Oil majors standing on their last legs

BP expects refining margins, which have been weak, to remain ‘under significant pressure’

If Big Oil was a two-engine aeroplane, you could say it’s been flying on a single engine since energy prices crashed in 2014. Now, the second motor is sputtering.

The major integrated oil companies, including Exxon Mobil, Total and BP, have relied on their so-called downstream businesses, which include refining crude into petrol, oil trading and gas stations, to cushion the losses on their upstream units, which pump crude and natural gas.

“The crash in oil prices in late 2014 brought refineries worldwide a pleasant surprise: booming margins,” said Amrita Sen, chief oil analyst at consulting firm Energy Aspects in London. “But now, the market is changing.” BP, the first major to report second-quarter results, showed the impact on Tuesday. The company said its downstream earnings fell to $1.51 billion (Dh5.5 billion) from $1.81 billion in the first quarter and $1.87 billion a year ago. Refining margins were the weakest for the April-to-June period in six years, BP said.

Worse, the company said the refining margins will remain “under significant pressure.” So far in the third quarter, its inhouse measure of margins stood at $10.70 a barrel, little more than half the $20 it achieved between July and September 2015. Valero Energy Corp, the largest US refiner, also said on Tuesday it faced “weaker petrol and distillate margins” during the quarter. While the downstream business is sputtering, it’s still keeping the plane aloft. Margins remain well above the depressed levels of $5 to $7 a barrel of the late 1990s and early 2000s. In part, Big Oil sowed the seeds of its problem. Companies pushed their refining units as hard as possible in late 2015 and early 2016, using them to cushion the impact of low energy prices. All went well while demand growth was robust, but as soon as it slowed, refined products swamped the market.

US petrol futures briefly fell below $1.31 per gallon on Tuesday, the lowest for this time of the year in at least a decade, before closing 0.9 per cent higher. Prices were down 0.5 per cent at $1.34 at 11:13am in London. The drop in petrol is dragging down crude as investors fear that refiners, facing low margins, will cut processing rates. West Texas Intermediate traded at $42.66 a barrel Wednesday, down about 17 per cent from its most recent peak of $51.67 in early June.

With oil and gas production barely profitable at current prices, the drop in refining margins foreshadows a difficult second half for majors that rely on their “integrated” model of upstream and downstream businesses to cushion periods of low prices.