Relative Efficiency and Performance in the Integrated Oil and Gas Industry

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1 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, Rio de Janeiro, RJ Brazil Phone: , Fax: , robertocunha@ie.ufrj.br

Institute of Economics, Federal University of Rio de Janeiro Avenida Pasteur 250, Sala 123 Urca,

2 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)

fundamentally on this resource Economies of many countries influenced by its price dynamics and physical availability Trading values of other

3 Introduction The integrated oil and industry 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

with legal protections over national oil reserves IOCs said to detain best technologies, being the ones capable of exploring complex projects Integrated IOCs can

4 Introduction The integrated oil and industry Source: BP Statistical Review 2008

5 Motivations The 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

Are the ones with higher productivity levels attaining highest performance indicators? How do oil companies respond to raising oil prices efficiency-wise?

6 Proposed Plan of Action 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)

Gather data on inputs and outputs quantities for the period 3.

7 Presentation Summary 1.Introduction The integrated oil and gas industry 2.Data and model choice 3.Results 4.Conclusions

8 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 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 29,53 Millions of barrels added to reserves per drilled well Firm 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 0,65 Success rate in well drilling activities

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 29,53 Millions of barrels added to reserves per drilled

9 Production DEA Data and Model Choice 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 Variable returns to scale (VRS) Firm 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 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 437,3 417,5 439,5 492,9 474,5 Thousands of Barrels Produced per Well

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

10 Refining DEA Data and Model Choice Refining segment model Inputs: Refining Capacity (Mb/d) Refining Throughputs (Mb/d) Outputs: Refined Product Sales Volume (Mb/d) Output oriented Variable returns to scale (VRS) Firm 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 0,90 Refined Products Sales / Refining Capacity Firm 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 0,98 Refined Product Sales / Refinery Throughput

RD Shell 0,98 0,99 1,03 1,01 0,99 Total 0,90 0,89 0,87 0,91 0,90 Refined 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

11 Performance Indicators Return over Assets (RoA), 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), Equal to year s net income over year s total revenue Measures the relative capacity of minimizing total costs Return over Equity (RoE), Equal to year s net income over year s total equity Normalizes year s profits by a measure of a company s value

03-07 Equal to year s net income over year s total revenue Measures the relative capacity of minimizing total costs Return over

12 Financial DEA Data and Model Choice Financial performance model Inputs: Total assets (US$) Total revenue (US$) Outputs: Net income (US$) Output oriented Variable returns to scale (VRS) Firm 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 0,09 Return over Assets Firm 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 0,07 Profit Margin

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 0,09 Return over Assets Firm 2007 2006 2005 2004 2003 BP 0,07 0,08 0,09 0,07 0,06 Chevron 0,08

13 Presentation Summary 1.Introduction The integrated oil and gas industry 2.Data and model choice 3.Results 4.Conclusions

14 Exploration Segment Firm CRS te VRS te Eff Chg Tech Chg TFP Chg BP Chevron ConocoPhillips ExxonMobil RD Shell Total mean Time Period Inputs Year's Number of Completed Exploratory Wells Drillings Outputs Year's Number of Completed Productive Exploratory Wells Increase in Proved Reserves due to Extensions and Discoveries Orientation Input Oriented Scale VRS

15 Exploration Segment

16 Exploration Segment

17 Production Segment Firm CRS te VRS te Eff Chg Tech Chg TFP Chg BP Chevron ConocoPhillips ExxonMobil RD Shell Total mean Time Period Inputs Year's Total Oil Production Proved Reserves at Previous Year-end Outputs Year's Total Net Productive Oil Wells Orientation Output Oriented Scale VRS

027 Total 1.000 1.000 1.000 0.991 0.991 mean 0.743 0.928 1.009 1.016 1.

18 Production Segment

19 Refining Segment Firm CRS te VRS te Eff Chg Tech Chg TFP Chg BP Chevron ConocoPhillips ExxonMobil RD Shell Total mean Time Period Inputs Refined Product Sales Volume Refining Capacity Outputs Refinery Throughput Orientation Output Oriented Scale VRS

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.

20 Refining Segment

21 Performance Assessment Firm CRS te VRS te Eff Chg Tech Chg TFP Chg BP Chevron ConocoPhillips ExxonMobil RD Shell Total mean Time Period Inputs Total Revenue Total Assets Outputs Net Income Orientation Output Oriented Scale VRS

22 Performance Assessment

23 Presentation Summary 1.Introduction The integrated oil and gas industry 2.Data and model choice 3.Results 4.Conclusions

24 Conclusions Exploration Production Performance Refining DEA Average DEA DEA DEA BP plc 1 0,656 0,683 0,780 0,631 Chevron Corporation 0,948 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, ,576 0,827 0,601 Total S.A. 0, ,524 0,830 0,654 Correlation -0,486

25 Conclusions 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

26 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, Rio de Janeiro, RJ Brazil Phone: , Fax: , robertocunha@ie.ufrj.br

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