Oil price reshapes the energy Industry

The years 2005-2008 will probably be seen historically as the starting point for a new oil price paradigm-a fundamental shift in prices, comparable to that of the 1970s, which may mean the world never again sees $20 oil.

That shift, unsurprisingly, has had a very marked impact on the structure of the energy Industry as a whole. And that impact is clearly discernible in the history of the Platts Top 250 Energy Companies rankings. In recent years, the rankings have been increasingly dominated at the top end of the scale by Intergrated oil companies with global reach.

Between 2004 and 2007, these companies in the International Oil and Gas category (IOGs), reaping massive returns from the windfall of ever-increasing prices, essentially swamped the first thirty places in the Platts rankings, which are based on four financial measures: assets, revenues, profits, and return on invested capital.

Non-oil staging a come-back?

However, the strength of the majors at the top of the league is only part of the story. Figure 1 shows that while the large oil companies are currently unassailable in the highest rankings, last year's financial performances, as reflected in the 2008 column, saw a resurgence of non-oil companies in the rankings overall, particularly in the 50-100 range.

There are probably three reasons for this. First, a wave of mergers and takeovers in the oil Industry over a period of years has actually reduced somewhat the outright number of IOGs participating in the market.

Second, power and gas companies, hard-hit in many cases by unhedged rises in fuel costs between 2004 and 2006, have begun to adjust well to the new world order. Figure 2, by way of illustration, shows the combined profits of the ten leading electric utility companies in the Platts' rankings, expressed as a percentage of the profits of the ten leading IOGs.

As prices rocketed, the utilities appeared to struggle to keep pace, losing ground heavily against their oil competitors in 2006.

But the harsh lessons of the market appear to have rapidly sunk in. In the 2007 rankings, which mostly record 2006 financial performance1, the electric utilities were already recovering vis-a-vis their oil rivals. By this year's rankings, the comparison with oil majors' profits shows the utilities actually ahead of where they were in 2005.

It is noteworthy that of the non-oil sectors of the energy Industry, it has in fact been the electrical utilities that have weathered the price storm best. Considered alongside gas utilities, so-called "diversified" utilities, and independent power producers, only the electrical utilities at the top of their game avoided an outright dip in profitability as markets surged. The independent power producers, by contrast, suffered heavily at the start of the oil price run-up.

The combined profitability figures from 2006 show the leading IPPs as negatively profitable, largely on the back of the heavy losses suffered by California's Calpine Corp and low profits all round elsewhere. Calpine filed for bankruptcy in 2005 after finding itself locked into unprofitable fixed price electricity supply contracts which pre-dated the price rises.

Asian growth combines with deregulation and greater transparency

The third factor in the apparent recovery of non-oil companies in the Platts rankings is a combination of rapid growth in Asian and Middle Eastern economies, coupled with the accelerating trend to deregulation, public listing and/or financial reporting among eastern European, Middle Eastern, Asian and Latin American energy businesses.

Since the Top 250 can only be based on those companies which actually report data, denationalization and decisions to list on stock exchanges can result in the entry of significant new players to the list-and because utility businesses have been much slower to deregulate or denationalize than oil businesses, many of these new entrants are non-oil. China Coal Energy, to take one example, is the third largest coal mining company in the world, but only appears in this year's rankings following its December 2006 listing on the Hong Kong Stock Exchange.

Of the 82 companies which have entered the rankings since 2005 (not all have remained), a significant number appear to fall into this category. In Europe, we see names like British Energy, CEPSA, EDF, Gaz de France and Gazprom appearing. In Asia, Chinese companies have been quick to seize the value of public floatation, bringing a swathe of power and coal companies into the listings.

First Persian Gulf companies enter the Top 250

Interestingly, only one of thirteen new entrants for 2008 is a North American business-Western Refining Inc, which vaulted into the rankings via its $1.23 billion acquisition of Giant Industries in 2006, which virtually doubled the company in size.

The others are a scattering of Asian, European, and, importantly, Middle Eastern newcomers, including the Abu Dhabi National Energy Company and the Saudi Electricity Company.

These two companies are the first from the Persian Gulf ever to enter the Top 250 rankings, for despite the presence of heavyweight oil businesses in the region-Saudi Aramco, KPC, ADNOC, IRNA and the like-the nationally-owned oil companies of OPEC continue to treat their financial data as a state secret.

As Persian Gulf oil producers seek to capitalize on the windfall flow of oil cash into sovereign funds by investing in parallel energy businesses, the trend to greater transparency and disclosure is likely to continue over the next several years at least.