http://www.canoe.ca/ReutersNews/ENERGY-REFINING.html

February 9, 2000

Shakeouts seen in downstream oil business

HOUSTON, Feb 9 (Reuters) - Brutal competition and low returns are reshaping the oil refining and marketing business and industry executives told a conference in Houston this week that they don't expect the process to slow down any time soon.

Speakers at the Cambridge Energy Research Associates conference here predicted that some established players would exit the industry, others would form alliances with each other and that relative newcomers would continue to make inroads.

Nobody was betting that the "downstream""business of refining crude oil into marketable products like gasoline and jet fuel would become an easy place to make a fast buck.

"The downstream business has got much tougher and will get tougher still," was the grim appraisal of Royal Dutch/Shell Group SHEL.L managing director Paul Skinner.

Over the last 20 years most refining investments have failed to deliver adequate returns and refinery profit margins will probably continue to decline in real terms, Skinner said.

Roger Beach, chairman and CEO of Unocal Corp., said poor returns led his company to sell its refining and marketing assets in 1997, transforming Unocal from a small integrated oil company to a relatively large oil and gas exploration company.

"The handwriting was on the wall. If we didn't improve our performance, we wouldn't be around very long going into the 21st century," Beach said.

Tosco Corp., the largest independent U.S. refiner, bought Unocal's West Coast refineries and service stations and Chairman and CEO Thomas O'Malley said he would buy more refineries if prices were based on historical refining margins.

"Our success has rested on the discipline of insisting that these units make money...You cannot start off losing money the first year," he said.

As for the marketing side of the business, O'Malley said Tosco was still trying to figure out how to turn its 7,000 gasoline stations and convenience stores, visited by a million people each day, into highly profitable "selling zones".

Skinner said major integrated oil companies like Shell were likely to reduce investment in their refining operations although they would continue to value the cash they generated.

Merchant refiners, who supply independent gasoline retailers, and major crude oil producing nations will own a growing share of world refining capacity, he said. Venezuela's state oil company PdVSA has a significant refining presence in the United States through its wholly owned U.S. subsidiary Citgo.

Similarly the Saudi oil company Aramco is part of a three- way U.S. refining and marketing joint venture with Shell and Texaco Inc..

O'Malley said some of the new entities that have been created, such as the downstream joint venture between Marathon Oil Inc. and Ashland Inc. , could end up as public companies in their own right.

Skinner, noting that grocery chains were now in the business of selling gasoline in Europe and the United States, said other new players would probably also enter the fray.

-- Homer Beanfang (Bats@inbellfry.com), February 09, 2000

Answers

Eliminate the competition, raise prices, shaft the public...remember the robber barons at the turn of the last century, I think Standard Oil was at the top of the list. There used to be some anti-trust protection for the public which now is apparently non-existent.

-- Carl Jenkins (Somewherepress@aol.com), February 09, 2000.