The Return of Windfall Profits

Corporate Research E-Letter No. 10, March 2001

The Return of Windfall Profits: An Overview of the Oil Industry

by Philip Mattera

After years with a low profile, thanks to stable prices and ample supply, the oil industry--along with the rest of the energy business--is back in the spotlight. The United States these days feels as if it has been transported back in time to the 1970s, when rising energy prices helped to push the economy into recession and to generate a national malaise.

A year ago, oil prices surpassed $30 a barrel for the first time since 1991. Last summer gasoline prices shot up, exceeding $2 a gallon in parts of the Midwest. This past winter natural gas prices went through the roof. At the same time, utility deregulation has created an electricity supply problem in California, resulting in periodic blackouts in the nation's largest state.

The experts profess to be baffled by the soaring prices. Many blame the natural gas problem on the cold weather; others say consumers went overboard in switching from oil to natural gas. Yet others charge that the federal government and environmentalists discouraged exploration in the 1990s. Rising oil prices were attributed to miscalculations on the part of OPEC planners and domestic refiners. Some fingers were pointed at the U.S. penchant for gas-guzzling SUVs.

Mainstream analysts avoid another, more compelling explanation: that the increasing concentration of ownership in the energy industry is reducing competition and thus contributing to price inflation. The petroleum industry has seen a remarkable wave of mergers in the past few years. Exxon took over Mobil. British Petroleum swallowed Amoco and then Atlantic Richfield. Chevron is in the process of acquiring Texaco. Phillips Petroleum is taking over Tosco Corp., creating the second largest refining operation in the country, after that of Exxon Mobil. What were once known as the Seven Sisters--the world's largest integrated oil and gas producers--will soon be down to four.

The survivors of this takeover wave have been enjoying extraordinary growth in their profits. Last year Exxon Mobil had net income of $17 billion--an all-time record not just for that company but for any company. Exxon Mobil's profit was double the amount the company netted the year before. One hundred percent profit increases were also posted by BP Amoco, Chevron and Texaco.

Unlike the 1970s, when President Carter accused oil companies of staging "the biggest rip-off in history," there has been no aspersions cast on the industry by the Bush Administration, which is led by two former oil men. Instead, the Administration is promoting business-friendly solutions to the problem. Bush advocates oil drilling in areas of the Arctic National Wildlife Refuge, and Cheney is preparing an overall energy strategy that is likely to be heavy on regulatory relief.

Congressional Republicans are eager to jump on this bandwagon. Senate Energy Committee Chairman Frank Murkowski of Alaska has introduced the National Energy Security Act. Apart from encouraging Arctic National Wildlife Refuge drilling, the bill would, among other things, streamline environmental permitting and review procedures. At the press conference announcing the legislation, Murkowski and other Senate Republican leaders introduced the industry representatives who had helped write the measure. Apparently, we've returned to a world in which oil companies get whatever they want.

World's Ten Largest Integrated Oil & Gas Corporations
(excluding government-controlled companies), ranked by total revenues in 2000

1. Exxon Mobil Corp. $232.7 billion 
2. BP Amoco PLC $171.3 billion 
3. Royal Dutch/Shell Group $149.1 billion 
4. Total Fina Elf S.A. $115.2 billion 
5. Chevron Corp. $52.0 billion 
6. Texaco Inc. $51.1 billion 
7. Eni S.p.A. $48.2 billion 
8. Repsol YPF S.A. $43.1 billion 
9. Conoco Inc. $39.3 billion 
10. USX-Marathon Group $33.8 billion

Sources: Oil & Gas Journal, Oct. 16, 2000, updated from company press releases announcing results for 2000.

Thumbnail Sketches of the Top Ten

EXXON MOBIL CORP. (headquarters: Irving, Texas) 
2000 profits: $17.7 billion 
The marriage of Exxon Corp. and Mobil Corp. in late 1999 reunited two descendants of the old Standard Oil empire and created the world's largest petroleum company. The new corporation, which operates in more than 200 countries, is at the Top of the list of private-sector players in terms of global production of both oil and gas as well as in the size of oil reserves. The Exxon part of the company's name is still widely associated with one of the world's worst environmental disasters: the March 1989 spill of more than 10 million gallons of crude oil into Alaska's Prince William Sound by the Exxon Valdez tanker ship. In 1994 an Alaska jury assessed the company $5 billion in damages, but Exxon appealed the verdict in a process that has dragged on for years. The company is also the target of Campaign Exxon Mobil, a coalition of religious and environmental groups, because of its refusal to address the problem of global warming. In December 2000 a court in Alabama ordered Exxon Mobil to pay $3.5 billion in damages after the company was found guilty of defrauding the state of royalty payments from natural gas wells located in state waters. The company is challenging the verdict. Just last month another jury ordered the company to pay $500 million to 10,000 gas station owners around the country who claimed they had been overcharged for more than 10 years.

BP AMOCO PLC (London) 
2000 profits: $12.0 billion 
British Petroleum (BP) grew out of moves by Western interests to capture control over the oil supply of Iran (then Persia) early in the 20th Century. After the company's Iranian assets were nationalized but then rescued by a CIA-led coup, BP began to expand its oil activities to other parts of the world and moved into new fields such as chemicals and animal nutrition. Its petroleum business got major boosts in the late 1960s from big strikes in Alaska and the North Sea. Over the past two decades BP has grown by swallowing up U.S. oil companies. During the 1980s it acquired Standard Oil of Ohio. In 1998 it offered some $50 billion to acquire Amoco Corp. Shortly after that deal was completed, BP (renamed BP Amoco) set its sights on Atlantic Richfield Co., known as Arco. It was only after BP Amoco agreed to sell off Arco's Alaskan assets (to Phillips Petroleum) that the Federal Trade Commission dropped its objections to the deal. The company positioned itself to expand in China by agreeing last fall to invest $400 million in Sinopec Corp. BP Amoco has sought to improve its environmental image--which has been tarnished most recently by controversial new drilling plans in Alaska--by introducing a new low-sulfur gasoline.

ROYAL DUTCH/SHELL GROUP (The Hague, Netherlands and London) 
2000 profits: $12.7 billion 
Royal Dutch/Shell is a peculiar British-Dutch partnership. The British side of the company had its origins in the efforts of Marcus Samuel to challenge Standard Oil in Asia. Samuel's "Shell" Transport and Trading Company eventually hooked up with a firm called Royal Dutch, which started out drilling for lighting oil in Sumatra. In the early 20th Century what became known as the Royal Dutch/Shell Group began acquiring properties in the U.S. market that were later collected under the name Shell Oil Company. During the 1980s Royal Dutch/Shell became the target of an international campaign to pressure the company to end its extensive oil, chemical and coal businesses in South Africa. The company was accused of violating the United Nations embargo on the export of oil to the apartheid regime. During the 1990s the company came under similar criticism because of its dealings with the dictatorship in Nigeria and the environmental impact of its operations on the Ogoni indigenous people in that country. In a move to expand its natural gas operations in the United States, Royal Dutch/Shell recently announced an unsolicited takeover bid for Barrett Resources Corp.

TOTAL ELF FINA S.A. (Courbevoie, France) 
2000 profits: $6.9 billion 
Total Elf Fina is the result of the merger of leading oil companies in France and Belgium over the past two years. Total originated in the Compagnie Francaise des Petroles (CFP), a participant in the Turkish Petroleum Company consortium of Western interests that developed oil supplies in the former Ottoman Empire after World War I. The company later expanded its sources of crude to countries such as Venezuela and Algeria (where its operations were nationalized in 1971). CFP added Total (a brand name adopted in the 1950s) to its corporate name, which was shortened to Total in 1991. Around the same time, the French government reduced its stake in the company, ultimately to less than 1 percent. In 1999 Total acquired Belgium's Petrofina, an integrated oil and gas company, for $11 billion and took the name Total Fina. Shortly thereafter the company made a hostile bid for its French rival Elf Aquitaine (once majority owned by the French government), which fought but then succumbed to the $49 billion takeover. The company has come under fire by human rights activists for its involvement (in partnership with the U.S. company Unocal Corp.) in a natural gas pipeline project in Burma. It has also been embroiled in legal disputes stemming from the December 1999 oil spill off the coast of France by a tanker carrying crude oil for the company.

CHEVRON CORP. (San Francisco) 
2000 profits: $5.2 billion 
Known until 1984 as Standard Oil of California (Socal), Chevron's greatest accomplishment was its successful exploration gamble in Saudi Arabia in the 1930s. The oil turned out to be so plentiful there that Socal brought in Texaco to form a joint venture called Caltex. (The two companies later brought in the predecessors of Exxon and Mobil to form the Arab American Oil Company, or Aramco.) The company's next big moment came in 1984, when it served as a white knight (friendly acquirer) to Gulf Oil, which was being pursued by corporate raider T. Boone Pickens. In the late 1980s Chevron came under fire from the right for maintaining its investment in Angola (which it inherited from Gulf) and from the left for its operations in South Africa. During the same period it rebuffed a takeover bid by Pennzoil. Starting in the early 1990s the company has been investing billions of dollars in the former Soviet republic of Kazakhstan. Like Shell, Chevron has been criticized for its operations in Nigeria. In an effort to survive in a rapidly consolidating industry, Chevron announced in October 2000 that it planned to acquire Texaco for about $36 billion. The deal is still being reviewed by regulators.

TEXACO INC. (White Plains, New York) 
2000 profits: $ 2.5 billion 
Texaco, which is in the process of being swallowed by Chevron, started life as the Texas Company, an early oil producer in the southwest. During the 1930s it was invited by Chevron's predecessor, Socal, to share in the riches of Saudi Arabian oil, and it had controversial dealings with Franco and Hitler. Texaco grew into one of the Seven Sisters that dominated the world oil industry, but in 1985 it was socked with an $11 billion damage award by a Texas court, which found that Texaco's bid for Getty Oil improperly interfered with an agreement that Pennzoil had made to acquire part of Getty. After filing for Chapter 11 bankruptcy, Texaco settled with Pennzoil for $3 billion. In 1996 Texaco agreed to pay $176 million to settle a racial discrimination suit that had brought to light details of blatant racism in the company. Since 1993 Texaco has been fighting a lawsuit brought by a group of Ecuadorean Indians who filed an action in U.S. federal court accusing the company of environmental negligence.

ENI S.p.A. (Rome) 
2000 profits: $5.8 billion 
One of Italy's largest companies, Eni is involved in petroleum exploration and production in more than 30 countries. The Ente Nazionale Idrocarburi (National Hydrocarbon Agency) was created by the Italian parliament in 1953 after methane deposits were found in the country's Po Valley. Under the leadership of Enrico Mattei, a partisan leader during the Second World War, Eni made alliances with a variety of oil-producing countries and also branched out into other fields such as chemicals, textiles and newspaper publishing. Eni went public in 1992, and several years later the Italian government began selling off its majority interest (it's now down to about 30 percent). Over the past few years Eni has been on an acquisition binge, going after petroleum companies in Portugal and Britain.

REPSOL YPF S.A. (Madrid) 
2000 profits: $2.3 billion 
Repsol was formed in the late 1980s as part of a reorganization of various energy properties owned by the Spanish government. In 1989 about one quarter of the company was privatized through a stock offering that raised more than $1 billion. The company became a major force at the retail level after the Spanish government agreed to relinquish its control of the country's energy distribution network. The YPF in the company's name is the result of the acquisition of Argentina's largest integrated oil company in 1999.

CONOCO INC. (Houston) 
2000 profits: $1.9 billion 
Conoco, founded in Utah in 1875 as Continental Oil, was absorbed into Standard Oil and then became independent again after the trust was split up in 1911. Conoco merged with other companies to become a force in the western U.S., and after World War II it began to expand abroad. In the late 1970s it entered into joint ventures with Du Pont and was then acquired by the chemical giant, which wanted a reliable source of crude oil. In 1998 Du Pont spun off part of Conoco and divested its remaining stake the following year. Last year Conoco announced major oil finds off the coast of Venezuela and in the Gulf of Mexico.

USX-MARATHON GROUP (Houston) 
2000 profits: $432 million 
Marathon began life in the 1880s as The Ohio Oil Company, a competitor to Rockefeller's Standard Oil empire. Like Conoco, it was taken over by the trust and then liberated again after Standard Oil was dismantled. Ohio Oil had a major strike in Texas in the 1920s and began exploring abroad after World War II in partnership with Conoco and Amerada Hess. The company, which took the name Marathon in 1962, became the focus of a takeover battle between Mobil and U.S. Steel in 1982. U.S. Steel changed its name to USX in 1986. That same year it acquired Texas Oil & Gas, which it consolidated with Marathon. To thwart a takeover effort by corporate raider Carl Icahn, USX divided its steel and oil operations into two separate stocks. In 1998 USX-Marathon Group merged its refining and retail operations with those of Ashland Inc., forming a joint venture called Marathon Ashland Petroleum.