The Union Oil Company was the most important of these. Operating difficulties plus the threat of taxation on its out-of-state properties led to the creation of the Standard Oil Trust in The trust controlled member corporations principally through stock ownership, an arrangement not unlike that of the modern-day holding company.
The tremendous growth of Standard did not occur without competition. Pennsylvania producers engineered the creation of an important competitor, the Pure Oil Company, Ltd. This concern endured for more than a half century. In one of the largest and most significant oil strikes in history occurred near Beaumont, Texas , on a mound called Spindletop. Drillers brought in the greatest gusher ever seen within the United States. This strike ended any possible monopoly by Standard Oil. One year after the Spindletop discovery more than fifteen hundred oil companies had been chartered.
Oil production in the United States by more than equaled that of the rest of the world combined. Many smaller companies developed outside the Northeast and the Midwest where Rockefeller and his associates operated. He later moved to Spindletop where he became instrumental in the organization of the Texas Company, soon a major competitor of Standard. As Standard Oil grew in wealth and power, it encountered great hostility not only from its competitors but from a vast segment of the public.
Standard fought competition by securing preferential railroad rates and rebates on its shipments. It also influenced legislatures and Congress through tactics that, though common in that era, were unethical. In the Supreme Court declared that the Standard Trust had operated to monopolize and restrain trade, and it ordered the trust dissolved into thirty-four companies.
The splitting-off of the Standard affiliates proved difficult. Some marketed, some produced, some refined, and these concerns quickly moved toward vertical integration of their businesses.
But the decision ensured that though the industry might have giants, they at least competed with one another. Increasing sales of gasoline first for automobiles and then for airplanes in the early s came as oil discoveries across the United States mounted. The oil industry had a vast new market for what had been for many years a useless by-product of the distilling process. As soon as the internal combustion engines created demand, refiners sought better methods to produce and improve gasolines.
Before its entry into World War I , the United States contributed oil to the Allies, and in the oil companies cooperated with the Fuel Administration. Although the U. Judging from government surveys, many producers believed that a major oil shortage would soon occur.
These firms invested in the Middle East, Southeast Asia, and South America and searched for oil everywhere while they continued to export quantities of oil from the United States. Joiner became convinced that some flatlands in an East Texas basinlike structure contained oil. He obtained a lease near Tyler, Texas, and on October 5, , after having drilled two dry holes, struck perhaps the largest oil pool ever found in America.
It lay beneath , acres and contained 5 billion barrels. In a sense the Joiner strike came at an inopportune time; it was the onset of the Great Depression. The price of oil plummeted to ten cents a barrel in , creating chaos in the industry. But some New Deal measures restored a modicum of prosperity, and then World War II stimulated the oil business enormously.
The various oil strikes focused attention on a legal situation unique to the United States. This right of capture continued for years despite the efforts of such industry giants as conservation-minded Henry L. Doherty of Cities Service Oil Company, who sought to institute oil field unitization. Financial Accounting Standards Board.
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About Hydrocarbons. Upstream, Midstream, Downstream. Understanding Oil Production s. Gas Production Numbers Explained. Drilling and Service Companies. Key Takeaways The oil and gas industry is broken down into three segments: upstream, midstream, and downstream.
Midstream companies are responsible for transportation from the wells to refineries and downstream companies are responsible for refining and the sale of the finished products. Well-servicing companies conduct related construction and maintenance activities on well sites. Article Sources. Thanks to their control of reserves, national oil companies NOCs will produce the most oil globally, with significant integration throughout their refining and petrochemical value chains.
Competition will grow. The oil industry will soon collide with sectors such as utilities, automotive, telecoms, technology, agriculture and petrochemicals. These are progressively converging into overlapped ecosystems, altering competition by blurring traditional boundaries. This will enable new competition and cooperation opportunities.
Oil companies, even those with large reserves or strong core competencies, will have to rise to the challenge. They have the geopolitical skills to operate in dozens of countries and the muscle to manage several multi-billion-dollar capital projects every year, all while maintaining complex arrays of alliances and partnerships with host governments and competitors. Along their growth journeys, these players have excelled in multiple dimensions, mastering core competencies that include:.
Competition will emerge from multiple energy and non-energy players, intensifying the pressures on traditional businesses. To survive in this new competitive landscape, oil companies will have to further strengthen and leverage their traditional core competences, while developing new skills to navigate in an increasingly uncertain environment. Traditional oil companies recognize that the market is changing, and have not been idle. Since the beginning of the 21st century they have been attempting to reshape their business models in order to strengthen their competitive positions.
These initiatives focus on creating value through five different strategic angles:. Smaller companies are starting to follow in their footsteps. Both Shell and Total have been betting on small projects and companies in the renewables sector. At a different pace, BP and Chevron have also expressed their commitment to renewables. Most investments have focused on solar and wind power. While many IOCs have been divesting from downstream and fuel distribution, several NOCs are investing in refining and petrochemical capacity to secure outlets for their crude oil and industrialize their home countries.
These new, large-scale refineries will displace small ones, and may frequently be built alongside petrochemical complexes. Numerous small, independent companies have succeeded in specialized niches. These pioneers have led the way in best practice and technology development for their own niches, in many cases leaving big oil companies behind.
Oil companies are retargeting their investments into unconventional and deepwater fields, which offer much potential for expanding their reserves. The low carbon transition is both driving and in turn being driven by a combination of the demand-side, policy, financial market, and social pressures described above. The oil and gas industry is adapting to define its role in the transition, but as argued here, there are multiple pathways toward decarbonization and the speed and direction of each can vary widely.
As such, each company is making its own strategic adjustments to the low carbon transition, adjustments that can also vary widely from company to company. Among the factors shaping the diversity of industry responses include obvious considerations such as geographic location of production, location in the oil and gas value chain, and asset mix between oil and gas.
Below we review a range of strategies being deployed by the oil and gas sector to adjust for the low carbon transition. The range is intended to be representative, rather than comprehensive. However, these five strategies suggest that there are a number of paths that the industry can take, each with its own drivers, risks, and upsides. Of each path, the communications component should not be underestimated.
Because some of the strategic pivots described here are considerable, the ability not just to plan and execute a new strategy, but perhaps equally importantly the ability to explain the plan to markets due to the untested nature of their ability to generate financial returns as well as policymakers and the public to ensure the strategy is engaged as a productive part of a broader low-carbon transition is of the utmost importance.
At times the industry has clearly not devoted enough attention to building public trust around its activities, leaving it vulnerable to counter-messaging from environmental groups on issues like pipeline safety or fracking and groundwater contamination, or the ongoing tar sands versus oil sands branding debate. There are strategies available to gas producers that can insulate against environmental pressure risks that are not currently available, at least to the same degree, to oil producers.
As described above, a low-carbon transition offers a cloudy, but still-critical, role for natural gas until to both complement renewables and meet rising energy demand—particularly as a cleaner substitute for coal power generation. In the power sector, the ability of oil and gas companies to connect the low carbon integrated opportunities along the gas and electricity value chain will be a key competitive advantage. Investment in downstream gas infrastructure LNG terminals, etc.
Additional support for a hydrogen economy or electric vehicle charging infrastructure are other opportunities for producers to leverage the unique complex project management skills and strong balance sheets that the sector is known for, but also serve the potential for gas to enable renewables and provide firming capacity.
More broadly, the shift away from traditional fuels in support of a demand picture that is electrifying while also decarbonizing can provide a hedge against the variance in demand picture, particularly if presented as an alternative to coal-powered electrification in key demand-growth centers such as Asia.
The potential for gas to serve as a low-carbon natural gas baseload, or intermittency solution to renewables, is significant. Of particular interest are emerging integrated gas-renewables projects that specifically are geared to efficiently operate gas generation as a back up to wind or solar. These projects are highly effective in the United States thanks to abundant land for wind and cheap natural gas.
In emerging Asia, the prospect of using natural gas as firming capacity for solar in markets such as India and southeast Asia will be closely tied to the ability to lower gas prices through increased volumes of LNG with more flexible pricing structures.
However, in the current World Energy Outlook, the IEA finds that the bulk of flexible resources needed to balance the growing amount of wind and solar energy will mostly come from coal, hydro, batteries, and demand response—rather than natural gas—in the high growth markets of China and India. A key enabling factor for natural gas may be whether gas exporters can earn emissions credits when their product is used to displace coal in the power generation mix—an initiative being considered under Article 6 of the Paris Agreement.
Developing decarbonized oil and gas is another key strategy that the industry is deploying in response to the low carbon transition. There are opportunities to reduce the carbon and climate impacts of oil and gas production, both through efficiency improvements and new technologies.
Most of the focus here is on Scope I emissions, i. These programs would include:. Taken together or adopted individually, this suite of technologies can improve the resiliency of oil and gas in a decarbonizing policy environment, particularly as scalability and cost-efficiency allow deep decarbonization to deploy at a greater rate—two areas again where the balance sheets and business experience of major oil and gas companies can be leveraged.
Furthermore, these tools also position companies as good faith actors in the broader conversation about combating climate change, notably before the policy environment forces their implementation or limits their necessity through broader restrictions.
Arguably, the Repsol announcement on net zero is the clearest indication of this trend. For US IOCs, as there is little sign of regulatory action on net zero—at least on the federal level—it is more difficult to justify allocating capital toward investments tied to those goals at the expense of traditional earnings-generating activities.
Another specialization route involves the industry tailoring toward a demand center and locking in demand by investing in infrastructure. Some of the most notable steps in this area have been taken by national oil companies, particularly in Russia and the Middle East, which have made structural investments in the high oil and gas demand growth regions of southeast Asia and India. National oil companies exhibit geopolitical influence, which is another key for success in the low carbon transition.
The history of the oil and gas markets shows that state to state geopolitical partnerships are critical to de-risking fixed asset investments in riskier emerging markets. There are also several areas where geographic specialization is also evident among international oil companies as a response to the low carbon transition, such as the strategic focus of US IOCs on North American shale, particularly the Permian Basin.
Shale is a more flexible resource with a shorter payout period, making it ideal for a period of transition and uncertainty on the demand side. A second geographic response by IOCs has been in Asia. This includes both LNG opportunities and petrochemicals. These more geographically-oriented strategies might allow companies to place a hedge against a shifting demand picture towards more stable or secure sources of demand over the long-term.
Doing so positions oil and gas companies in locations of significant energy demand growth where for policy, accessibility, or availability reasons might otherwise limit the opportunities for renewables. Moreover, it allows the industry to participate in the energy addition part of growing global energy demand and the low-carbon transition, if organized as an alternative to coal, or a complement to renewables, or augmented by deep decarbonization technologies such as CCS.
Companies can identify ways to diversify their portfolio through investments outside of technologies designed to decarbonize oil and gas or make its production more efficient.
This includes venture capital type investments, currently being pursued by companies such as Saudi Aramco and Chevron Technology Ventures, which can participate in new tech startups focusing on micro-grid, electric vehicles, batteries, and a range of technologies going beyond oil and gas.
Offshore wind, for example, could easily blend with the deepwater and offshore expertise of oil and gas companies, making it a compelling diversification opportunity for industry leaders like Equinor, Shell, and BP. Offshore wind also offers the crucial element of scale, which will allow boards and investors to assess whether it will be a legitimate long-term money maker for the super-majors in a way eventually comparable to their oil and gas operations.
Another crucial factor is that the barriers to entry in offshore wind are considerable due to operational, financial, and project management complexity, creating competitive advantages that few companies outside the traditional super-majors and international oil companies possess. This means the competitive landscape is less likely to be as saturated as solar power, for example, and the potential for attractive returns is likely greater. Renewable energy investments by major IOCs have been a pillar of the conversation thus far on how the oil and gas industry can adapt and contribute to the low carbon transition.
But as renewable technologies themselves continue to evolve, the question that IOCs may be better positioned to address is less about what renewable technologies in which they choose to invest, but how they choose to invest. Among the available renewable investment and diversification pathways available to oil and gas companies, complete transitions away from oil and gas and into fully integrated renewables remains another option.
The larger, global scale super-majors would find a total transition on this scale impossible unless measured over a matter of decades. Still, recent divestment programs and write-downs of higher cost oil and gas reserves suggest a broader transition to renewables and net zero emission fuels is possible over the long term. ESG policies can be adopted as a response to environmental and societal pressure, and oil and gas companies have already begun to adopt these policies, both defining their relationship with environmental standards and ensuring transparency at each level of organization and production.
The policies can assuage investor concerns about the sustainability of a company, not least by transparently articulating an understanding of and approach to the other aforementioned pressures confronting oil and gas companies in the low carbon transition.
They can also signal adaptability as the transition continues to take shape. Furthermore, as companies demonstrate commercially viable articulated plans for net zero emissions, they will become more likely to attract sustaining capital to scale the strategies and technologies that underpin what amounts to a significant shift in their legacy business models. Because the industry is in the early stages of implementing ESG frameworks, particularly carbon disclosure aspects, companies can largely define their own standards and thus craft low-cost but demonstrative policies.
Moving forward, how companies choose to manage the environmental, social, and governance aspects of ESG will undoubtedly change in response to signals from investors and the policy environment, but at present whether companies manage these variables as integrated parts of a broader strategy in the low carbon transition, or as individual buckets, remains to be seen. For example, the introduction of board committees focused on sustainability or more transparent auditing of carbon emissions are possible ways in which environmental and governance priorities might be creatively combined.
Active engagement with local stakeholders in areas of high oil and gas production, such as the aforementioned Permian Strategic Partnership, provides another example of integrating the environmental with the social. This reflects both a more activist ESG investor base among major pension and insurance investors in Europe, as well as more acute policy pressure from the European Union member governments, some of which have direct ownership stakes as well.
Time will tell if these strategies will succeed, but with pressure continuing to grow as the low-carbon transition proceeds, ESG policies—with greater depth and a track record of strong implementation—will be a source of credibility with investors and policymakers alike.
It would be a mistake to assume that the low carbon transition will be even in terms of speed and scope across geographies and industries. There is little so far to suggest that the low carbon transition will be linear, instead there will likely be a series of stops and starts even as overall progress on global climate mitigation is still visible and measurable.
There are many high-profile examples in both directions—from the negative impact of US President Donald Trump announcing plans to exit the Paris Agreement, or the positive impact of former United Kingdom UK Prime Minister Theresa May enacting a binding net zero emissions goal for the UK on her last day in office. Uneven political trends create uneven policy trends for the low carbon transition. The trends are broadly uneven because the low carbon transition is not yet the dominant factor in energy policy; rather, in large parts of the world, issues of affordability, access, economic competitiveness, and national security remain as or often more important than climate.
The range of policy, investor, and social pressures on the growth case for oil and gas does not preclude a significant and vital role for the industry in the low-carbon energy transition. Multiple pathways for decarbonization include oil and gas when partnered with the right technologies and policies.
The baseline of existing skill sets and resources throughout the industry to mobilize new lower carbon forms of energy suggest that there may be opportunities for oil and gas companies. Failing to take advantage of this opportunity will leave the industry in a position of responding to a changing status-quo in the energy system, driven by each of the pressures previously described.
This does not necessarily mean that the sun will set on industry; however, the changes in the status quo will continue to force oil and gas companies to operate with a risk portfolio that is increasingly beyond their control and dramatically more constrained as the market and policy environment continues to take shape—particularly if any of the aforementioned black swan scenarios are realized.
To respond to the low carbon energy transition, oil and gas companies must recognize the role their industry will play in global energy demand growth, and couple that role with the needs and expectations of the low-carbon system as it emerges. It must then communicate its vision of this role and encourage its peers to take similar steps, working as partners with stakeholders in the oil and gas industry, alternative energy sector, and policy community to build structures which support high-energy growth, low-carbon pathways for the future through the following vital steps:.
Taken together, these steps can position the oil and gas sector to not just survive to the low carbon transition, but evolve, thrive, and even perhaps lead the transition to an energy system which can simultaneously meet the 1. The following hypothetical Harvard Business School-style case study was developed following a series of workshops organized by the Atlantic Council Global Energy Center in New York City, Houston, Abu Dhabi, and Singapore to explore the pressures confronting oil and gas companies in the low carbon transition, and the available strategies or business models to mitigate and lead into the future.
The challenge posed to fictional investment firm Gray Canyon Asset Management in the following case study, dated in late summer , examines these dynamics, and reflects on the discussion in the first half of the paper addressing the key questions and uncertainties, as well as the opportunities, the oil and gas sector will face.
The case study focuses on access to capital, which is a key element of managing the transition to a low carbon economy. Uncertainty both about the pace of the transition and the ability of oil and gas companies to reposition their legacy business models profitably represents a challenge for investors. This case study demonstrates how the investment community weighs prospective government climate policy changes and assesses whether they align with the wide range of technology and strategic pathways oil and gas companies are taking to manage the transition.
Martha Radcliffe stepped off the elevator and walked across the football field-sized trading floor at Gray Canyon Asset Management. What made today different was that Martha knew there was a strong chance the meeting she was attending would end with her terminating one of her longest-standing colleagues, senior portfolio manager Richard Hernandez. Hernandez, with a solid but unspectacular record as a portfolio manager, had a disastrous run over the past three years.
Was Hernandez no longer up to the job, or was he simply in the wrong place at the wrong time? Hernandez had played several roles as he advanced in his career at Gray Canyon. From to , G-Ro had generated a robust 18 percent annual return to investors. Shark retired to Pebble Beach in , taking his Houston boardroom and Hill Country hunt lodge connections with him. Hernandez was tapped to bring a new approach to G-Ro, one that would include more analytics, big data, technology focus, and, most importantly, openness to diversification into clean and renewable energy.
Martha Radcliffe had worked with Shark, admiring both his old school ways and his massive returns that had carried the overall portfolio in more than one year. But even they did not expect the catastrophe that followed. Worst of all, the high-flying deepwater services and Canadian oil sands producers had seen returns plummet and dividends cut to near zero as these higher cost plays were particularly unloved by markets in an era of oversupply.
Even though there were some good companies and assets, the market refused to recognize any growth or upside in the stocks and the underperformance continued. Worse, because of buying the dips and a stubbornly bullish team view on commodities, once-mighty G-Ro was down an aggregate of 91 percent. G-Ro investors were furious and calling not only for Hernandez to go, but with many of them hoping that Stanhope would follow him out the door.
Radcliffe could see that Hernandez knew the direction this meeting was likely to take, but knew him well enough to know he would approach the conversation in a measured and data-driven way. Actually, Radcliffe did mind. But she trusted Hernandez and decided to let him proceed. Hernandez sent a quick text and minutes later a youngish looking woman entered the room.
I would like to hire her to be our new ESG analyst.
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