5 Min Read
* Exxon, Chevron committed to downstream for technology
* No line of buyers to snap up refineries
* Breakdown of fully integrated model happening slowly
By Braden Reddall
SAN FRANCISCO, July 14 (Reuters) - The very biggest U.S. oil companies seem perfectly happy holding on to their refining arms given that expertise in processing oil and gas after extraction looks likely to be more in demand in the future.
The refining arm spin-off announced by ConocoPhillips (COP.N) on Thursday, coming just weeks after a similar move by Marathon Oil Corp (MRO.N), inevitably led to speculation about who would move next. [ID:nL3E7IE1Z0]
Alan Gelder, head of downstream consulting at Wood Mackenzie, said Marathon's success only made Conoco's decision easier, since Conoco was already slimming its refining arm.
Yet "one size doesn't fit all," with oil companies taking a wide variety of strategic approaches. Anyway, he added, selling refineries has proven hard enough without a rush for the exits by every U.S. integrated oil company.
"We're not aware of a line (of buyers) anywhere," Gelder said, noting Murphy Oil Corp (MUR.N) announced plans to sell its refining business a year ago. [ID:nN22119712]
This follows years of a slow unraveling of the fully integrated model in oil, which goes back to John D. Rockefeller's attempt to remove volatility from the business at Standard Oil -- the predecessor of both Exxon and Chevron.
Unlike in early days of the oil business in the 19th century, there is little chance of an oil glut now, and far more risk of being stuck with too much refining capacity.
At first glance, the two businesses seem to be a perfect fit. But while rising prices for oil lead to swelling profits for oil producers, they can be a disaster for refiners: Pricey oil often pushes refiners' profit margins into the red, as they find it harder to pass on price increases to retailers in a crowded market.
The emergence of dedicated and acquisitive refiners such as Valero (VLO.N) and PBF Energy underlines the specialization trend. Plus, pipelines and storage are run increasingly by third parties -- such as Oiltanking Partners, which had a strong debut for its shares on Thursday. [ID:nN1E76D0A1]
Yet with much of the oil now being extracted getting harder to refine, Chevron Chief Executive John Watson told reporters in London in April that he could not think of a time in his 30 years at the company when being integrated made more sense.
"We believe it is central to our value proposition and executing our long-term growth strategy," Chevron, the second-largest U.S. oil company, said on Thursday.
As for Exxon, the world's largest private-sector oil company, it also values the technological expertise of the downstream, and notes its chemicals and refining business reported a 20 percent return in the last cycle.
"There's no fire sales at Exxon Mobil," Michael Dolan, a senior vice president, told analysts recently when asked about integration. "There's just good, solid capital discipline."
Canadian producers are also seen as likely to keep hold of their downstream arms given the unique challenges they face in producing the heavy oil north of the U.S. border. [ID:nN1E76D1T2]
Other major oil companies, however, have decided that the more consistent returns offered from exploration and production, with oil prices in the range of $100 per barrel, make that a preferable business in which to invest.
"If the upstream is going to be consistently good, then it probably doesn't make sense to necessarily have refining assets," said Dave Geddes, a refinery consultant who teaches refining economics at the Colorado School of Mines.
BP Plc (BP.L), having exited 10 refineries in a decade, is selling refineries in California and Texas. Royal Dutch Shell (RDSa.L) has sold some in Europe due to overcapacity, and said in April it was closing one in Australia. [ID:nL3E7FC01S] (Editing by Steve Orlofsky)