UTC Energy Investment Series
The Energy Value Chain
Energ y f irms
occupy t wo
of the top five
p o s it ion s on
t he For tune
500 list of most
profitable companies. Exxon-
Mobil with profits of US$ 36
billion, six times the annual
budget of Trinidad and Tobago,
was the world’s most profitable
c omp a ny i n 2 0 0 5, w h i le
Chevron reaped some US$ 14
billion. The profits of integrated
oil and gas companies are
derived from their participation
in the entire value chain – from
source to final consumer. In
generating huge surpluses from
their core activity, big oil and
gas companies create myriad
business oppor tunities for
other firms in ancillary services
which are often overlooked.
Whi le prof itabi lit y of t he
individual segments of the
industry varies substantially
Exploration &
development
Hydrocarbon
production
Shipping
and periodically, there exists
the vast potential for attractive
returns commensurate with
risks and resource availability
throughout the energy value
chain.
A value chain can be defined
as a sequence of consecutive
production activities. In the
case of the energy sector, this
value chain is the constellation
of activities that surrounds the
production of hydrocarbons,
i nclud i ng t he upst rea m
(extraction and production of oil
and gas), downstream processing
(oil refining, gas processing and
the production of downstream
pet rochem ic a ls), au x i l ia r y
industries (financial, process
chemicals, etc.), transportation
(pipelines) and associated service
industries. Figure 1 illustrates a
simple value chain, applicable to
the gas sector.
See figure 1.
1. A Simple Value Chain
Refining &
blending
Storage
Distribution
Opportunities for profitable
business exist along the entire
value chain, including those
activities that are ancillary to
the core production processes.
Significant marco–economic
benef its in t he form of
additional income, employment,
technologica l development/
technolog y t ra nsfer a nd
infrastructure development also
flow from an energy value chain.
The more developed the value
chain, the greater the benefits
that accrue to both individual
firms and the economy.
In Trinidad and Tobago, the
energy value chain can be broken
up into three main components:
the oil value chain, the gas
value chain and more recently,
the liquefied natural gas (LNG)
value chain.
The most visible activity in
the oil and gas value chain is
Market
exploration and production
(E&P) or upstream phase. The
E&P business is reputed to be the
most risk prone economically
and physically, but it generates
t he h ig he st re t u r ns when
successful. Petroleum producing
wells may yield a variety of
commercial streams including
oil, natural gas, condensate
and natural gas liquids, which
prov ide t he compa ny w it h
multiple revenue streams. The
business is dominated by large
vertically integrated companies
or firms with substantial risk
capital. E&P investments also
create a market for petroleum
ser v ices est i mated at US$
160 billion annually. These
include geophysical activities,
drilling and associated services,
engineering and design, sub
sea engineering construction
of plat form, supply a nd
ma intena nce of machiner y
and equipment. Bot h loca l
and foreign firms are actively
involved in the provision of
services which absorbs up to
80% of total E&P expenditure.
The upstream segment of the
energy value chain, particularly
with respect to natural gas,
is dominated in Trinidad by
foreign multinationals–namely,
BP, BHPBilliton, British Gas,
EOG Resources and Repsol.
However, state owned Petrotrin,
itself an integrated company,
contributes the largest single
share of oil production.
See figure 2.
Oi l a nd gas a re produced
concurrently at the E&P stage
but move along separate paths
thereafter. In the case of oil, the
crude material is either exported
to foreign ref ineries in the
UTC Energy Investment Series

2. The Hydrocarbon Value Chain

USA or piped to the Petrotrin
refinery at Pointe-à-Pierre. In
its natural state, crude oil has
no intrinsic value. It is at the
refining stage that crude oil is
transformed into a wide range
of useful products including
gasoline, diesel, aviation fuel,
lubricants, and petrochemicals.
The global industry is expected
to spend more than US$100
billion over the next ten years to
meet projected refining capacity
needs. The multiple output of the
refining process is transported to
global markets and distributed
to final consumers in a highly
competitive retail market.
production of petrochemicals–
met hanol a mmonia and
derivatives. Globally, gas fired
power generation is the fastest
growing market for natural gas.
The deregulation and increased
compet it ion i n t he power
generation market has expanded
the value chain to include energy
trading and training.
3.
The LNG value chain may be
structured into seven stages:
gas produc t ion, pipel i ne
transpor tation, processing,
liquefaction, shipping, regasifi-
cation, storage, distribution and
sale of gas to final consumer.
This is illustrated in Figure
3. Liquefaction is the most
expensive portion of the gas
value chain accounting for 30%-
45% of total production costs.
See figure 3.
LNG is a highly integrated
business, with most companies in
the LNG business holding equity
in all stages of the value chain,
which gives them the flexibility
to harvest benefits optimally. As
a nation Trinidad and Tobago
only holds equity interest in the
liquefaction process. A recently
adopted local content policy
framework seeks to expand
national involvement in the
LNG value chain. Global trade
in LNG is projected to increase
six fold between 2003 and 2030,
calling for massive investments
in liquefaction, regasification
and tanker capacity.
The highly interlinked nature
of the energy value chain and
the continuing importance of
energy in economic life create
abu nd a nt oppor t u n it y for
firms to participate directly
and indirectly in the industry.
Opportunity beckons across the
energy value chain: where are
the entrepreneurs?

Natural gas flows continuously

via pipeline from production to
the final consumer, punctuated
only by the need for separation
and processing. Natural gas has
several valuable fractions that are
separated at the gas processing
plant. Propane, butane and
natural gasoline are removed
from the gas stream for export
as natural gas liquids (NGL’s).
The remaining gas (largely
methane) is used downstream
as fuel in power generation,
manufacturing and commercial
activities or as feedstock in the