Value Chain: The Oil and Gas Industry; Internet Research The oil and gas industry is often...

Value Chain: The Oil and Gas Industry; Internet Research The oil and gas industry is often in the news these days as gasoline prices fluctuate and as controversial new sources of oil are introduced. We will use the value chain to study the industry and find out where the profits are. At a relatively high level, the value chain of the oil and gas industry would look like the following.

Step one of the value chain is to identify the land where oil and/or gas are likely to be present, followed by drilling to obtain the product, and then additional steps until the product is delivered to the customer, usually in a convenience store or a retail outlet of one of the large integrated oil firms such as Exxon Mobil or BP.

Steps one and two are often combined into what is called a sector for oil and gas exploration and drilling. Also, refining and marketing are often combined into a sector, oil and gas refining and marketing. Thus, there are four sectors:

1. Oil and gas drilling and exploration

2. Oil and gas equipment and services

3. Oil and gas pipelines (transportation of unrefined oil or refined product)

4. Oil and gas refining and marketing

There are a number of companies that operate in just one of the sectors. Some operate in two or more. There is also a fifth group of companies, integrated oil and gas producers, that operates throughout the value chain.

In addition to the four sectors, there are the last two steps in the value chain that involve delivery and purchase of product. The delivery of the product to the customer is often by truck, but could also be by pipeline. Integrated oil and gas producers are involved in these last steps as well as independent truckers and distributors.

Required Go to the Yahoo link for Industries—Basic Materials (https://biz.yahoo.com/p/1conameu.html) and research the four sectors of the industry.

1. For each of the four sectors, determine (a) the size of the sector as measured by the total market cap of the sector (this is the value of all of the outstanding shares of a firm at the date you do the research, for all firms in the sector) and (b) the profitability of the sector, as measured by return on equity (ROE: ROE is earnings divided by total shareholder equity) and net profit margin (profit to sales) of the sector. Put the information in a table so that you can readily compare the sectors on the three measures. Interpret the table of measures in terms of where the profits are in the oil and gas industry. Which part of the industry would a company like to be in and why?

2. What are some of the critical success factors for each of the first seven steps in the value chain for this industry?

3. Explain the nature of the sustainability risks in the industry, from the perspective of the BP oil spill of April 2010.