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Are We Seeing the End of Big Oil?

timothy posted more than 2 years ago | from the just-wait-for-the-worldwide-famine-of-the-'70s dept.

Businesses 230

Hugh Pickens writes "Cyrus Sanati writes in Fortune Magazine that up until now, it has been widely accepted that being bigger was better for oil companies, but the announcement that ConocoPhillips plans to break up into two separately traded companies, separating its exploration and production unit from its refining and marketing units, took Wall Street by surprise, raising uncomfortable questions about the future of Big Oil. 'That's because the exploration side and the refining side of the oil business have little to do with one another,' writes Sanati. 'Contrary to popular belief, Big Oil has almost no control over the price of oil these days. That power squarely rests with oil-rich nations that hold most of the world's oil reserves and the Wall Street banks and hedge funds that speculate and make markets in the oil trading game. So even though ExxonMobil pumps oil, it can't guarantee that its refining unit will be able to profitably process a barrel into gasoline or heating oil.' ... 'If the ConocoPhillips story is a success for shareholders, there will be calls to break up Big Oil just in time for the annual meetings in the spring. So by this time next year, it is possible that Big Oil will go the way of Rockefeller's once gargantuan Standard Oil — with the markets, not the government, forcing a break up this time.'"

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230 comments

With profits like these... (3, Insightful)

tetrahedrassface (675645) | more than 2 years ago | (#36958216)

Who would need to be bigger? Seriously huge profits, and most exploration is already done. These companies have been exploring for years now for deposits. It is probably just a crafty way to hide the hordes of money they are making...

Re:With profits like these... (4, Insightful)

alostpacket (1972110) | more than 2 years ago | (#36958374)

Exactly my thoughts as well. It also appears to move them one step further away from potential spills and the bad publicity that follows. The exploration units wont be household names. BP tried to hide that it basically owned that platform in the Gulf by outsourcing it IIRC. So this looks to possibly be another layer to hide profits and more. This isn't free markets creating competition and innovation, this is shell games and accounting tricks. It's also ridiculous to think ExxonMobil is somehow powerless at the behest of Wall Street traders when it was the #1 most profitable company in 2010. They dont tremble when a barrel of crude hits $100+, they laugh all the way to the bank.

Re:With profits like these... (5, Insightful)

TheRaven64 (641858) | more than 2 years ago | (#36958412)

Not just hiding profits, also splitting liability. BP is going to be paying a lot for the oil spill. Wouldn't it be so much more convenient if they didn't own or operate the rig and could just blame it on a small company, which could then pay its entire $1M capitalisation in compensation and then go bankrupt?

Re:With profits like these... (5, Interesting)

vlm (69642) | more than 2 years ago | (#36958506)

Not just hiding profits, also splitting liability. BP is going to be paying a lot for the oil spill. Wouldn't it be so much more convenient if they didn't own or operate the rig and could just blame it on a small company, which could then pay its entire $1M capitalisation in compensation and then go bankrupt?

You write as if you don't know very much about the oil business, at all. BP did not own nor operate the rig, TO did.

One problem you have not considered is your solution would probably have saved the gulf. TO and BP are multibillion dollar companies, and as such every interaction between them is handled almost lawerly, with infinite levels of ass covering and record keeping. As anyone who has ever worked in a situation like that knows, that leads to horrendous paralysis. Which is unfortunately exactly what you don't want on a drilling rig hovering over a 3 mile deep gas filled hole.

In your scenario, Mr Million dollar company says F U guys I'm hitting the big red switch and pumping the heavy kill pill downhole. Its only a million bucks not a billion. What actually happened was a lot of "you don't wanna be the guy who broke the billion dollar contract relationship" and "who is authorized vs who is liable to declare an emergency or not to" and "who gets to push what button when and why". Which is fine if you have all the time in the world, but if you don't then the platform blows up, everyones killed, and the gulf is flooded with oil, because you can sue individuals but you can't sue oil spewing out of a well.

Basically we have a super monopoly / ogliopoly situation now. That doesn't work so well. A bunch of little companies, even if a little artificial, would provide more efficient and safer operations overall.

Re:With profits like these... (1, Offtopic)

RandCraw (1047302) | more than 2 years ago | (#36959256)

Great idea. Let's say I'm a giant pharma. I decide to promote 'efficiency & safety' by dividing up each of my candidate drugs into its own 'independent' company in which I am NOT the owner, but merely the major investor. (Oddly enough, the other pharmas are more than willing to play this game, so we collaborate).

Throughout development, marketing, and distribution, the indie company then charges all of a drug's costs back to the parent company (where the real work is run & done, and to whom most profits will flow), but because it's supposedly autonomous and 'independent', the indie company remains responsible for all potential liabilities related to the drug. Down the road, if the drug fails to make it to market (too low profits) or encounters safety problems (too high costs), I liquidate my share of the indie company and walk away.

Is that the kind of improvement in 'safety and efficiency' you were talking about?

Re:With profits like these... (1)

Dachannien (617929) | more than 2 years ago | (#36959332)

Nice straw man. I believe the topic of conversation was oil and oil service companies.

Re:With profits like these... (0)

Anonymous Coward | more than 2 years ago | (#36959636)

One problem you have not considered is your solution would probably have saved the gulf. TO and BP are multibillion dollar companies, and as such every interaction between them is handled almost lawerly, with infinite levels of ass covering and record keeping.

...

A bunch of little companies, even if a little artificial, would provide more efficient and safer operations overall.

Do you really believe that a bunch of little companies - each with their own lawyers and contracts, each of which must be separately monitored by safety and environmental regulators, and each with their own ass covering/record keeping propensities - would lead to greater efficiency and safety in deep water operations? Apparently you also believe that this band of little companies could even muster the resources/financing/insurance/etc. to undertake deep water drilling projects.

You write as if you don't know very much about the oil business, at all.

Re:With profits like these... (3, Informative)

TheCRAIGGERS (909877) | more than 2 years ago | (#36958510)

With something as big as the Gulf spill, the media vultures who are constantly circling for disasters like this won't be fooled by something so simple. And neither will the public when the media announces that BigOilCo owns the company that caused the newest natural disaster.

The PR was bad enough for BP in the last spill, and they were (somewhat) actively trying to clean it up. A lot of eyes were on them. How bad do you think the PR would be if BP had said "Well, it's not our problem. It's the problem of our Exploration subsidiary." So I don't think it's that good a get out of jail free card as you say.

Re:With profits like these... (1)

Anonymous Coward | more than 2 years ago | (#36958648)

You're not very good at PR.

They wouldn't say "It's not our problem, it's our exporation subisdieary's problem", they would say "Due to the severity of this situation we are going to assist exporations subsidiery in cleaning up their mess"

Or something thereabouts. Don't wash you hands of it, play the hero solving someone else's problem.

Re:With profits like these... (2)

obarthelemy (160321) | more than 2 years ago | (#36958694)

This is not high school anymore: reputation is less important than money. Do you think all those big banks, and their bankers, give a damn about what we think of them, as long as they can take home huge bonuses ? same everywhere: the companies mostly don't care, the employees don't give a f**k.

Re:With profits like these... (1)

TheCRAIGGERS (909877) | more than 2 years ago | (#36959172)

This is not high school anymore: reputation is less important than money. Do you think all those big banks, and their bankers, give a damn about what we think of them, as long as they can take home huge bonuses ? same everywhere: the companies mostly don't care, the employees don't give a f**k.

I remember a lot of TV and radio ads around the time of the disaster, basically asking people to not boycott them. I also remember a lot of news talking about declining profits, and how the local BP stations were being hit hard. Now, obviously BP survived this, but it does sound like bad PR can certainly have an effect in this situation. When you have 8 gas stations all clustered together, all with the same prices and services, it becomes extremely easy to say "Screw BP, I'll drive 100ft and go to Shell instead, because they don't kill baby animals."

If it had been worse, I'm guessing a lot more people would have done just that. And while it is debatable just how much BP is harmed when Habeeb has to close the local hometown BP station, I'm sure it doesn't help, and I'm sure if that happened on a large enough scale it could certainly impact their cash flow.

Re:With profits like these... (1)

Anonymous Coward | more than 2 years ago | (#36959384)

Yawn, there are ways to block such liability splitting.

Basically make anyone who has a hand in the deal is at least partly responsible and liable.
They've done this with labour laws, and vicarious liability laws.

Here if you hire a subcontractor, and their worker gets hurt, and their employer is at fault, you also share blame, and this goes all the way up.

The result is, health and safety becomes a liability that goes all the way up, and there is no way to contract out that risk. Which means you don't hire companies with bad safety records or sloppy safety protocols. The safety/performance trade off is now EVERYONES problem.

Re:With profits like these... (4, Informative)

peragrin (659227) | more than 2 years ago | (#36958908)

100 billion in profits on 1 trillion in sales means you have 10% margin out of that 90% is overhead. And you are making 1% profit. Only billion dollar companies can live with that. Even Dell makes 15%, and Apple makes 30%.

Record profits only have meaning when you think like a small minded idiot.

Not to defend exxon but wall street speculators cause more price swings than any other force, from the big oil companies to the country oil cartels. Pass a law that says you must hang on to futures trades for 24 hours and watch the price stablize.

Re:With profits like these... (3, Interesting)

Rei (128717) | more than 2 years ago | (#36959444)

That's probably the most intelligent comment I've seen in this thread in all regards. Especially the point about locking people into futures trades.

And the original article is right -- oil exploration/production and refining have relatively little to do with each other. They don't even profit based on the same numbers. Production profits based on the market value of the particular type of crude. Refining profits based on the "crack spread", the difference in price between a particular refined product and its feedstock. Both fluctuate wildly and independently.

There is an "oil cartel" -- OPEC. But acting as though every entity involved in the oil industry, from multinationals to refiners, is likewise a cartel, is just plain silly. The amount of competition between different oil companies is huge. They're all selling basically the same product**, so they deal in very small margins, trying to out-optimize their operations relative to each other, with pure, raw scale being the way to keep their total profits up.

** -- There are some ways oil companies try to distinguish their products from each other, namely in how they market branded gasoline (not just commercials talking about additives or whatnot, but more in terms of marketing to retailers -- getting them to pay a small premium in exchange for services like delivery and whatnot).

Re:With profits like these... (0)

Anonymous Coward | more than 2 years ago | (#36959534)

I hadn't thought of that, but you are probably right - think about it "That spill? That wasn't us... that was a different company. Yes, we share a name and owners, but really we are two separate companies. Don't stop visiting our pumps!"

Re:With profits like these... (3, Interesting)

petermgreen (876956) | more than 2 years ago | (#36958434)

It is probably just a crafty way to hide the hordes of money they are making...

I'd say it's more likely a way to seperate the reputations of the two units.

As oil and gas supplies dwindle we are being driven towards sources that are dirtier and/or riskier. Remember the deepwater horizon incident? remember the tar sands controversy? remember the fracking controversy? If you were running a consumer facing buisness would you really want to be associated with that?

Re:With profits like these... (1)

postbigbang (761081) | more than 2 years ago | (#36958598)

Reputations? They have reputations? As gouging and lying sons of bitches, yes.

Don't drink the koolaid about the bogus problem with these subsidized, molly-coddled, tax-subsidized, media manipulating bunch of crow bait.

They want to break up to see their new tracking stocks soar. Make no mistake about the intent: this is about making more money with the same market-manipulated evil that they've used for the past 40 years.

Re:With profits like these... (2, Insightful)

Anonymous Coward | more than 2 years ago | (#36958632)

Your comment shows how little you understand about the market. They do have massive profits but the article is about how they are breaking up to separate the finding, drilling, and production of crude from the refining of that curde into usable products. They're doing this because exploration and production is currently very profitable while refining and marketing is have trouble with shrinking margins due to the price of crude, increased regulation, etc. They're getting smaller not to hide profits but to dump operating costs.

The more interesting question for these companies is what happens when they dig too many dry holes or the price of crude tanks etc. etc. One of the reasons that a huge integrated oil company is a good idea (from a business point of view) is that when production business are having issues, refining is traditionally going well, and when refining is having issues then production is usually going well.

Also, to defend the industry on the economics side a bit (though they deserve little defense from an environmental standpoint), what they do is expensive like almost nothing else so by default the companies are going to be large. It's the only way to be able to fund the production and refining without risking the entire company every time you dig a hole. What results from that size is poor on-the-ground efficiency, confused decision making, poor accoutability, a bad environmental record, massive profits (especially if you look at the number in a vacuum and don't consider at the amount you had to risk to get those profits), and the ability to actually produce enough hydrocarbon products to meet world demand. It is definitely a double edged sword but the "big companies are evil" mantra is naive and frankly just stupid. They're dangerous and need to be watched because of their scale and the effect they can have on economic and environmental systems but they're not evil.

Regardless of whether they favor a big integrated approach that insulates you from various risks related to changing markets or they favor putting your eggs in the basket that is currently doing well and adjusting when the market changes I assure you they're not trying hide profits...they're trying to increase them or reduce risk of ruin depending on the approach you take.

If you really want to do something about big oil, quit using (or reduce) your car, electricity, and commercial mass produced products then convince another 5 billion or so people to follow suit. Or perhaps you could make renewables economically viable through innovation. The problem is that that R&D requires investment levels that only large companies can provide the most common of which in the renewables space comes from big oil. They invest at a rate to keep them out ahead of demand not at a rate to get to renewables the quickest but they still invest alot more than anyone else. LIke I said it's a double edged sword.

Re:With profits like these... (1)

Anonymous Coward | more than 2 years ago | (#36958690)

Wow. Just wow. Exploration is already mostly done? Sure it is. Try looking at any of the major oil companies capital expenditure programs and see how much goes into exploration and how many exploratory wells need to be drilled in order to bring on one profitable field. I'll give you a hint: I work for a major oil co. and our capital and exploratory budget for 2011 was 26 billion dollars. Yes, that is to acquire leases, find oil, and bring it online. It is getting harder and harder to replace reserves that are depleted too. The biggest problem the major international oil companies actually face is the national oil companies (the state sponsored ones such as Petronas in Malaysia, Gazprom in Russia, etc.) These companies tend to get preferred access to leases and can often effectively shut out the majors.

First Post (-1)

Anonymous Coward | more than 2 years ago | (#36958220)

First Post.

Yes but not because of that but (0)

Anonymous Coward | more than 2 years ago | (#36958222)

Hydrogen as fuel. And its taking too long.

Re:Yes but not because of that but (5, Insightful)

jank1887 (815982) | more than 2 years ago | (#36958312)

we do use hydrogen as fuel. It just currently brings carbon along for the ride. you want to pay extra to separate the two first? go right ahead. you can't get it for free.

Re:Yes but not because of that but (1)

Fractal Dice (696349) | more than 2 years ago | (#36958682)

A small quibble over terminology but in a post-oil world, the capture of energy and the transportation of energy are two seperate problems. "Hydrogen as fuel" is one possible solution to the transportation problem, completely seperate from the capture problem.

Markets?!? (2, Insightful)

XxtraLarGe (551297) | more than 2 years ago | (#36958226)

with the markets, not the government, forcing a break up this time

<sarcasm>Wait, the market is providing a better solution than the government? How is that possible?</sarcasm>

Re:Markets?!? (1)

Anonymous Coward | more than 2 years ago | (#36958358)

Wait, the market is providing a better solution than the government? How is that possible?

Apparently it isn't, yet. You accidentally edited this out from the beginning of your sentence...

So by this time next year it is possible that...

Don't let that get in your way though. Wild speculation is as good as facts when reinforcing your own point of view, right?

Re:Markets?!? (4, Insightful)

tbannist (230135) | more than 2 years ago | (#36958368)

How about:

<sarcasm>Wait, the market is providing the exact same solution as the government. How is that possible?</sarcasm>

Re:Markets?!? (0, Troll)

roman_mir (125474) | more than 2 years ago | (#36958590)

No, the market is providing a solution, which makes sense. Governments do not do this. By the time Standard Oil was broken up it wasn't a monopoly. There are no monopolies in free market anyway, there is no such thing as a natural monopoly. It's a ruse by the government and gov't hired charlatans that people think are economists to justify gov't interference with the market.

Whenever gov't participates in any sort of 'breaking of a monopoly', you know it's lobbied by other businesses who cannot effectively compete on price and/or quality against a company that provides the solution that market prefers at that point in time.

Re:Markets?!? (0)

Anonymous Coward | more than 2 years ago | (#36958828)

No, the market is providing a solution, which makes sense for executives.

FTFY. Allowing competition can't ever be a good thing.

Re:Markets?!? (1)

tbannist (230135) | more than 2 years ago | (#36958864)

That sounds like a bunch of ideological bullshit.

Governments do not provide solutions?

That might be the case, government moves slowly, the question is whether it was a monopoly when the government started it's prosecution. That prosecution often has the effect of the curbing a companies worst excesses which means the prosecution may be enough to correct the company's behavior, regardless of the outcome.

There are no monopolies in free markets?

Is this because, by (your) definition free markets don't have monopolies, or because any market that has a monopoly is therefore not actually free? Free markets can develop all kinds of monopolies. That's why we have the phrase "natural monopoly" and "cornering the market".

There's no such thing as a natural monopoly?

Economist beg to differ.

Any economist who agrees with something the government said is a charlatan?

That's one way to dismiss anyone who disagrees with you out of hand.

Government anti-trust laws are always motivated by inferior competitors?

I supposed this does follow from your insane beliefs. If there are no monopolies that are not government mandated then, of course, there can be no legitimate basis for anti-trust laws. A monopoly that doesn't exist can't illegitimately hurt a competitor. Of course, if monopolies can develop in free markets then it stands to reason that their is a rational basis for anti-trust law because a monopoly which does exist can illegitimately use it monopoly power against competitors.

It seems to me that you've got a series of circular arguments, and frankly, I haven't seen any arguments this bad since the Microsoft anti-trust days when people (often paid by Microsoft) told me "the best solution is always the one the market chooses" because "the market always chooses the best solution". Apparently, no other considerations were allowed.

Re:Markets?!? (0)

Anonymous Coward | more than 2 years ago | (#36958400)

Yeah, imagine if they ended up like Norway... That would be horrible.

Re:Markets?!? (2, Interesting)

bky1701 (979071) | more than 2 years ago | (#36958402)

The market always makes the best choice. However, it is best for the rich who own the big players in the market, not for the workers or consumers.

Re:Markets?!? (2)

Semptimilius (917640) | more than 2 years ago | (#36958438)

And the summary gives an example where government had to step in because the market created a monster. Long ago, granted, but still looked on as a favourable move. Naturally, when the economics no longer make sense, "the market" brings about a change. Though, this isn't necessarily a better solution without governments protecting the entities; oil-rich nations and nationalized oil corporations will gobble up the smaller players if given the chance.

Does this matter (4, Interesting)

Anrego (830717) | more than 2 years ago | (#36958240)

to anyone besides investors?

What I got from the article is that one really big company is becoming two merely large companies for market purposes. How does this impact any of us down here?

I was however relieved that this wasn't another "year of the electric car" type article and it had a fair amount of substance!

Re:Does this matter (-1)

asto21 (1797450) | more than 2 years ago | (#36958366)

Such a slow news day and my story on secure social networking still doesn't get picked up | http://slashdot.org/submission/1744302/Cryptbook-The-future-of-social-networking [slashdot.org] But big oil does? WTF?

Re:Does this matter (0)

TheRaven64 (641858) | more than 2 years ago | (#36958428)

That's because your story is 'I had a kind-of idea, except without any of the details about how it would be designed and implemented, but it would be really cool if stuff worked like this vague idea'. That's not news, it's entirely free of content.

Re:Does this matter (0)

Anrego (830717) | more than 2 years ago | (#36958456)

Probably for the best, that would get torn to shreds.

Public key crypto don't work like that ;p

Re:Does this matter (1, Informative)

asto21 (1797450) | more than 2 years ago | (#36958546)

Of course it does. You encrypt using a somebody's public key. They decrypt with their private key. The client applications would manage the keyring and encryption/decryption without the user having to do much. In any case, chuck it. I don't want to run a parallel discussion on my article on this thread. The point I was making is that something (even if rather sketchy) that is tech related and quite relevant now is shot down but this story was posted.

Re:Does this matter (0)

Anonymous Coward | more than 2 years ago | (#36959326)

I always assume an alterior motive. Seems to me this is a CYA ploy since the smaller "exploration" company is more likely to be the one to cause catastrophic dammage to land/sea/whatever and they don't want their larger assets being exposed to lawsuits.

Article is stupid (0)

Anonymous Coward | more than 2 years ago | (#36959340)

There's no such thing as "Big Oil" in the West.

Entities like Aramco & Rosneft make Exxon Mobil look like a mom & pop heating oil outfit.

logical (3, Interesting)

StripedCow (776465) | more than 2 years ago | (#36958274)

Any conglomerate should be split up. It just make sense. Like modular programming does.

The output of any division of a conglomerate should be accessible to the whole market, not just the big encompassing company that holds the division.

Letting companies grow bigger and bigger only leads to near-monopolistic situations, and eventually less choice for the consumer.
If, for example, Apple were split into two companies, one for software, one for hardware, this would probably lead to a much richer variety of products. And, also important, more opportunities for users to tinker :)

Re:logical (1, Insightful)

nharmon (97591) | more than 2 years ago | (#36958318)

Where do you draw the line? Do you allow Apple to tie firmware in with the hardware? What about operating systems? Does the operating system include the interface?

Re:logical (0)

StripedCow (776465) | more than 2 years ago | (#36958406)

How about limiting the number of employees of a company? :)

Then they can produce any locked-down stuff they want, except that they will not be able to reap society from intelligent workers, and any base products they use (bought from other companies) will be available to any other market-player.

Welcome to the open-economy.

Re:logical (4, Insightful)

vlm (69642) | more than 2 years ago | (#36958556)

I don't think making all 25K employees 1099 contractors is gonna help anyone but the tax lawyers.

Re:logical (4, Interesting)

Dishevel (1105119) | more than 2 years ago | (#36958320)

How about we allow success.
Monopolies are not in and of themselves bad.
Only when they use their position unfairly should the government step in.

Re:logical (0)

Anonymous Coward | more than 2 years ago | (#36959182)

Monopolies are not in and of themselves bad.
Only when they use their position unfairly should the government step in.

Because there's so many examples of monopolies that don't use their position unfairly...

Re:logical (1)

geminidomino (614729) | more than 2 years ago | (#36959580)

Only when they use their position unfairly should the government step in.

I'm all for that. Of course, then the government would have to step in before any monopolies form anyway, since using their position unfairly is Business 101.

Re:logical (4, Interesting)

Anrego (830717) | more than 2 years ago | (#36958338)

If, for example, Apple were split into two companies, one for software, one for hardware, this would probably lead to a much richer variety of products. And, also important, more opportunities for users to tinker :)

Much as I hate apple, the tie in that have with software and hardware is one of the advantages they have over PC from (most) consumer perspectives. The operating system works nearly perfectly with the hardware because they define the hardware. They don't have to deal with a bazillion unique configurations.. only a few that they've chosen.

Apple splitting up this way would be a mistake on their part.

And I think what we draw from this is that in a lot of cases (especially cases where things are evolving) there is an advantage of being a big blob. I think where it makes sense to split something up is when the components stop evolving significantly (which may at this point be the case with oil). When a widget just becomes a widget, it makes sense.

Re:logical (1)

Anonymous Coward | more than 2 years ago | (#36958616)

Not really... This is not going to be good for the consumer in any way. It will reduce the number of refineries operating in the US by 2 possibly 4 units due to cost pressures by gov'ts on the east and west coast. That will increase the cost of gas for everyone, but also allow the refining operation to take the same margin on a higher cost commodity.

It will make the upstream side of the company less resilient to drilling failures and/or fines. This will result in a higher churn of the company as it tries to buy/sell drilling opportunities. Upstream, which usually takes a while to recoup it's costs will run the hazard of running out of capital. If this happens they will sell "some" asset. This will slow down the drilling process, thereby reducing the oil available on the market, thereby increasing the cost to the consumer, and finally increasing the dollar value of the margin on a barrel of oil.

This is "peak oil" being created by the market, and by a CEO anxious to get a massive payout before he retires next year.

Re:logical (4, Insightful)

Attila Dimedici (1036002) | more than 2 years ago | (#36958662)

Any conglomerate should be split up.

I agree that conglomerates should (at least in most cases) be split up, but not by the government. Most conglomerates were formed when various factors favored centralizing everything. What made that economically efficient was the cost of communicating information from one place to another. It was more efficient to put all of the decision makers in close proximity to one another and send the necessary information to them at that central location since much of the same information was necessary for making decsions about disparate business entities. When the cost of transmitting information was high, this was the most efficient way to organize things.
However, as a result of this centralization, a lot of information that was only significant to one of the business entities was "lost" to the decision makers. This was not critical because the savings of only having to transmit the other information to one place made up for it. Now, as the cost of communicating information to various locations has fallen, the cost savings of centralization have diminished to the point that much of that "lost" information is now more valuable than the savings from centralization. This will gradually lead to the breakup of conglomerates along the fault lines of information.
Of course, not all conglomerates will voluntarily break up. But as their various divisions are less able to compete with the now independent divisions of their competitors, all of their divisions will suffer. If the refining side of an oil conglomerate, must get all of their oil from the exploration side they will not be able to take advantage of cost savings from dealing with outside exploration companies that are at the moment more successful than the in-house exploration division. If the exploration side must sell all of their oil to the refining side, they will be unable to maximize profit by selling to outside refiners who at the moment have a need to pay higher prices to obtain oil. If both sides are free to deal with outside competitors of the other division, the advantages of having both in the same company diminish.
The market is perfectly capable of sorting this out. If I am correct, the new companies of the ConocoPhillips split will be more successful than they were as part of one company and other companies will follow suit. Those that do not will gradually fall behind in the market until they either do so, or they go out of business.

Re:logical (1)

sorak (246725) | more than 2 years ago | (#36958744)

I would have to agree with anrego about the Apple part. Forgive me for not using a car analogy, but if you're getting married, there is a large amount of work to do. You have to buy a cake, pick decorations, write your vows, (find someone to conduct it if you're an atheist), find a place to hold it, throw the biggest formal party of you life, and plan a honeymoon on top of that.

Or you could hire a wedding planner.

Apple is a wedding planner. They take care of all the details and just try to integrate several small things in a way that works. Now, I don't want every company to be like Apple, but I can see the advantage of the business model. (Not a fan of Apple, I just think this is one thing they got right).

The question is this: if everybody is following the Apple model (in some industry), then is this something that should be split up, or is this just a sign that many of the elements have become commoditized to the point where customization is irrelevant?

Re:logical (1)

Fractal Dice (696349) | more than 2 years ago | (#36958794)

Something that deserves more study is the question of why a large monolithic company can outcompete an ecosystem of smaller units in the first place. The existance of large companies seems to contradict all the theory of how a free market is supposed to efficiently self-organize and motivate people.

Re:logical (2)

StripedCow (776465) | more than 2 years ago | (#36958950)

Something that deserves more study is the question of why a large monolithic company can outcompete an ecosystem of smaller units in the first place.

Probably because of its anti-competitive advantage... a large conglomerate has the strength to lock its customers in, lock their competitors out. Heck, they create their own "ecosystem" and completely control it (look at the Apple "app" ecosystem).

Re:logical (1)

ledow (319597) | more than 2 years ago | (#36958978)

And, from a commercial perspective, the exact opposite is always much better. Why outsource to a third-party that is ALWAYS making profit on top of their operating costs, when you could do it yourself if you have enough to buy the equipment/personnel in the first place?

Take a school. Why bother hiring a cleaning company when you could just hire cleaners? Why bother to hire an IT company when you could just buy and manage the computers yourself? Why bother to pay an external caterer when you could just build a kitchen/canteen and do it yourself?

Every third-party you use is sucking profit from the price you pay - by definition, you are paying more for the base services than strictly necessary. Now sometimes economies of scale mean it's not practical to, say, buy your own PCB manufacturing plant to make your own computers to put in your offices, but a lot of things can easily be done in-house and thus you "consume" an external third-party and get what would be their profit, albeit indirectly.

I know that if I owned a large company, I'd try to keep as much as possible in-house and expand the company rather than use third-parties. Greater control, greater profit, and other services you can offer other companies. If I were Google, I *would* own a motherboard manufacturer by now, and be churning out my own custom-built PC's. I probably wouldn't own a processor manufacturer (economies of scale again), but I'd almost certainly be doing lots of things in-house by expanding the scope of the company, to the point where I'd be making my own racking, basic datacentre equipment, etc. What better advert than "Google only uses Google motherboards/UPS/rack/cables/switches/etc. - which will be available for sale next year"?

Every time you employ a third party, you are paying the amount that they have to charge to a) do the job you want, b) do lots of other jobs for other people, c) hiring people to do all those jobs permanently, pay pensions, h&s, etc. and d) make a profit and expand their own business. Do it yourself, and you save all of d) and quite a bit of the others to get exactly what you want.

And, sensibly, it's not a monopoly if you do that either - because you're not necessarily taking over the entire market for that job - you're just no longer using it yourself and are doing it in-house instead.

Google *might* be buying in their own sandwiches, but I imagine they have their own catering departments. Same for big oil - they *might* be using third-parties for exploration, research, refining, etc. but chances are they are all doing it in-house and making a tidy profit against the alternative. Breaking up those functions into separate companies just causes the bills and finger-pointing to rise - and that's assuming that some of those functions are profitable AT ALL.

Re:logical (1)

StripedCow (776465) | more than 2 years ago | (#36959094)

And, from a commercial perspective, the exact opposite is always much better.

As seen by that single company, that is. But from the perspective of the global economy it certainly is not.

I feel so, so, much better. (2)

fuzzyfuzzyfungus (1223518) | more than 2 years ago | (#36958280)

Now that I know that energy prices are actually in the hands of a combination of shadowy capital funds and petro-kleptocrats, rather than 'big oil', I will definitely be sleeping better.

Re:I feel so, so, much better. (1)

Talderas (1212466) | more than 2 years ago | (#36958398)

I can help but think this is sarcasm but we've known this is the case for awhile now.

Re:I feel so, so, much better. (2, Informative)

tbannist (230135) | more than 2 years ago | (#36958494)

It's worse than you think. Energy prices are in the hands of shadowy capital funs and petro-dictatorships. The (relatively) nice guys in the petro-dictatorship group are the petro-kleptocrats. The rest of them buy stability for their repressive regimes by funding and exporting terrorists. Both Saudi Arabia and Iran have been arming terrorists, giving them small piles of cash and pointing them at countries they don't like for decades. Often that country is the United States.

The invasion of Iraq is one of the biggest tragedies in this entire debacle. Ignoring what's actually been done to Iraq and it's people, the primary result (so far) of the invasion of Iraq was to give American money to the same people who funded 9/11 (by increasing oil prices and increasing America's usage of oil), and weaken the U.S. The Bush tax cuts were to stimulate the economy after 9/11 (they failed to do so), and combined with the invasions of Afghanistan and Iraq, those policies have led directly to the current U.S. debt crisis. The invasion of Iraq has strengthened America's enemies and weakened America and it's allies.

Re:I feel so, so, much better. (3, Insightful)

CrimsonAvenger (580665) | more than 2 years ago | (#36959642)

The Bush tax cuts were to stimulate the economy after 9/11 (they failed to do so)

And yet, Federal tax revenues increased by 30% from 2000 to 2007 (and then began dropping in 2008 as the Housing Bubble burst).

And this in spite of the recession immediately post-9/11, which saw tax revenues drop 10% over a two year period.

Very clever. (0)

Anonymous Coward | more than 2 years ago | (#36958298)

Size has become an economic liability. The large oil companies currently draw too much public criticism and blame, particularly for windfall profits, increasing gas prices and spills. Smaller companies are unlikely to be called en mass before congress and threatened with more taxes. In the event of an accident, liability would be conveniently limited to a smaller-sized company. Besides, breaking it up allows even more company executives to be paid as CEOs.

Nice try. . (2)

intheshelter (906917) | more than 2 years ago | (#36958326)

WTFE!! I don't believe an ounce of the "poor little oil company" line in this story. Sell that crappy story to someone else because I'm not buying it.

Strategy to limit liability? (4, Interesting)

Walter White (1573805) | more than 2 years ago | (#36958328)

Sounds like a good way to limit exposure to unexpected costs associated with drilling. Sell the crude to the refining unit at cost of production and the drilling unit accumulates no profits that would be paid out as a result of a large spill. It would just go bankrupt, sell off any equipment it owns (if it owns any at all) and reform under a new corporate charter. Profit!

Re:Strategy to limit liability? (1)

Anonymous Coward | more than 2 years ago | (#36958562)

Sounds like a good way to limit exposure to unexpected costs associated with drilling. Sell the crude to the refining unit at cost of production and the drilling unit accumulates no profits that would be paid out as a result of a large spill. It would just go bankrupt, sell off any equipment it owns (if it owns any at all) and reform under a new corporate charter. Profit!

You seriously think that they did this so that, if there were another spill, it would be easy to bankrupt a publicly traded company named ConocoPhillips and start a new one????

Re:Strategy to limit liability? (1)

FaxeTheCat (1394763) | more than 2 years ago | (#36959032)

You really do not have a clue what it takes to start an exploration company, do you?
Besides, the companies are publicly traded, which mean over (a pretty short) time they will not have the same owners anymore. Do you think the owners of the upstream company feel a need to give away money?

Anyone notice a pattern? (1)

MikeRT (947531) | more than 2 years ago | (#36958340)

That power squarely rests with oil-rich nations that hold most of the world's oil reserves and the Wall Street banks and hedge funds that speculate and make markets in the oil trading game.

Wherever the market is being broken down you either find Big Government or Big Finance. Sometimes both, but we're seeing that Big Finance is as much a mortal enemy of the free market as Big Government.

Breaking up means more government support (0)

Anonymous Coward | more than 2 years ago | (#36958354)

I can't imagine exploration being the money maker; just as I can't imagine corporate research being a money maker.
If they break off their vital, but unprofitable pieces, then it is more likely that said piece will fail - because the profitable pieces aren't there any more to pick up the slack.
And the government won't like that - they'll have to save it - more tax breaks and bailouts to save domestic oil.

Old news? (4, Insightful)

vlm (69642) | more than 2 years ago | (#36958382)

exploration and production unit from its refining and marketing units, took Wall Street by surprise, raising uncomfortable questions about the future of Big Oil.

The economist podcast discussed it some last week, as they discussed their previous weeks issue. I've noticed a disturbing trend where /. bifurcated around March and now some stories are fresh but the late ones are actually going further back in time as time goes on. Wasn't this a ST:TNG plotline?

Anyway, the ominous BS makes no sense. I've been following this market for, well, decades, now, and all it boils down to is the oil majors are extremely competent at exploration and production, both directly and indirectly by financing other companies exploration and production work. The refining operations are almost meaningless now because every nation either wants to shut them down to prevent pollution (although the hypocrites still want gas for their SUVs) or they want massive overproduction capability for strategic warfare reasons. So refining is a dead market. As for the marketing units, yeah, they're real geniuses alright, look how everyone loves BP, for example.

So all it amounts to is focusing on what makes a net positive on the income statement and casting off the deadwood that is a net negative to the income statement. Its the oil industry equivalent of joe average non-IT focused business outsourcing their IT department, just like they've outsourced their electrical production and (mostly) their "business standard uniform" production and maintenance.

The reason its spun as doom and gloom, is they have no empathy and only see the effect on themselves. The marketing unit sponged off the profits of the production unit to make CNBC commercials that were beyond stupid. Now they are cast off like the debris they are, so they won't have the cash to pay to CNBC... So, MSM is going to get less advertising bucks from the oil majors. Hmm, I wonder how they feel about that? Expect some attack stories in the near future along with the doom and gloom, and then the MSM will find someone else to attack and it'll all be ignored.

Re:Old news? (1)

biodata (1981610) | more than 2 years ago | (#36958522)

There seems a bit of confusion here between marketing, advertising and PR. I don't think the marketing units make adverts specifically, I think they market oil products, i.e. sell them to people and companies. I suspect that marketing oil products is fairly profitable, but I am not an oil marketer. BP, for instance, probably still markets quite a lot of oil products fairly profitably, regardless of any damage to its 'intangible' brand value in one particular country.

Re:Old news? (1)

dogger (151449) | more than 2 years ago | (#36959604)

This is spot on.

Exploration and Production is High Margin
Refining and distribution is Mediocre Margin

If the Oil trading group acts to maximize the profit, it could be at the disadvantage of the refining and distribution operations. It is a very very complex supply chain. This break up will allow Refining and distribution to maximise their own margin without regard for the upstream supply chain.

"with the markets, not the government"????? (3, Insightful)

TarPitt (217247) | more than 2 years ago | (#36958414)

So "Big Oil has almost no control over the price of oil these days. That power squarely rests with oil-rich nations that hold most of the world's oil reserves" is NOT the government (actually many foreign governments) controlling the price of oil?

So the power of governments of Saudi Arabia, Venezuela, and Russia becomes a triumph of libertarian free market ideology?

Yes, in the same world where the high economic growth of the communist-run, government controlled economy of the People's Republic of China demonstrates the triumph of "economic freedom"

Re:"with the markets, not the government"????? (3, Informative)

Bob the Super Hamste (1152367) | more than 2 years ago | (#36958534)

I would hardly call the collusion of the governments Saudi Arabia, Venezuela, and Russia and the rest of OPEC to control the price of hydrocarbons a triumph of libertarian free market ideology.

Re:"with the markets, not the government"????? (1)

Arlet (29997) | more than 2 years ago | (#36958710)

At this point, it is more likely the flow of hydrocarbons is determined by the physical limits on production rate, so the price is determined by the free market.

Re:"with the markets, not the government"????? (1)

Bob the Super Hamste (1152367) | more than 2 years ago | (#36958820)

True, but if it were a free market then the price signal should indicate that additional capacity should be brought online which I don't believe is happening. I always hear that OPEC wants to increase productions but doesn't have the capacity, but the moment prices start to drop they announce that they will be cutting production.

Re:"with the markets, not the government"????? (1)

Arlet (29997) | more than 2 years ago | (#36959194)

The free market can only bring capacity online if the capacity exists.

A good reason to cut production quickly is that it's better for the overall production of the oil field if you don't stress it too much. Taking it easy gives the oil a chance to settle, and will increase the lifespan of the field.

Re:"with the markets, not the government"????? (1)

Phil-14 (1277) | more than 2 years ago | (#36959466)

We've exported most of the industry to foreign governments where only state-owned corporations are allowed to drill for oil but "the price is determined by the free market?"

After having a front-row seat to the slow bleeding inflicted upon the industry over the past two and a half decades, I was curious about how the people the rest of y'all handed the power to felt about y'all. This morning I found out:

Putin: US is a 'Parasite' [politico.com] .

Have a day, guys.

Dump the expensive stuff (1)

grumling (94709) | more than 2 years ago | (#36958418)

To me this sounds more like "we want to get rid of the expensive geologists and engineers" than a break-up of the vertically integrated players. And besides, there aren't that many places that are unexplored. As long as they can get oil from the middle east and third world (using third world labor prices) it makes sense.

Re:Dump the expensive stuff (2)

vlm (69642) | more than 2 years ago | (#36958636)

To me this sounds more like "we want to get rid of the expensive geologists and engineers" than a break-up of the vertically integrated players

Its extremely important to note that one "bunch" of units was a net positive to the balance and income statements, and one "bunch" of units was a net negative or in the case of refining is floundering right around zero.

All the geologists and (most of the) Pet Eng work for the net positive group. I think their jobs are pretty safe. If anything, without the deadweight holding that group down, their salaries and bonuses are gonna rise.

Some of the pet eng guys and all of the chem eng guys work in the floundering group's refineries, which superficially looks really bad for them, but as long as people continue to buy gasoline, they're Probably pretty safe. If the rest of the company is floundering I would not expect extravagant pay increases or bonuses, but as long as you've got a bunch of cat crackers you need a catalyst engineer and that's kinda a secure lifetime job, until we stop burning gas, spraying bug spray, making plastic, etc.

I wouldn't start sending out the resumes yet.

Re:Dump the expensive stuff (0)

Anonymous Coward | more than 2 years ago | (#36959498)

No, it's almost the other way around. They want to cast off the underperforming refining parts of the business.

And as oil gets rarer, you need more geologists and petroleum engineers to find and produce what is left, not less. Well, that or be satisfied that you'll have less oil supply every year.

Price of oil no, price of gas yes (1)

Anonymous Coward | more than 2 years ago | (#36958424)

While they may not control the cost of oil, their profits indicate that they aren't properly competing to keep the price of gas low.

Re:Price of oil no, price of gas yes (1)

Bob the Super Hamste (1152367) | more than 2 years ago | (#36958758)

It might not be the oil companies fault as is some states there is a minimum markup that must exist on gasoline. Here in Minnesota it is $0.08 a gallon. Also the states [minnesotagasprices.com] and federal government ($0.184 per gallon) make far more money from gasoline taxes [gaspricewatch.com] than the oil companies make in profit from the sale of gasoline. Also keep in mind how many billions of gallons of fuel we burn each year [eia.gov] (about 378 million gallons a day). What you have is a low margin very high volume product.

Also for the exact Minnesota the defines that cost of gasoline and states that is can't be sold for below cost. Below is the section defining cost:
(3) for purposes of gasoline offered for sale by way of posted price or indicating meter by a retailer, at a retail location where gasoline is dispensed into passenger automobiles and trucks by the consumer, "cost" means the average terminal price on the day, at the terminal from which the most recent supply of gasoline delivered to the retail location was acquired, plus all applicable state and federal excise taxes and fees, plus the lesser of six percent or eight cents. [mn.gov]

Re:Price of oil no, price of gas yes (1)

night_flyer (453866) | more than 2 years ago | (#36958782)

oil companies make a profit of 4% of every gallon sold, they also paid record taxes last year, unlike GE...

It's all about the profits (1)

sdinfoserv (1793266) | more than 2 years ago | (#36958680)

This is about splitting the liability of drilling away from the company. I don't believe for a second they don't control pricing aka profit. 5 out of 10 of the world’s LARGEST and MOST PROFITABLE companies are oil companies... .this is a cover your ass move. Like the Catholic Church going through bankruptcy before getting sewed by the boys the padre’s boinked..

Re:It's all about the profits (1)

FaxeTheCat (1394763) | more than 2 years ago | (#36958866)

It splits the responsibility of drilling away from the DOWNSTREAM part of the company.
But it is the UPSTREAM part of the company that is the big profit center, so at best what they are doing is removing liability from the least profitable part of the company.
Which mean the liability stays where the big money is.

Common members of board of directors (1)

DanCentury (110562) | more than 2 years ago | (#36958768)

I'm sure the smaller companies with have common members of their respective board of directors, and common shareholders as well, so virtually not much changes.

There's probably less risk by dividing up the companies. If one company has a screw up, it's sister company can skate by unscathed. It will be more and more difficult for oil companies to find resources; as they take more and more chances, there's more opportunities for public blunders.

electric cars? (1)

WebArtistuk (2197848) | more than 2 years ago | (#36958844)

We could probably run our vehicles on water soon and the electric car is already in action SO then end of oil is near overall

Re:electric cars? (1)

FaxeTheCat (1394763) | more than 2 years ago | (#36958940)

>We could probably run our vehicles on water soon
No. That will actually never happen, but if you really think so, I am a Nigerian princess that need your help to get a large sum of money out of Nigeria

>and the electric car is already in action SO then end of oil is near overall
Let me reveal a secret to you: Oil is used for a lot of better things than energy for your car.

What do you mean gone (0)

Anonymous Coward | more than 2 years ago | (#36958870)

Standard Oil is Exxon-Mobile, only by a different name.

Federal Reserve (1)

geoffrobinson (109879) | more than 2 years ago | (#36959026)

"and the Wall Street banks and hedge funds that speculate and make markets in the oil trading game." == "cheap credit from the Federal Reserve"

They should also mention one other cause: demand.

It may help (2)

PPH (736903) | more than 2 years ago | (#36959102)

When the oil refiners and distributors have an interest in seeing the price of their inputs go down and they bid accordingly, the pressure will be for lower prices. Today, Exxon acquires leases, explores and extracts crude oil. Much of their market value (what Wall Street rewards them for) is the perceived value of their reserves. So the higher the price of crude, the better they look to investors. Meanwhile, Exxon refines and distributes products. That arm of the business is rewarded for volume times the difference between input costs and sales. So it would seem that cheaper crude would help their market share. In the final analysis, when crude prices go up, so does Exxon's share price. So currently the refining arm isn't motivated to push prices down.

The whole market is geared up to bid up crude prices. Much like the California energy crisis, everything is put onto the spot market and passed through as many speculators a possible. And much like 'sane' energy markets, once the players aren't sitting on both sides of each bid, I'd expect to see more fixed price long term crude delivery contracts. This will cut the speculators out of much of the market. This can only be good.

Upstream versus downstream (1)

Anonymous Coward | more than 2 years ago | (#36959402)

As the article explains, there are two ends to the process: 1) finding and producing oil and gas (upstream), versus 2) refining and distributing oil and gas (downstream). They've always been quite different. Upstream is very risky with massive capital required, very long times between exploring, finding and producing (10 years sometimes), and huge swings in success and failure depending upon whether you find deposits or not and the current price of oil by the time you start producing. Imagine going to your bank and asking for a billion-dollar loan for your business that won't have a cent of revenue for 5-10 years, and you can't tell them whether the main product will be sold at half or double the current price. Big risk. Big payoff. Or big failure. This is why the profits from oil companies look obscene at some times, but when the price of oil goes down (like in the 1980s), they get soaked. And if they don't turn most of that profit into investment in the next risky exploration cycle, they'll soon be out of business as their producing reserves naturally dwindle.

Downstream is less risky in some ways (there's always crude to buy and refined product to sell somewhere at some market price), but it has razor-thin margins. Growing the business at all still requires huge capital investments that take years to implement, and there are continual demands for better environmental controls that add costs. Volatility in crude price doesn't help either.

Some big companies are almost entirely upstream, while some are almost entirely downstream. Others are combined. It's hard to say whether it's optimal to be an "integrated" oil company that deals with both ends of the market, or whether there are advantages to partitioning the two ends, but it's easy to see why split-ups might happen given how different the equations for the two are. That, and the fact that it generally sucks to be in the refining market these days, because everyone wants more refined product, but nobody wants a refinery approved anywhere near them or expansion of existing ones. Generally speaking, the downstream side of the oil business has done poorly for years compared to the upstream side.

I kind of wonder if another aspect is in play. Big oil companies need to find big deposits. They have huge overhead, but they can afford to explore and develop in remote places (e.g., deep water) that smaller companies can't access. However, if there are fewer "big prizes" to find, or if you've hit technical limits in terms of the new territory you can explore for the remaining "big prizes", then it's going to be tough for a big company to survive. It would be the beginning of the end. Kind of like the whaling industry in the 1800s as most of the big whales got killed off. I don't think we're there yet, but it is something to watch for if the reserves of the big companies start consistently going down.

Standard Oil has pretty much reformed (0)

Anonymous Coward | more than 2 years ago | (#36959622)

Um, the funny thing is Standard Oil has pretty much reformed under Exxon-Mobile. I think they have acquired almost all of the assets that the old Standard Oil had...

No, it's getting bigger (1)

biggerboy (512438) | more than 2 years ago | (#36959716)

Big Oil is being replaced by Bigger Oil, namely the government-owned or -influenced entities like Gasprom/Rosneft/Lukoil/CNOOC/SINOPEC or other nationalized entities like Petróleos de Venezuela.

What we have now is a dreamworld compared to what's coming soon when nationalistic or patriotic tendencies mix in even more obviously than today.

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