Professional services firm Ernst &Young has warned high oil prices are continuing to put pressure on some of the world’s largest energy industry firms.
A market report by the firm has looked at the challenges facing companies with a vertically integrated operating model – the main operating structure used by major oil companies in the 20th century – where a company owns both upstream and downstream operations.
In its report “Oil downstream: vertically challenged?”, Ernst & Young said higher oil prices have shifted value creation to the upstream, often leaving downstream operations with low margins and very competitive markets.
It said: “The high levels of consolidation activity in the late 1990s and early 2000s was driven by a belief that size would offer a distinct advantage, particularly in terms of access to resources and in terms of the ability to handle big projects.
“But a decade or so later, the supermajors face as many challenges as their smaller rivals.”
It added that large oil and gas firms have instead had to turn to riskier megaprojects in remote/harsh locations, with demanding technological and environmental challenges, which have challenged the sector’s project management capability.
It also noted that majors have fallen out of favour with the stock market, with equity markets increasingly discounting them below their absolute value.
“Established in an era of low prices and seen as good defensive investments in the early years of the 2000s, rising prices have prompted investors to move on, bypassing most of the biggest companies,” the report said.
“In broad terms, the higher the oil price, the more the share performance of the independents has outshone that of the integrated majors.”
This has led many majors to shed some or even all refining assets in order to concentrate on their more profitable upstream operations
The report highlighted that despite the strategic shift away from refining, Asia is still seen as the one place ripe for downstream expansion.
It added: “Several of the major integrated companies, including ExxonMobil, Shell, and Total SA, are planning or considering refining and/or petrochemical ventures with Chinese NOCs.”