Economic Report 1999 Index

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Industry Structure During the last 18 months the international industry has experienced a number of high profile mergers and acquisitions. This activity, which provides the industry with three out of the ten largest private companies in the world (BP Amoco, Exxon-Mobil and Shell), introduces a new phase for the international industry which will enable it to address the continual change in markets, geopolitics and technology. Figures 11 and Figure 12 summarise the recent financial performance of the international oil industry. Figure 11 indicates that the oil and energy sectors lagged behind the S&P 500 in terms of the economic value added (EVA) during the 1990s. Figure 12 compares the return on capital employed of UK quoted companies in selected industry sectors. The poor returns of the E&P sector and integrated oil companies throughout the period are clear. Figure 11 - S & P 500 Source:  Morgan Stanley Figure 12 - Return on Capital Employed Source:  Datastream The primary driver of recent industry consolidation is to foster a step change in worldwide performance and profitability and create international growth opportunities. In addition to cost saving, the strategic benefits are resources, greater global reach, downstream synergies, portfolio balance and improved capital productivity. Whilst the consolidation process has created fewer but larger international companies these entities remain small in proportion to the scale of the global oil and gas industry. Figure 13 places in context the relative position of the private sector companies. In terms of production, the combined worldwide oil and gas production in 1998 of leading UKCS operators BP Amoco, Exxon-Mobil and Shell was less than 11% of the world total. Figure 13 - Global Liquid Reserves Source:  Oil and Gas Journal The changing international oil industry structure and innovative new ways of doing business, for example alliancing, outsourcing and partnering, in addition to radical consolidations, have enabled the upstream industry to reduce its cost base and enhance its financial performance. These changes should benefit the future development of the UKCS through access to cost savings, improved and more rapid technology transfer and improved profitability leading to increased investment. In particular, the re-introduction of Capital Gains Tax Rollover Relief should assist asset trading and increase activity of niche companies, boosting exploration and production on the UKCS.