ExxonMobil: Cracking the Barrel

The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.

An Integrated Supermajor

Valued in early 2019 at more than $300 billion, ExxonMobil is the world’s fourth-largest oil and gas company ranked by 2017 revenue. Each day, the company produces the energy equivalent of nearly four million barrels of oil, with production approximately evenly split between petroleum liquids and natural gas. As an integrated player, ExxonMobil has amassed a well-diversified, international portfolio of assets spanning the petroleum industry value chain.

ExxonMobil’s success to date can be partially attributed to its focus on integration: each part of the petroleum production value chain is reflected in its three business segments. The first of these, Upstream, comprises ExxonMobil’s global production assets spread throughout nearly 40 countries, while the second, Downstream, consists of 21 refineries located in 14 countries. Feedstock from both the Upstream and Downstream divisions act as input for the Chemicals division, in which a variety of chemicals—including polymers and elastomers—are produced for end use in everyday items like packaged goods and rubber products.

Oil’s New Normal

As technological advances make unconventional resource plays economically viable, producers have shifted their portfolios to include oil and gas reserves found in oil sands and shale plays. The more technically challenging extraction processes associated with these unconventional sources increase energy companies’ capital expenditures while also shrinking operating margins and increasing the risk of environmental damages.

The issue of shrinking margins for upstream extraction assets is exacerbated by the price volatility of its output, crude oil. While the early 2010s saw benchmark West Texas Intermediate (WTI) prices exceed $100 per barrel, prices have since fallen and now trade substantially lower and with increased volatility. WTI prices at the beginning of 2019 stood at just under $50 per barrel and consequently, the revenue-generating potential and profitability of upstream assets have been impaired.

Fortunately, ExxonMobil’s downstream refineries serve to partially hedge price volatility. While lower oil prices hurt the profitability of upstream assets, they have the potential to buoy refinery profitability. Feedstock becomes cheaper, but the price of refinery output does not necessarily suffer the same decline. Thanks to this effect, integrated oil companies like ExxonMobil have enjoyed far more stable profitability in comparison to pure-play upstream firms.

Reconsidering Downstream

Management has publicly committed to investing in the Upstream division, ExxonMobil’s largest business unit both in terms of average revenue and capital deployed. While this gives the company a foothold in attractive plays like the Permian basin and allows it to secure a supply of natural gas for the emerging international trade, performance has floundered. Despite a steady increase in average capital employed, upstream production has remained stagnant and returns have plummeted. While ExxonMobil’s upstream segment generated an average annual return of 9.2 per cent over the last five years, the same five-year average figure stood at 43.8 per cent ten years ago.

In contrast, ExxonMobil’s downstream segment has yielded an average 19.8-per-cent annual return over the past five years. While management has been increasing capital employed in the Chemical segment, which boasts a comparable average return, average capital used in the downstream industry has remained stagnant; the company has made many Downstream divestments over the past decade. In maintaining the status quo and focusing on the upstream and chemical segments at the expense of downstream operations, management is overlooking potentially lucrative opportunities.

ExxonMobil should instead double down on its downstream success and look to increase capital allocation to business areas focusing on refining and related operations. Given the immense resources and time required to construct a greenfield refinery, ExxonMobil should make full use of its extensive operational experience and look to acquiring ownership in existing businesses. Assets situated in close proximity to existing upstream projects where the company has no existing downstream ownership would provide the additional benefit of helping guard against profitability declines should oil prices drop.

A Developing Opportunity

Natural resource extraction, especially that of energy products, tends to be a complex undertaking. Should the technical capabilities or investment capital be lacking in a developing country, or should an interested domestic agent not exist, the country may be unable to efficiently and economically export its resources to market. To resolve the issue and realize the wealth associated with these resources, governments often turn to private investors as a source of foreign direct investment (FDI).

While foreign assets can carry additional risk, particularly if the country exhibits an unstable political or economic climate, they can sometimes present high-yield investment opportunities. This is especially true of large-scale assets; because so few players have both the resources and the desire to invest in such projects, attractive returns can often be found for those players willing to take on the risk. Governments of developing nations will often further incentivize FDI through tax benefits or other subsidies.

As a global petroleum supermajor, ExxonMobil is one of the few companies that could effectively invest in developing nations’ large-scale petroleum projects. Capitalizing upon opportunities before other players would give ExxonMobil strategic vertical integration that might otherwise be sacrificed to competitors. Furthermore, ExxonMobil already has an upstream presence and experience in many such countries, from which it could draw to assist in the success of this venture. To grow its downstream operations, the company should seek attractive international investment opportunities.

In analyzing downstream opportunities for ExxonMobil, the following six criteria should be of primary concern: local demand, capacity, cost, regulatory environment, proximity to production, and majority ownership. Three specific countries hold the most attractive opportunities.


ExxonMobil recently acquired offshore upstream assets in this country and legislation passed in 2016 updated the 1984 Petroleum (Exploration and Production) Act, thereby improving the country’s regulatory environment and facilitating resource extraction. Only one refinery currently exists: the government-owned Tema Oil Refinery (TOR), located 29 km east of Ghana’s coastal capital, Accra. It has a capacity of 45,000 bbl/d but has had capacity reduced to two-thirds of that following a furnace explosion in January 2017.

In mid-2018, lenders declined to issue loans for crude purchases and since then, the refinery has been substantially idle. Furthermore, TOR is incapable of fully refining oil from Ghana’s Jubilee oil field, responsible for the majority of the country’s oil production—the refinery was established before this oilfield began producing in 2010 and was designed to process heavier crude blends. As a result of poor management and neglect, TOR owed banks $199 million as of August 2016 and the facility has been earmarked for closure by the energy ministry.

There are two opportunities available here. Firstly, ExxonMobil could invest the capital required to resolve TOR’s issues, increase capacity, and delay government closure of this refinery. This decision would expand refining capabilities to encompass lighter oil and would require an investment of approximately $1.2 billion. Alternatively, the government is seeking an investor to develop a new $3.5 billion, 150,000 bbl/d facility meant to replace TOR; ExxonMobil could partner with the Ghanaian government to develop the new refinery, giving the company the opportunity to implement industry best practices from the ground-up.


With a maximum crude oil production of 2.5 million bbl/d, Nigeria is the largest oil-producing nation in Africa. The country has four refineries with a combined capacity of 445,000 bbl/d, but years of neglect have left them broken down, producing at less than 15 per cent of their capacity as of October 2018. To supplement this shortfall, Nigeria had to import $6.3 billion in refined petroleum products in 2017.

In response to the capacity shortfall, construction has begun on the massive 650,000 bbl/d Dangote refinery, expected to be operational by 2022. Smaller, modular refineries are also being developed, some with capacity as small as 1,000 bbl/d, but in aggregate, expected to add 700,000 bbl/d of capacity. As of October 2018, 40 modular refinery projects were registered, with 10 in the advanced stages of construction and expected to be in operation as early as mid to late 2019.

In Nigeria, ExxonMobil has two options: buy into the concessions of the four larger, older refineries, or build a network of three to four modular refineries with capacities around 25,000 bbl/d.


Brazil’s massive deepwater reserves and inland basins have paved its path to becoming a major oil producer. Historically, Brazil’s nationalized petroleum company, Petrobras, has dominated production. However, recent financial distress has sparked a desire to privatize assets: the company plans to raise $26.9 billion through asset sales and partnerships by 2023. ExxonMobil has already taken advantage of this opportunity, having secured drilling rights in the Santos and Campos basins.

Petrobras has also turned to divesting downstream assets: four refineries are being sold in two packages, one containing two northeastern refineries and the other containing two southern refineries. Each refinery package also contains storage and midstream capacity. Under the terms of the sale, the purchaser will acquire a 60-per-cent stake in the refinery assets.

The northeastern package contains Abreu e Lima and Landulpho Alves, with respective capacities of 115,000 bbl/d and 323,000 bbl/d. Approximately 70 per cent of production at Abreu e Lima is diesel fuel and construction on a second 115,000 bbl/d train is underway. The southern package contains Alberto Pasqualini and Presidente Vargas, with respective capacities of 201,000 bbl/d and 208,000 bbl/d. The two refineries serve demand in the local market, with more than 85 per cent of Presidente Vargas’ production supplied to the surrounding area.


The option that best aligns with the prescribed criteria is the investment in the southern Brazilian assets, Alberto Pasqualini and Presidente Vargas, given ExxonMobil’s established presence in the country, the availability of well-located assets, and the potential for ExxonMobil to capitalize on local demand for heavy crude refining capacity. This southern asset package includes 736 kilometers of pipeline and seven storage terminals capable of holding 6.1 million barrels of crude and 3.3 million barrels of refined products. Because ExxonMobil additionally has a Chemical operations presence in Brazil, there is opportunity for greater vertical integration in the future.

While Ghana’s lack of refinery competition presents an attractive landscape, its TOR refinery and greenfield expansion both require government partnerships, introducing significant political risk. Majority ownership of the assets would furthermore be difficult to achieve, with a proposed PetroSaudi International partnership in 2015 leading to rumours of a total sell-off of TOR in 2015; the refinery ultimately withdrew its partnership offer.

Nigeria, on the other hand, lacks sufficient infrastructure to handle mega-projects like the Dangote refinery, while the small modular refineries are set to be awash in supply. Once Dangote comes online, the smaller refineries will furthermore lose competitiveness as Dangote reaches economies of scale. The chances of succeeding in the acquisition are also uncertain; in 2017, the Nigerian Senate voted to cancel a refinery contract with Italian firm Eni, preventing the global player from repairing and operating a 210,000 bbl/d facility.

Financially, this Brazilian acquisition is most reasonable. The refineries produce mainly gasoline and diesel fuel and have a combined feedstock throughput of more than 400,000 bbl/d. Assuming a typical yield of refined products and given Brazil’s recent diesel price of approximately $3.40 per gallon and its gasoline price of just over $4.00, each barrel of crude has a realizable value of $120 based on these two products alone. ExxonMobil can use its experience in refinery operations to keep operating costs low, ensuring healthy margins and sufficient buffer in the event of crude price spikes.

In 2010, Petrobras paid a net $350 million to increase its stake in the Alberto Pasqualini refinery by 30 per cent, implying a price of $17 per annual barrel produced. Assuming that ExxonMobil would purchase the assets at a similar price, the company would need to invest $1.5 billion to obtain 60-per-cent ownership in the refineries. ExxonMobil would furthermore need to account for the value of the pipeline and storage network, with the company’s bid partially dependent upon the benefits it would realize from the vertical integration that such asset ownership would bring.

Refining a Strategy

A key factor driving the recommendation is the significant local demand for refined petroleum products in the Brazilian market. Current Brazilian refining capacity of 2.3 million bbl/d stands in stark disparity to local demand of 3 million bbl/d, and without additional investment to expand refining capacity, the supply-demand imbalance will persist. The issue is exacerbated by Brazil’s difficulty refining heavier crudes, as its refineries have historically processed lighter grades. This provides ExxonMobil an opportunity to monopolize this market by retooling its acquisitions. At 60-per-cent ownership in these two assets, ExxonMobil will own 11 per cent of Brazil’s refining capacity and will have a strong foothold for further growth in the country.

Key drivers of refineries’ competitive advantage are operational efficiency and location. Through this acquisition, ExxonMobil is in a position to vertically integrate and generate operational efficiencies through guaranteed feedstock from its producing assets. Furthermore, the joint acquisition of the crude pipeline network will service demand across Brazil without the need to enter costly fee-based contracts with a midstream operator, decreasing per-barrel transport costs and increasing profitability. The terminals allow ExxonMobil to remain agile in the face of volatility and easily export refined petroleum products to international markets in the unlikely event of a drop in Brazilian demand. The refineries furthermore expand ExxonMobil’s downstream capacity by five per cent, significantly expanding the size of the business. Petrobras’s intent to divest 60 per cent of these assets aligns with the aforementioned criteria of majority ownership, allowing ExxonMobil to retain control over its assets.

After purchasing the Brazilian assets, ExxonMobil must integrate the refineries into its current operations and draw on its expertise to optimize performance. ExxonMobil should then look to retool the facility to refine heavier types of oil, specifically crudes with American Petroleum Institute gravity of less than 16.

Pipeline to Progress

Given the scale of this recommendation, a number of risks must be addressed. The sheer size of the proposed acquisition may prove too large for ExxonMobil to successfully integrate into its portfolio. However, the company does have success at managing largescale assets: its wholly-owned Baytown and Jurong downstream assets have refining capacities of 561,000 bbl/d and 592,000 bbl/d, respectively.

Brazil has a substantial amount of debt: at $1.4 trillion, this represents nearly 70 per cent of its 2017 GDP. The country has an undesirable S&P credit rating of BB- and despite the rating outlook having been stable since January 2018, the debt load presents a real risk. To mitigate against potential currency depreciation, ExxonMobil should consider longterm currency hedging to fix the value of its production in U.S. dollars.

ExxonMobil’s success to date has largely been due to its position as a sizeable, integrated player in the oil and gas industry. In a time of energy privatization, by pursuing this asset acquisition in southern Brazil, ExxonMobil will be able to build out its refining business in a country where it can further solidify its position as a dominant player.