Performance Comparison and Strategy Selection of Oil Companies

under the Normal Environment of Low Oil Price

Yu Zhihong

1,2

Safety Engineering Department, China Institute of Industrial Relations, Beijing, China

School of Mechanical and Transportation Engineering China University of Petroleum, Beijing, China

Yuzhihong2003@126.com

Keywords: Normal Environment of Low Oil Price, Oil Companies of Different Categories, Business Performance,

Business Strategy, Optimization.

Abstract: Under the normal environment of low oil price, the financial performance of most oil companies dropped

significantly. Based on the analysis of performance gap of all three kinds of oil companies during low oil

price period, it has been disclosed why Chinese oil companies went through low oil price with much worse

performance compared with multinational oil companies according to further performance analysis by

business sections. Based on the different strategies adopted to deal with low oil price by oil companies, it

has been proposed for Chinese national oil companies to accelerate marketization, optimize the structure of

upstream production, optimize the layout of midstream downstream and chemical business , strengthen

the development of special technology and carry out strategic management of the budget.

As from the second half of 2014, with the

combination impact of slowdown of global

economic growth, over supply of crude oil, inflation

of US dollar and the numerous geopolitical dispute,

the global oil price dropped by more than 50%. It

called an end to four years’ volatility period of high

oil price. The drop of oil price not only showed that

world petroleum market was experiencing a new

round adjustment, but also indicated the oil supply

and demand would maintain loose. As a result, oil

price would stay low for the next few years which

will be the new normal environment. With the low

oil price, the revenue of oil companies dropped

significantly and profit margin was narrowed. The

whole oil industry is facing a new round of

integration.

1 INTRODUCTION

The risk of oil price is one of the major risks that oil

companies may face. The impacts on different oil

companies by the drop of oil price are totally

different. Throughout the oil industry, although the

profitability of the upstream related business in all

the oil companies is reduced dramatically, the loss of

some companies may be compensated by the profit

earned through downstream and chemical segment

because they had mature and perfect portfolio

structure. But for some small companies, it is highly

possible that they will go bankruptcy because they

can not earn as much as to offset their expense due

to small scale and imperfect portfolios.

1.1 Classification and Characteristics

of Oil Companies

According to the size of oil companies and the

characteristics of the main business, oil companies

are generally divided into three major categories of

(not including oil service companies):

The first category is International Oil Company

(known as IOC) who is mostly engaged in oil and

gas exploration, development, production, refining,

marketing and trade. IOCs are especially referring to

5 super majors including ExxonMobil, BP, Royal

Dutch Shell (Shell), Chevron Corporation (Chevron)

and Total. IOCs are implementing diversification

and integration strategy(Peng Yuanzheng, 2014)

They have strong financial strength and operate

globally. Oil refining and marketing are also their

main business and have a large share in the whole

business. Each sector of their business can be a

profit pool. They have strong business flexibility and

good anti risk ability. They have a good control of

Zhihong Y.

Performance Comparison and Strategy Selection of Oil Companies under the Normal Environment of Low Oil Price.

DOI: 10.5220/0006018400200025

In Proceedings of the Information Science and Management Engineering III (ISME 2015), pages 20-25

ISBN: 978-989-758-163-2

the resources and their assets have a wide

distribution over the world, especially in resource

rich area. They own a large number of core assets

and profit centers worldwide. They have a strong

sense of brand awareness and profit awareness.

Finally, their core competitiveness prevail over other

oil companies and they have a great advantage over

the cost saving and profit making.

The second category is Independent Oil and Gas

Company (known as E&P). Independent Oil and

Gas Companies are non-integrated companies which

receives nearly all of its revenues from production at

the wellhead which includes Conocophillips,

Apache Corporation, Devon Energy and so on .

They are exclusively in the exploration and

production segment of the industry, with no

downstream marketing or refining within their

operations. Conocophillips has been regarded as

E&P instead of IOC since it was broken down into

two. Independent Oil and Gas Companies are

focused in upstream business and have a short

industry chain. Compared with IOC, they are much

smaller and are more flexible in operation. They

invest in high profitability projects of short-term and

mid-term, and build up step by step around the core

competitiveness power such as comparable

advantage of special advantage. Their assets are

more centralized and they are active in capital

market. They pay more attention to short term

profitability and will dispose their assets as quickly

as possible according to their strategy(Wang Zhen,

Wang Rulang, Xiao Fei,2009).

The third category is National Oil Company

(known as NOC). NOCs are major players in oil

industry which include Saudi Aramco, StatoilHydro

ASA (Statoil), Petrobras, Petrochina Company

Limited (Petrochina), China Petroleum & Chemical

Corporation (Sinopec), China National Offshore Oil

Company (CNOOC), and so on. A national oil

company (NOC) is an oil company fully or in the

majority owned by a national government. NOCs are

implementing integrating strategy and most of them

are only strong in upstream. Although NOCs are

also increasingly investing outside their national

borders, their major businesses still lie within their

own countries. NOCs are given the privilege in

carrying out the oil business in their countries by

their governments. In some senses, NOCs undertake

part of the roles of their governments such as

ensuring adequate energy supply and safeguarding

oil industry. During previous years, some of the

NOCs have undertaken successful reforms on

their systems and are becoming more and more

IOCs which include Statoil, Petrobras, Pemex and so

on.

In recent years, the boundaries between different

categories of oil company are becoming more and

more vague.

1.2

Performance Analysis on Oil

Companies during Low Oil Price

Period

To make the analysis on the performance of the

oil companies of different categories during the low

oil price period, we chose typical companies from

each of the three categories. By comparing the

performance of the 2015 Q1 with that of 2014 Q1,

the impact of oil price plunge on oil companies has

been analyzed. The average crude oil price of WTI

in 2014 Q1 was 98.7 $/bbl while dropped to 48.5

$/bbl in 2015 Q1, down almost 50.9%, which can

explain the impact of oil price on the performance of

oil companies very well. The typical companies we

chose included ExxonMobil, BP, Shell, Chevron and

Total form IOCs, Conocophillips, Apache, Devon

Energy form E&Ps, and Statoil, PETROCHINA and

Sinopec from NOCs. The indicator for the analysis

we chose was the net profit attributable to the

shareholders. According to the financial report

publicly published by each company, different

companies had totally different performances as we

can see the change of the net profit attributable to

the shareholders caused by oil price plunge from

figure 1. The third largest NOC of China CNOOC

was not included in the analysis due to no public

data obtainable on that indicator.

As we could see from figure 1, the net profit

attributable to the shareholders of all chosen

companies dropped with the impact of the oil price

plunge. The drop ranged from 20% to 119%

according to different companies. The impacts of oil

price on performance of different companies were

totally different. According to performance by

different categories of oil companies, we could draw

below conclusions:

The performance of IOCs was impacted less by

the oil price drop, with net profit attributable to the

shareholders falling 20% to 56% and maximum drop

keeping the same pace with the drop of the oil price.

The net profit attributable to the shareholders of

3 NOCs fell 43% to 85%, with 2 Chinese NOCs’

falling even over 80%.

The performance of E&Ps was impacted most by

the oil price drop, with net profit attributable to the

shareholders falling 73% to 119% and even 2 of

them recorded net loss.

Performance Comparison and Strategy Selection of Oil Companies under the Normal Environment of Low Oil Price

Figure 1: Impact of Oil Price on Performance of Different Oil Companies.

To do the further analysis to explain why the

performances of different companies were impacted

differently by oil price, we broke down the

performance analysis by segments. Because there

was no standard global criterion to split the whole

oil industry into different segments, we just

simplified the analysis by dividing the whole

business into upstream and others (including the

mid-stream, downstream, LNG, petrochemical and

so on).

-10%

10%

30%

50%

70%

90%

110%

130%

(1)

ExxonMobil Shell Chevron BP* Total Statoil Petrochina* Sinopec*

Profit ($billion)

2015 Q1 Profit

Reduced Amount Compared with 2014 Q1

Reduced Percentage(%)

Figure 2: Impact of Oil Price on Upstream.

Figure 2 shows the performance impact on

upstream business for different companies that oil

price plunge caused. Due to the availability of the

data, two different indicators were employed in the

analysis such as operating profit and net profit.

As we can see from figure 2, the companies with

* indicate the data reported are operating profit,

while others without * indicate net profit. The

performance of the upstream business of all the oil

companies were impacted heavily by the oil price

plunge, with the profit falling 56% to 109% which

was beyond the falling of oil price of 50.9%. Among

them, Total experienced smallest drop while Sinopec

biggest. The performance of upstream business of

IOCs and NOCs saw the same trend with the impact

of the oil price plunge as performance of the E&Ps.

Figure 3 shows the performance impact on the

segments without upstream for different companies

that oil price plunge caused. As we can see from the

chart, the profit of the segments without upstream

for all oil companies increased a lot ranging from

43% to 133% except two Chinese oil companies.

Among them, Total experienced the biggest increase

of133%. On the contrary, two Chinese oil companies

PETROCHINA and Sinopec still experienced big

drop during the same period with the oil price

plunge, falling 56% and 112% separately.

-150%

-100%

-50%

50%

100%

150%

(3)

(1)

ExxonMobil

Shell

Chevron

BP*

Total

Statoil

Petrochina*

Sinopec*

Profit ($billion)

2014 Q1 Profit 2015 Q1 Increased Amount Increased Percentage(%)

Figure 3: Impact of Oil Price on Segments without

Upstream.

According to the above analysis, the oil price

plunge had a direct impact on the performance of

upstream. Perfect portfolio structure between

upstream and other segments can help to lower

down the risks arising from the fluctuation of oil

price. Although the profitability on the midstream

ISME 2015 - Information Science and Management Engineering III

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and downstream business were also impacted by the

oil price plunge, the impact could be relieved by the

reduced cost and lengthened industry chain. As a

result, the segments other than upstream

demonstrated strong performance as compared with

loss in the upstream caused by the oil price plunge.

Through the integration and diversification strategy,

the IOCs can stabilize the crude price internally by

supplying oil produced to the midstream and

downstream. When the crude oil price increases, part

of the profit in the upstream can be transferred to

midstream and downstream. Vice versa, the profit of

midstream and downstream can be transferred to

upstream when the crude oil price drops. The risks

can be reduced through internal transfer for IOCs

and the profit of the whole company can stay stable.

For Chinese oil companies, no profit can be derived

from midstream and downstream to offset the loss

incurred in upstream because no stable profit center

is formed in midstream and downstream business.

So with the plunge of the crude oil price, the profit

of the two Chinese oil companies fell sharply too.

For E&Ps, the fluctuation of crude oil price can have

a big impact on the performance of the companies

because they operate only in upstream and their

business scopes are quite simple. During the low oil

price period, it is highly possible that they could go

bankruptcy or be merged due to financial disaster

caused by oil price drop.

2 STRATEGY ADOPTED BY OIL

COMPANIES TO DEAL WITH

LOW OIL PRICE

With the extended period of low oil price, most of

the worldwide oil companies entered ‘cold winter’

due to the financial stress. Oil companies adjusted

their strategies correspondingly to cut their loss to

the minimum and save themselves. According to the

publicly announced information, strategies adopted

by different companies are listed in the table 1.

Based on the above mentioned analysis, the oil

companies of different categories adopted different

strategies to cope with the low oil price based on

their characteristics:

 Strategy adopted by IOCs: Streamline the

portfolio to maintain steady growth; Focus on

the value creation of exiting assets; Explore

the opportunity to acquire new assets that

align with its strategy; Optimize capital

allocation and cut the spending

 Strategy adopted by E&Ps: Divest non-core

assets to maintain financial stability; Hedge

part of its production to relieve the risks

arising from fluctuation of oil price; Explore

the new opportunity in adverse environment

for transformation

 Strategy adopted by NOCs: Focus more on

strategy adjustment and divert from resource

driving to efficiency driving; Strengthen the

optimization of the portfolio; Cut the

spending but not as much as IOCs

3 CONCLUSIONS

The prevailing view is that oil price may stay at low

level for a while. The loss experienced by Chinese

oil companies exposes the big gap between them and

IOCs. It is now the critical period for the three

Chinese NOCs to reform. Under the normal

environment of low oil price, it is very important for

them to develop their own strategies by pooling

experiences from both IOCs and other successful

NOCs. Below listed are some proposals for them:

i Seize the opportunity of the mixed ownership

reform to introduce more social and private capital.

Accelerate marketization of NOCs, divest the

government role and improve operational efficiency.

Norway national oil company Statoil and Brazil

national oil company Petrobras provide good for

successful reform. Ministry of Petroleum and

Energy (MPE) is responsible for the block bidding

process, evaluation of the company involved in the

bidding and making decisions of home country's

share in each block. Two NOCs run parallel to

manage oil and gas business in Norway. Statoil

which is a pure economic organization is 66.7%

owned by MPE and is mainly responsible for

operations. Another company, Petoro, is wholly

owned by MPE and manages government’s portfolio

of exploration and production licenses on the

Norwegian continental shelf. Petoro is not an

operator of any fields and does not directly own the

licenses. In Brazil, National Agency of Petroleum

(ANP) was established and takes over

thegovernment role played by Petrobras before.

Petrobras, as a company, no longer enjoys any

privileges, and competes with other participants in

the market. The successful reforms of the two oil

companies loose tie for them and achieve the market

operation in open environment of the oil industry.

Their performances were greatly improved. At

present, Chinese oil companies has launched the

reform of mixed ownership. Through introduction of

Performance Comparison and Strategy Selection of Oil Companies under the Normal Environment of Low Oil Price

Table 1: Strategies Adopted by Different Oil Companies to Deal with Low Oil Price.

Company Strategy Adopted

ExxonMobil

 Take steady growth strategy with strict control over the scale of investment and optimizing

investment structure, with investment prioritized in upstream

 Temporarily suspend the M&A and wait for good opportunities

 Divest some of the unconventional oil and gas assets and focus on the growth of shale oil

 Cut 2015 CAPEX by 12% to $34 billion

Cheveron

 Implement the downsizing plan and improve the strategic layout of the assets

 Accelerate the divestiture of non-core assets, with the plan to strip $15 billion between 2015 –

2017

 Optimize the capital allocation, with priority given to key projects under construction including

West Texas Permian and Australia's LNG projects

 Cut 2015 CAPEX by 12% to $35 billion

Shell

 Strategy diverted to control investment, optimize the allocation of resources and develop spetial

technology

 Divest part of the North American shale oil and gas assets suffering big loss

 Look for the opportunity for acquisition and purchased BG Group with $70 billion

 Suspend part of the high investment projects and plan to cut the expenditure of $15 billion for

the next 3 years

Total

 Optimize the asset portfolio around the technological advantages and divest the non-core assets

of $5 billion which do not meet the strategic objectives

 Look for opportunity to acquire large scale projects with long term growth and to acquire LNG

or offshore project to utilize its technological advantages

 Suspend investment in the U.S. shale oil and gas and cut 2015 CAPEX by 10% to $24 billion

 Implement strategy diversion, take measures to strictly control the investment scale and numbers

of big projects

 Explore intrinsic potential and optimize the portfolio structure

 Announce the plan to freeze the salary of 80,000 staffs and divest non-core assets to raise fund

 Suspend part of the upstream and downstream projects and announce the plan to cut the 2015

CAPEX to $20 billion from $25 billion

Statoil

 Focus on the medium and long term growth and continue to invest in long term project with high

potential including some exploration and offshore projects

 Take a moderate control over the spending and cut 2015 CAPEX by 20% to $18 billion

PETROCHINA

 Focus diverted to quality and efficiency from scale. Improve the operation efficiency and take

the "revolutionary" measures to reduce the cost and increase the efficiency

 Optimize overseas portfolio structure and slow down the development of non-conventional

resources in Canada and Australia

 Cut 2015 CAPEX by 7% to $43 billion

Sinopec

 Focus on efficiency, reform and innovation to achieve transformation

 Organize the operation based on the fluctuation of the oil price

 Cut 2015 CAPEX by 12% to $22 billion

CNOOC

 Implement diversification strategy, foster the ability to survive the oil price cycle and explore the

new potential in midstream and downstream business

 Plan to sell the shares owned in Bridas Energy to lower down the risk

 Cut 2015 CAPEX by 26%-35% to $11-$13 billion

Conocophillips

 Completed $14 billion in non-core asset sales to focus on core area

 Capital allocation shifted to the North American unconventional and announce the plan to cut the

spending especially on Australia LNG

private capital, not only can they obtain strong

financial support and reduce the investment risk in

low oil price period, but more importantly, it will

guide the companies to grow in a healthy way and

achieve the goal of market-oriented management

through continuous optimization of capital structure.

ii Optimize business structure and industrial

chain. The oil companies which run with the strategy

of integration of upstream and downstream have

special advantage to deal with low oil price.

Integrated business structure can make the company

to optimize resource allocation and enhance the

company's ability to deal with the risks of low oil

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price. The biggest issue that Chinese NOCs have is

that the profitability of downstream segment has

always been far lower than the profitability of the

upstream segment. Although the government roles to

guarantee the fuel supply and protect the consumers’

interests are part of the reason to prevent them from

profiting, excess capacity and low efficiency of

management caused by previous expansion without

proper planning is another major driver behind that.

Adjusting of the structure between different

segments and optimizing the layout of the

downstream business to match the level of its total

capacity is crucial to enhance the profitability and

buffer low oil prices impact.

iii Focus more on efficiency instead of fast

pace and large scale during the process of expansion.

The philosophy of achieving the production target

without consideration of efficiency has been adopted

by Chinese NOCs for a long time. Some oil fields,

including Shengli oilfield and Liaohe oilfield, have

been over exploited. The water cut is so high (over

85% or even up to 90%) that it can never make

profits to produce for some wells. Even so, those

wells are still producing without shut in. Although

Chinese NOCs have launched concept transition

from scale-driving to efficiency –driving, the deep-

rooted traditional idea is still major force behind the

production organizing. It is extremely important for

Chinese NOCs to arrange production and make the

decision based on benefit instead of output.

iv Explore the potential and strengthen the

integration of existing assets. Optimize the layout of

global asset. Through internationalization, Chinese

NOCs has acquired lots of assets abroad and

expanded very fast in these years. It will take time

for them to digest and integrate according to the

strategic layout. They must play an active role the

M&A market. It is important to improve the capital

efficiency by way of divesting, exchange, purchase,

merger and sale. Purchase only mode has to be

reversed and some assets which do not meet the

efficiency criteria must be stripped off or sold. M&A

is the main way for the Chinese NOCs to obtain

overseas assets. The falling of oil price demonstrates

good opportunity for M&A. Although facing

financial stress, it is still critical for Chinese NOCs

to buy some big assets with high quality to improve

the structure and layout. Perfect structure has to be

formed which includes good ratio between

exploration and development, oil and gas,

conventional and non-conventional.

ACKNOWLEDGEMENTS

Supported by Educational reform project of China

Institute of Industrial Relation (JG1431)

REFERENCES

Peng Yuanzheng. 2014. “Dropping International Oil Price

and Strategy for Petroleum Enterprise”. China

Petroleum Enterprise. (12):27-32

Wang Zhen, Wang Rulang, Xiao Fei. 2009. “Analysis on

Multinational Petroleum Companies Tactics on 0il

Price Fluctuation”. Techno-Economics in

Petrochemicals. (4):14-17

Performance Comparison and Strategy Selection of Oil Companies under the Normal Environment of Low Oil Price