Background
 

•  Brief worldwide history of the industry

•  Current situation

In 1999, the price of oil saw one of its most rapid increases in history. At the beginning of the year, buyers paid only $11 to $12 per barrel of oil. But by the end of 1999, the price had rocketed to $27 a barrel, and then on March 7, 2000, to $34. Although prices above $30 a barrel were not sustainable, as of early June 2000, oil still lingered at $29 a barrel, well above historical norms. 
Nevertheless, the oil business, as a whole, did not take benefit from this price increase: exploration and production companies enjoyed record earnings, while marketing and refining firms suffered the worst profit margin in years. Overall results for 1999 were still significantly better than for 1998. 

 Exploration and production

Exploration and production companies, including both independents and divisions of oil companies, began to profit from increasing oil prices in the second half of 1999 and the beginning of 2000. Typically, oil companies derive about 60% to 70% of their profits from these divisions, so they rely heavily on the market price of crude oil. Thus, major US oil companies’ exploration and production divisions presented a 312% earnings increase in first-quarter 2000 compared with first-quarter 1999.

 Refining and marketing

While exploration and production companies saw profits soar along with crude oil, independent refiners and major oil companies’ refining and marketing divisions suffered from the situation. However, their profits began to recover slightly in fourth-quarter 1999, and accelerated further in the first quarter 2000. Known in the industry as the “down-stream”, this sector is an important part of delivering petroleum products to businesses and to the public. Refining is the process of transforming crude oil into products such as gasoline and heating oil. Marketing is the delivery of products to end-users.
Intuitively, high or rising oil prices might seem to be positive for all oil companies. However, they can also hurt a key industry business: refining and marketing, which accounts for about 30% of the average integrated oil company’s earnings. Because refiners and marketers must buy crude oil in order to make petroleum products, rising crude oil prices tighten their margins. Some independent refiners even suffered 70% to 80% declines in operating income in 1999 compared with 1998. 
 

In late 1999 and early 2000, the high prices of gasoline was a hot political issue. Prompted by constituents’ complaints, many government officials called for the release of the Strategic Petroleum Reserve (SPR) to dampen prices. Established after the 1973-74 oil crisis, the SPR is an emergency supply of crude oil stored in huge underground caverns along the coast of the Gulf of Mexico. The Energy Policy and Conservation Act stipulates that the SPR can be drawn down when the president determines that it is “required by a severe energy supply interruption or by obligations of the United States”. However, many industry observers felt that 1999 prices did not constitute an emergency, as they did not seem to have a major impact on nation’s safety or its economy. But, in September, Gore advocated dipping into US emergency oil reserves; the next day, President Bill Clinton directed a release of a relatively small 30 million barrels of crude from the nation's 570 million-barrel reserve. 
 

Worldwide, Oil-consuming countries put strong pressure on OPEC to raise output in order to bring prices down quickly, but increases have been small. Oil prices were still at a 10-year high by September. At that time, mass protests took place in Europe, where gas prices have historically been much higher to begin with. 

•  Major players

The United States’ competitors are of two kinds:
 - OPEC members: Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela. 
- And also, non-OPEC producers: Mexico, Norway, Russia and Oman.

The graph below shows the 20 largest oil producers as of July 1999, in terms of million barrels per day.

Sources: www.itds.treas.gov

 In addition to publicly held companies (the top 10 of which accounted for more than $550 billion in revenues in 1999), national oil companies – owned wholly or in part by national governments – also play major role in the industry. These companies, most notably those that are members of the OPEC, are comparable in size to the publicly traded oil companies. 22 of the top 50 oil and gas firms are fully state-owned; another 7 have substantial government ownership. Of the world’s top 25 oil companies, 15 are at least partly state-owned. Thus, Saudi Arabia’s national oil company, Aramaco, is the largest oil company in the world. The world’s second largest is Iran’s National Iranian Oil Co. (NIOC), followed closely by Venezuela’s state-owned Petroleos de Venezuela S.A. (PDVSA). All three of these companies have large-scale integrated oil operations, including US-based refining and marketing businesses.

Largest publicly owned oil companies - 1999
 

	COMPANY	BARRELS PER DAY(THOUSAND)
1	Exxon Mobil	2,502
2	Royal Dutch/Shell	2,354
3	BP Amoco	2,049
4	Total Fina Elf	1,363
5	Chevron	1,107
6	Texaco	930
7	Repsol YPF	722
8	ARCO	658
9	Conoco	348
10	Phillips	235

Source: Company reports

Leading state-owned oil companies - 1999
 

	COMPANY	COUNTRY
1	Aramco	Saudi Arabia
2	NIOC	Iran
3	PDVSA	Venezuela
4	Pemex	Mexico
5	CNPC	China
6	INOC	Iraq
7	KPC	Kuwait
8	Sonatrach	Algeria
9	Adnoc	UAE
10	Petrobras	Brazil

Source: Standard & Poor’s estimates
 

Industry trends

 Among industry trends, consolidation was the biggest issue in 1999 when some of the industry’s largest companies merged. Political and regulatory issues surface in the public area, shaping the oil business. Finally, the Internet has transformed the way the oil industry, like many others, conduct business.
 

• Huge mergers

The oil and gas industry is undergoing seismic changes. In an effort to control costs and bring more efficiencies from their operations, the major oil companies have been on a consolidation track. 
In the past year, British Petroleum linked up with Amoco and has now combined with Arco (they generated about $84 billion in revenues in 1999); Exxon got back together with Mobil, forming the largest oil company based on revenues (nearly $187 billion in combined 1999 revenues) and reuniting the two descendants of John D. Rockefeller's Standard Oil. Total merged with Petrofina. Total and Petrofina then absorbed rival Elf Aquitaine. Phillips bought Arco's Alaskan oil-producing assets. 
In the most recent chapter of consolidation, Anadarko Petroleum in spring of 2000 announced plans to acquire Union Pacific Resources Group of Fort Worth, Texas. The merger will link Houston-based Anadarko, one of the world's largest oil and gas exploration and production companies, with Union Pacific, the top domestic driller during the past seven years. Anadarko-Union Pacific will become the sixth-largest natural gas producer in North American and one of the biggest independent oil production companies.
 

•  Political and regulatory issues

Several political and regulatory issues face the US oil industry; these will have a significant impact on profitability in coming years. The exploration and production segment is affected by taxation and royalties, and by regulations governing the availability of US-owned property for oil exploration. The refining and marketing segment is even more subject to regulation, with rules covering refinery emissions, requirements for cleaner gasoline, and regulations for underground tanks. 
The two main regulations are the followings: 
? Energy Policy Act of 1992 (also know as the National Energy Security Act of 1992): Signed into law in 1992 by President George Bush, this law sets out a comprehensive energy strategy that is based largely on conservation, reduced dependence on foreign oil, the introduction of renewable energy sources and the increasing use of alternative transportation fuels. 
? 1990 Clean Air Act: Under this law, the Environmental Protection Agency sets limits on how much of a pollutant can be in the air anywhere in the United States. This ensures that all Americans have the same basic health and environmental protections. The law allows individual states to have stronger pollution controls, but states are not allowed to have weaker pollution controls than those set for the whole country. The Clean Air Act regulates the production of pollutants from many sources, including petroleum used by cars. 
 

Many refiners would like the government to remove the 2% oxygen mandate of the 1990 Clean Air Act Amendments and let refiners choose how to formulate gasoline to meet California Air Resources Board specifications.
The American Petroleum Institute estimates that the industry’s total capital spending for clean fuels under the 1990 Clean Air Act Amendments had exceeded $30 billion by the year 2000. Thus, US regulations have molded companies’ strategies in the past and are likely to continue doing so in the future.
 

• The Internet

While new communications technologies have shaped many different industries, the oil business has been slow to adapt to the Internet. Because oil is primarily a fixed-asset business, the benefit of the Internet has not been rapidly apparent.
In 2000, however, the concept of electronic commerce in the oil industry has become a reality. Equiva Trading, a downstream joint venture between Shell, Texaco and Aramco, joined forces with HoustonStreet.com to develop an online exchange for whole sale crude oil and refined products trading in the United States. Separately, Shell, Chevron, BP Amoco and Texaco have created an Internet site for ship fuel. The system, OceanConnect.com, was available for selected locations in the second quarter of 2000. 
Many major oil companies are recognizing that online procurement and inventory management can reduce costs. BP Amoco has begun using the Internet to purchase basic catalog items, which account for over half of the company’s procurement transactions. The shift to the Internet should save BP Amoco about $200 million a year, with the company pricing an e-commerce transaction at just 40 cents, compared with $400 for an outside sales visit.
In 2000, Chevron, Shell and Norway announced plans to establish Internet-based procurement systems that could produce billions of dollars in savings for oil companies. Chevron believes that such B2B e-commerce links could save the oil industry $11 billion overall, based on buyers’ estimated savings potential of 5% to 30%.

It is now obvious that the possibilities offered by the Internet in the energy industry are tremendous.