Your favorite Exxon station is very likely not owned or operated by Exxon and the same is true for the rest of the major oil companies. The Chevron’s and BP’s of the world largely distanced themselves from the branded retail gasoline business following the mega-mergers of the late 1990’s and early 2000’s due to financial and regulatory factors.

In fact, these businesses – that most people still refer to as gas stations – are now thought of by the industry as convenience stores that sell motor fuels. The downstream segment – refining and marketing – of the oil and gas business has been marginally profitable for decades. But the vertically integrated model first championed by John D. Rockefeller’s Standard Oil remains attractive to the majors because owning refineries provides a guaranteed market for their often highly-profitable upstream businesses of finding and developing oil and gas. The upstream was often thought of as subsidizing the downstream, as Steve Coll described it in his book about ExxonMobil, “Private Empire.”

In 2009, ExxonMobil’s upstream earnings per barrel – on a barrel of oil equivalent basis (boe), which includes oil and gas combined – were $11.92/barrel of oil equivalent (boe). Meaning for every barrel of oil and gas produced that year the company earned $11.92. On the flip side, their downstream earnings per barrel – based on refined products sold – were $0.76/bbl. And Exxon is one of the most profitable international oil companies in the world. Chevron for example, earned $10.57 per upstream boe and $0.01 per bbl of downstream product sold.

By the time refined products like gasoline make it to the local retail station level the profit margins are razor thin – measured in cents/gallon. So the majors largely got out of the furthest downstream segment of the business, opting instead to enter into sales contracts with private station owners. ConocoPhillips got out of the refining business altogether, spinning off its downstream operations in a deal that officially closed last year.

Branded Gasoline

It is often said that gasoline is fungible; meaning the product coming from one refinery is essentially identical to that being produced at any other. But if this is true, how can so many companies brag about their specially formulated fuels that make your car run cleaner and better? BP has “Invigorate,” Shell has “Nitrogen Enriched,” Chevron touts “Techron,” and so on.

Chevron for example, earned $10.57 per upstream boe and $0.01 per bbl of downstream product sold.

The answer lies in the way refined products are transported through large “trunk” lines to distribution terminals called “racks.” Some may remember the bulk petroleum storage facility or tank farm featured during the intro to the popular series “The Sopranos.” That facility in Linden, New Jersey is where the Colonial Pipeline – the main pipeline serving the East Coast- terminates, and it is at this point where individual companies lease storage space and blend in the proprietary ingredients used to make the branded gasoline seen in television ads. The process is repeated at similar facilities throughout the country.

Gasoline is also becoming less fungible as regulations vary by state, season and urban versus rural areas. The Colonial Pipeline transports a wide variety of petroleum products; “Colonial has active product codes for 38 different grades of gasoline – including reformulated gasolines (RFG) and multiple vapor pressures for each grade, seven grades of kerosene (including two for military), 16 grades of home heating oil and diesel fuel (including diesel fuel marine for the U.S. Navy and light cycle oil) and one grade of transmix. Of the 62 codes, 29 are for fungible products and 33 are for products that must be shipped on a segregated basis,” the company says on its website.