What Is an Integrated Oil and Gas Company?

An integrated oil and gas company is a business entity that engages in the exploration, production, refinement, and distribution of oil and gas, as opposed to companies that specialize in just one segment. Given the high entry costs relating to many oil and gas industry operations, many of the world's largest oil and gas companies, like Chevron and Exxon, are integrated.

Typically, integrated companies divide their various operations into categories: upstream, which includes all exploration and production endeavors, midstream, which covers transportation and storage, and downstream, which is confined to refinement and marketing activities.

Key Takeaways

  • An integrated oil and gas company is one that is involved in the entire value chain of the oil business.
  • Integrated oil and gas companies have individual business divisions dedicated to the upstream, midstream, and downstream sectors of the oil and gas industry.
  • Being an integrated company allows for complete control and improved efficiency. It also provides for various streams of revenue and diversification.
  • Some of the largest and most influential oil and gas companies in the world are integrated companies, such as Chevron, Exxon, and BP.

Understanding an Integrated Oil and Gas Company

Integrated oil and gas companies are referred to by a few different names; "supermajors" and "big oil" are the two most common. The defining characteristic of these companies is that they are involved in the entire value chain of the oil industry. Their assets consist of or are related to equipment in exploration and drilling, transportation via trucks, tankers, or pipelines, refineries, and even gas stations.

Because integrated oil and gas companies are involved in so many facets of the fossil fuel industry, often their bottom line can be counterintuitive. For example, during times of rising crude prices, an integrated oil and gas company may have lower profit margins than a nonintegrated rival as a result of having greater downstream than upstream capabilities.

The idea of an integrated oil and gas company can be dated back to the one that started it all, Standard Oil. J.D. Rockefeller's oil company. Standard Oil began in 1870 and was broken apart in 1911 due to antitrust legislation. Some of the biggest integrated companies today come from the breakup of Standard Oil, such as Exxon, BP, and Chevron.

Oil and Gas Operations

Oil and gas operations are categorized into upstream, midstream, and downstream activities. The upstream activity involves oil and gas exploration and production, the midstream activity focuses on oil and gas transportation and storage, and the downstream activity deals with oil and gas refinement and marketing.

These seemingly different business activities naturally require specialized and dedicated resources to manage, and there are many stand-alone upstream, midstream, and downstream oil and gas operators. However, integrated oil and gas companies with both upstream and downstream operations are a significant force within the oil and gas industry.

It was J.D. Rockefeller who believed in complete integration because he believed it removed inefficiencies in the operations of a business. It was better to do everything yourself than to have to rely on other businesses and their methods of operation. Once inefficiencies were removed, it would allow him to offer the lowest price possible for his product.

Integrated Companies vs. Independent Companies

An independent oil and gas company is one that is not integrated and focuses on only one segment of the oil and gas industry. There are pros and cons to being either an integrated or independent company. With vertically integrated operations, an integrated oil and gas company is in direct contact with the energy end market and may gain certain market intelligence. This, in turn, helps it better manage oil and gas productions based on changing market demands. An integrated oil and gas company can be difficult to value when different types of production and operating assets are all lumped together, leading to potentially lowered market valuation.

An independent oil and gas company with only one type of operation brings a sharper focus to its business activity, such as eliminating competing resource allocations among different businesses. But the lack of profit counterbalance between upstream and downstream operations could be a challenge for independent oil and gas companies in unfavorable market conditions.

Profitability Diversification

An independent oil and gas company may thrive or wither on the rise or fall of oil and gas prices, while an integrated oil and gas company often has less concern about price volatility. Balanced by its upstream and downstream operations, the business of an integrated oil and gas company can essentially hedge its profits against market downturns.

For example, when crude oil production experiences diminished profitability from declining oil prices, refining operations at an integrated oil and gas company would likely see expanded profit margins because of the lower input costs, ensuring a certain level of locked-in profits.