ExxonMobil Reorganises: What will it mean for you?

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1 ExxonMobil Reorganises: What will it mean for you? 2012 By John Sargeant (Senior Consultant) and Stuart Speding (Head of Lubricants Practice) Introduction ExxonMobil has announced that is going to consolidate its fuels and lubricants businesses into ExxonMobil Fuels, Lubricants and Specialties Marketing Co from the beginning of February. The statement emphasised their commitment to operating efficiently and effectively. It added that: ExxonMobil (XOM) strives to capture substantial value across business lines through integration. The integrated business model has placed many of our businesses at the top of their respective areas of competition, resulting in significant competitive advantage and shareholder value. For those of us who enjoy reading between the lines of corporate pronouncements, there is plenty in that short statement to stimulate water-cooler conversations for weeks to come. Although this was a relatively routine announcement for XOM, the potential implications for the lubricants industry are huge. No doubt, in their Irving, Texas HQ, XOM already have elaborate plans for the roll-out and activities of the new organisation. So what might be the consequences? As they say, it would be wrong to speculate but, then again, it would be crazy not to. We think that, at a high level, competitors should be mulling over potential consequences both internal and external: Internally, what role and contribution will XOM expect lubes and base oils to make to the wider corporation? Externally, what will be the impact of this integration on XOM s competitive behaviour in lubricants markets? rpsgroup.com/downstream 1

2 Lubricants in perspective We believe the key is to first recognise the role lubricants have played for all the oil majors. Although they account for just one per cent of the barrel, it is clear lubes have occupied a special place in big oil thinking. They have combined high tech, strong branding and much higher unit profitability than fuels. But they demand a lot of attention. Lubes have often been a beach-head business for multinational companies, allowing them to gain a foothold in new markets at relatively low cost, and often near-zero fixed capital commitment (examples range from Azerbaijan to Vietnam). They have acted as the human face of their oil major parents who are ultimately interested in upstream acreage and trading volume. In some countries, lubricants have been one of the very few inland oil products allowed to be traded by nondomestic players as their markets moved slowly towards openness (think of post-franco Spain in the 1980 s or, more recently, China). But, exciting as lubes may be, they are rarely anywhere near the core activity of their parent major. And, profitable as they may be, their contribution to the corporate bottom line is small. Shareholders don t seem to reward the majors for stellar lubricants performance. It would not be surprising, then, for the CFO to see lubes as a means to an end, not an end in itself. Tensions are inevitable. The discipline of the share price can translate into searching questions from the top of the company about the way lubes are managed. While, in the corporate oil core, assets comprise highly tangible acreage, steel structures etc., lubricants businesses value their customer franchise as their key asset. And whereas the corporation rightly looks to focus its core business on a limited number of high performing key assets, lubes businesses seek to exploit the power of their brands across a multitude of markets. It is not surprising if this leads to corporate impatience. In fact, you might say that the old Mobil Corporation was the exception to the rule that big oil loses interest in lubes over time. Mobil 1, for many years its leading lubes brand, was also its flagbearer. Exxon and Mobil came together in It is a measure of the power of the Mobil lubricants heritage that Base Oil, Lubricants and Specialties have been managed separately from the rest of the XOM downstream for so long within Exxon s stringent approach to marketing businesses. This is characterised, by XOM as well as its rivals, as operational excellence competitive products, reliably delivered - but perhaps lacking customer warmth. rpsgroup.com/downstream 2

3 Internally: exploiting the integration Let s apply this perspective to the two questions we posed, first concerning integration. One thing s for sure. Integration will result in more than just a sober reduction in overhead between fuels and lubes. There were far-reaching rationalisations following the 1999 merger. Although we can expect further savings, to identify the real prize from this latest initiative we have to look further. Could the announcement actually signal a cooling in the love affair with lubes? At the moment, XOM makes about 4 million tonnes of Base Oil for its own operations and sells some 2 million tonnes to third parties. No other player comes close to its share of the Base Oil merchant market. But Base Oil refining is notoriously cyclical. Also, large as it is in industry terms, Base Oil makes up a very small proportion of XOM s total refining capacity. So its success begs the question: does XOM need to produce so much and, if Base Oil investment is coming into close internal competition with fuels, will it be allowed to take as large a share of the investment pie in future? Over time, will XOM tend to place less importance on Base Oil capacity in favour of fuels or simply divert funds upstream or to the shareholder? This is in a context where all XOM s Downstream investment together amounts to scarcely 10% of the corporate total. Even in the short term, base oil (versus fuels) production is notoriously dependent on short term operational decisions; crude feedstock availability itself can dictate how much base oil refineries will manufacture. If operational decisions are made more in favour of fuels than in the past what impact might this have on XOM Base Oil sales? So the importance and sophistication of XOM has devoted to its Base Oil position might, just might, diminish over time. This could mean less XOM Base Oil production and a gradual lowering of its Base Oil profile. Either way, given the uncertainty surrounding the potential impact of GTL s from Shell s plants in Qatar, which potentially could undercut conventional basestocks, it is a good time for XOM to give itself the internal flexibility to respond quickly to whatever challenge may appear. (Remember that XOM itself walked away from the GTL option some years ago.) Looking beyond the downstream, will the glamour so long associated with Mobil 1 slowly leech away to the many other exotic energy programmes which XOM show-case in their annual reports? In summary, is the influence of XOM on lubricants markets on the wane? Our view is, emphatically, no. rpsgroup.com/downstream 3

4 Externally: Time for a destructive game-changer? The fears of some of XOM s competitors could be realised if the new organisation opted to take a more integrated view of Base Oil and marketing margins. Taking one simple scenario, if the corporation decided that, over time, healthy marketing margins are bound to erode, so why not trade some marketing margin for volume, especially at times when base oil margins are strong? The competitive environment could be fundamentally altered for the many competing brands which are base oil price-takers. It could all hinge on XOM s long term corporate appetite for lubricants.... or scope for marketing economies? We do ask ourselves where significant savings are likely to be made in XOM s marketing operations. In the wake of the post-merger integration, we believe XOM has already evolved an efficient, lean back office and supply chain. So any corporate appetite for cost base reductions seems more likely to come in sales and marketing. Could saving come from: Brand at the expense of Mobil1 s image? Technology potentially forfeiting leadership bragging rights? People by either moving more to indirect sales or further linkage with fuels? But there are few places where XOM still has fuels and lubes teams large enough that could deliver synergy savings. Taking all these possibilities together, we sense they would not amount to an adequate marketing prize for ExxonMobil. So should we expect a margin play in the market place? Might XOM give staff greater scope at certain times to compete more on price with the thought of that Base Oil margin at the back of their minds? No one should assume that marketers will be allowed to drop prices unilaterally and simply watch as the margin walks out the door. More likely, and insidiously, could there be some targeted pricing flexibility when, for example, negotiating with major customers? Of course, this already happens occasionally. We are asking: will it become more frequent? So what should I do? In many ways the potential changes and threats to competitors we have outlined are no more than the veiled threat which has existed for many years. What may be new is the catalytic effect of XOM s announced changes to fuels and lubes. Even more topical, the dire current state of European refining, including the recent collapse of Petroplus is bound to feed debate in many companies over the need to disintegrate fundamentally weak parts of the Downstream business. The debate extends beyond lubes. A more integrated XOM might be more of a threat to the larger marketers who target the largest customers. They will no doubt be developing their own contingency plans. Smaller players will perhaps not see themselves key XOM competitors. They may also fear challenges from a big player like rpsgroup.com/downstream 4

5 XOM. But they should explore how they can turn XOM s marriage of fuels and lubes to their advantage. They may suggest to their customers that the old giant is a little less of a lubes player than it used to be. They can draw confidence from the fact that a decade ago XOM, faced with the chance to reinvest to regain a strong lubes position in Europe, chose instead to cut its workforce and streamline its offer. Smaller players may sense an opportunity to draw the contrast with themselves they are the folks who really understand and care about lubes and who care about their customers. There are many instances where cost-effective marketing tactics have built significant lubes businesses in the face of towering competition. For example, in the growing Indonesian market, the feisty, local brand, Top 1, maneuvered itself into a strong position. Its success was based on concerted marketing campaigns, adopting the tactics and positioning we would expect from big oil. Indeed its image is strongly international although its technical base is far less exotic. Similarly, in China, we saw the meteoric rise of the Monarch lubes brand, largely acquired by Shell in Although it began its short life with the most basic promotion it quickly grew, pioneering the use of prime-time TV advertising, to command, as an independent brand, a large share of the automotive market. Its complete lack of secure Base Oil, OEM links and other benefits enjoyed by larger players did not prevent it from quickly becoming the largest domestic automotive lubes brand. While it would be naïve to predict any outcomes from ExxonMobil s move we can all be sure we should watch for some hefty commercial threats and perhaps some opportunities for smart competitors. For further information, or to arrange an exploratory conversation with one of our senior specialists, please contact Stuart Speding - Head of Lubricants Practice, RPS Energy M E stuart.speding@rpsgroup.com W rpsgroup.com/downstream 5

6 About RPS Downstream RPS Energy a global energy consultancy RPS Energy is part of RPS Group, a FTSE 250 company with a turnover of $700m and 4500 employees One of the world s leading suppliers of independent technical and commercial advisory services, project management and transaction support to the international energy industry Over 30 years international experience and a resource base of over 1000 technical staff and associates We carry out 500 projects in 100 countries each year for clients including Governments, NOCs, IOCs, Independents, and Financial Institutions worldwide RPS Energy operates from main locations in UK, Ireland, the Netherlands, USA, Canada, Brazil, United Arab Emirates, Singapore, Malaysia and Australia The Downstream Consultancy business of RPS Energy has provided advisory services across the value chain from Refining, Trading and Supply, to Commercial Fuels, Lubricants and Retail Our experience and capability have supported a large number of strategic investment and business improvement projects for downstream companies worldwide Deep sector knowledge and project delivery The focus of our support is on optimising business performance and maximising growth potential Our teams are made up of highly experienced, industry professionals with unparalleled depth of knowledge and a strong track record of delivering incremental value and process improvement for worldclass companies in major markets around the world We work closely with our clients to understand their issues and find effective ways of improving their business. We then craft solutions that ensure we also build enhanced, long-term capability Given the unique combination of deep sector experience and market insight we are able to offer tailored, pragmatic solutions and deliver actionable plans to help our clients achieve and sustain their business goals RPS Downstream Consulting Offers rpsgroup.com/downstream 6

7 Lubricants Project Credentials RPS Energy has deep experience in the lubricants sectors and has recently undertaken a large number of market studies and advisory projects for leading lubricants players worldwide. Our team of sector specialists with considerable practical business experience and insight has enabled us to deliver highly qualified and uniquely differentiated consulting services. Some of our recent assignments are as follows: Brand Positioning and Pricing In order to maximise value extraction from their chosen focus markets and sectors, RPS designed and executed market evaluation and strategic value mapping programme on behalf of a global lubricants player to assess their current perceived positions on brand, cost, quality, and pricing in end consumer market. Output included value propositions, pricing strategies and an aligned brand positioning. Such programme has lent a context to RPS to develop clear brand strategies based on our strategic Brand Evaluation Framework to help our client grow their market and margin shares in line with their desired brand positioning and sector aspirations. Business Organisation With the NOC client seeking to re-organise and transform its downstream operations to improve returns, RPS acted as subject matter expert (SME), providing leading specialist knowledge and expertise to formulate a new market strategy. Business Expansion Following the completion of an in-depth market assessment RPS identified potential opportunities to access new high value segments and customers for our client. Acting as trusted advisor, RPS has developed a strategic business plan which includes an option to leverage the complementary strengths of the two major global lubricants brands and form a winning JV. Automotive Lubricants Market Studies Our client, a global supplier of lubricants and fuels additives, wished to better understand the end user channels in order to further develop their own forward strategy. RPS analysed the trends impacting demand in the various channels and provided insight into the forward demand projections. Detailed market maps were produced out to 2017 for 6 major European markets along with India and Russia. Market Entry Delivered a detailed review of a potential material new market for a global lubricants player, covering market characterisation, pricing and margin analysis, and competitor analysis. The study concluded with recommendations for the highest value segments to enter and the most appropriate go-to-market approach. This has facilitated a further work to support the confirmed strategic segments of choice, which delivered a strategic evaluation of segment value propositions, route to market models, price positioning and brand destination statements Market Entry Study To support a client s market entry strategy into the Middle East, RPS performed a detailed market assessment of the downstream sectors that included: Setting up a market leading Retail presence Creating a lubricants business (including manufacturing) rpsgroup.com/downstream 7