Comments: IOCs Look to the Upstream
Authors: Donnelly John 
Published: February 2015

Editor's column

The relationship between international oil companies (IOC), national oil companies (NOC), and service companies has been evolving over the past 3 decades. NOCs, which own a large majority of global reserves, have become better at project management and at developing and deploying technology. Service companies have taken over much of the industry’s upstream technology developed as IOCs restructured their businesses. IOCs, in many cases, have been struggling to replace reserves and see an unclear future.

A new report maintains that the latest IOC strategy is to divest some downstream assets to raise capital for more vigorous upstream plays, such as deepwater or unconventional plays. Higher capital spending in upstream activities will be the main driver for the restructuring of operations by integrated oil companies, according to GlobalData (Business Restructuring in International Oil Companies, www.globaldata.com). As an example, several integrated oil companies restructured business segments last year by divesting or spinning off downstream assets, among them ConocoPhillips and Marathon. Both companies announced last year that they would separate their upstream and downstream operations into separate entities. Even with the spinoffs, ConocoPhillips and Marathon will be among the largest refineries in the United States.

The study concludes that the main reason is so these companies can focus more on upstream activities over the next 5 years because of the lack of significant discoveries since 2010 and because of the depletion of their global conventional reserves. The money raised from divesting downstream assets could help fund expensive deepwater plays or to acquire “pure play” smaller upstream firms that have expertise offshore or in unconventional projects. “IOCs have shifted from a more holistic approach to maximizing the profitable returns from individual sectors,” the report says. “These companies have decided to divest stakes in noncore assets to build up their core strategic assets, primarily focusing on upstream activities.”

IOCs need to increase spending in the upstream to keep pace with firms devoted solely to upstream projects, according to the report. Reserve replacement ratios of the IOCs have lagged those of upstream pure-play companies from 2007 to 2011. That ratio of IOCs was 132% over the period compared with 179% for companies devoted solely to upstream activities. “The reserve replacement ratio helps in deciding the future prospects of a company and the number of years it will be able to sustain its current production levels with its current reserves,” the report said.

Regions that should see significant upstream activities by IOCs include the South China Sea, Baltic Sea, Barents Sea, South America, and east and west Africa.

One of the things that has made the downstream less attractive and profitable for integrated companies is the imposition of stricter environmental regulations in the US and western Europe particularly since 2010. Looking forward, refinery expansion is likely to take place elsewhere such as in Asia, Africa, the Middle East, and Latin America, where regulations are less strict.