oil and gas

Note: Sample Data 2006
Oil and GasFigure 1.22
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Figure 1.22

Global Oil Demand Growth Rate (2000-2011)

Oil and Gas

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Oil and GasFigure 1.23
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Figure 1.23

Projected Oil Consumption for India, China and US (2030)

Oil and GasIncreasing Oil Consumption...
World oil consumption increased by about 1.1 million barrels a day in 2005, with OECD countries accounting for only about a quarter of the increase.
Oil and GasTable 4.1
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Table 4.1

In 2004, 18% of the electricity generated in the US was by natural gas.

Oil and GasTable 4.2
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Table 4.2

North America constituted around 27% and 19% of crude oil and natural gas imports respectively.

Oil and GasFigure 1.26
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Figure 1.26

Natural Gas Consumption by Sectors (in billion cubic feet)

Oil and GasWinter Warmth...
Use of oil and gas typically increases during winter in the Northern Hemisphere, as North America, Europe and Japan burn fuels, heating oil, gas and kerosene, to warm up homes, offices and factories.
Oil and GasFigure 11.1
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Figure 11.1

At the end of 2004, the world oil reserves replacement ratio was at 18%.

Oil and GasFigure 4.4[e]
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Figure 4.4[e]

World Oil: Change in Production Vs Reserves

Oil and GasFigure 11.2
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Figure 11.2

The crude oil R/P ratio has decreased from 40.58 yrs in 2000 to 40.57 yrs in 2004, whereas the natural gas R/P ratio increased from 65.69 yrs to 66.70 yrs.

Oil and GasFigure 11.3
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Figure 11.3

Since 2000, the cost of finding and developing new sources of oil has risen about 15% annually.

Oil and GasTechnology Reducing Cost...
Directional and extended-reach drilling technology is playing a critical role in reaching and hitting the reserves with greater accuracy and reducing development costs.
Oil and GasBenefits of Integration....
Vertically integrated companies enjoy significantly higher profits in both upstream and downstream operations.

Correlation Between Economic Growth and Oil Consumption

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Oil and gas consumption is a critical factor behind economic growth of the industrialized world and it is a key to the progress and prosperity of many nations. After a decline of 0.8% in 2009, global GDP growth in 2010 was estimated to be around 4.7%.  The strong global economic growth in 2010, aided in the increase of the global oil consumption (Figure 1.22) .


According to BP, the global oilconsumption after falling for two consecutive years in 2008 and 2009 grew by3.1% (2.7 m b/d) to reach 87.4 million barrels per day (m b/d) in 2010. OPECestimates that the global oil demand rose by 2.1 m b/d, averaging 86.7 m b/d in2010. This increase in oil demand was the result of a remarkable recovery bythe global economy. The InternationalEnergy Agency (IEA) reported that global oil demand grew by 2.7 m b/d in 2010.A large of portion of this growth came from China, up 10.7% to 9.3 m b/d.  The IEA estimates the global oil demand togrow by 1.6% in 2011.

In 2010, the total consumption in Organization for Economic Cooperation and Development (OECD) nations grew at a slow pace at the rate of 1.5%.  Analysts are predicting that the OECD consumption is expected to fall slightly in the coming years, while non-OECD demand will drive the increases in the world oil consumption. Most of the demand for oil in 2010 came from emerging nations like China and India.  China emerged as the world’s second largest consumer of oil after the US  in 2010 and Japan is the third largest followed by India.

In 2011, many unexpected events affected the world and the global economy remained volatile. The international financial crisis had a deep impact on the global economy, as it spread beyond the Organisation for Economic Cooperation and Development (OECD) region. Owing to the sluggish economic growth, the global demand and consumption for oil declined in 2011.

Consumption Growth in Emerging Markets

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World oil consumption increased by about 1.1m b/d in 2005, with OECD countries accounting for only about a quarter of the increase. Demand in emerging economies rose more than the global average, with China accounting for more than one-half of that increase. Chinese demand growth started gaining momentum in late 2002, accelerated markedly in the second half of 2003 and then soared 15% y/y in 2004. OPEC estimates that in 2005, consumption in China grew to an average of 6.58m b/d compared with an average of 6.52m b/d in 2004. Industrial growth in China continues to drive oil demand. It started in mid 2003 when Chinese economic growth outgrew the electric grid’s capacity prompting a surge in diesel demand as factories, apartment buildings and hotels installed their own diesel generators.

India’s economic path is quite different to that of China’s, with the latter much more focused on energy-intensive industries while the former remains largely agricultural and is increasingly service driven. India is the world’s sixth largest consumer of oil, importing around 70% of its crude, with more than 60% of its imports coming from the Middle East. India accounted for 30% of the total Non-OECD Asia group’s oil demand in 2005. Driven by a boom in the automobile sector, Indian oil consumption grew 5.5% y/y in 2004, accounting for 3.2% of world oil consumption. OPEC estimates that in the January-October period of 2005, oil consumption in India grew 1.8% y/y, relatively lower than the average 4.2% annual growth observed over the last 5 years.

According to International Energy Agency (IEA), emerging markets such as Brazil, China and India are expected to account for the vast majority of increases in global oil demand going forward. As these developing economies continue to expand, they will also continue to develop a tremendous need for fuel and natural resources.  With economies like India and China growing at not less than 8% and with a combined population of 2.45 billion, the demand is further expected to surge in the coming years.   The EIA projects that Chinese oil consumption will nearly double from 8.5 million barrels per day (m b/d) in 2010 to 15.3 m b/d by 2030. The projected annual increase in oil consumption during the period 2010-2030, in China and India would be between 80% and 90% respectively (Figure 1.23) .

China, India, and other developing countries are now hitting the same developmental ‘tipping point’ that the US, Western Europe, and Japan had decades ago. These emerging markets are entering the accelerated phase of oil demand growth so evident in the long-term charts of US and Japanese crude oil demand. 

By 2015, emerging markets are set to spur a shift in worldwide oil consumption, with a projected demand of 9.9 million barrels per day (m b/d), with maximum consumption in China. In 2010, China accounted for a third of world’s oil consumption at 8.5 m b/d, compared with 4.8 m b/d in 2000.. It’s also estimated that China's demand for oil when compared to other emerging economies could surge fairly quickly by more than 40 m b/d by 2022. 

The Organization of the Petroleum Exporting Countries (OPEC)’s World Oil Outlook also expresses that developing countries are set to account for most of the rise, with consumption rising by 23 mb/d over the period 2008–2030 to reach 56 mb/d (Figure 1.24). Almost 80% of the net growth in oil demand from 2008-2030 will be in developing Asia.  

For developing countries, the growth in transportation is the single most important source of demand increase (Figure 1.25). Around 70% of current crude oil output is used to fuel automobiles. The increasing per capita income in emerging economies is set to double the existing 625 million global automobiles in less than 20 years, pushing the up the consumption. For instance, with an estimated 13.6 million vehicles sold in 2009, China surpassed the US, which sold 10.4 million vehicles, as the world’s largest auto market. With gasoline prices among the lowest in the world for oil-importing countries, and are a third of retail prices in Europe and Japan, the demand for automobiles had grown by 45% between 2008 and 2009. 

According to the China Association of Automobile Manufacturers, China may boost vehicle output by a million units every year to reach 20 million a year by 2017, which in turn would push the demand for oil.

According to OPEC Annual Report, in 2011, the global economic slowdown affected world oil demand. Overall, the global demand for oil in 2011 was predominantly due to the growth in China, followed by other Asia, Latin America and the Middle East.  Emerging economies such as China, India, Russia and Brazil were among the top oil consuming countries of the world 

Electricity from Natural Gas

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Natural gas, by nature of the fact that is clean burning, has become a very popular fuel for the generation of electricity. It is used to generate large portion of electricity in the US, both for commercial as well as residential use. In 2004, it was used to generate 18% of the electricity in the US (Table 4.1) . According to the EIA, the demand for electricity in mature markets will increase in the residential sector. In the US, total residential electricity use is projected to grow on average by 1.6% per year, to 6.2 quadrillion British Thermal Units (Btu) in 2025 from 4.3 quadrillion Btu in 2002. In Western Europe, it is expected to grow by 0.4% per year through to 2025. In emerging economies, the demand for electricity is forecast to increase most rapidly in the coming years. China and India together accounted for 37% of delivered residential energy consumption in the emerging economies in 2002 and are projected to account for more than 43% in 2025.

Demand for electricity in mature economy commercial sectors is expected to increase at 1.9% per year from 2002 to 2025. In emerging economies, as more clinics, schools, and businesses gain access to electricity, demand is expected to grow at an average rate of 4.3% per year through 2025. Demand for electricity will thus drive the natural gas industry as it is preferred to coal to fire generators, owing to environmental considerations and the low capital cost required installing new natural gas powered generators.

As of 2010, in North America, Europe, and Russia, most of the natural gas is used to generate electricity to generate heat and satisfy a variety of residential and commercial uses.  From 2007 to 2030, demand for natural gas is expected to increase by 42%.

It is estimated that natural gas consumption worldwide would increase by 44% from 108 trillion cubic feet (tcf) in 2007 to 156 tcf in 2035, with the industrial sector contributing 39% towards it. Electricity generation is an important use for natural gas throughout the projection, and its share of the world’s total natural gas consumption will increase from 33% in 2007 to 36% in 2035.  

Residential electricity demand would increase by 24%, due to growth in population and disposable income and continued population shifts to warmer regions with greater cooling requirements. Total industrial electricity demand is projected to increase by only 3% from 2008 to 2035. According to the EIA, the total demand for electricity will increase by 30% from 3,873 billion kwh in 2008 to 5,021 billion kwh in 2035. 

Natural gas, by nature of the fact that is clean burning, has become a very popular fuel for the generation of electricity. It is used to generate large portion of electricity in the US, both for commercial as well as residential use. In 2009, it was used to generate 23.28% of the electricity in the US. 

International Trade

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2004 witnessed strong economic growth across most major regions, providing a solid basis for dynamic global trade. The sharp increase in average crude petroleum and coal prices in 2004 enhanced the volume of international crude oil trade to 42.7m b/d, and that of natural gas to 678.8m standard cubic meters. Strong domestic oil demand in the US and China, which was not matched by an increase in domestic oil output, led to an increase in net oil imports. The share of crude petroleum and petroleum products in international fuel trade has remained stable at about 80% over the past decades. The Middle East remained by far the largest exporter of crude oil, with 16.65m b/d, although Africa recorded increased export growth of 9.1% in 2004. The expansion of African fuel exports in recent years is partly due to the emergence of new producers and exporters in the region including Chad, Equatorial Guinea and Sudan (Table 4.2) .


In 2010, world trade expanded by 14.4% due to large fiscal stimulus packages and loose monetary conditions by the governments across the globe. As a result the global economy recovered in 2010, which aided in the rebounding of the oil prices. 


As per BP estimates, after two consecutive declines, global oil trade grew by 2.2%, or 1.2 million b/d, with net Asia Pacific imports accounting for nearly 90% of the growth. The global net imports of oil declined by 0.9% to 41,951.9 1000 b/d (Year-on-Year) in 2010. Net imports of oil grew robustly in US (+1.3%, 9,183.9 1000 b/d) and Japan 0.7%, 3,469.9 1000 b/d) (Table 1.5). 


In 2010, the global net exports of crude oil and petroleum products increased by 0.6% to 59,631.5 (1000 b/d) over 2009. Net export growth of crude oil and petroleum products was largely from the Middle East (+3.1%, 18,831.3 1000 b/d) and Russia (+15%, 7,852.2 1000 b/d) (Table 1.6). The growth in global trade was roughly split between crude and refined products, though crude still accounted for 70% of global oil trade in 2010.


According to OPEC’s World Oil Outlook, 2009:


• It underscores the future role of the Middle East as the major crude oil exporter as well as the increasing share of Asia-Pacific imports from this region. 


• Asia-Pacific will also be the destination for an increasing percentage of exports from Africa and the Former Soviet Union (FSU), with Russia likely to significantly enhance its crude exports to the region as new pipelines to China and Russia’s east coast become operational over the period 2007-2030.  


• With the United States and Canada, a combination of lower demand, the expansion of non-crude supply and significant increases in Canadian synthetic crude production that offset declines in conventional crude oil will result in lower crude imports. Transportation economics indicate that the decline should come from the Middle East and Africa, while imports from Latin America will stay comparable to current levels. 


• In the case of Europe, crude oil imports will also decline - but only until around 2020. In the next ten years, European crude imports are expected to rise moderately, mainly to compensate for the domestic loss in crude oil supply. It is anticipated that these imports will mainly come from Russia and the Middle East and Africa, but with declining proportions from Russia.


• The Middle East is already the key crude oil exporting region and its role in this respect will likely grow despite the foreseen lower crude oil exports in the medium-term. Total crude oil exports from this region are projected to stand at 16 million barrels per day (mb/d) in 2015, 17 mb/d in 2020 and above 21 mb/d in 2030 – this compares to 16.3 mb/d in 2007. 


• The most important destination for Middle East crude oil exports in 2030 will be the Asia-Pacific, which will account for almost 17 mb/d of these exports, representing the most dominant regional flow for the global trade in crude oil.


• Another important partner for the Middle East will be Europe with imports projected at 3.4 mb/d by 2030.  


• Middle East crude oil exports will likely be more eastward oriented by 2030. The growing share of the Asia-Pacific in global crude oil imports is clearly illustrated in (Figure 1.27).   By 2030, demand in the Asia-Pacific will increase by around 15 mb/d, compared to 2007. However, crude oil production will decline by more than 1 mb/d during the same period. Therefore, the growing gap between demand and the local production in these regions has to be filled by imports primarily in the form of crude oil from all producing regions, mainly from the Middle East, as already underscored and supplemented by Russian, Caspian, African and marginally crude oils from the Americas (Figure 1.28).  The major trade partner will continue to be the Middle East, which satisfies almost 17 mb/d of Asian crude oil demand. Another two important partners will be Africa, with slightly above 3 mb/d of crude exports predominantly from West Africa, and the FSU region at around 2.5 mb/d.


According to BP Statistical Review of World Energy 2012, crude oil accounted for 70% of global trade in 2011. Nearly two-thirds of the growth in oil trade came from China. Regionally, Middle East was the largest exporter while Asia-Pacific was the largest importer of crude oil in 2011 



Impact of Weather on Oil Consumption

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Cold weather always has a major impact on oil demand. Not only does it drive up heating oil use, it also makes energy transportation more difficult as oil trucks are reliant on roads to be plowed in order to proceed. Furthermore, oil barges can be delayed by frozen rivers and harbors.

Use of oil and gas typically increases during winter in the Northern Hemisphere, as North America, Europe and Japan burn fuels, heating oil, gas and kerosene, to warm up homes, offices and factories. The impact of cold weather on natural gas is greater compared with that of crude oil. Total natural gas consumption peaks during the winter, when cold weather increases demand for natural gas heating.  For instance, in the month of January when winter season is at its peak, the natural gas usage also peaked (Figure 1.26) The main fuels that drive this seasonal pattern are heating oil or gas oil in North America and Europe and Kerosene in Asia.

For the 2005-06 winter seasons, natural gas prices remained high throughout the US owing to high heating demand. In December in the Eastern US, seasonal storms caused natural gas prices to increase dramatically. Lingering damage to the energy infrastructure in the Gulf of Mexico, caused by Hurricanes Rita and Katrina, also continues to impact upon fuel prices.

According to Energy Information Administration (EIA), residential and commercial demand for heating accounts for over 50% of the natural gas delivered for end-uses in the US during the winter. During the summer, total consumption of natural gas is, on average, about 30% lower than in the winter, with about half the gas used to generate electricity for air conditioning.  In contrast to these seasonal patterns, natural gas demand in the industrial sector is more even throughout the year, although it has varied from about 20% to 40% of total consumption over the past six years.


Reserve Replacement Ratio

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The reserve replacement ratio is a measure of the magnitude of reserve additions. It is calculated by dividing the net reserve additions in a year by the annual production rate. A company’s reserve balance will decline if it does not add as many reserves as it produced during the year. A reserve replacement ratio of at least 100% means the company is at minimum maintaining its reserve base. Data available till 2004 indicate that the world oil reserves replacement ratio was 18% at the end of 2004 (Figure 11.1) .

In terms of companies, ExxonMobil Corporation’s additions to its worldwide proved oil and gas reserves totaled 1.7 billion barrels of oil-equivalent (boe) in 2005. It replaced 129% reserves of its oil and gas reserves in 2005. The Corporation's ten-year average reserves replacement is 114%, with liquids replacement at 118% and gas at 110%.

An increase in the reserve replacement ratio generally comes from acquisitions or new discoveries. For example, ConocoPhillips added 1.5 billion boe to its proved reserves during 2005. The company’s reserve replacement ratio was 230%, based on a production of 675m boe, bringing ConocoPhillips’ total reserves to 9.4 billion boe. The improvement in 2005 over 2004 is on account of extensions and discoveries from the projects in Qatar, the US and the Asia Pacific region, as well as their re-entry into Libya and their increased equity ownership in Lukoil.

BP’s reserve replacement ratio for the year 2010 was 106% – making 2010 the eighteenth consecutive year of reserve replacement of at least 100%. ExxonMobil Corporation also has 100% replacement ratio for the last 17 consecutive years.  Its proved reserves in 2010 totaled 24.8 billion oil-equivalent barrels. The company’s 10-year average reserves replacement is 112%, with liquid replacement at 99% and gas at 131%.

The overall picture of world replacement can be seen in (Figure 4.4 [e]).



Reserve Life

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Reserve life is a measure of the longevity of reserves, that is, the number of years the reserve base will continue to produce at its present rate. It is calculated by dividing the total reserves by the annual production rate. Reserve life is also represented as reserve to production (R/P) ratio. The crude oil R/P ratio has decreased marginally from 40.58 years in 2000 to 40.57 years in 2004, whereas the natural gas R/P ratio, during the same period, increased from 65.69 years to 66.70 years. The trend in global oil and gas reserve life for the past five years is outlined in (Figure 11.2) .

The Houston Exploration Company reported its 2005 natural gas reserves as 860.82 billion cubic feet (bcf) and production as 114.311bcf (both onshore and offshore). Its R/P ratio therefore comes out to be 7.5 years. Edge Petroleum Corporation’s estimated total proved reserves was 103 bcf for 2005 and production was 16.4 bcf giving an R/P ratio of 6.28 years.

The crude oil R/P ratio was 45.7 in 2010 whereas the natural gas R/P was 62.8. 

Finding and Development Costs

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Finding costs are the costs of adding proven reserves of oil and natural gas through exploration and development activities and the purchase of properties that might contain reserves. It is measured as the ratio of exploration and development expenditures to proven reserve additions over a specified period of time. Since 2000, the cost of finding and developing new sources of oil has risen about 15% annually, according to the John S Herold consulting firm. (Figure 11.3) compares the average cost of production per barrel for ExxonMobil and Chevron Corporation. It is evident that ExxonMobil, whose average cost of production per barrel was $5.36 in 2005, benefits from a cost advantage over Chevron Corporation, whose average cost of production per barrel was $6.32 in 2005.

Technology

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Technological advances in both exploration and development have been key factors in overcoming three interlocking probabilities involved in these processes - the probability that a given geologic structure contains hydrocarbons, the probability that the hydrocarbons will be located and the probability that once located, the hydrocarbons can be produced optimally. The four areas where new and improved technologies have dramatically added to the world’s oil and gas reserves over the last 25 years are:


• Seismic and Advanced Reservoir Modeling
• New and Emerging Drilling Capabilities
• Integrated Deepwater Development Systems
• Value-chain Liquefied Natural Gas Innovations

Advancements in seismic technology have enabled engineers to locate hydrocarbons below the surface. Reservoir and geological modeling have enhanced the possibility of determining the best well locations and well designs to maximize the amount of oil and gas recovered.

Directional and extended-reach drilling technology is playing a critical role in reaching and hitting the reserves with great accuracy and reducing development costs. In the past, natural gas had some limitations with storage and long-distance pipeline transportation. However, advancements in liquefied natural gas (LNG) technologies are rapidly changing the case, with gas markets becoming global in nature. Technology has made gas supplies from the Middle East competitive in the consuming markets of Asia, Western Europe and the US.

Apart from the above-mentioned areas, technology also plays a key role in the following:

Business continuity and disaster recovery: Oil and gas companies have to automate areas of the platform if they want to keep operations running during a crisis, for example, hurricanes. If an oil well is damaged, the company should know where and how to make up for lost production.


Security: The increased use of digital systems will be required on all levels, including data and communications. Electronic-access control systems, Radio Frequency Identification (RFID) tags and electromagnetic locking systems are used to provide access to the rig by appropriate personnel.


Mobility: Even the smallest delay in communicating information from onshore and offshore locations can cost a company millions of dollars. Wireless platform phones, Personal Digital Assistants and machine-to-machine communications using RFID are some of the devices used to transfer critical data.

Technology has made it possible to discover and develop oil and gas resources. Technologies like three-dimensional (3D) seismic technology with enhanced computational capability allow the industry to accurately search out new deposits. Technology has also enabled the industry to economically develop large oil and gas deposits off-shore. At every step of the value chain, technology has enabled the industry to grow from strength to strength. Companies have therefore increasingly employed new technology to attain competitive advantage and enhance performance as a whole.

The use of technology has become more pertinent than ever before. ExxonMobil, for example, has made a significant investment in refining technology to manufacture low sulfur fuels and in projects to reduce nitrogen oxide and sulfur oxide emissions that are a cause of environmental degradation. In 2009, ExxonMobil’s environmental expenses for all such remediation and preventive steps totaled USD5.1 billion. This includes about USD2.5 billion in capital expenditure (mostly towards technology) and about USD2.6 billion in operating expense. 

The company has also been actively using technology in its upstream sector. Exxon-Mobil maintains the industry’s largest proprietary upstream technology research and development effort, investing more than USD200 million annually. Upstream technology application goes into basin analysis, seismic acquisition, processing and interpretation, reservoir modeling and simulation, drilling and facilities design. These technologies support the full spectrum of upstream activities, from initial exploration to enhanced recovery and field depletion and are applied to the full range of the world’s largest and most diverse upstream portfolio. BP Plc. continues to innovate and apply leading-edge technology in its day to day operations, such as aeromagnetic and seismic technology which enables BP’s exploration team to find new reserves.

Chevron Corporation’s Energy Technology Company, meanwhile, delivers integrated technologies and services to upstream, downstream and gas-based businesses. These activities are varied and include deepwater exploration and production systems, reservoir management and optimization, heavy oil recovery and upgrading, shallow-water production operations, gas-to-liquids processing, improved refining processes, and safe, incident free plant operations.

Integration Levels

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The oil industry is made up of a multitude of coexisting companies with varying degrees of vertical integration. The degree of vertical integration refers to the extent to which a company performs different successive stages in the production of a particular product. A fully integrated oil company is involved in the upstream as well as downstream segments of the industry.

Vertically integrated companies enjoy significantly higher profits in both upstream and downstream operations. For example, Canada’s five biggest integrated oil companies increased their combined profits by 34% in 2005 to $9.6 billion because these integrated energy companies were able to take advantage of record oil and natural gas prices, as well as high refining margins in their downstream businesses that process oil into fuels, which are in turn sold through their gas station networks.

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