061 1.007 1.069


InputsTotal Revenue

Total Assets

Outputs Net Income


Scale VRS





June 24th 2009

Performance Assessment





June 24th 2009



3.Results

4.Conclusions






June 24th 2009

Conclusions

Exploration DEA

Production DEA

Refining DEA AveragePerformance

DEA

BP plc 1 0,656 0,683 0,780 0,631

Chevron Corporation 0,948 0,594 1 0,847 0,627

ConocoPhillips 1 0,578 0,699 0,759 0,439

Exxon Mobil Corporation 0,809 0,632 0,703 0,715 1

Royal Dutch Shell plc 0,906 1 0,576 0,827 0,601

Total S.A. 0,965 1 0,524 0,830 0,654

Correlation -0,486





June 24th 2009

1. Our hypothesis was apparently confirmed

– More efficient firms were not the most profitable ones

– Interesting clues are present

2. Misinterpretations

– Being more efficient is more costly in the integrated oil & gas industry?

– The return on efficiency might not be as appealing as other market strategies

3. Suggested interpretation

– Companies in this industry are subject to externalities such that cost minimization is a weak determinant of performance

– The ability to take higher risks is directly associated with the company`s size, thus dissociating performance from productive efficiency itself

Conclusions


Relative Efficiency and Performance in

the Integrated Oil and Gas Industry

Roberto Pougy Ferreira da Cunha

Edmar Luiz Fagundes de Almeida, PhD

Mariana Iooty de Paiva Dias, PhD

Energy Economics Group, Institute of Economics, Federal University of Rio de Janeiro

Avenida Pasteur 250, Sala 123 – Urca, 22295-900 - Rio de Janeiro, RJ Brazil

Phone: +55 21 3873-5269, Fax: +55 21 2541-8148, [email protected]

relative efficiency and performance in the integrated oil … · · 2009-07-08relative efficiency...

Documents