Synergy[edit]

The motivations for the Exxon-Mobil merger reflected the industry forces. Companies needed a
secure presence in the regions with high potential for oil/gas discoveries and stronger position to
make large investments. The benefits of the merger fell broadly in two categories: near-term
operating synergies and capital productivity improvements.
[27]

Near-term operating synergies. $2.8 billion in annual pre-tax benefits from
operating synergies (increases in production, sales and efficiency, decreases in unit costs and
combining complementary operations). Management expected to realize the full benefits by the third
year after the merger. During the first two years, the benefits should have been partly offset by one-
time costs at $2 billion for business integration. The firms also planned to eliminate about 9,000 jobs.
A year later, pre-tax annual savings were re-assessed and increased to $3.8 billion.
[32]

Capital productivity improvements. Management also believed the combined company could use
its capital more profitably than either company on its own. These improvements were realized due to
efficiencies of scale, cost savings, and sharing of best management practices. The businesses and
assets of Exxon and Mobil were highly complementary in key areas. In the exploration and
production area, for example, Mobil's and Exxon's respective strengths in West Africa, the Caspian
region, Russia, South America, and North America lined up well, with minimal overlap. The firms
also had a presence in natural gas, with combined sales of about 14 bcfd. And Mobil contributed its
LNG assets and experience to the venture.
[27]

There were technology synergies as well. In upstream, Exxon and Mobil owned proprietary
technologies in the areas of: deepwater and arctic operations, heavy oil, gas-to-liquids processing,
LNG, and high-strength steel. In downstream, their proprietary technology focused on refining and
chemical catalysts. Exxons lube base stocks production fitted well with Mobil's leadership in lubes
marketing.
[27]
Generally, the Exxon-Mobil deal was a move by the dominant partner to increase its
asset base by 30 percent while raising capital productivity.

Upstream
The strength of our global organization allows us to explore for and capture all resource types,
across all geological and geographical environments, using industry-leading technology and
capabilities. We use our unique geoscience capabilities and understanding of the global
hydrocarbon endowment to identify and prioritize all quality resources.

Major projects are more capital intensive, and operating complexity places even greater emphasis
on execution excellence. What remains unchanged is our long-term perspective, disciplined
approach to investment, technological leadership and focus on world-class operational performance.
The strength of our global organization allows us to explore for and capture all resource types,
across all geological and geographical environments, using industry-leading technology and
capabilities. We use our unique geoscience capabilities and understanding of the global
hydrocarbon endowment to identify and prioritize all quality resources.
We deliver industry-leading project execution for a portfolio of diverse opportunities that includes
conventional, heavy oil, tight gas, shale gas, deepwater, liquefied natural gas (LNG), Arctic and sour
gas projects.
We focus on safe operations, reservoir management, continuous improvement and on applying
production operations best practices around the world. With experience and applied technology, we
can capture more oil and gas reserves at both new and mature fields. Advances in seismic imaging,
reservoir simulation, drilling and facility design allow us to reach deposits that were previously
unidentified or unreachable.


Downstream
As the largest global refiner, the majority of our refining capacity is integrated with our lubes and/or
chemical businesses. Our global functional organization facilitates efficient development and
deployment of global best practices and new technologies.

Our downstream operations refine and distribute products derived from crude oil and other feedstocks.
Our global network of manufacturing plants, transportation systems, and distribution centers provides
fuels, lubricants, and other high-value products to customers.
We are the worlds number one supplier of lube basestocks and the largest global marketer of finished
lubricants. Supported by a highly trained field force, a strong distributor network and a robust supply,
ExxonMobil delivers high-quality products and application expertise to customers around the world.
We also create long-term value by selling high-quality products and services daily to millions of
customers across the globe. We market our fuels products to millions of customers worldwide through
our retail service stations and three global business-to-business segments Industrial and Wholesale,
Aviation, Marine Fuels and Marine Lubricants.

2009 Downstream Recap
Exxon Mobil reported GAAP earnings of $1.8 billion, and a return on capital employed of 7% in 2009.
The company's immense complex of refineries produced 5.4 million barrels per day, and Exxon Mobil
invested $3.2 billion in its downstream operations during the year.

Macro View
Exxon Mobil believes that transportation energy demand will grow by 35% by 2030, driven by demand
from the non-OECD or developing world. Despite this growth, Exxon Mobil recognizes the tough current
business environment in the refining and marketing business. The company attributes this to increased
capacity coming on line and new regulatory mandates expected in 2010.

Downstream Strategy
One way that Exxon Mobil will manage through this environment is through cost cutting. The company
has cut its operating expenses by 10% since 2005 in fuels marketing, and plans to continue this in 2010
and beyond.

In refining, Exxon Mobil has increased its purchases of what it calls "challenged crude" or crude oil
feedstock that is more difficult to refine due to its characteristics. Since this feedstock is more difficult to
refine, it trades at a discount to other grades. Exxon Mobil believes the company can utilize its
technology, efficiency and integrated downstream operations and earn an acceptable margin on this
feedstock.

Return On Capital Employed
Exxon Mobil has historically maintained a higher return on capital employed than its competitors in the
downstream, achieving an average return on capital employed of 23% over the 2002-2009 cycle.

Other companies focused on the down stream are also having problems with margins. Frontier Oil
Corporation (NYSE:FTO) reported a loss for the fourth quarter of 2009 and full year, due to what the
company called "weak demand for refined products, particularly distillates, and narrow crude
differentials."

Tesoro Corp (NYSE:TSO) is considering closing its refinery in Hawaii, and turning it into a fuel terminal.
The refinery is operating well under its capacity of 93,500 barrels per day, and averaged only 68,000
barrels per day in 2009.

Sunoco Inc. (NYSE:SUN) reported a loss from continuing operations of $135 million in the fourth quarter
of 2009. The company blamed weak demand for fuel due to the economy.

Bottom Line
Exxon Mobil will attempt to continue making a profit in its downstream operations despite the poor
environment that is plaguing the industry. If history is to be a guide, the company will do better than its
competitors here. (Before jumping into this hot sector, learn how these companies make their money.
To learn more, read Oil And Gas Industry Primer.)

The process of crude oil refining
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Once crude oil is extracted from the ground, it must be transported and refined into petroleum products that have any
value. Those products must then be transported to end-use consumers or retailers (like gasoline stations or the
company that delivers heating oil to your house, if you have an oil furnace). The overall well-to-consumer supply
chain for petroleum products is often described as being segmented into three components (shown graphically in
Figure 1).
Upstream activities involve exploring for crude oil deposits and the production of crude oil. Examples of firms
that would belong in the upstream segment of the industry include companies that own rights to drill for oil
(e.g. ExxonMobil) and companies that provide support services to the drilling segment of the industry (e.g.
Halliburton).
Midstream activities involve the distribution of crude oil to refiners; the refining of crude oil into saleable
products; and the distribution of products to wholesalers and retailers. Examples of firms that would belong
in the midstream segment of the industry include companies that transport oil by pipeline, truck or barge
(e.g. Magellan Pipeline); and companies that refine crude oil (e.g. Tesoro).
Downstream activities involve the retail sale of petroleum products. Gasoline stations are perhaps the most
visible downstream companies, but companies that deliver heating oil or propane would also fall into this
category.

Figure 1 Well-to-consumer supply chain for petroleum products. Upstream midstream and downstream

Some companies in the petroleum industry have activities that would fall into upstream, midstream and downstream
segments. ExxonMobil is one example of such a firm. Others have activities that fall primarily into only one segment.
The KinderMorgan pipeline company is an example of a specialized petroleum firm, in this case belonging to the
midstream segment. Many regions have local gas station brands that would specialize in the downstream segment of
the industry. One of the best-known regional examples is the WaWa chain of gas stations and convenience stores in
eastern Pennsylvania, but large grocery stores and retailers like Costco and Wal-Mart are increasingly involved in
downstream sales of petroleum products.
Petroleum refineries are large-scale industrial complexes that produce saleable petroleum products from crude oil
(and sometimes other feedstocks like biomass). The details of refinery operations differ from location to location, but
virtually all refineries share two basic processes for separating crude oil into the various product components. Actual
refinery operations are very complicated. The link below will take you to a 10-minute long video that provides more
details on the various refining processes.
The first process is known as distillation. In this process, crude oil is heated and fed into a distillation column. A
schematic of the distillation column is shown in Figure 2. As the temperature of the crude oil in the distillation column
rises, the crude oil separates itself into different components, called fractions. The fractions are then captured
separately. Each fraction corresponds to a different type of petroleum product, depending on the temperature at
which that fraction boils off the crude oil mixture.

Figure 2: Crude Oil Distillation
Credit: EIA


Figure 3: Important processes of a refinery
Credit: EIA

The second process is known as cracking and reforming. Figure 3 provides a simplified view of how these processes
are used on the various fractions produced through distillation. The heaviest fractions, including the gasoils and
residual oils, are lower in value than some of the lighter fractions, so refiners go through a process called cracking
to break apart the molecules in these fractions. This process can produce some higher-value products from heavier
fractions. Cracking is most often utilized to produce gasoline and jet fuel from heavy gasoils. Reforming is typically
utilized on lower-value light fractions, again to produce more gasoline. The reforming process involves inducing
chemical reactions under pressure to change the composition of the hydrocarbon chain.
The production of final petroleum products differs from refinery to refinery, but in general the oil refineries in the U.S.
are engineered to produce as much gasoline as possible, owing to high demand from the transportation sector.
Figure 4 shows the composition of output from a typical U.S. refinery.

Figure 4: Products made from crude oil
Credit: EIA

Nearly half of every barrel of crude oil that goes into a typical U.S. refinery will emerge on the other end as gasoline.
Diesel fuel, another transportation fuel, is generally the second-most-produced product from a refinery, representing
about one-quarter of each barrel of oil.