energy industry

The end of Big Oil? Not so fast.

August 5, 2011: 5:00 AM ET

Splitting up energy giants may make sense while oil prices are as high as they are today, but it may not be worth the organizational headache for Big Oil to break apart.

Nodding donkey pumping units work at one of the oil wells at the BP-operated Wytch Farm site which is western Europe's largest onshore oil field on February 25, 2011 near Poole, England. BP announced this week it put its stake up for sale in the site that was discovered in 1973.

BP's Wytch Farm oil well in Poole, England

By Shelley DuBois, writer-reporter

FORTUNE -- Big Oil may be going out of style, but it is certainly not going away.

With major players like ConocoPhillips (COP) and Marathon (MRO) splitting up, industry leaders and the market are starting to question the model of the huge, integrated oil company that handles every portion of the business, from plumbing crude out of the ground to selling it at the gas tank.

But just because the Big Oil's big business model is being questioned -- and rightfully so -- doesn't mean it's going anywhere.

A few days ago, Fortune pointed out that many big oil companies are undervalued. Splitting them, in theory, could be worth billions of dollars to shareholders. But Big Oil companies need to consider many more factors than short-term shareholder perks before making such drastic decisions. Some may go for it, deciding to opt out of the integrated, one-stop-oil-shop model. But despite the changes major petroleum companies may experience, oil will likely stay Big with a capital B.

When it makes sense to be big, and when it doesn't

Within the industry, different parts of oil companies are descried as sections of a river: upstream, midstream and downstream. A typical Big Oil company owns the whole river. Upstream involves looking for new wells, drilling them, and pumping crude out of the ground. Midstream means the transportation of new oil by ship routes and pipelines. Then you hit downstream, which is all about processing the product. Downstream assets include refineries, which distill crude into different chemicals, including gasoline. Gas stations, and other retail operations, are also downstream.

Big profits happen upstream. It pays well and pays quickly to strike oil, but companies have to spend a lot of money up front to explore new sites and then drill them.

When oil prices are low, it makes sense to have a hand in the refining and retail businesses, since both provide a steady stream of money that can fund searching for new wells and drilling. So when oil prices dipped during 1980s, then stayed low through the early 1990s, it spurred a mega-merger trend among major oil companies. Hence, we currently have companies like ExxonMobil, BpAmaco, and ConocoPhillips. More

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