SR Ltd is one of the operating companies in Oil and Gas Exploration and Production service industry. As per the financial reports of 2014, the company had seven operating fields for exploration of oil and gas resources (Oilandgasuk.co.uk,2015). In the year 2015, the company acquired the right for test drill on three of the oil fields in Edwina, Felicity and Georgia. However since the company is trading in exploration of the sustainable fossil fuels hence the company has to engage huge capital for the purpose of test drilling and production of oil and gas in different fields. The report here focuses on the various challenges faced by SR ltd in execution of the test drilling process. After the initial analysis of the problems, the report seeks to provide certain recommendations to the management on various legal, financial and ethical aspects (Zhao et al. 2010).
Similar to the other operating companies in the E&P industry, SR Ltd is also facing a large number of challenges that may be summarized as follows:
Financial issue: The major issue haunting the management of SR Ltd is the availability of the adequate financial resources to compote the test drill in the newly acquired fields. The fields are all reported to be in shallow water. The average cost of drilling each shallow water production is around $ 30 million. Moreover, the actual production can commence only after the position and the size of the oil reserves are identified with the help of the test drill. Hence, this will involve huge financial costs for SR Ltd.
Managerial issue: Although negligent, however SR Ltd also faces challenges related to recruitment and retention of required labor force for the test drillings in shallow waters. The huge numbers of oil and gas leakages accidents have contributed to the employee turnover rate in Sr Ltd (Jin and Jorion, 2006).
Farm Out offer: Considering the financial constraint, SR Ltd has also decided to avail the farm out option to Drill Well. However, the company was facing problems with the option payment terms of DW and was apprehensive about the deal
Sustainability issue: The protest of the Care Green party against the potential threats of the sustainable resources used by the companies in E&P industry is creating a negative publicity for SR Ltd and is threatening the long-term future of the company.
Corporate governance issue: The unethical signature forgery by the major outsourcer Boring Holes UK has also questioned the ethical integrity and honesty o SR Ltd as mentioned within their CSR reports (Hall and Vredenburg, 2012).
As per the predicated financial forecast of the SR Ltd, the company needs to maintain 63 US$ million of cash needs in order to start the drilling tests in the three newly acquired fields. The company has thus considered the option of right issue and commercial loans in case of sourcing of finance for the cash needs of the new fields. The critical analysis of the article 1 shows that the shareholders of the Forglass, a fracking company were unhappy with cash call and unwilling to provide extra investment. If SR Ltd considers the option of right issue then the company may face the same problem with the shareholders as mentioned in the article (Armaroli and Balzani, 2011). The shareholders of SR Ltd may not be interested in making an extra investment considering the fact that the company has not yet made the dividend payments and has only declared to make a dividend payment of US $ 10 million at the beginning of the financial year of 2015. Thus, if the company continues to increase the equity through right shares then the return on total equity may decrease and the shareholder’s interest may be affected (Wei et al. 2010).
Article 2 reports that majority of the banks are short of funds and are not ready to take risks related to commercial loans to the E&P industries (Keller, 2012). Considering the predictions made by the financial manager of SR Ltd the gross operating profits are predicted to increase 48% considering an average increase in the oil prices by 5%. This shows that the company’s operating profit for the year 2015 may rise which will make SR ltd eligible under the conditions of Bank of England to secure commercial loans. However, this long term liability will also give rise to potential amount of interest payments for the company in the long term (zhang, 2012).
Considering the financial problems faced by SR Ltd in respect of securing loan and right issues, the company offered a farm out option to the Drill Well (DW). As per the farm out deal DW agreed to make payments to SR Ltd in installments helping the company to commence with the drilling process. DW will make initial payment of US$ 2 Million on signing of the Georgia Test Drilling license. The next payment of US $ 2 million will be made at the commencement of the test drilling and the final US $ 6 million will be made on completion of test drilling for the purpose of oil production. However, in lieu of the investment of US $ 10 million, DW has made an offer to buy the proven reserves of Georgia at 10% discount than the current price that is US $ 11 Million per MMbbl (gas or oil) (He et al.2010). The problem thus faced by SR Ltd is that according to the geological surveys, the field of Georgia may yield around 8 to 10 MMbbl oil and gas that means that under the current price SR Ltd will have a gain of either US $ 88 million or US $ 110 million. Thus if the company avails the farm out offer then the company will lose on the revenue from the Georgia field. However DW also proposes that the price of the proven reserves will remain fixed at US $ 11 million irrespective of the changes in the price levels of oil and gas. Now considering this situation, the prices of the oil and gas are forecasted to increase by an average of 5%, which may be a revenue loss for DW. However SR Ltd will not sustain high loss in this regard.
In this section SR Ltd has to deal with the dual thought concerning the ethical punishment that the company should give to the major outsourcer company for their act of signature forgery. Although SR ltd has taken the decision to forgo the actions of BoringHoles UK, however as per section 1 of the Forgery and Counterfeiting Act 1981 and Fraud Act 2006, the management at BoringHoles UK is legally punishable in the court of law. If SR Ltd forgoes the actions then the company may have to face future legal actions on the contrary if the company takes legal actions the company may lose an essential outsourcer, which may add to the problems of the company. However, the forgery of the signature done by the manger of BoringHoles UK on the control supervision log sheet did not cause any physical or monetary damage to SR Ltd.
The stakeholder analysis of SR Ltd reveals that the company needs to keep the government and the social care organizations satisfied in terms of ethical considerations because the acts of the government and social organizations like CareGreen have high influence on the share price of the company (Yang, 2008). The protest by the CareGreen Party against the E&P companies for their extensive exploitation of the finite fossil fuels has made the management of SR Ltd apprehensive about the image of the company. Thus to prevent a fall of the share prices and to retain the employees SR Ltd needs to take preventive actions.
The following reasonable recommendations can be given to SR Ltd after considering the various challenges.
Armaroli, N., and Balzani, V. (2011). Energy for a sustainable world. Wiley-VCH, Weinheim.
Christoff, J. (2011). Firms reported in open sources as having commercial activity in Iran's oil, gas, and petrochemical sectors. Washington, DC: U.S. Govt. Accountability Office.
Hall, J., and Vredenburg, H. (2012). The challenges of innovating for sustainable development. MIT Sloan Management Review, 45(1).
He, J., Deng, J., and Su, M. (2010). CO 2 emission from China's energy sector and strategy for its control. Energy, 35(11), 4494-4498.
Jin, Y., and Jorion, P. (2006). Firm value and hedging: Evidence from US oil and gas producers. The Journal of Finance, 61(2), 893-919.
Kammen, D. M., Kapadia, K., and Fripp, M. (2004). Putting renewables to work: How many jobs can the clean energy industry generate. RAEL Report, University of California, Berkeley, 13.
Kaygusuz, K. (2002). Oil and Gas Production and Consumption in Turkey. Energy, Exploration & Exploitation, 20(1), pp.37-50.
Keller, E. A. (2012). Introduction to Environmental Geology, 5e.
Odi.org, (2015). The fossil fuel bailout: G20 subsidies for oil, gas and coal exploration | Publication | Overseas Development Institute (ODI). [online] Available at: https://www.odi.org/publications/8678-fossil-fuel-bailout-g20-subsidies-oil-gas-coal-exploration [Accessed 20 Mar. 2015].
Oilandgasuk.co.uk, (2015). Economic Forecasts - Oil & Gas UK. [online] Available at: https://www.oilandgasuk.co.uk/forecasts.cfm [Accessed 20 Mar. 2015].
Theodoropoulos, T. (2010). The secret world of energy. Athens, Greece: Public Gas Corporation S.A.
Tordo, S., Johnston, D. and Johnston, D. (2010). Petroleum exploration and production rights. Washington, D.C.: World Bank.
Wei, M., Patadia, S., and Kammen, D. M. (2010). Putting renewables and energy efficiency to work: How many jobs can the clean energy industry generate in the US?. Energy policy, 38(2), 919-931.
Yang, M. (2008). China's energy efficiency target 2010. Energy Policy, 36(2), 561-570.
ZHANG, K. (2012). Strategic replacement situation and outlook of China oil-gas production area.Petroleum Exploration and Development, 39(5), pp.547-559.
Zhao, Z., Du, J., Zou, C., and Hu, S. (2011). Geological exploration theory for large oil and gas provinces and its significance. Petroleum Exploration and Development, 38(5), 513-522.
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