Oil & Gas

High Risk, High Return Gets More Complicated

Geopolitics adds to exploration challenges

A high-risk category became even more challenging early in 2013, with the terrorist attack on an Algerian oil field and the deaths of hostages, including four employees of Norway's Statoil.

Less than three years after the Deepwater Horizon oil spill disaster in the Gulf of Mexico, the attack demonstrated how political instability compounds the already difficult task of extracting natural resources safely and responsibly.

Despite slow global economic growth, the major international oil company (IOC) brands—ExxonMobil, Shell, BP and Chevron— generally performed well financially.

Results of the major country-owned national oil companies (NOCs) varied.

The oil and gas category lost 4 percent in brand value. The greatest decline of all BrandZ™ categories, it was driven in part by Petrobras, Brazil's national oil company, which experienced its first quarterly loss in 13 years.

These other trends influenced the category:

Exploration difficulty

Shell received US government approval to drill off the coast of Alaska, but suspended its operations after an accident incapacitated one of its ships.

Joint ventures

To share the potential risk of exploration in the Arctic and Siberia, leading Russian and IOC brands formed joint ventures.

Focus on gas

Brands shifted away from renewable energy sources in favor of extracting natural gas with fracking, the process of using hydraulic pressure to fracture rock and release gas trapped underground.

NOCs experience mix results

The BRIC economies impacted the oil and gas category, most notably the performance of Brazil's Petrobras. The state-controlled company faced conflicting pressures from its mission to simultaneously serve the public welfare and make a profit. As Brazil's economic growth slowed, job creation became a priority for a government focused on the rise of more people into the middle class. By contracting almost exclusively with Brazilian companies to fulfill its infrastructure and equipment needs, Petrobras helped keep the unemployment rate low. But it also sustained inefficiencies and expenses that impacted financial performance.

Similarly, the increase in car ownership in Brazil drove greater demand for gasoline, but government controls regulated the prices Petrobras could charge at the pump. A new CEO joined Petrobras early in 2012, but not before Ecopetrol, a Latin American competitor, increased its market share. Owned by the Colombian government, Ecopetrol appears in the BrandZ™ ranking for the first time this year.

Similarly, government gas price controls impacted the results of China's Sinopec, which experienced a decline in net profit. Pressed by rising domestic demand, PetroChina, China's largest oil and gas company, continued its international exploration efforts, especially for natural gas, because of the government's commitment to improving air quality.

IOCs face challenges

Economic duress in Europe and Japan, along with slower growth in China, impacted the financial results of the major international oil and gas brands last year. The IOCs also faced these two key challenges: too few major new oil exploration projects; and too much natural gas, which depressed prices.

ExxonMobil and Chevron, the two largest US producers, reported strong profits, however, based on their refining businesses. Major long-term exploration investments hurt Shell's profit. Along with the suspension of drilling off of Alaska, Shell's business was also negatively impacted by political instability in Nigeria. ExxonMobil encountered production problems in Kazakhstan and the North Sea. It acquired a Canadian exploration business to access gas deposits in the shale rock of Western Canada.

Chevron, among the brands most engaged in fracking to extract shale gas in Europe, acquired a major stake in a private Lithuanian oil and gas company. Environmental concerns limited fracking in France and other parts of Western Europe.

Ventures with Russian brands

The need to combine technical expertise and potential reserves produced several collaborations between IOCs and Russian brands. In joint ventures formed with Rosneft, ExxonMobil will explore several Arctic off shore locations and Siberian fields, and Rosneft will gain access to several ExxonMobil fields in Texas.

In a deal with BP, Rosneft purchased the British-owned oil and gas brand's Russian holdings, TNK-BP, and BP increased its stake in Rosneft to about 20 percent. The companies expected the new relationship to increase exploration capability and produce operating synergies.

Russia's Gazprom worked on a long-term deal to meet China's growing gas needs. Gazprom supplies a significant amount of Europe's natural gas. The European Union targeted the company for anticompetitive practices. Gazprom's stock price declined.

Higher prices drove a 6.2 percent increase in net income to $11 billion for Lukoil. Russia's second largest oil producer appeared for the first time in the BrandZ™ ranking of oil and gas brands.

Expansion depends on brand and reputation

Reputation was the critical currency that the international companies relied on when negotiating with governments for exploration rights. Brand remained the consumer-facing expression of the company in its retail gas station locations.

Shell operated 44,000 retail locations worldwide, for example, roughly 10,000 more than McDonald's. Sinopec controlled about 29,000 gas stations, mostly in South and Eastern China.

While the financial impact of these downstream operations may be less critical than the benefit derived from upstream exploration and refining, brand presence is significant. Generally, oil and gas companies viewed their petrol station businesses as cash generators for supporting the huge expense of exploration.

Brand becomes especially important as oil and gas companies establish themselves in countries and attempt to be understood as good local citizens. Typically companies aim advertising at influencers and engaged audiences.

Shell, which has operated in Iraq for about five years, but has a long-term commitment in the country, introduced a marketing campaign aimed at the Iraqi public. Launched late in 2012, the campaign positioned Shell as a contributor to the country's wellbeing, not simply an extractor of its resources.

Insights BrandZ BigData™

Brands draw investor praise, consumer scorn

The oil and gas category has a polarizing effect. Business people and investors surveyed in the BrandZ™ research rate the top brands as an excellent investment, while acknowledging the less than attractive public image of the industry.

Consumers, hugely influenced by the increasing price of gas at the pump, and concerned about the environment, are generally quite negative about the oil and gas category brands, saying they are "arrogant," "uncaring" and even "dishonest."

The multinationals attract most opprobrium and achieve very low levels of "trust," while the national oil corporations score well above average.

Action Points

1 . Innovate

Innovation implies technological competence. That means not just doing something on time, but also doing something no other organization can do; something that's never been done before. That kind of innovation attracts the best workers and helps win major contracts.

2. Develop partnership skills

The cost and complication of oil and gas exploration means that one company alone seldom completes a major project. Success requires effective partnership. It's important to be known for reliably delivering on promised work on time, on budget and with a high degree of excellence.

3. Support local businesses

It's a good thing to do. And it's smart. When working internationally, supporting local businesses improves good will and reduces costs. And it's much cheaper than flying everything in from the other side of the world.

4. Help local communities

It's another cost of doing business. To be successful, a long-term business engagement requires a complementary commitment to improving local living conditions with investments in health care, education and other underfunded needs.

Oil and Gas Down 4%

The oil and gas category includes both private International Oil Companies (IOCs) and state-owned National Oil Companies (NOCs).

BrandZ Top 100 2013

BrandZ Global 2013 Report Top 100 Report

Top 100 Chart

2013 BrandZ Top 100 Infographic

BrandZ 2013 Infographic

Methodology and valuation by Kantar Millward Brown

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