The Association of Business Executives QCF

International Business Case Study ExxonMobil

29 May 2012, Afternoon
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This is an open-book examination and you may consult any previously prepared written material or texts during the examination. Only answers that are written during the examination in the answer book supplied by the examination centre will be marked.

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ABE 2012

J/601/2793

Notes
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 As in real life, anomalies may be found in this Case Study. Please simply state your assumptions where necessary when answering questions. ABE is not in a position to answer queries on Case data. Candidates are tested on their overall understanding of the Case and its key issues, not on minor details. There are no catch questions or hidden agendas.  After the publication of the Case Study, subsequent developments may occur. The examination is based on the published Case Study, and students who do not mention such developments will not be penalised. However, students may consider such developments in their answers if they wish.

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ExxonMobil ExxonMobil is an American multinational petroleum (oil) corporation. It is a direct descendant of the Standard Oil Company founded by John D Rockefeller. It was formed on 30 November 1999, by the merger of Exxon and Mobil. Its headquarters are in Texas in the USA. It is affiliated with Imperial Oil, which operates in Canada. ExxonMobil is one of the largest publicly traded companies by market capitalisation in the world, having been ranked either No.1 or No. 2 for the past 5 years. ExxonMobils oil reserves were 72 billion oil-equivalent barrels at the end of 2007 which, at the then (2007) rates of production, are expected to last over 14 years. The corporation has 37 oil refineries in 21 countries constituting a combined daily refining capacity of 6.3 million barrels. ExxonMobil is the largest refiner of petroleum in the world. ExxonMobil is the largest of the six oil super majors with daily production of 3.921million BOE (barrels of oil equivalent). In 2008, this was approximately 3% of world production, which is less than several of the largest state-owned petroleum companies. When ranked by oil and gas reserves it has the14th largest reserves in the world but with less than 1% of the total reserves. ExxonMobil operates in three main divisions. These are upstream, downstream and chemicals. Upstream  Encompasses the basic operations of ExxonMobil. These are exploration, extraction, shipping, and production of oil and gas. Based in Houston, Texas in the USA. Downstream  Covers the activities concerned with marketing, refining and retail operations. Based in Fairfax, Virginia in the USA. Chemicals  Involves the production of chemicals from petroleum products for use in manufacturing industries such as technology and automotive (vehicles). Thedivision is based in Houston, Texas in the USA. Table 1 Earnings (Profit) by Operating Division Millions of US Dollars (US$) 2007 Upstream Downstream Chemicals 26,497 9,573 4,563 2008 35,402 8,151 2,957 2009 17,107 1,791 2,309 2010 24,097 3,567 4,913 2011 34,439 4,459 4,383

Table 2 Return on Average Capital Employed (%) by Operating Division 2007 Upstream Downstream Chemicals 41.7 37.8 34.0 2008 53.6 31.8 20.4 2009 23.4 7.1 13.9 2010 23.3 14.8 26.3 2011* 25.2 16.9 21.8

* based on increases in capital and exploration expenditures in 2011

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ExxonMobil History Standard Oil was established in 1870 and it grew by a series of takeovers and mergers to such an extent that it dominated the market in the U.S. In 1911 the Supreme Court of the U.S. ruled that Standard Oil must be dissolved and split into 34 companies. Two of these companies were Jersey Standard, which eventually became Exxon, and Socony (Standard Oil Company of New York), which eventually became Mobil. Also in 1911, the USs kerosene output was eclipsed for the first time by gasoline (petrol). The growing car market inspired the product trademark Mobiloil, which was registered by Socony in 1920. Over the next few decades, both companies grew significantly. Jersey Standard became the largest oil producer in the world. It acquired a 50% stake in Humble Oil & Refining Co, a Texas oil producer. Socony purchased a 45 percent interest in Magnolia Petroleum Co., a major refiner. In the Asia-Pacific region, Jersey Standard had oil production and refineries in Indonesia but no marketing network. Socony had Asian marketing outlets supplied remotely from California. In 1933, Jersey Standard and Socony merged their interests in the region into a 50-50 joint venture. The new company, known as Standard-Vacuum Oil Co. operated in 50 countries, from East Africa to New Zealand, before it was dissolved in 1962. The Mobil Chemical Company was established in 1950. Its principal products included basic chemical compounds such as ethylene, polyethylene, olefins and aromatics. The company produced synthetic lubricant base stocks as well as lubricant additives, propylene packaging films and catalysts. Exxon Chemical Company (first named Enjay Chemicals) became a global organisation in 1965 and in 1999 was a major producer and marketer of olefins, aromatics, polyethylene and polypropylene along with many specialty lines such as plasticisers, solvents and adhesive resins. In 1955, Socony-Vacuum became Socony Mobil Oil Co. and in 1966 simply Mobil Oil Corp. A decade later, the newly incorporated Mobil Corporation absorbed Mobil Oil as a wholly owned subsidiary. Jersey Standard changed its name to Exxon Corporation in 1972 and established Exxon as a trademark throughout the United States. In other parts of the world, Exxon and its affiliated companies continued to use its Esso trademark. On 24 March 1989, the Exxon Valdez oil tanker struck a reef in Prince William Sound, Alaska and spilled more than 11 million U.S. gallons (42,000 m3) of crude oil into the ocean. The oil spill was the second largest in U.S. history, and in the aftermath of the incident, the U.S. Congress passed the Oil Pollution Act of 1990. An initial award of $5 billion in damages was reduced to $507.5 million by the U.S. Supreme Court in June 2008, and distributions of this award have commenced. In 1998, Exxon and Mobil signed a $73.7 billion agreement to merge and form a new company called Exxon Mobil Corporation. The merger of Exxon and Mobil was unique in American history because it reunited the two largest companies of John D. Rockefellers Standard Oil trust, Standard Oil Company of New Jersey (Exxon) and Standard Oil Company of New York (Mobil), which had been forcibly separated in 1911. This reunion resulted in the largest merger in U.S. corporate history.

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In 2005, ExxonMobils stock price surged in parallel with rising oil prices, surpassing General Electric as the largest corporation in the world in terms of market capitalisation. At the end of 2005, it reported record profits of $36 billion in annual income, up 42% from the previous year (the overall annual income was an all-time record for annual income by any business, and included $10 billion in the third quarter alone, also an all-time record income for a single quarter by any business). The company and the American Petroleum Institute (the oil and chemical industrys lobbying organisation) put these profits in context by comparing oil industry profits to those of other large industries such as pharmaceuticals and banking. On 12 June 2008, ExxonMobil announced that it was exiting the retail fuel business, citing the increasing difficulty of running petrol stations under rising crude oil costs that lead to reducing profitability. The process will gradually phase the corporation out of the direct market, and will affect 820 company-owned stations and approximately 1,400 other stations operated by dealers distributing across the United States. The sale has not resulted in the disappearance of Exxon, Esso and Mobil branded stations. The new owners will continue to sell ExxonMobil gasoline and license the appropriate names from ExxonMobil, who will in turn be compensated for use of the brands. In 2010, ExxonMobil acquired XTO Energy, a company that focuses on development and production of unconventional energy resources. In terms of potential future developments, many gas and oil companies are considering the economic and environmental benefits of Floating Liquefied Natural Gas (FLNG). This is an innovative technology designed to enable the development of offshore gas resources that would otherwise remain untapped, because environmental or economic factors make it unviable to develop them via a land-based LNG operation. ExxonMobil is waiting for an appropriate project to launch its FLNG development. The only FLNG facility currently in development is being built by Royal Dutch Shell and is due for completion in 2017. On 30 August 2011, ExxonMobil announced a $3.2 billion joint venture with Russian oil company Rosneft to develop two offshore oil fields in Russia. (see APPENDIX 1).

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ExxonMobil Corporate Strategy - company-originated information ExxonMobil are aware of the need to change and are committed to continuous innovation. They believe that the following points from their annual report are key to achieving this. World Class People One reason for ExxonMobils success is their ability to attract and retain the brightest minds. Their goal is to develop their employees to have the highest technical and leadership capabilities in the industry. ExxonMobil employs more than 16,000 scientists and engineers, more than 1,000 of them with PhDs. Their expertise is not only in geology, chemistry and physics, but also oceanography, palaeontology and microbiology, as well as computer, environmental and medical science. Investing in their people creates a sustainable source of competitive advantage. Technology Leadership ExxonMobils ongoing commitment to technology is also a competitive advantage and they are recognised as an industry leader. For example, they continue to build on the seismic and reservoirmodelling technologies that they pioneered, which today enable them to identify new resource opportunities, drill more accurately and improve recovery. They use their advanced Molecule Management technology in their plants to optimise the value of every hydrocarbon molecule, while minimising energy use. ExxonMobil has developed technologies that can make vehicles more fuelefficient, including polymers that help tyres stay inflated longer, lightweight plastics for automotive parts and advanced lubricants. Financial Strength ExxonMobils financial position remains unparalleled in industry. In todays challenging economic environment, this represents a unique competitive advantage. Moodys and Standard & Poors both recognise ExxonMobils superior financial strength by assigning the highest credit rating to their financial obligations. ExxonMobil is one of very few public companies that have maintained this credit rating consistently for decades. ExxonMobils financial strength gives them the flexibility to pursue and finance attractive investment opportunities throughout the business cycle. In 2010, ExxonMobil invested $32.2 billion to develop new projects to help meet growing global demand safely, efficiently, and in an environmentally responsible manner.

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Risk Management Operational Risk Risk cannot be eliminated, but it can be managed. ExxonMobil manages risk through a capable and committed workforce with clear accountability, well-developed and clearly defined policies and procedures, high standards of design, rigorously applied management systems, employee and contractor training, and a systematic approach to assessing performance that drives continuous improvement. As events in 2010 made clear, the energy industry faces multiple risks and challenges. The Deepwater Horizon oil spill in the Gulf of Mexico spurred governments and consumers to ask what the industry can do to ensure that meeting future energy needs does not come at the expense of safety or the environment. ExxonMobil asked itself a similar question after the 1989 Exxon Valdez oil spill. They realised that just a commitment to safety and operational excellence was not enough. What was also needed was a system that put commitment into action. They introduced their Operations Integrity Management System (OIMS). OIMS is the cornerstone of their commitment to managing risks to safety, security, health and the environment. It guides the activities of each of their employees and contractors around the world. Through OIMS, ExxonMobil has achieved industry-leading safety performance and continues to improve environmental performance. Climate Change Risk Meeting growing demand while addressing climate change risk is the global challenge that shapes ExxonMobils activities and investments. Since 2005, they have invested $1.6 billion in activities that improve energy efficiency and reduce greenhouse gas (GHG) emissions. They have also invested more than $5 billion in projects to reduce natural gas flaring. As a result, they have reduced their GHG emission by 11 million tonnes in 2010 compared to 2005. They have also been active in developing applying carbon capture and storage technology to store carbon dioxide (CO2) in underground geological formations. In addition, their substantial natural gas portfolio has the potential to help reduce GHG emissions because natural gas has lower CO2 emissions per unit of energy. They are also investing in research programmes into algae biofuels and technologies that help consumers use energy more efficiently. External Criticism Contrary to their internal statements there has been widespread criticism aimed at ExxonMobil. For example, ExxonMobil has been accused of paying funds to oppose the widely held belief that an increase in the temperature of the earths atmosphere is due to the greenhouse effect, caused primarily by increased levels of carbon dioxide released in the burning of coal and petroleum-based fuels. According to the environmental pressure group, Greenpeace, ExxonMobil have invested more than $50 million in spreading awareness of research which discredits global warming.

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The Petroleum Industry Significant Events 1895 - 2011 1884 saw the invention of the combustion engine and in 1896 Henry Ford made the first motorcar. In 1901 the first oil well was drilled in East Texas - this was the birth of Texaco Oil Corporation. In 1907 Shell (British) and Royal Dutch merged to form Royal Dutch Shell. In 1908 oil was discovered in Persia and the Anglo Persian Oil Company formed (in 1954 it became British Petroleum (BP)). Oil was discovered in Bahrain in 1932, which lead in 1933 to Saudi Arabia granting oil concessions to Standard Oil of California that became California Arabian Standard Oil Company (Casoc) In 1936. Texaco took a 50% share in Casoc. In 1944 Casoc became Aramco - Arabian American Oil Company. In 1938 Mexico nationalised its foreign oil companies. Oil was also discovered in Kuwait and Saudi Arabia. In 1948 the largest oil field in the world (about 80 billion barrels) was discovered in Saudi Arabia. Oil was discovered in Algeria and Nigeria in 1956. Natural gas was discovered in Groningen Field, Netherlands in 1959. Also in this year the Arab Oil Congress in Cairo - a gentlemans agreement for oil-producing countries to have a greater influence on oil production and marketing - led to the formation in 1960 of OPEC (Organisation of Petroleum Exporting Countries) in Baghdad. The five founding members were Saudi Arabia, Venezuela, Kuwait, Iraq, and Iran. In 2010 the member countries were Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela. Oil was discovered in Alaska in 1968. There was also an oil spill in 1969 in Santa Barbara, California, 6 miles offshore from Summerland, California. This created a major backlash against the industry. Oil was then discovered in the North Sea in 1969 and the first oil was brought ashore in 1975. Libya, Saudi Arabia, Algeria and Iraq negotiated a price increase from $2.55 to $3.45 per barrel in 1971 and OPEC countries began nationalising oil assets. In the same year Libya nationalised the BP concession and U.S. oil production peaked. In 1972 Iraq nationalised the Iraq Petroleum concession, and in 1973 they nationalised all oil assets. The Saudi Government acquired a 25% interest in Aramco. The 1973 Arab oil embargo on oil exports to the U.S. for siding with Israel in the Yom Kippur War caused oil prices to rise from $2.90 to $11.65 per barrel. In 1975 the Venezuelan oil industry was partially nationalised. In March of 1979, a nuclear meltdown at the Three Mile Island nuclear plant in Pennsylvania in the US marked the end of large scale nuclear power investment in the US. The years 1979-1981 saw oil prices rise from $13.00 to $34.00 per barrel but in 1986 price collapsed to around $12 per barrel as a result of a glut in supply and reduced demand from developed countries. In 1986, a major accident at the Chernobyl nuclear power plant in Ukraine (at that time part of the USSR) highlighted the potential long-term risks associated with this form of power generation. On 6 July 1988 an explosion occurred at the Piper Alpha Rig oil and gas production platform operated by Occidental Petroleum (Caledonia) Ltd in the North Sea, off the UK coast. The explosion and resulting fire destroyed the platform, killing 167 men, with only 59 survivors. At the time of the disaster the platform accounted for approximately 10% of North Sea oil and gas production, and was the worst offshore oil disaster in terms of lives lost and industry impact.
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Less than a year later, in March 1989, the Exxon Valdez ran aground in Prince William Sound, Alaska leading to a significant oil leak and environmental damage. The disaster was made worse by the initial unconcerned reaction of the President of Exxon. In August of 1990 Iraq invaded Kuwait, which led to a United Nations embargo on Iraq. The oilfields in Kuwait were set alight by attacking Iraqi forces during the first Gulf War in 1991. The UN embargo was partially lifted in 1995 to allow partial resumption of Iraq oil exports in an oil for food deal. Qatar inaugurated the worlds first significant liquid natural gas (LNG) exporting facility in 1997and in the same year the Kyoto Protocol was proposed, with its overall aim being to limit greenhouse gas emissions. (See APPENDIX 2). A 50-year moratorium on mining and oil exploration in Antarctica was approved in 1998. BP announced its plans to acquire Amoco for $48.2 billion. Exxon acquired Mobil for $75.4 billion. In 1999 Total Fina and Elf Aquitaine merged to create Total, a French oil supermajor. 2002 saw the merger of Conoco and Phillips. A national strike in Venezuela shut down oil production. In 2003 BP purchased a 50% interest in TNK - the 4th largest Russian oil company. In January 2004 there was an explosion at an LNG (Liquefied Natural Gas) plant in Algeria, which halted oil production. Oil was at a record price of $55.67 per barrel due to concerns over high demand and possible supply disruptions in the Middle East and damage on the Gulf Coast from Hurricane Ivan on 25 October. December of that year saw the continuing renationalistion of the Russian oil industry. In March 2005 there was an explosion at BPs Texas City Refinery that killed 15 people and injured 170 others. On 31 March the price of oil briefly exceeded $58 per barrel and continued rising in response to a strong demand amid concern over supply. On 29 August the price of oil reached $70.80 per barrel. On 13 July 2006 oil prices hit a record high of $78.40 per barrel as a result of supply and world political concerns. There were nuclear tensions in Iran; supply concerns in Iraq, Nigeria and the Gulf of Mexico; missile testing by North Korea and flare-ups between Israel and Lebanon. In September Russia began exerting nationalistic pressures on multinational oil companies such as Royal Dutch Shell, ExxonMobil and Conoco Phillips. On 22 December it was announced that the Russian state controlled organisation, Gazprom, was to buy half of the Sakhalin-2 project from Royal Dutch Shell and partners for $7.45 billion, thus continuing Russian efforts to have more control over their industry. In March of 2007 the European Union introduced new environmental regulations to reduce GHG emissions by 20% by 2020. On 23 March oil prices rose as a result of tension over the Iranian capture of 15 British soldiers who reportedly strayed into Iranian waters. 27 March saw a Venezuela deal with the China National Petroleum Corp to export more oil to China instead of to the U.S. On 1 May Venezuela nationalised part of its oil industry by taking over the operating control of oilfields operated by Conoco Phillips, Chevron, ExxonMobil, BP, Statoil and Total. In January 2008 the oil price briefly reached $100 per barrel for the first time as a result of supply concerns and a weak U.S. dollar. In March Venezuela announced plans to price more of its oil sales in euros to protect against the drop in value of the U.S. dollar. 8 April saw BP and Conoco Phillips announce plans to develop an Alaska gas pipeline - in competition to the previously announced plan led by Trans Canada Pipelines. On 11 July crude oil prices hit a record high of over $147.27 per barrel on continued concern over supplies and the weak U.S. dollar. On 18 November, a Saudi supertanker was hijacked off the coast of Somalia. The price of oil dropped below $50 per barrel at the end of November 2008.
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January to March 2009 saw the oil price continuing to fall reaching $34 per barrel, and declining natural gas prices in North America caused significant cuts in gas drilling in both Canada and USA. In June the Khurais oilfield in Saudi Arabia, the largest single oil development ever, started to produce oil. In October the oil price rose above $80 per barrel - driven mainly by the weakness of the U.S. dollar. In December ExxonMobil offered $30 billion to acquire XTO Energy Inc (asignificant shale gas producer in the United States). 5 February 2010 saw Russia and Venezuela announce a plan to jointly invest $20 billion over 40 years to develop the Junin 6 Field in the Orinoco Basin. On 20 April there was an explosion and fire on the Deepwater Horizon oil rig while drilling BPs Macondo exploration well in the Gulf of Mexico. 11 workers were killed and a major environmental catastrophe along the Gulf Coast occurred. On 16 June, BP suspended dividend payments to shareholders and set aside $20 billion to cover damage claims from the oil leakage. In July BP finally succeeded in stopping the leak. 4.9 million barrels of oil are estimated to have leaked from the well, causing damage to the natural environment and to the livelihoods of those in the fishing and tourism industries. In 16 January 2011, BP signed a deal with Rosneft to jointly explore for oil and gas in the South Kara Sea off the Russian Arctic. The so-called Arab Spring with unrest in various countries of the Arab world created concern over energy supply and boosted oil prices from January to April. The civil war in Libya caused a dramatic fall in the supply of Liquefied Petroleum Gas (LPG). In March a major earthquake in offshore Japan created a tsunami that caused considerable damage to the Fukushima Nuclear plant 150 miles north of Tokyo - raising questions on the viability and safety of nuclear power. On 14 July Conoco Phillips announced plans to split into two companies: an exploration and producing company and a refining/marketing company. On 26 September Chevron approved the $29 billion Wheatstone LNG project in Western Australia. This was a joint venture between Chevron and the following partners: Apache, Kuwait Foreign Petroleum Co, Royal Dutch Shell and Kyushu Electric. In October, the Libyan leader, General Gadaffi was killed and an interim government was installed. In December 2011 there was a world meeting held in Durban, South Africa which was aimed at gaining further progress on the Kyoto Protocol (see APPENDIX 2).

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Competitive Aspects The oil and gas industry comprises state/national oil companies (NOCs) of which there were 138 in 2011 and the major global corporations (also known as International Oil Companies (IOCs)). This group comprises the six major players: ExxonMobil, BP, Royal Dutch Shell, Chevron, Conoco Phillips and Total. British Petroleum (BP) At the end of 2010 the company had 79,700 employees. It had upstream operations in 29 countries. It had 16 refineries and 22,100 retail sites under three main brands: BP, ARCO in the U.S. and ARAL in Germany. Financial summary 2010 Revenue Loss Return on capital employed $308.91 billion $3.7 billion n/a (not applicable)

The impact upon the financial results from the Gulf of Mexico oil spill was $40.7 billion (company report) and has led to the company selling assets to fund the costs involved in the clear up. In 2009 profits were $26.4 billion with total revenues of $245.1 billion. The figures for 2011 have shown that BP has started to recover from the effects of the oil spill with profits of $25.7 billion on revenue of $385.46 billion. Royal Dutch Shell Royal Dutch Shell operates in over 90 countries with approximately 101,000 employees. It has 47 refineries and 43,000 Shell service stations worldwide with sales of 145 billion litres of fuel in 2010. The strategy of Royal Dutch Shell seeks to reinforce its position as a leader in the oil and gas industry in order to provide a competitive shareholder return, while helping to meet global energy demands in a responsible way. Financial summary 2010 Revenue Profit Return on capital employed Chevron Chevron operates in over 30 countries with 62,000 employees and has16 refineries and over 20,000 retail outlets (including associated companies and their brands). Its headquarters are in California, USA. The company vision is to be the global energy company most admired for its people, partnership and performance. Chevron aims to earn the admiration of all its stakeholders - investors, customers, host governments, local communities and employees - by not only achieving its goals but by the ways these goals are achieved. Financial summary 2010 Revenue Profit Return on capital employed
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$368.1 billion $20.5 billion 11.5%

$198.1 billion $19.0 billion 17.4% (10.6% in 2009)

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Conoco Phillips Conoco Phillips, based in the U.S., is the fifth largest private sector energy corporation in the world. It operates in 39 countries and employs over 29,000 people. It has a limited number of retail outlets in the southern U.S. and in six European countries (under the Jet name). In 2010 it sold its retail outlets in eight European countries, having previously sold some U.S. outlets to Chevron in 2007. Financial summary 2010 Revenue $198.6 billion Profit $11.3 billion Return on capital employed 7.1% In February 2011 it was granted rights to explore/develop offshore wells in Bangladesh. Total Total is a French-based corporation that was created in 1924. It merged with Petrofina in 1999 and Elf Aquitaine in 2000. It is the 14th largest publicly quoted corporation in the world, based on market capitalisation. It is also the second largest company in France. It has nearly 93,000 employees and operates in 130 countries. It has over 17,000 petrol stations worldwide. Financial summary 2010 Revenue Profit Return on capital employed $220.8 billion $14.3 billion 12%

(Converted from euro to dollar at the rate of 1= $1.3858)

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Future Issues The oil industry has to plan and create long-term strategies if it is to survive. Future projections, such as those made by Richard Watson in his book Future Files - A Brief History of the Next Fifty Years, should be heeded. APPENDIX 3 is based on the section of the book that describes the situation regarding oil production. In the light of this and their long-term survival, ExxonMobil must focus on producing sound strategic plans for the future and needs to consider all strategic options. Power Generation Oil and gas are major sources of fuel for generating electricity. According to data from the International Energy Agency and the Organisation for Economic Cooperative Development (OECD) their contribution to worldwide electricity generation was 26% (see below) in 2008 but this is forecast to reduce as cleaner and renewable resources are adopted. The future of nuclear power as a source is uncertain as questions on safety continue to be unresolved. Source of Electricity (World total year 2008) Coal Electricity ((TW) h/year)1 Proportion
1

Oil 1,111 5

Natural Gas 4,301 21

Nuclear 2,731 13

Hydro 3,288 16

Other 568 3%

Total 20,261 100%

8,263 41

Data source: IEA/OECD Aviation fuels Aviation fuels represent a considerable amount of downstream sales and the emissions caused by aircraft flights have come under scrutiny by environmentalists. Total emissions from air transport are significantly less than other transport modes but in terms of the total number of passenger miles they are important. Aircraft manufacturers have taken significant steps to reduce their emissions with better aircraft designs with lighter composite materials, notably the Boeing 787 Dreamliner, and with larger aircraft (e.g. Airbus A380), which have more fuel-efficient engines. Notwithstanding environmental concerns there have also been the increases in fuel prices to contend with. For the long-term future it has been forecast that demand for aviation fuels will rise in line with projected air travel growth, particularly from the BRIC (Brazil, Russia, India, China) nations. Downstream It is expected that the main oil companies will all start to divest themselves of their retail outlets and for them to be run as concessions by the major superstore chains such as Tesco, Carrefour and Walmart. New Energies In the face of the global concern on climate change and the move away from traditional fuels, all of the major oil and gas companies have projects aimed at developing clean energy. However, in the medium term these new energy sources will be overshadowed by traditional operations based upon oil and gas.
1 (TW) h/year = Terawatt - hours per year

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The Electric Car One of the biggest threats to the oil and gas industry is the emergence of the electric car. Sales of electric vehicles are forecast to grow dramatically over the next twenty years. Factors such as the high price of petroleum products, the drop in the price of electric vehicles, actions taken by governments to install the necessary infrastructure of recharging points, and communities becoming more aware of environmental issues combine to ensure that this growth will happen. It is highly likely that the move away from oil as a fuel will be led by firms from the technology sector. Oil Prices Following the rise in medium-term oil prices to the level of $115 per barrel it is hoped that oil prices will stabilise but, as history has shown, oil prices are very sensitive to political changes. When they are able to command a higher price for their products, oil companies have found that funds become available to exploit new reserves of oil and gas, which would not have been viable at lower market prices. Because of the increases in revenues caused by recent large increases in prices, the major oil and gas companies have been relatively unaffected by the global economic downturn. Environmental Concerns As the Exxon Valdez oil spillage in 1997, the BP oil well explosion in the Gulf of Mexico in 2010 and other incidents have clearly shown there is growing concern about the impact of the oil and gas industry on the natural environment. This growing concern may well be expressed by stringent international action backed up by legal action. This will inevitably impact on the operations of the large corporations and affect their profitability. As BP has learnt, costs arising from environmental damage can be very large, and not only do they impact upon profitability but they also affect the image of the company.

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APPENDIX 1 New York Times 30 August 2011 Exxon Reaches Arctic Oil Deal With Russians By Andrew Kramer MOSCOW - ExxonMobil won a coveted prize in the global petroleum industry Tuesday with an agreement to explore for oil in a Russian portion of the Arctic Ocean that is being opened for drilling even as Alaskan waters remain mostly off limits. The agreement seemed to supersede a similar but failed deal that Russias state oil company, Rosneft, reached with the British oil giant BP this year - with a few striking differences. Whereas BP had planned to swap stock, ExxonMobil, which is based in Texas, agreed to give Rosneft assets elsewhere in the world, including some that ExxonMobil owns in the deepwater zones of the Gulf of Mexico and on land in Texas. In announcing the arrangement Russias Prime Minister Vladimir Putin described a sweeping global alliance - and a potentially vast investment by ExxonMobil in the Russian Arctic. But while Russian news agencies said Mr. Putin had stated the potential investments by both companies to be as high as $500 billion, ExxonMobil officials said the figures, at least initially, would more likely be in the tens of billions of dollars. For ExxonMobil, which is Americas largest company and is a spin-off of the original Standard Oil, the deal means wading deeper into Russias risky business environment. As a result of the agreement, which is almost certain to require a review in Washington, more of the companys investments and future earnings will partly hinge on policies set in the Kremlin. Russia has reneged on deals with Western oil companies before. In 2006, for example, it compelled Royal Dutch Shell to sell 50% of a Sakhalin offshore development to Gazprom, a state company - after Royal Dutch Shell spent a decade and more than $20 billion of its own money and that of other investors to build the projects infrastructure. Until now, ExxonMobils principal investment in Russia has been a production sharing agreement on Sakhalin Island, on Russias eastern coast. That arrangement, which waives local taxes and provides the Russian government with a share of the oil produced, is regarded as less risky than the latest deal. Under the new agreement, the state-owned Rosneft could become a part-owner of drilling operations in the United States. Those operations could include two of the industrys most contentious oil extraction methods - drilling for oil in the deep waters off the Gulf of Mexico and using the so-called hydraulic fracturing, or fracking, technique on land. The Russians want to learn about both types of drilling for use at home. The Rosneft deal would also be among the most significant attempts by a company from a country that is not an American ally to acquire United States oil fields since Cnooc, the large Chinese oil company, tried to buy the California oil company Unocal. Although it was not formally banned, that deal fell apart in 2005 after members of Congress criticised the potential Chinese ownership of American oil assets. The ExxonMobil-Rosneft deal, if completed, would further a long-held goal of the Russian petroleum industry to diversify internationally. It would allow Russia to do that by using access to reserves at home to gain the necessary capital and technological expertise.

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Russias economy is dependent on petroleum for about 60 percent of its export revenue. Policies here are also important for world oil supplies, as Russia now pumps more oil than Saudi Arabia. Yet Russias onshore fields in Siberia are in decline, threatening the prosperity and geopolitical clout that has come with oil wealth in the last decade. For Russia, the agreement is a result of a new openness to foreign investment in its oil industry that is meant to address the declining output in Siberia. The Kremlin opened discussions last year with Western oil companies whose prospects on the other side of the Arctic Ocean - above Alaska and Canada - had at least temporarily dimmed with the moratorium on offshore drilling in the aftermath of BPs oil spill in the Gulf of Mexico. Rosneft is also to invest $3.2 billion in exploration in the Kara Sea, the body of water between the northern coast of European Russia and the Novaya Zemlya island chain. Once seen as a useless, ice-clogged backwater, the Kara Sea now has the attention of oil companies. That is partly because the sea ice is apparently receding - possibly a result of global warming, which would ease exploration and drilling.

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APPENDIX 2 International Climate Change - Major Initiatives The Kyoto Protocol The Kyoto Protocol is a protocol to the United Nations Framework Convention on Climate Change (UNFCCC) and is aimed at combating global warming. The UNFCCC is an international environmental treaty with the goal of achieving the stabilisation of so-called greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous impacts upon the eco and climate systems on which human livelihoods depend. The protocol was initially adopted on 11 December 1997 in the city of Kyoto, Japan, and entered into force on 16 February 2005. As of October 2011, 191 nation states have signed and ratified the protocol. The only remaining signatory to the original not to have ratified the protocol is the United States. The Durban Talks On the 11th December 2011, exactly 14 years after the adoption of the Kyoto Protocol, it was announced that the international talks held in Durban, South Africa, had achieved only partial success. The main outcomes were:
 he European Union will place its current emission-cutting pledges inside the legallyT binding Kyoto Protocol. This was a key demand of the developing countries.  alks on a new legal deal covering all countries will start in 2012 and end in 2015 with T the new laws coming into effect by 2020.  he management of a fund to provide climate aid to poor countries was agreed. T However, the means of raising money for the fund have not been agreed. The fund will be known as the Green Climate Fund and the total fund available will be $100 billion.

The discussions ran almost 36 hours after the intended close. The conclusion was delayed by a dispute between the EU and India over the precise wording of the agreement for a new global deal. India did not want the deal to be legally binding. A compromise proposed by Brazil that the agreement should have legal force was accepted. There were serious concerns expressed by the Alliance of Small Island States (AOSIS) who are particularly vulnerable to rises in sea level caused by global warming, that only a legally binding agreement would prevent a critical rise in global temperature. The delegates from the so-called Basic group - Brazil, South Africa, India and China - criticised the agreement for its tight deadline and its excessive legality.

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APPENDIX 3 From Whiter than White to Greener than Green Energy has always been a strategic resource and the same will be true of a handful of key resources in the future. Ten of the worlds largest oil companies are nationals, i.e. state controlled. Moreover, many of the owners of the worlds biggest remaining oil fields are moving to the far left politically and could potentially nationalise all energy and resource production within their borders. Venezuela is frequently quoted as a future trouble spot as it contains some of the worlds most significant remaining reserves, but Nigeria (which has the eighth-largest oil reserves), Libya, Bolivia, Peru, Ecuador, Angola and Sudan are other countries that could potentially shut off supplies to foreign nations or become catalysts for conflict. All this is important because we are about to enter a critical historical period. Resources (everything from oil and water to uranium and grain stocks) are running low, so there will be a headlong rush by energy-dependent countries into the arms of nations that can satisfy this hunger until technology provides them with a more sustainable solution. Energy anxiety will be dominated by the paradoxical need for secure access to future supplies, while at the same time engaging in public rhetoric about the need to cut emissions and reduce dependency. The same will be true of other key materials, and future development will be heavily influenced by the cost and regulations of these resources. Edward O. Wilson (Pellegrino University Research Professor in Entomology at Harvard University) calls this the bottleneck. This is the point at which population growth, economic development and environmental destruction put maximum stress on both the planet and human race. As a result, the resources trade will increasingly operate on a no questions asked basis. In the long term, it is thought that energy and general resource-scarcity issues will be solved through technology; but in the meantime, energy (along with climate change and sustainability) will dominate politics. Most studies predict that we will hit peak oil production by 2015 or 2020 at the latest. Supplies will run out around 2050. This will be followed by peak gas and peak coal. As a result, nuclear power is firmly back on the political agenda, an inconceivable thought 20 years ago. Wide-scale use of wind and particularly solar power is also being seriously investigated; although it is hard to see how either can successfully replace oil, coal and gas without a substantial change in the way energy is used. According to Richard Heinberg, a U.S. academic and author of several books on the end of cheap oil, we should all be planning for another 1930s-style economic depression. A report produced for the U.S. department of Energy says that when peak oil does hit, we will experience abrupt and revolutionary change. The worlds appetite for oil is certainly insatiable. Between September 2003 and May 2008 the price of oil increased by almost 500% but demand has not declined at all. Indeed, demand is predicted to rise by 50% between now and 2025. China has already been responsible for 40% of the greater demand for oil since 2001. Meanwhile, demand for electricity there has risen by 700% since 1978 and China currently consumes 30% of the worlds coal, 40% of its steel and 25% of its aluminium and copper. Are we all in denial about the future availability of oil? Probably. When it does run out, we will certainly be in for a shock. Higher fuel prices will drive global change but it is thought that we will adjust. The intensity of oil usage is already changing, as are attitudes and behaviour surrounding energy creation and consumption.

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The end of oil may lead to a renaissance in local manufacturing and consumption and even to the end of the worldwide obesity epidemic. If you think the last point is a bit far-fetched, consider this: In Cuba the average adult lost 9 kg after 1992 because the collapse of the Soviet Union increased the severity of the U.S. oil embargo and the country had to rely on 10% of its pre-1992 oil supply. As a result, Cubans started to use gearless Chinese bicycles to get around and this increased the fitness of the entire nation. Extract from Future Files - A brief History of the Next Fifty Years, Richard Watson, Nicholas Brealey Publishing, 2010.

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