AM-97-07 Downstream Financial Performance: Back to the Future?

Description:

The industry is in the midst of a period of consolidation and a search for new structures that can achieve greater shareholder value. Decontrol in 1981 signaled the beginning of the maturity era in the U.S. downstream petroleum industry and initiated the long-term process of rationalization and consolidation. Over the past 15 years, all of us involved with attempting to forecast the near-term future have struggled to analyze the fundamentals of supply/demand/price, technology, and strategic motivations to understand what would happen next. However, accurate predictions have been difficult to formulate. This is likely the result of industry maturity coupled with the lack of the type of driving forces that contribute to a stabilized industry. Over the decade following the early 1980s rationalization, a certain degree of uncertainty has persisted as demonstrated by weak and erratic downstream earnings. The missing, stabilizing factors include lack of product demand growth, absence of price leadership among a diverse array of competitors, no technology leadership, and the inability (or unwillingness) of the industry to rationalize capacity. In addition to the absence of stabilizing forces, there is, in fact, a long list of factors that cause the industry to be somewhat unstable, such as inventory, weather, world economics, refinery outages, and the Wall Street paper refinery. In order to plan strategically, companies need to have confidence in their predictions of future events. Of course all forecasts share a common feature--they are most likely incorrect. Well-designed strategic plans accommodate this by incorporating preconceived responses when future reality deviates from the original baseline predictions. The downstream industry strategist thus has the challenge of describing a span of future possibilities that at least bracket the eventual realities. With such an array of outcomes defined, elements and options of the preferred strategy and tactics can be thought through in advance, allowing a more effective implementation when ultimately needed. Since the analysis of fundamentals has not provided a clear baseline answer, we pose the question, “Are there other models of maturing business sectors that can aid us in formulating plans and strategy for our industry ?” We believe that we can go “Back to the Future” in seeking to understand the characteristics of our industry and by looking at past leading industries, we can paint a clearer picture of the future of the petroleum downstream.