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Rev. 01/20
TB0443
Andrew Inkpen
Michael H. Moffett

The Global Oil and Gas Industry

The oil and gas industry is one of the largest, most complex, and most important global industries. The industry
touches everyone’s lives with products such as transportation, heating and electricity fuels, asphalt, lubricants,
propane, and thousands of petrochemical products from carpets to eyeglasses to clothing. The industry impacts
national security, elections, geo-politics, and international conflicts. The prices of crude oil and natural gas are
probably the two most closely watched commodity prices in the global economy. In recent years, the industry has
seen many tumultuous events, such as the growth in oil and gas production in the United States; sanctions on
Russia and Iran; continued technological advances in unconventional oil and gas; ongoing strife in Iraq, Libya,
and various other oil-exporting nations; major new discoveries of oil in Guyana and gas in east Africa; the Saudi
Aramco IPO; and continued heated debate about climate change and renewable energy. All of this comes amid
predictions that the global demand for energy will increase 20% by 2040.

Oil and Gas Industry Background

The first oil well was drilled in the Baku region of Azerbaijan, then part of the Russian Empire, in 1843. Soon
after, the first kerosene plant was built. By 1901, Baku produced half of the world’s oil. When Colonel Edwin
Drake struck oil in northwestern Pennsylvania in 1859, the first phase of the U.S. oil industry began. John D.
Rockefeller emerged in those early days as a pioneer in industrial organization. When Rockefeller combined
Standard Oil and 39 affiliated companies to create Standard Oil Trust in 1882, his goal was not to form a
monopoly, because these companies already controlled 90% of the kerosene market. His real goal was to achieve
economies of scale, which he did by combining all the refining operations under a single management structure.
In doing so, Rockefeller set the stage for what historian Alfred Chandler called the “dynamic logic of growth and
competition that drives modern capitalism.”1

With the Spindletop discovery of oil in East Texas in 1901, a new phase of the global oil industry began.
Before Spindletop, oil was used mainly for lamps and lubrication. After Spindletop, petroleum would be used
as a major fuel for new inventions, such as the airplane and automobile. Ships and trains that had previously
run on coal began to switch to oil. For the next century, oil, and then natural gas, would be the world’s most
important sources of energy.

Since the beginning of the oil industry, there have been fears from petroleum producers and consumers that
eventually the oil would run out. In 1950, the U.S. Geological Survey estimated that the world’s conventional
recoverable resource base was about one trillion barrels. Fifty years later, that estimate had tripled to three trillion
barrels. In recent years, the concept of peak oil has been much debated. The peak oil theory is based on the fact
that the amount of oil is finite.

After peak oil, according to the Hubbert Peak Theory, the rate of oil production on Earth will enter a
terminal decline. At various times, some analysts have argued that the peak has occurred, whereas others have
argued that peak oil is a myth. An article in Science stated:

Copyright © 2020 Thunderbird School of Global Management, a unit of the Arizona State University Knowledge Enterprise.
This case was written by Professors Andrew Inkpen and Michael H. Moffett for the sole purpose of providing material for class
discussion. It is not intended to illustrate either effective or ineffective handling of a managerial situation. Any reproduction, in
any form, of the material in this case is prohibited unless permission is obtained from the copyright holder.

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 Although hydrocarbon resources are irrefutably finite, no one knows just how finite. Oil is trapped
in porous subsurface rocks, which makes it difficult to estimate how much oil there is and how much
can be effectively extracted. Some areas are still relatively unexplored or have been poorly analyzed.
Moreover, knowledge of in-ground oil resources increases dramatically as an oil reservoir is exploited.

To “cry wolf” over the availability of oil has the sole effect of perpetuating a misguided obsession
with oil security and control that is already rooted in Western public opinion—an obsession that
historically has invariably led to bad political decisions.2

Regardless of whether the peak has or has not been reached, oil and natural gas are an indispensable source of
the world’s energy and petrochemical feedstock, and will be for many years to come. The difficulty in determining
oil and gas reserves is that true reserves are a complex combination of technology, price, and politics. While
technical change continues to reveal new sources of oil and gas, prices have demonstrated continued volatility,
and resource owners have sought more control over access. As prices rise, reserves once considered non-economic
to develop may become feasible. As prices fall, the opposite occurs.

The oil and gas industry has always been cyclical, with the price of oil and gas moving up and down. The
1970s was the beginning of a turbulent period in the industry. The Arab oil embargo early in the 1970s resulted
in large price increases. Events in Iran and Iraq led to another round of crude oil price increases in 1979 and
1980 (Exhibit 1). The period 1985 to 1998 was largely a period of low prices. Prices then started back up, only
to fall after September 11, 2001. After 9/11, prices rose until the recession at the end of the decade, continued
rising until 2014, and then fell significantly.

Exhibit 1. The Price of Oil (Brent Blend), 1975-2019 (US$ per barrel)

Source: “BP Statistical Review of World Energy,” June 2019.

Oil and Gas Reserves

Reserves are the main assets of companies that produce oil and gas. Reserves represent the future of any company’s
production, cash flows, and profits. To develop new reserves, oil and gas companies need access to potential oil-
producing locations. Exhibit 2 offers a picture of the proved reserves by country (those deemed as commercially
viable for production under current technological and business conditions) for both oil and gas. For oil, two
countries—Saudi Arabia and Venezuela—hold 35% of the world’s proved reserves. For natural gas, the top three
countries—Russia, Iran, and Qatar—possess over 48% of the world’s proved reserves. The concentrations of
reserves give these countries a very high degree of leverage on the future of the oil and gas industry. Control over
reserves means that if the IOCs want access to these reserves, they must work with the NOCs.

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 Exhibit 2a. World Proved Oil Reserves, 2018
Thousand Percent Thousand Percent
Rank Country million barrels of world Rank Country million barrels of world
1 Venezuela 303.3 17.5% 16 Algeria 12.2 0.7%
2 Saudi Arabia 297.7 17.2% 17 Norway 8.6 0.5%
3 Canada 167.8 9.7% 18 Angola 8.4 0.5%
4 Iran 155.6 9.0% 19 Mexico 7.7 0.4%
5 Iraq 147.2 8.5% 20 Azerbaijan 7.0 0.4%
6 Russia 106.2 6.1% 21 Oman 5.4 0.3%
7 Kuwait 101.5 5.9% 22 India 4.5 0.3%
8 United Arab Emirates 97.8 5.7% 23 Vietnam 4.4 0.3%
9 United States 61.2 3.5% 24 Australia 4.0 0.2%
10 Libya 48.4 2.8% 25 Other Africa 3.9 0.2%
11 Nigeria 37.5 2.2% 26 South Sudan 3.5 0.2%
12 Kazakhstan 30.0 1.7% 27 Egypt 3.3 0.2%
13 China 25.9 1.5% 28 Indonesia 3.2 0.2%
14 Qatar 25.2 1.5% 29 Malaysia 3.0 0.2%
15 Brazil 13.4 0.8% 30 Yemen 3.0 0.2%
Top 15, total 1,618.8 93.6% Top 30, total 1,700.9 98.3%

OPEC, total 1,242.2 71.8% World, total 1,729.7 100.0%

Exhibit 2b. World Proved Natural Gas Reserves, 2018

Trillion Percent Trillion Percent
Rank Country cubic metres of world Rank Country cubic metres of world
1 Russia 38.9 19.8% 16 Egypt 2.1 1.1%
2 Iran 31.9 16.2% 17 Azerbaijan 2.1 1.1%
3 Qatar 24.7 12.5% 18 Canada 1.9 0.9%
4 Turkmenistan 19.5 9.9% 19 Kuwait 1.7 0.9%
5 United States 11.9 6.0% 20 Norway 1.6 0.8%
6 Venezuela 6.3 3.2% 21 Libya 1.4 0.7%
7 China 6.1 3.1% 22 India 1.3 0.7%
8 United Arab Emirates 5.9 3.0% 23 Uzbekistan 1.2 0.6%
9 Saudi Arabia 5.9 3.0% 24 Other Africa 1.2 0.6%
10 Nigeria 5.3 2.7% 25 Myanmar 1.2 0.6%
11 Algeria 4.3 2.2% 26 Ukraine 1.1 0.6%
12 Iraq 3.6 1.8% 27 Kazakhstan 1.0 0.5%
13 Indonesia 2.8 1.4% 28 Oman 0.7 0.3%
14 Malaysia 2.4 1.2% 29 Vietnam 0.6 0.3%
15 Australia 2.4 1.2% 30 Netherlands 0.6 0.3%
Top 15, total 172.0 87.3% Top 30, total 191.6 97.3%

World total 196.9 100.0%

Source: BP Statistical Review of World Energy, June 2019.

Discovering or obtaining new oil and gas reserves is the lifeblood of the industry. Without access to new
reserves to replace oil and gas production, the industry would die. However, measuring and valuing reserves is
a scientific and business challenge because reserves can only be measured if they have value in the marketplace.
The oil sands of Alberta, Canada, are a good illustration of how difficult it is to accurately measure oil and gas
reserves. Oil sands are deposits of bitumen, a molasses-like viscous oil that will not flow unless heated or diluted
with lighter hydrocarbons. Although the oil sands in Alberta are now considered second only to the Saudi Arabia
reserves in the potential amount of recoverable oil, for many years these were not viewed as real reserves because
they were non-economical to develop. For most of the 2000s and through 2014, the main town in the oil sands
region, Fort McMurray, was in the midst of a boom not unlike the gold rush booms of the 1800s. Housing
and labor were scarce and the infrastructure struggled to keep pace with the influx of people, companies, and
capital. The development of the oil sands occurred because of a combination of rising oil prices and technological

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 innovation. With the fall in oil prices after 2014, the oil sands production growth had slowed. In 2018, housing
prices had collapsed and were the same level as in 2006.

Oil and Gas in the Global Economy

Oil and gas play a vital role in the global economy. The International Energy Agency (IEA) predicts that energy
demand will rise significantly over the next three decades, with most of the increase coming from developing
countries. Most of the world’s growing energy needs through 2040 will continue to be met by oil, gas, and coal.
In 2018, fossil fuels—oil, gas, and coal—made up 85% of the world’s primary energy, with nuclear, hydroelectric,
and other renewables making up the balance of 15%. With increased energy efficiency, energy as a percentage
of total GDP has fallen and is expected to continue to fall.

Oil and Gas Supply

All countries are consumers of products derived from the oil and gas industry, but only a small set of nations are
major oil and gas producers. The majority of the developed economies of the world are net importers of oil and
gas, giving rise to geopolitical issues involving a diverse set of oil consumers and producers. Exhibit 3 shows the
major oil and gas-producing nations. The impact of unconventional technologies can be seen in the significant
increases in U.S. and Canada production. The United States has become the world’s largest oil and gas producer.
The Permian Basin in West Texas and Southeastern New Mexico is one of the most important U.S. oil-producing
regions today. Production in the Permian has grown from less than 1 million b/d in 2010 to more than 4.5 million
b/d in 2019. With the development of new pipeline infrastructure, production in the Permian was forecasted
to keep growing by about 800,000 b/d in 2020. From 2000 to 2019, Canadian oil sands production grew from
600,000 b/d to more than 3.0 million b/d in 2019. The United Kingdom is one of the countries with declining
production, having dropped from 2 MM b/d in 2004 to about 1 million b/d in 2018.

Exhibit 3. Major Oil and Gas-Producing Nations, 2018

Source: “BP Statistical Review of World Energy,” June 2019.

*Includes crude oil, shale oil, oil sands, condensates (both leased condensate and gas plant condensate) and NGLs (natural gas liquids—ethane,
LPG, and naptha separated from the production of natural gas). Excludes liquid fuels from other sources such as biomass and derivatives of coal and
natural gas.

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 Industry Financial Performance
The oil and gas industry has been regularly criticized by politicians and the media for its high profits. That
profitability, however, is extremely volatile and driven by price. In many of the past 50 years, industry profitability
was less than many basic manufacturing industries.

In the U.S., proposals for industry excess profits taxes are common during high price cycles, prompting Lee
Raymond, former ExxonMobil CEO, to comment in 2005, “I can’t remember any of these people seven years
ago, when the price was $10 a barrel, coming forward and saying, ‘Are you guys going to have enough money
to be able to continue to invest in this business?’ I don’t recall my phone ringing and anybody asking me that
question.”3

The oil and gas industry is highly cyclical and the cycles can last many years. In the 1990s, crude oil prices
stayed low, and for the first 14 years in the new millennium, prices steadily rose (except for a brief dip in 2009). In
2014, oil prices fell significantly and by the end of the decade had yet to return to the high prices of 2008–2014.
Many small and mid-size U.S. producers were struggling in 2020 as prices remained low for both oil and gas.

Although the oil industry is highly profitable in some years, its long-term profitability is not much higher
than average profitability across many industries. As evidence, some years ago Fortune reported that the oil
industry ranked 30th out of 36 industries in return to investors over the 1985–1995 period, 34th out of 36
U.S. industries in return on equity in 1995, and 32nd in return on sales.4 In the U.S., the oil and gas industry
has earned return on sales (net income divided by revenue) of about 8%, compared to an average of about 6%
for all U.S. manufacturing, mining, and wholesale trade corporations.

One comparative measure of financial performance is shown in Exhibit 4, a comparison of the S&P 500
index of equities and the S&P 500 Energy Sector index. The Energy Sector index comprises companies engaged
in exploration and production, refining, marketing, storage, and transportation of oil and gas and coal and
consumable fuels. It also includes companies that offer oil and gas equipment and services. After 2014, Energy
Sector performance lagged behind the S&P 500.

Exhibit 4. Oil and Gas Financial Performance

Source: Data drawn from Standard & Poors. The S&P 500® Energy comprises those companies included in the S&P 500 that are classified as
members of the GICS® energy sector.

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 The Role of OPEC
The oil and gas industry has seen a remarkable bevy of government regulations and interventions over the past
century, from heavy taxation of petrol in Europe to U.S. price controls on domestic production in the 1970s. The
creation of the Organization of the Petroleum Exporting Countries (OPEC) represents government intervention
on a global scale. OPEC was founded in 1960 with the objective of shifting bargaining power to the producing
countries and away from the large oil companies. In 2020, OPEC had 14 members. The most recent changes in
membership were the addition of Congo (2018) and the departure of Qatar (2019).

OPEC’s mission is “to coordinate and unify the petroleum policies of Member Countries and ensure the
stabilization of oil prices in order to secure an efficient, economic, and regular supply of petroleum to consumers,
a steady income to producers, and a fair return on capital to those investing in the petroleum industry.”5 Despite
being a cartel, OPEC’s ability to control prices is questionable. Surging oil prices in the 1980s resulted in energy
conservation and increased exploration outside OPEC. Maintaining discipline among OPEC members has been
a major problem (as is typical in all cartels). Massive cheating was blamed for the oil price crash of 1986, and in
the 1990s, Venezuela was considered one of the bigger OPEC cheats in regularly producing more than its quota.

Exhibit 5 shows OPEC production and crude oil prices. Although OPEC in the past was instrumental in
sending periodic shocks to the system, OPEC’s influence had waned over the previous decades.

Exhibit 5. OPEC Production and Crude Oil Prices

Source: Data drawn from “BP Statistical Review of World Energy,” June 2019. All data is annual average.

The Resource Curse

The resource curse is a paradox of the oil and gas industry. Despite high resource prices, the living standards in
many oil-producing countries are low because of the inability of countries rich in natural resources to use that
wealth to strengthen their economies. Counterintuitively, many of these countries also have lower economic
growth than countries lacking an abundance of natural resources.6 When times are good and oil prices are high,
oil-rich countries may prosper. When oil prices fall, as they inevitably do, an overreliance on the oil sector can
leave a country in a perilous situation. For example, Russia’s GDP fell by 4% in 2015, inflation increased, and
the country was running a sizeable budget deficit. Moreover, the oil industries of the petroleum-nationalistic
countries often suffer from a lack of investment and heavily subsidized domestic petroleum products. As another
example, Iran has huge oil reserves, but the country’s upstream oil industry is in a shambles, with U.S. sanctions
having a large impact. Iran’s 2019 daily oil production was about 1.65 million b/d lower than one year earlier.

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 Mexico has declining production and significant imports of refined products. Until recently, the Mexican
constitution did not allow foreign direct investment in the oil and gas industry. After many years of under-
investment, and of Mexican governments using the oil industry as their primary source of revenue, the industry
is in dire straits. Without major investment and new technology, Mexico’s oil production will keep falling. For
example, production at the Cantarell oil field, one of the largest fields in the world, fell from more than 2 million
b/d in 2004 to 161,000 b/d in 2018.

Major Industry Players and Competitors

The organizations that dominate the global oil and gas industry have changed dramatically over time in who they
are, what they do, and, of critical significance for the future of the industry, how they compete.

Integrated Oil Companies

The term integrated oil companies (IOCs) refers to companies that operate in many industry segments, from
exploration to refining, marketing, and retail. In the early days of the industry, there was true vertical integration,
in which producers refined most of their production and then marketed refined products through their company-
owned retail outlets. In the modern industry, the IOCs operate in many segments, but the true vertical integration
seen in the days of John D. Rockefeller is long gone. Somewhat confusingly, the term IOC can also refer to
international oil company.

For many years, the largest IOCs (also known as oil majors) were the Seven Sisters, and included:
1. Standard Oil of New Jersey (Esso), which later became Exxon and then merged with Mobil to create
ExxonMobil
2. Royal Dutch Shell
3. Anglo-Persian Oil Company, which became British Petroleum, then BP Amoco following a merger
with Amoco (which was formerly Standard Oil of Indiana). The company is now known as BP.
4. Standard Oil of New York (Socony) became Mobil, which merged with Exxon
5. Standard Oil of California (Socal) became Chevron
6. Gulf Oil, most of which became part of Chevron
7. Texaco, which merged with Chevron in 2001

Exhibits 6 and 7 show the world’s largest oil and gas companies by stock market capitalization and revenue.
The exhibits show that the industry is dominated by a mix of global IOCs and national oil companies (NOCs).
Based on market capitalization, the largest publicly traded (and in some cases, government-controlled) companies
are a diverse and global set of firms, such as ExxonMobil (United States), Gazprom (Russia), Petrochina (China),
Sinopec (China), and Total (France).

The urge to get larger and more integrated can be seen in comments from the Oil and Natural Gas
Corporation (ONGC) chairman. ONGC, an Indian state-controlled firm, and primarily an upstream company,
made public its commitment to participate in the entire hydrocarbon value-chain. According to the former
chairman of ONGC:

We have to be an integrated oil company. Every major global oil company is an integrated player.
I’m not being arrogant, but oil and gas is big business where the big boys play. You can survive in
this business only if you are integrated; otherwise, you will be out.7

Given the long product lifecycles and the huge capital investment required in the oil industry, the large
IOCs are often described as stodgy and conservative. Before its bankruptcy, Enron executives regularly derided
the oil majors as dinosaurs that were too slow moving and that would eventually become extinct. The reality,
of course, is very different. Oil majors like BP, ExxonMobil, and Shell and their predecessor companies have
been around for more than a century. Through experience that was occasionally painful, the IOCs learned how
to deal with the enormous financial and political risks of the oil and gas industry. The IOCs took a long-term
view and recognized that cycles and uncertainty were an inherent part of the industry. Lee Raymond, former
ExxonMobil CEO, said:
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 We’re in a commodity [business]. We go through peaks and valleys, but our business is to level out the
peaks and valleys, so that over the cycle our shareholders see an adequate return on their investment.8

On the surface, the IOCs looked similar in terms of the activities they performed. All appeared to be
vertically integrated from exploration to distribution of refined products. However, there were fundamental
cultural, organizational, and financial differences among the firms. The IOCs used various organizational designs
to deal with vertical integration. The IOCs had different portfolios of projects and business lines around the
world, and over the years developed different relationships with various governments and national oil companies.

Exhibit 6. Largest Oil and Gas Firms, Market Cap 2019

Source: Statistica.com. Market capitalization as of July 2019.

Exhibit 7. Largest Oil and Gas Firms, Revenue 2019

Source: Offshore Technology, March 2019.

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 National Oil Companies
One of the most important trends of the past few decades has been the growing importance of NOCs. Although
BP, ExxonMobil, and Shell are among the largest publicly traded companies in the world, they do not rank in
the top ten of the world’s largest oil and gas firms measured by oil and gas reserves. The largest firms based on
reserves are, by a large margin, NOCs partially or wholly state-owned. The NOCs control about 90% of the
world’s oil and gas, and most new oil is expected to be found in their territories. Exhibit 8 shows the world’s
largest NOCs by production.

Exhibit 8. World’s Largest NOCs by Production

Source: Individual company reports and Investopedia, November 9, 2018. mmboe/d is million barrels of oil equivalent (combined oil and natural
gas) per day.

Viewed from a business perspective, the NOCs have a mixed reputation. The national oil company of
Indonesia, Pertamina, was described a few years ago as a bloated and inefficient bureaucracy:

. . . [Pertamina] operated almost as sovereignty unto itself, ignoring transparent business practices,
often acting independently of any ministry, and increasingly taking on the role of a cash cow for then-
President Suharto and his cronies. During the 32-year tenure of President Suharto, Pertamina awarded
159 contracts to companies linked to his family and cronies. These contracts were awarded without
formal bidding or negotiation processes. . . Indonesian petroleum law dictated that every aspect of
operation in the country was subject to approval by Pertamina’s foreign contractor management body,
Bppka. Dealing with the incomprehensible Bppka bureaucracy on simple matters, such as acquiring
work permits for expatriate personnel, can take hours of filling in applications and months of waiting.9

Venezuela nationalized its oil industry in the 1970s and created Petróleos de Venezuela (PDVSA). PDVSA
developed a reputation for professionalism and competence and was relatively free from the corruption and
cronyism that pervaded, and continues to pervade, so many of the NOCs.10 By 1998, 36 foreign oil firms were
operating in Venezuela, and PDVSA had ambitious expansion plans. In 1999, Hugo Chávez became president and
almost immediately began to question the management and autonomy of PDVSA. After a bitter strike in 2002,
PDVSA lost about two-thirds of its managerial and technical staff. In 2006, the Venezuelan Congress approved
new guidelines to turn 32 privately run oil fields over to state-controlled joint ventures. From a peak of 2.9 million
b/d in 1998, PDVSA output was less than 1 million in 2019. As a company, PDVSA is indistinguishable from
the government. Its top officials are appointed from the government. The company is required to spend much
of its investment budget on social programs. Company hiring policy is based on social and political goals; e.g.,
candidates from larger families are given priority.

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 According to many analysts, nationalization failed to live up to expectations almost everywhere. NOCs
often suffered from excessive and misguided government intervention. Many NOCs operated as the de facto
treasury for the country. In Nigeria, for example, the oil industry contributed about 75% of the government’s
total revenue and about 90% of export revenue. It is estimated that hundreds of $billions from the oil industry
have been stolen or misused since 1960. Some of the Middle Eastern NOCs are required to hire large numbers
of locals, leaving them heavily overstaffed. PDVSA and all of the Gulf country NOCs must sell their products at
hugely subsidized prices. Underinvestment in the downstream is a chronic problem for many NOCs, resulting in
countries like Indonesia and Iran, with huge reserves, having to import petroleum products. Monopoly positions
held by many NOCs contribute to underinvestment. In Russia, Gazprom controls the pipeline network, making
it difficult for other Russian gas producers to expand their production. Russia also uses its NOCs as agents of
foreign policy. Disputes between Russia and its neighbors, Belarus and Ukraine, have resulted in disruption of
oil and gas shipments to Western Europe.

Some NOCs are well-run and profitable enterprises. Statoil of Norway is considered among the best of the
NOCs. The NOCs of Brazil and Malaysia are viewed as reasonably well-run companies. Petrobras has developed
leading technology in deepwater drilling and, until its 2014 corruption scandal, had a market capitalization
rivaling that of the IOCs.

The role that NOCs will play in the future is not clear. Some analysts see NOCs as inefficient and corrupt
arms of government that will never compete in a true economic sense. Other analysts raise different issues,
suggesting that the NOCs are in a period of transition and will become competitive forces to be reckoned with.
Regardless of what happens, the NOCs and their sovereign owners control most of the world’s oil and gas reserves.
As Paolo Scaroni, the chairman of ENI, the Italian IOC, commented:

Big Western oil firms are like addicts in denial. The oil giants are trying to do business as usual
as if nothing was wrong. Yet they are, in fact, having trouble laying their hands on their own basic
product. State-owned national or state-controlled oil companies are sitting on as much as 90% of the
world’s oil and gas and are restricting outsiders’ access to it. Worse, the best NOCs are beginning to
expand beyond their own frontiers and to compete with the oil majors for control over the remaining
10% of resources. The first step in overcoming this predicament is admitting that it is a problem.11

The Strategic Goals of IOCS and NOCs

One way to view the differences between publicly traded IOCs and state-controlled NOCs is to consider their
strategic goals. Exhibit 9 positions large oil and gas firms based on the degree to which they are motivated by
shareholder maximization or public policy goals. As publicly traded firms, the IOCs must be responsive to the
expectations and demands of their private shareholders. These expectations are largely concerned with wealth
creation, which means the IOCs must be very focused on cost control and financial performance. Maximizing
shareholder value, both in general financial profitability and the [hopeful] increase in share value, is clearly the
primary objective of large IOCs such as BP and Shell. They are private industry concerns, owned and operated
on behalf of private individuals, and not government. As a result, they have very limited public policy goals,
although as part of a global trend toward emphasizing the so-called triple bottom line (financial returns, social
responsibility, environmental sustainability), they do include nonfinancial objectives in their business and strategic
decision-making.

Two IOCs are shown separately: Total (France) and ENI (Italy) because both firms are publicly traded and
also tightly connected to their respective national government. A small group of firms is termed hybrids: well-run
publicly traded firms with government control that includes Petrobras and Statoil. Other state-owned firms that
are traded on stock exchanges include Saudi Aramco, Gazprom, Rosneft, and PetroChina.

Another set of firms is 100% government-owned and controlled but employs strong financial discipline
and stewardship. Petronas (Malaysia) and many African NOCs fall into this category. Finally, there is set of
government-owned and government-controlled NOCs that seem to exist primarily as public policy arms of
their government owners. This set includes the NOCs of Iran, Mexico, Nigeria, and Venezuela. These firms have
limited shareholder value goals (i.e., goals tied to financial metrics such as ROI and ROCE).

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 Exhibit 9. The Strategic Goals of NOCs and IOCs

Independents
Independents are the non-government-owned companies that focus on either the upstream or the downstream.
Many of these companies are sizable players and rank in the top 50 of all non-government-owned oil and gas
companies. The largest E&P independents include U.S. firms such as Marathon, Occidental, CononcoPhilips,
Apache, and Woodside of Australia. Exhibit 10 shows the largest independent E&P firms by revenue.

Exhibit 10. Largest Independent E&P Firms by Revenue, 2018

Source: Corporate SEC filings. Note: Occidental acquired Anadarko in 2019.

In the downstream sector, the largest independents are scattered around the world’s largest energy-consuming
countries. The downstream independents include Phillips66 and Valero in the United States, and Neste and
Tamoil in Europe. Some downstream independents are involved in multiple businesses such as refining, pipelines,

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 and retail distribution, while others are in only one core business area. The downstream independents tend to
have lower market capitalizations than the upstream independents.

Other Firms
In addition to the IOCs, NOCs, and independents, the oil and gas industry includes many other firms that perform
important functions. The oilfield services firms, the three largest of which are Schlumberger (100,000 employees),
Baker Hughes (66,000 employees), and Halliburton (60,000 employees), play a critical role throughout the
exploration, development, and production phases. These firms provide both products and services that, according
to Baker Hughes’ website, help oil and gas producers “find, develop, produce, and manage oil and gas reservoirs.”
Because the oilfield service firms do not seek ownership rights to oil and gas reserves, their role could become
increasingly important in the future as partners to the NOCs. Exhibit 11 shows the largest oilfield services firms
by market capitalization, and Exhibit 12 shows the range of activities performed by oilfield services firms.

Exhibit 11. Largest Oilfield Service Firms by Market Capitalization

Source: Corporate SEC filings.

Thousands of other firms provide a vast array of services and products for the industry. For example, gas
utilities such as Gaz de France and Tokyo Gas are major customers for gas producers. Pipeline companies distribute
gas, crude oil, and petroleum products. The firms involved in drilling and seismic services provide drilling rigs
and expertise for onshore and offshore wells.

The Oil and Gas Industry Value Chain

In every industry, there are various activities that transform inputs of raw materials, knowledge, labor, and capital
into end products purchased by customers. A value chain helps identify the independent and economically viable
segments of an industry.12 Value refers to what customers are willing to pay for, so the value chain helps identify
specific activities that create value throughout the chain. Companies can use value chains to determine where
they are strong and where they have limited competitive strength. All industries have upstream (close to raw
materials and basic inputs) and downstream (close to the customer) segments. The oil and gas industry value
chain is shown in Exhibit 13. In the oil and gas industry, the terms upstream, midstream, and downstream are
important descriptors of industry activities.

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 Exhibit 12. Oilfield Services Firms Activities

Source: The Norwegian Oilfield Services Analysis 2014, EYGM Limited.

Exhibit 13. Global Oil and Gas Value Chain

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 Upstream: Exploration, Development, and Production
Upstream activities include exploration, development, and production. In simple terms, after a lease is obtained,
oil and gas are discovered during exploration; the discovery requires development; and production is the long-
term process of drilling and extracting oil and gas. Since exploration and development must take place where
resources are located and most oil ownership regimes are based on state sovereignty, companies have to deal with
complex government policies and regulations. Most countries grant oil and gas development rights to private
companies through a process of either negotiation or bidding. The main aim of the private company is profit
maximization, whereas the host country government is usually interested in maximizing revenue. Not surprisingly,
these two aims often conflict.

The method used to bid for, grant, and then renew or extend oil and gas rights varies from country to
country. Once the rights to explore are acquired, a well is drilled. A financial analysis is a determining factor in
the classification of a well as an oil well, natural gas well, or dry hole. If the well can produce enough oil or gas
to cover the cost of completion and production, it will be put into production. Otherwise, it is classified as a dry
hole, even if oil or gas is found. The percentage of wells completed is used as a measure of success. Immediately
after World War II, 65% of the wells drilled were completed as oil or gas wells. This percentage declined to about
57% by the end of the 1960s. It then rose steadily during the 1970s to reach 70% at the end of that decade,
primarily because of the rise in oil prices. This was followed by a plateau or modest decline through most of the
1980s. Beginning in 1990, completion rates increased significantly. The increases of recent years have more to
do with new technology than higher prices.13

Most upstream projects are done in some type of partnership structure. For example, a production-sharing
agreement for the Azeri, Chirag, and Gunashli development in Azerbaijan was signed in September 1994. BP was
the operator with a 34.1% stake; the partners were Chevron with 10.3%, Socar 10%, Inpex 10%, StatoilHydro
8.56%, ExxonMobil 8%, TPAO 6.8%, Devon 5.6%, Itochu 3.9%, and Hess 2.7%.

Reservoir Management
For companies involved in the upstream, reservoir management is an essential skill. Reservoir management involves
ensuring that reserves are replaced and that existing oil and gas fields are efficiently managed. Asset acquisition,
divestiture, and partnering are key aspects of reservoir management. Upstream companies try to replace more
than 100% of the oil and gas produced. Determining the level of proved reserves (the amount of oil and gas the
firm is reasonably certain to recover under existing economic and operating conditions) is a complex process.
Consider the following comment on the auditing of reserves:
Though the word “audit” is customarily used for these evaluations, oil and gas reserves cannot be
“audited” in the conventional sense of a warehouse inventory or a company’s cash balances. Rather,
“proved reserves” are an approximation about formations thousands and even tens of thousands of
feet below ground. Their size, shape, content, and production potential are estimated in a complex
combination of direct evidence and expert interpretation from a variety of scientific disciplines and
methodologies. Added to the science is economics; if it costs more to produce oil from a reservoir
than one can sell it for profitably, then one cannot “book it” as a reserve. Reserves are “proved”
if there is a 90% chance that ultimate recovery will exceed that level. As perverse as it may sound,
under the “production-sharing agreements” that are common in many oil-producing countries, when
the price goes up, proved reserves go down.14

Matthew Simmons, founder of the energy-focused investment bank Simmons and Company (now a
division of PiperJaffray), commented that “95% of world’s ‘proven reserves’ are in-house guesses,” “most reserve
appreciation is exaggerated,” and “95% of the world’s ‘proven reserves’ are unaudited.”15 The pressure to replace
reserves has, on occasion, resulted in some unintended behaviors. In 2004, Shell’s CEO left earlier than anticipated
after revelations that the company had overstated its reserves by nearly 25%.

Upstream Profitability
The profitability of crude oil is a function of the market value for oil and the costs to extract and transport it to
market. The most important cost determinant is the reservoir—where oil is found and how much there is. For

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 example, onshore production in Saudi Arabia and Kuwait has the lowest breakeven price—about $20/barrel. For
offshore Angola, the breakeven price for new projects was about $70/barrel. New oil sands projects in Alberta had
breakeven prices of between $70 and $90/barrel depending on the technology used. For U.S. shale oil, breakeven
prices depended on the field location. Some analysts were predicting that future production costs for U.S. shale
oil could get as low as $5–$20/barrel as technological advances continued.

Production costs change over time. Technological advances continue to drive down costs, especially for
deepwater and unconventional oil. The economic cycle also impacts costs. Costs for labor, energy, and materials
rise and fall through the cycles. For example, it was estimated that operating costs in the Alberta oil sands fell
about 20% in 2014 as the industry went through a down cycle in oil prices.16

The term breakeven price was also used to understand the relationship between oil exporting nations and
their fiscal management. In other words, what is the oil price that a country requires in order to match oil revenues
to planned government expenditures—its fiscal breakeven price. Many oil-exporting nations have seen their
fiscal breakeven prices rise significantly over the past decade as they increased spending on social and military
programs. After the price decrease in 2014, the major oil-exporting nations of Africa and the Middle East saw
budget surpluses swing to deficits.

Midstream: Trading and Transportation

The midstream in the value chain comprises the activities of storing, trading, and transporting crude oil and
natural gas. As shown in Exhibit 11, once oil and gas are in production, there is a divergence in the value chain.
Crude oil must be sold and transported from the wellhead to a refinery. Natural gas must be moved to markets
via pipeline or ship; we provide an overview of the gas business in a later section.

Crude oil has little or no value until it is refined into products such as gasoline and diesel. Thus, producers
of crude oil must sell and transport their product to refineries. The market for crude oil involves many players,
including refiners, speculators, commodities exchanges, shipping companies, IOCs, NOCs, independents, and
OPEC. Market-making activities in the oil business have become front-page news, and the daily price of crude
oil is as frequently reported in the news as the weather.

The ease by which liquids can be transported is a key reason why crude oil has become such an important
source of energy. Although pipelines, ships, and barges are the most common transportation platforms for crude
oil, railroads and tank trucks are also used in some parts of the world. In recent years, railroads have made a
resurgence in the United States and Canada because of the rapid growth in production of oil in North Dakota
and Alberta and a shortage of pipeline capacity. The shipping industry is very fragmented, and because oil tankers
travel for the most part in international waters, largely unregulated. New technologies in ship building in recent
decades have allowed ships to become larger and safer.

Pipelines in Alaska, Chad, Russia, and other countries have allowed oil to be transported from very remote
locations to markets. The construction and management of pipelines is fraught with geopolitical challenges,
which means the pipeline development process takes many years or even decades. Pipelines that cross national
borders are enormously complex to negotiate and build. Countries with pipelines that cross their territory have
been known to use them as bargaining chips. Terrorists often sabotage pipelines and, in some countries, such as
Nigeria and Iraq, oil theft from pipelines and the associated environmental and safety issues are daily occurrences.

Downstream: Oil Refining and Marketing

The refining of crude oil produces a variety of products, including gasoline, diesel fuel, jet fuel, home heating oil,
and chemical feedstock. In the U.S., about 60% of refinery product volume is gasoline. Refined products are sold
directly to end users through retail locations, directly to large users, such as utilities and commercial customers,
and through wholesale networks. Exhibit 14 shows the world’s largest refining companies by refining capacity.

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 Exhibit 14. Largest Refiners

Source: Energy Insight by McKinsey.

The financial performance of the refining sector has always been volatile. The primary measure of industry
profitability is the refining margin, which is the difference between the price of crude oil and refined products.
Exhibit 15 tracks the refining margins in the three main regional markets: North America (U.S. Gulf Coast),
Europe, and Asia Pacific (Singapore).

Exhibit 15. Regional Refining Margins

Source: BP Statistical Review of World Energy, June 2019.

Crude prices fluctuate for many reasons. Weather in the Gulf Coast states, political instability in oil-
producing countries, or economic growth reports from China can all impact the price of crude oil. These
fluctuations are not always accompanied by matching changes in the price of finished products, leading to large
expansions or contractions in the refining margin. Refiners also get squeezed between the commodity markets
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 for crude oil (crude is the largest cost to a refiner) and commodity markets for refined products like gasoline.
According to the New York Mercantile Exchange:
A petroleum refiner, like most manufacturers, is caught between two markets: the raw materials he
needs to purchase, and the finished products he offers for sale. The prices of crude oil and its principal
refined products, heating oil and unleaded gasoline, are often independently subject to variables of
supply, demand, production economics, environmental regulations, and other factors. As such, refiners
and non-integrated marketers can be at enormous risk when the prices of crude oil rise, while the
prices of the finished products remain static, or even decline. Such a situation can severely narrow the
crack spread, the margin a refiner realizes when he procures crude oil while simultaneously selling
the products into an increasingly competitive market. Because refiners are on both sides of the market
at once, their exposure to market risk can be greater than that incurred by companies who simply
sell crude oil at the wellhead, or sell products to the wholesale and retail markets.17

Profits on refining are usually lower than profits in other lines of business for oil and gas companies. Shell’s
head of downstream operations described the business as, “Grubbing [i.e., begging] for pennies in a street…
If this industry, and especially the downstream, were to let its cost base slip, then we’re going to have difficulty
getting through those down-low cycles.”18 The refining sector typically does well during a period of falling oil
prices, then flattens out and starts declining in profit as oil prices stop falling or start rising.

The profitability of refining is driven primarily by the following factors:

1. The costs of crude oil and energy to run the refinery.

2. The supply and demand for refinery products (i.e., if refining capacity is tight, refining margins usually
rise).
3. Refinery product prices, which are set by a combination of the supply and demand of refinery products
and crude oil prices.
4. Refinery location.
5. Company technology and operational skills.

After a so-called golden age of refining from 2002 to about 2006, refining entered a new and more uncertain
age. Many U.S. and European refineries were either shut down or on the verge of closure. Exhibit 16 shows
average oil refinery utilization rates by region. Industry experts view rates below 80% as unsustainable. A report
by ATKearney concluded that by 2021, every refinery in Western Europe and North America would have to
restructure, strategically reposition their assets, or leave the market.19 Some of the larger refineries in Europe,
such as Repsol’s Cartagena facility, were making major investments to increase production of ultra-low sulfur
diesel and improve conversion capacity. In the United States, no new greenfield refineries have been built for
decades, and many small refineries were closed. Nevertheless, total refining capacity continued to rise through
debottlenecking and expansions to existing sites.

In contrast to the United States and Europe, the last few decades saw aggressive expansion of greenfield
refining capacity in Asia, Brazil, Eastern Europe, and the Middle East. In 2009, Reliance Industries completed
the world’s largest refinery complex at Jamnagar in India. The Jamnagar complex has a capacity of 1.24 million
b/d. In the near term, Jamnagar is expected to focus on export markets. The largest market for Jamnagar is in
the Middle East, followed by Africa, Europe, and the United States. Shipping costs are only pennies per gallon
for finished products, even from India to the United States.

There is no best competitive model in refining. In North America and Western Europe, the oil majors were
divesting or closing refineries. ConocoPhillips and Marathon split into upstream and downstream companies.
In contrast, Petrobras, Pemex, and several Middle East NOCs were expanding refining capacity.

Transportation Fuels Retailing

In the transportation fuels retail sector, competition is intense and margins have eroded over the past few decades.
In most countries, transportation fuel is seen as a commodity product, which means that spending money on
brand development has questionable results. The weakness of brands favored the entry of supermarkets like Costco
and Carrefour into fuel sales because they compete on price and proximity and can sell fuel as a loss leader. With
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 Exhibit 16. Average Oil Refinery Utilization Rates by Region

Source: Wood Mackenzie, as quoted in “Europe’s Move to Cleaner Energy Hits Refineries Hard.” The Wall Street Journal. Dec. 23, 2019. Forecast
values from 2019-2025.

traditional retail barriers to competition gone, the majors sold most of their company-owned service stations
in countries around the world. The buyers were a mix of convenience store specialists, such as Couche-Tard of
Canada (more than 16,000 fuel stores around the world), franchisers, distributors, and independent dealers.

Natural Gas
Although the industry has always been colloquially referred to as “oil and gas,” the two hydrocarbons are very
different in use, transportability, and markets. In recent years, natural gas has played a much more important
role in the global energy mix. The growth in liquefied natural gas (LNG) supply has had a major impact on
gas markets. For many years, natural gas was a niche product because, unlike crude oil, natural gas is not easily
transported. Without a pipeline infrastructure, natural gas in its gas form cannot be transported far from its
source. In some parts of the world, such as Western and Central Europe and North America, a network of
pipelines allows gas to be produced and distributed efficiently. In the U.S., gas pipeline companies operate more
than 285,000 miles of pipe. In other parts of the world, such as offshore Africa or Qatar, pipelines to a large
customer base are not feasible.

To transport gas to distant markets, it can be converted to LNG. To liquefy natural gas, impurities such
as water, carbon dioxide, sulfur, and some of the heavier hydrocarbons are removed. The gas is then cooled to
-259 degrees F (-162 degrees C) at atmospheric pressure to condense the gas to liquid form. The liquefied gas is
transported by specially designed cryogenic sea vessels and road tankers to maintain its temperature and liquid
form. In the past few decades, LNG has moved from being a niche product to a vital part of the global energy
business. As more players take part in investment, both upstream and downstream, and as new technologies are
adopted, the prices for construction of LNG plants, receiving terminals, and ships have fallen, making LNG a
more competitive energy source. LNG ships are also getting much larger and more efficient.

Major technological and structural changes continue to occur in the LNG business. The floating liquefied
natural gas (FLNG) vessel is a technology that allows producers to commercialize offshore gas deposits without
pipelines and onshore infrastructure. FLNGs create opportunities to commercialize gas fields that would otherwise
be untouched. Another innovation is the floating natural gas liquefaction, regasification, and storage (FLRSU)
vessel which moves the various industrial processes offshore and makes the equipment available for redeployment
at the end of the resource life.

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 Changes in the LNG market and in LNG shipping increased flexibility for producers and consumers, and
shorter contracts are being negotiated. An LNG ship can deliver its gas anywhere there is an LNG terminal,
making LNG almost as flexible in delivery as crude oil. LNG is close to becoming a global traded commodity.
As well, buyers and sellers have been taking on new roles. Buyers have been investing in the upstream, including
liquefaction plants (e.g., Tokyo Gas and the Tokyo Electric Power Company invested in the Darwin liquefaction
plant in Australia). New buyers and producers have been emerging. On the producing side, the impact of shale
gas on U.S. and global gas markets has been significant. As recently as 2003, the consensus was that the United
States would have to import large quantities of LNG to satisfy domestic gas demand. Production now exceeds
domestic gas demand, and the United States has become a major LNG exporter.

The increased use of gas for power generation has also had a major impact on gas markets. Significantly
cleaner than coal, natural gas has been characterized as the preferable bridge fuel between coal and renewables like
wind and solar. This power demand market growth has been expedited by the lower costs and more widespread
use of LNG. As illustrated by Exhibit 17, gas prices have been much more volatile over the last 20 years as both
demand (power generation) and supply (LNG-facilitated stranded gas and unconventional gas development like
shale gas) have whip-sawed the market. Note how closely natural gas prices have tracked oil prices (in terms of
btus) for many years. This is a result of what is called “oil-to-gas pricing”—markets regularly benchmarked oil
as the value of a btu in the absence of well-defined natural gas markets.

Exhibit 17. Natural Gas Prices 1990-2018

Source: BP Statistical Review of World Energy, June 2019.

Petrochemicals
Petrochemicals, which are organic chemical products derived from oil and gas, are the farthest downstream activity
in the value chain. Although all of the major IOCs are involved in chemicals to some degree, they have different
strategic approaches. Exhibit 18 shows the world’s largest petrochemical companies. ExxonMobil Chemical
produces both cyclical commodity type products, such as olefins and polyethylene, as well as a range of less-
cyclical specialty businesses. Many of ExxonMobil’s refineries and chemical plants were co-located, providing
opportunities for shared knowledge and support services and the creation of product-based synergies. In the past,
BP and Shell had chemical businesses that were among the largest in the world.20 In 2005, BP sold the majority
of its chemical business to Ineos. Shell also downsized its chemicals business. The rising players in chemicals in
the Middle East and Asia include state-controlled companies, such as Sabic (Saudi Arabia) and Sinopec, and
non-state companies, such as Reliance (India).

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 Exhibit 18. Largest Chemical Companies

Source: Chemical and Engineering News. Note: DowDuPont split into three separate companies in 2019.

The commodity side of the petrochemical sector is capital-intensive and deeply cyclical. Margins and
profitability for commodity chemicals depend on scale, capacity utilization, operating cost discipline, and access to
low-cost feedstock. Specialty chemicals, at the other end of the spectrum, are sold on the basis of their performance
in customer applications, not chemical composition. Patented products or technologies can enhance the value of
specialty chemicals. Product differentiation may be the result of proprietary technologies such as unique catalysts
or chemical processes, and it can also be the result of brand names, marketing, customer service, and delivery.

Evolution of the Industry

Innovation and Technology
Innovation plays a key role across the oil and gas value chain. Innovations in areas such as deepwater drilling
and LNG shipping were discussed earlier. In the upstream, many important technologies have been developed
in the past few decades, including increased use of 3-D seismic data to reduce drilling risk and directional and
horizontal drilling to improve production in reservoirs.21 Innovations in financial instruments were used to limit
exposure to resource price movements. In oilfield management, wireless technologies allowed for faster and cheaper
communication than the traditional wired underground infrastructure. In refining, nanotechnology has enabled
refiners to tailor refining catalysts to accelerate reactions, increase product volumes, and remove impurities, which
has led to increased refining capacity. In retailing, innovations such as unmanned stations have reduced retail costs.

Mergers and Acquisitions and Alliances

Both mergers and acquisitions and alliances have been an important element in the oil and gas industry since its
inception. Although mega-mergers, such as BP-Amoco, Total-PetroFina, Chevron-Texaco, and Exxon-Mobil,
receive much of the press, there have also been many smaller deals. In recent years, NOCs have done many
acquisitions to gain access to resources and to new technology. Private equity-backed acquisitions and start-ups
have become more prevalent.

In chemicals, Ineos, the privately held British company, grew through a series of related acquisitions to
become one of the world’s largest chemical companies. In the upstream, the huge financial scale of projects such
as Gorgon, Kashagan, or Sakhalin I and II make it unlikely that a new entrant could challenge the majors in the

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 largest and most technological projects. However, if NOCs in China, India, and the Gulf continue to acquire
and grow, they may develop the technological and financial skills to compete for large complex upstream projects.

China and India

In 1998, China became a net importer of oil for the first time. In 2013, China overtook the United States to
become the world’s largest importer. By 2030, China will likely be importing about 80% of its oil. China and
Chinese companies are going to be major players in the oil and gas industry. Thousands of Chinese gas stations
are being built, and Chinese companies are aggressively investing in upstream projects around the world. Unlike
the U.S. and Europe, China has no qualms about allowing its oil companies to invest in countries like Sudan
and Iran.

India is also a force to be reckoned with in the global oil and gas industry. India, the third largest oil
consumer, needs energy to feed its rapidly growing and industrializing economy. Companies such as Reliance are
moving aggressively into the upstream, and state-owned companies such as ONGC, Oil India Limited, and Gas
Authority of India are slowly becoming more productive. Like China, India is far from self-sufficient in energy
and must find new energy sources.

Unconventional Oil and Gas

Growth in unconventional oil and gas production in the United States, and especially in areas such as the
Permian Basin, Bakken Formation, and Marcellus Shale, has had a major impact on the world’s energy supply.
Unconventional gas, mainly shale gas, coal-bed methane, and tight gas (gas locked in impermeable hard rock),
will constitute the majority of the growth in natural gas production over the next few decades. The production
of unconventional oil from shale will also grow substantially. The exploitation of unconventional resources is the
result of technologies such as hydraulic fracturing and horizontal drilling as well as the entrepreneurial initiatives
of industry participants doing what has been done for more than a hundred years—searching for innovative ways
to economically create value from scarce resources.

Industry Substitutes and Alternative Fuels

Various factors have contributed to a large investment flow into alternative fuel projects, including the
rapid rise in oil and gas prices in recent years, concerns about global climate change, perceived competitive
opportunities by energy companies (new entrants and entrenched players), and government subsidies. Despite
these investments and the often-strong public support for them, hydrocarbons will continue to be the world’s
primary energy source for years to come.

What’s Next for the Global Oil Industry?

A few predictions seem fairly safe: the global demand for oil and gas will continue to rise over the next few decades
in emerging market countries and flatten or decline in the major developed economies; NOCs will continue to
expand beyond their home markets; finding new conventional sources of oil and gas will get harder and require
innovative new technologies; unconventional oil and gas production will grow substantially; investment in
non-hydrocarbon energy sources will continue; the oil and gas industry will remain one of the most vital for the
global economy; the industry will continue to go through up-and-down cycles; and climate change activists will
continue to target the oil and gas industry. Finally, oil and gas firms, and especially the majors, will continue to
do what they have done for more than a century: take a long-term view, invest for the future, push the boundaries
of technology, and seek new resources and markets in every corner of the world.

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 Endnotes
1
Alfred D. Chandler. “The Enduring Logic of Industrial Success.” Harvard Business Review. 1990, March-April, 68 Issue
2, pp. 130-140.
2
Leonardo Maugeri. “Oil: Never Cry Wolf—Why the Petroleum Age Is Far from Over.” Science. 2004, 304, pp. 1114-1115.
3
Fox News. Transcript: ExxonMobil’s Lee Raymond. Monday, 2005, October 17. http://www.foxnews.com.
4
“The Fortune 500 Medians.” Fortune. 1996, April 29, pp. 23-25.
5
www.opec.org.
6
Richard Auty. Sustaining Development in Mineral Economies: The Resource Curse, Thesis. 1993. London: Routledge.
7
“We Have to Be an Integrated Oil Company.” Hindu Business Line. 2003, August 10. www.thehindubusinessline.
8
Fox News. Transcript.
9
“Indonesia Considers Legislation That Would End Pertamina’s 30-year Petroleum Monopoly.” Oil & Gas Journal. 1999,
July 26, pp. 27-32.
10
“Special Report, National Oil Companies.” The Economist. 2006, August 12, pp. 55-57.
11
“Face Value: Thinking Small.” The Economist. 2006, July 22, p. 64.
12
The value chain concept was developed by Harvard Professor Michael Porter, and is the main theme of the book Competitive
Advantage: Creating and Sustaining Superior Performance (Free Press, 1985). The concept was used by Porter to explain how
firms created competitive advantage. Porter’s generic value chain included primary and support activities. Primary activities
included: inbound logistics, operations (production), outbound logistics, marketing and sales (demand), and services
(maintenance). Support activities included: administrative infrastructure management, human resource management,
technology (R&D), and procurement. The extension of the firm value chain to the industry is logically consistent, especially
in the oil and gas industry where the IOCs compete across most of the major industry segments.
13
Oil Price History and Analysis. WTRG Economics, http://www.wtrg.com/prices.htm.
14
Daniel Yergin. “How Much Oil Is Really Down There?” Wall Street Journal. 2006, April 27, p. A.18.
15
http://www.simmonsco-intl.com/files/HBS%20Energy%20Forum.pdf.
16
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22 A09-16-0002 Rev. 01/20

This document is authorized for use only in Prof. Palash Deb & Prof. Ranjan Das's Industry Analysis, Strategy and Performance_Term-IV_Prof. Ranjan Das at Indian Institute of Management -
Calcutta from Jul 2020 to Oct 2020.