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Challenges Faced by National Oil Companies

Discuss, how National Oils companies (NOCs) are facing their biggest challenge and threat to their survival.

In this essay, a research work has been done to find out how National Oils companies (NOCs) are facing their biggest challenge and threat to their survival. Big Oil is one of the major international oil companies of USA. Recently the demand of oil and gas industry is falling very rapidly due to the stagnation of the global economy. From the middle of 2014, the reduction in the oil price has changed to perspective of national oil companies (Aastveit et al. 2015). It reduces the cash flow of oil and gas industry. Investors become more aware of their investment. There are also some global issues related to excessive carbon emission in the oil industry. It makes all the NOCs to rethink their existing business strategies.

The detonation of shale gas and oil production in the USA forced OPEC to take an unexpected decision. OPEC has taken the decision to control production level to increase market share. There are mainly three challenges that the company is facing recently. The company has found certain cash crunch of oil on projects and dividends. The company is very uncertain whether to abandon the policy of product maximizing or not.  The company has some plans to reduce the amount of Carbon Emission. It may increase the production cost of the company. It has become a challenge for the organization to survive in this critical situation.

The biggest oil companies such as Noble Energy Inc, ConocoPhillips, Big Oil and Anadarko Petroleum Corp is facing serious issues to generate enough cash to cover their spending because of tumbling oil prices. According to Solarin and Ozturk 2016, oil price has come down to $50/barrel in March 2016, from $100/per barrel in 2014. As mentioned by Reboredo and Rivera (2014), the oil industry is much more vulnerable because of low oil prices than many organizations had thought few months ago. For organizations related to oil and energy, business was good at $90 per barrel (Murray and King 2012). However, oil prices below $60 have resulted in complacency, uneconomic investment, capital inefficiency and value destruction (Cashin et al. 2014). Therefore, it is advised that companies and investors must adapt to new realities to survive in the market. According to Gkanoutas and Nesvetailova (2015), many oil firms and organizations are going to cut down or freeze their dividends unless the oil prices come back to normal.

Impact of Falling Oil Prices and Carbon Emission

Many other major oil companies such as Royal Dutch Shell PLC, BP PLC, Exxon Mobil Corp. and Chevron Corp. are also facing the same issue. In the first half of 2015, these companies experienced a combined $20 million cash flow because of their spending on new projects (Husain et al. 2015). Therefore, most of these companies are planning to cancel their future projects. For example, Shell PLC has canceled their plans to explore in Arctic Sea for oil resources. Besides, to cope up with the situation, companies are also planning to cut down their production. The four oil giants companies have already reduced their production to estimated 7.3 billion barrels according to July report from consultancy Wood Mackenzie (Basher et al. 2012). Some of the companies could manage to save their dividends by reducing the amount of production. The Chief Executive of Shell, Ben van Beurden has stated that they stepped back from many projects to save their dividends. He also said that the company authority is also planning to bring deeper cuts at his company. Authorities of these companies believe that the can only survive if they can enhance their ability to drive down cost. However, this strategy has paid off for the oil and gas companies as they could prevent the investors from revolting. According to Benes et al. (2015), this down cost strategy is a good strategy to adopt at this stage, but in the future, it might create problems as it comes with high risks. For some companies, it is quite impossible to control their spending unless oil prices rebound sharply as their long-term and high-cost projects are already in motion. Therefore, it can be said that some companies have managed to survive this crisis; however, most of the companies are facing issues, as they cannot pull back their projects that have already started.  

In the recent period, the oil and gas industry has to face two major issues. They are the economic issues and environmental issues. In November 2014, the OPEC had taken a decision to maintain a level of production. It helped to regain the lost market share of the oil industry. Due to this reason, the cost of oil fall more than 50% (Ftiti 2014). If OPEC maintains this level of production, then it will cause more than 700,000 bpd oversupply (Gately et al. 2013).  Hence, the increment in the crude process will not be possible in future. On the other hand, there are some serious global warming related issues raised in the UN Convention on Climate change. Most of the governments have taken global commitment to reduce global warming with the help of low-carbon economies and limiting the use of fossil fuel.

Strategies to Tackle the Challenges

Hence, the company Big Oil is facing three major areas of challenges in its business. They are the crash crunch of sub-50/bbl oil on dividends and projects (Means et al. 2015). The company has some confusion whether to abandon the policy of production maximizing as it lowers the price of crude. In order to reduce the amount of carbon emission, the company has to take some action plans. Implementation of these action plans gives rise to the cost of production. Thus, it becomes the major challenge for the organization to make balance between low price and low carbon.

The OPEC has developed a production-maximizing policy to increase the market share of oil and gas industry, which is started to fall since 2014. There are certain objectives of OPEC behind the development of this policy. The government tries to increase the offshore gas and oil resources of US. The aim behind this strategy is to increase the domestic supplies of gas and oil and increase the security of US's energy needs (Gabriel et al. 2012). In addition, the OPEC has the plan to improve, promote and sustain the supply chain of US's oil and gas industry with the help of product Maximization. As Solarin and Ozturk (2016) have mentioned that maximizing, production can help to regain market share for and industry. There is also another face of this strategy. Product maximizing strategy has increased the amount of oversupply of crude. It decreases the price of crude oil more than 50%. In the year of 2015, the price range of crude went below $40 per barrel (Xiong et al. 2013). This policy has become a serious issue for NOCs like Big Oil. If this level of production is maintained then, the predicted amount of oversupply will be more than 700,000 bpd during 2016 (Ftiti et al. 2014). It will decrease the price of crude oil more.

The main concern of Big Oil Company is that if the crude oil price remains low for a longer period then it will reduce the cash flow of the company. As Andersen and Ross (2013) mentioned that lower price of products, make investors more cautious about their investment. Hence, it can result in cancelation or postpone of various projects taken by the organization. Thus, it has become a major challenge for the company to use product-maximizing strategy for a longer time.

The US government has to rethink this strategy. They need to understand the cost of different NOC roles. Enhanced and appropriate strategies needed to be developed to support NOCs within the country at different financial stages. This new strategy also has to be linked to the national priorities and vision, which is to regain the market share of oil and gas industry. The government required developing a base resource strategy with a clear revenue stream. This resource-based strategy will be more affordable and executable for the NOCs like Big Oil.

 Big oil has to bring the focus on the cost of production and as well as the standard of production and reporting.  As Juvenal and Petrella (2015) mentioned that better quality of production can help an organization to regain its market share. The company needs to take strategy to improve the capacity building. It can help to use appropriate resources and efforts to develop right skills for right jobs. 

In order to deal with the amount of carbon emission, NOCs like Big Oil are planning to take some strategies. They are discussed below:

The company Big Oil is trying to embed sustainability in their future business and decision-making system. According to Merrick and Grabowski (2014), the oil and gas industry has to evaluate its portfolios not only to reduce financial, technological and commercial risks but also to reduce environmental risks. It can help the company to become innovative to increase carbon efficiency.

The gas and oil industry also have a vast opportunity to increase diversity in their production and use renewable energy. The company Big Oil can start invest in renewable energy sources like wind power. A new business division has been developed by the organization named as “New Energy Solution” to gather knowledge about renewable energy technologies (Robinson 2014). The company is trying to implement best practices to integrate renewable energy sources into their current business operation.

A global carbon cost can be introduced, so that the major carbon emitters take the fair amount of responsibility to reduce carbon emission. As Chapple et al. (2013) stated that global carbon cost can influence companies to use that are carbon proficient.  Like much other organization the company, Big Oil has taken initiative for a global pricing policy for carbon. The internal carbon price of the company is $50/ton (Sadorsky 2014). It has a strong impact on the carbon reduction initiative taken by the organization.

As Williams et al. (2012) mentioned that technology could play very important role to manage emission of greenhouse gas. Carbon capture and storage technology can restrict global temperature rise to 2 degree Celsius. It is done by reducing carbon dioxide production industrial power generation plants.  Like many other organizations, Big Oil is also planning to invest in carbon storage and capture system. This technology can theoretically prevent 70-90% carbon dioxide emission (Peters et al. 2012). The company is planning to make it an important part of it a portfolio of clean, sustainable product.

The Big Oil Company has to face some major issues related to the CSS system, as there is a deficiency of market mechanism, which can develop prospect for financial return. In order to limit the amount of greenhouse gas emission, Big Oil is mainly focused on three aspects. The company tries to integrate environmental change into mainstream corporate strategy. Implementation of renewable technologies in the business operation is the second priority of the organization. Thirdly, the company is trying to increase investment in the R&D department of greenhouse project. There is a huge conflict arise in the corporate strategy adopted by the big oil. Increasing the investment on research and development will increase the cost of production. On the other hand, the company also has to control its production cost in order to regain the market share. Hence, in order to sustain its position in global market the company has to make balance between investment and cost.

Presently the oil and gas industry has to face several challenges related to economy and environment. The demand of oil and gas industry has reduced due to the stagnation of the economy. It causes a huge loss of the market share in this industry. For this reason, OPEC has taken a decision to maintain the production level in order to regain the market share. However, It increases the amount of oversupply of crude. It is the main reason behind low price of crude. There are also some issues related to greenhouse gas emission. As Big Oil is one of the major national oil companies, it has to face these challenges as well. Instead of production-maximizing policies, the company can use resource-based policies in its business operation. Focusing on the quality of production can help the company to regain its market share. Implementing technologies like CSS and use of renewable energy sources can help the organization to reduce carbon emission.

References

Aastveit, K.A., Bjørnland, H.C. and Thorsrud, L.A., 2015. What drives oil prices? Emerging versus developed economies. Journal of Applied Econometrics, 30(7), pp.1013-1028.

Andersen, J.J. and Ross, M.L., 2013. The Big Oil Change A Closer Look at the Haber–Menaldo Analysis. Comparative Political Studies, 4(3), pp. 557-560.

Basher, S.A., Haug, A.A. and Sadorsky, P., 2012. Oil prices, exchange rates and emerging stock markets. Energy Economics, 34(1), pp.227-240.Reboredo, J.C. and Rivera-Castro, M.A., 2014. Wavelet-based evidence of the impact of oil prices on stock returns. International Review of Economics & Finance, 29, pp.145-176.

Benes, J., Chauvet, M., Kamenik, O., Kumhof, M., Laxton, D., Mursula, S. and Selody, J., 2015. The future of oil: Geology versus technology.International Journal of Forecasting, 31(1), pp.207-221.

Cashin, P., Mohaddes, K., Raissi, M. and Raissi, M., 2014. The differential effects of oil demand and supply shocks on the global economy. Energy Economics, 44, pp.113-134.

Chapple, L., Clarkson, P.M. and Gold, D.L., 2013. The cost of carbon: Capital market effects of the proposed emission trading scheme (ETS).Abacus, 49(1), pp.1-33.

Ftiti, Z., Guesmi, K., Teulon, F. and Chouachi, S., 2014. Evolution of Crude Oil Prices and Economic Growth: The case of OPEC Countries. Department of Research, Ipag Business School.

Gabriel, S.A., Rosendahl, K.E., Egging, R., Avetisyan, H.G. and Siddiqui, S., 2012. Cartelization in gas markets: Studying the potential for a “Gas OPEC”. Energy Economics, 34(1), pp.137-152.

Gately, D., Al-Yousef, N. and Al-Sheikh, H.M., 2013. The rapid growth of OPEC′ s domestic oil consumption. Energy Policy, 62, pp.844-859.

Gkanoutas-Leventis, A. and Nesvetailova, A., 2015. Financialisation, oil and the Great Recession. Energy Policy, 86, pp.891-902.

Husain, M.A.M., Arezki, M.R., Breuer, M.P., Haksar, M.V., Helbling, M.T., Medas, P.A. and Sommer, M., 2015. Global implications of lower oil prices. International Monetary Fund.

Juvenal, L. and Petrella, I., 2015. Speculation in the oil market. Journal of Applied Econometrics, 30(4), pp.621-649.

Means, E., Wynveen, J. and Fann, J., 2015. The Sky is Falling-Again: Oil Price: Biggest Factor Affecting the Industry. The Way Ahead, 11(02), pp.18-20.

Merrick, J.R. and Grabowski, M., 2014. Decision performance and safety performance: a value-focused thinking study in the oil industry. Decision Analysis, 11(2), pp.105-116.

Murray, J. and King, D., 2012. Climate policy: Oil's tipping point has passed.Nature, 481(7382), pp.433-435.

Peters, G.P., Marland, G., Le Quéré, C., Boden, T., Canadell, J.G. and Raupach, M.R., 2012. Rapid growth in CO2 emissions after the 2008-2009 global financial crisis. Nature Climate Change, 2(1), pp.2-4.

Robinson, M.L., 2014. Big Oil and the Love-Hate Relationship. In Marketing Big Oil: Brand Lessons from the World’s Largest Companies. Palgrave Macmillan US.

Sadorsky, P., 2014. Carbon price volatility and financial risk management.The Journal of Energy Markets, 7(1), p.83-85.

Solarin, S.A. and Ozturk, I., 2016. The relationship between natural gas consumption and economic growth in OPEC members. Renewable and Sustainable Energy Reviews, 58, pp.1348-1356.

Williams, J.H., DeBenedictis, A., Ghanadan, R., Mahone, A., Moore, J., Morrow, W.R., Price, S. and Torn, M.S., 2012. The technology path to deep greenhouse gas emissions cuts by 2050: the pivotal role of electricity.science, 335(6064), pp.53-59.

Xiong, T., Bao, Y. and Hu, Z., 2013. Beyond one-step-ahead forecasting: evaluation of alternative multi-step-ahead forecasting models for crude oil prices. Energy Economics, 40, pp.405-415.

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