Challenges Threatening Big Oil's Survival Essay. (50 Characters)

Discussion

Discuss the challenges that put a threat on the survival of Big Oil?

In this context, the author highlights the biggest challenges that put the Big Oil a threat to survive in the market. Big oil, the name is used to describe the seven or eight major oil companies of the world. The companies are often known as supermajors. The companies are BP plc, Royal Dutch Shell Plc, Total SA, ExxonMobil Corporation, Chevron Corporation, and Eni. The management of these companies focuses on mainly the sectors where it faces risk to be successful. Political issues can affect the oil company in a regulatory way, geological risks primarily due to less extraction, price risk, supply and demand risk, and cost risks. Due to the global economic stagnation, the "Big Oil" companies are facing a problem of their survival. In recent years, the demand of the major international and national oil companies has declined. In November 2014, Organization of the Petroleum exchange companies (OPEC) take an unprecedented decision to maintain production level to regain the lost market price (Kazmi 2014). The explosion of shale oil and gas production in the USA led to prices falling by over 50%. Furthermore, the UN Convention on Climate Change in Paris takes some serious decision to limit the global warming and climate change by lowering the carbon emission. These decisions put a limit to the use of fossil fuel and also to the fossil fuel company.

The decision made by OPEC and UN convention put the oil companies in a challenge to improve their lost market share. One major issue associated with the dividends, which the company has to provide from the profit. The Big Oil is facing problem due to the downfall in the global market (Mirchi et al. 2012). Another problem is due to the climate change issues that create pressure on the Big Oil to abandon their production maximizing policy. The oil and gas management companies need to focus on lowering the carbon emission in the environment. The central area where the "Big oils" are facing the challenge are

The most major oil companies are facing difficulties in generating enough cash to cover their spending and dividends. Expenditure on new projects and dividends to the shareholders outstripped the cash flow more than $20 billion combining the four supermajor companies- Royal Dutch Shell PLC, BP PLC, Chevron Corp., and Exxon Mobil Corp by the first half of 2015. It is expected from the company that they will reveal the shortfalls in the weekly earnings report. The oil prices fell to the lowest level since the financial crisis and marked down from $100 to $50 per barrel in the third quarter in 2014 (Mu and Ye 2015).

Cash crunch of sub-$50/bbl oil on projects and dividends

Top oil companies are facing uncertain future and the supermajor companies have cut down their expenditure and delaying their projects. Cost cutting often threatens the ability to maintain the production of the company.  The success of the companies depends on the ability to manage the cost in a proper way. However, the strategy of driving down the cost prevented the investors from revolting. The companies are already running some long-term projects which cannot put on hold. So considering the circumstances it is evident that the oil companies will need years to bring back their spending under control (Fiorito and van den Bergh 2016).

As stated by Mu and Ye (2015), the integrated oil companies explore the crude and refine the oil for the consumers. Studies have shown that the oil companies have to face a cash flow crisis of $80 billion in 2015 and a crisis of $55 billion in 2016. However, the policies taken by the companies for the cash flow problem to maintain proper balance sheets somehow saving the current market status. Chevron Corp. declared that the company will be able to clear its dividends and expenditure by 2017. In the case of Shell, the company will also be able to do the same keeping the price same at $50 a barrel.  However, the Exxon is the only company which has reported that their spending peaked up in 2013, and the cash flow doubled in 2014. Exxon has maintained a stable cash dividend payment.

Apart from the supermajor, some other national oil companies have promised that they can sustain spending through current status of the market. The Irving, a Texas-based oil company, has committed to increasing production despite the spending. The policy of cut to the spending on new projects may lead to lower production but in turn, it can lift the prices in future. It had been reported that the supermajor oil companies were unwinding their spending practices before the oil price crashed as the companies earned an enormous amount of cash when the oil price was high. Furthermore, considering the other megaprojects, Exxon, BP and Chevron have suspended their big drilling projects, and Shell has canceled a $7 billion exploration program (Geman 2014).

The explosion of shale oil is the main reason for the price drop of oil prices. Due to global economic stagnation and rise of the value of the dollar; the demand for oil has decreased. However, the UN Convention on Climate Change causes in abandoning the production-maximizing business policies of Big Oil companies. It is evident from the business model that the companies should produce a high amount of oil to meet the demand of the petroleum products. This policy also reflects that if no fossil fuel is there then there will be no source of supply. Thus, the oil companies have to drill, no matter how difficult it is to get the crude. The production maximizing policies result in generating excellent growth of oil companies. Exxon has managed $32.6 billion, and Chevron earned $21.4 billion in 2013 (Geman 2014). 

Whether to abandon production-maximizing policies

According to Fæhn et al. (2014), the concern for climate changes issue threatening the future of Big Oil. The issue changed the scenario of production maximizing policy along with the stagnancy in demand. So the companies have to look for the new strategy.  They have to focus beyond the easy fossil fuel availability and have to find out a new source of extraction. There is no choice left to the Big Oil due to climate change convention. They have to invest in the new strategies. Otherwise, they will lose the ground of other sources. It is true that the cost of extraction from new sources is much higher, but the companies have to consider the world's environmental issues. Exxon started its operations in the Arctic Region, and Chevron and Shell focused on the Gulf of Mexico to extract unconventional oil (Geman 2014).

The climate change issue raises some questions about the relationship between the company and its social approach. The production maximizing policy relies on three fundamental strategies- over the year the demand would rise, the increase in the demand would result in higher prices that would justify the expense of investment and the climate concern issue would not play insignificant. But none of the strategic assumptions holds today. The demand for the product rises but not at the expected pace and studies have shown that demand will decline. Thus, the oil companies face problem to recover their invested money. It has found that the oil price will continue with $55 per barrel and will not reach $73 until 2020 (Moffett and Inkpen 2011;2012).

The climate change issue has become a major concern and oil companies cannot deny the threatened consequences. In spite of the considerable expenditure by the Big Oil to raise doubt on climate change issues, people become more concern about the climate change effects such as extreme weather phenomenon, rising of the sea level, and drought, etc (Du and Vieira 2012). The need of alternative energy is rising, and the Big Oil has to admit that the production maximizing concept has some backlogs regarding the current issues. The oil companies must find some alternative methods to scale back their operation. Otherwise, they will face a challenge from other aggressive firms (Atabani et al. 2012)

The oil and gas companies are facing challenges to meet the energy demand and improving the energy access considering the environmental issue and climate change threats. The UN Convention on Climate Change in Paris has addressed most of the government to limit the climate change parameters and work on the global warming issues to control the carbon emission. The convention also put a suggestion to limit the use of fossil fuel, but it has estimated that fossil fuel will account for 50% of energy demand in 2040. The investment in alternative energy sources needs to increase ((Sandström et al. 2014).

Implications and way forward

The issue of carbon emission in the environment can be limited by increasing the share of natural gas in coal mix. The burning of natural gas emits almost half of the carbon compare to coal. But there are several doubts on the contribution of natural gas to meet the climate change threats (Varkey Theeyattuparampil et al. 2013). Global warming is mainly associated with carbon dioxide and methane. So a focus is needed for the control of methane emission also. The oil and gas industries need to focus on the climate risk along with their technological, commercial and financial risk. This will help the companies to become more innovative in their climate approach (Sheridan 2013).

The oil and gas companies have the opportunity to work on the aspects of renewal energy. Statoil, an oil and natural gas company, began investing in alternative energy such as utilizing the wind power at sea. The company also has the lowest emission of methane. The company also suggests that Big Oil needs to work on the performance of renewal energy performance and integrating useful technology in the core operations. The Big Oil, who is the major emitters of carbon, needs to take the responsibilities by introducing a carbon price. The companies need to adopt the technologies which are effective for low carbon emission (Mauter et al. 2013).

As stated by De Coninck and Benson (2014), many oil and gas companies are investing in carbon capture and storage (CCS). A theoretical approach has suggests that the investment can reduce up to 70-90% of the CO₂ emission into the atmosphere. The key point of the method is to eliminate total carbon dioxide from the fossil fuel so that it can be used for the long run. But a major drawback of CSS technique is it requires a high amount of energy, and it is very expensive (Melzer 2012). So the oil companies have to do significant research and improve the technology. Despite the investment by the Big Oil for renewable energy the progress in not satisfactory. But the investment shows some positive result as Shell designed to capture a vast amount of carbon dioxide each year. Furthermore, it is important for the oil and gas companies as well as for the government to work on the common path of carbon emission issue with the help of better technology and efficient regulatory work (Harrison and Falcone 2014).

Conclusion:

In the above discussion, the author has highlighted the cause of survival challenge facing by Big Oil. The stagnation of the global economy is the main reason for the decrease in the demand for petroleum products. Big Oil is struggling to meet the dividends and facing problem in running long-term projects due to the cash crunch. One solution to the problem is suspending the new projects till the market stability restore. The suspension of the projects may lower the production of the company but in a long run, the price of the product can rise. The climate change issues put a limitation on the use of fossil fuel use which put a knell to the use of fossil fuel by oil and gas companies. The Big Oil usually extracts the crude from the easily available fossil sources. But the fossil quantity is limited. So the maximize production policy of the Big Oil is limiting the amount of fossil. The Big Oil need to concern about the climate change consequences and need to apply some alternative strategies that will felicitate environment. Furthermore, the oil and gas companies should be aware of the global warming and limit the carbon emission. Limiting the carbon emission can affect the productivity of the company. The management needs to invest in the research of the alternative technologies which can reduce the carbon emission by capture and storage method. Obviously, the investment in the new technologies will increase the cost of production, but the Big Oil need to concern about the environment.

References:

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