Downstream Downturn | Russell T. Rudy Energy LLC
“Rigzone” reports that the major integrated oil companies such as Exxon, Total and BP have always had the advantage of using profits from their downstream operations (refining, distribution and marketing) to offset reversals in upstream (exploration and production) when oil and gas prices fall. That is the plan, and for a while it was working well. With the crude oil price crash in late 2014, the cost of raw materials for refiners fell and profit margins boomed.
It was good while it lasted. The integrated oil companies pushed their refineries to process more and more crude into products such as gasoline. This was all fine as long as demand for products kept pace with refinery output. However, as demand diminished, and supply kept surging, product inventories built. Now, with swelling stocks and diminishing margins, refiners are experiencing difficulties.
BP is a good example. In the second quarter of 2014, the company’s downstream earnings were $1.87 billion. For the second quarter of this year, they were down to $1.51 billion. Refining margins were the worst in six years, and the prospects are bleak.
With oil and gas prices at current levels, upstream operations are barely profitable. With refining margins thinning, the integrated majors appear to be facing a difficult second half this year. To cope with these challenges, Harold “Skip” York with Wood Mackenzie observes, “the majors aren’t going to get the cash flow from downstream that they were hoping. They have some discretionary capital spending they could cut in 2017.”
BP appears to be doing just that. In 2014 the company invested $23 billion in capital projects and expects to spend $17 billion this year. However, in 2017 the capital budget might be cut to as little as $15 billion.
To read the article in its entirety, please go to http://www.rigzone.com/news/article.asp?hpf=1&a_id=145849&utm .
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