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WPL's Main Processes

Question:

Discuss about the Petroleum Fiscal Systems and Production.

The gas and oil companies use various activities and processes that are integrated to change the petroleum resources into usable products for customers. These activities are linked to each other within individual and across the regions.

Value creation is an important tool to the organization as well as the country. According to (Adelman, 2004, p. 345) VCA examines the sequence of activities that are employed to get a product and service from production to procurement via various stages of production, distribution and the final consumer. This analysis usually involves distributors, buyers and suppliers referred to as value systems. Woodside petroleum limited (WPL) is a gas and oil company in Australia. It began the year 1954 and currently it has over 3511 staffs among them are five directors. It involves a number of processes including production, development, evaluation, exploration, sale, and marketing of hydrocarbons. In this report by (BP, 2008, p. 234) it discusses the social value.

The main products are natural liquefied gas, condensate, crude oil, pipeline gas, and liquefied petroleum gas. It operates involves operation of oil production, offloading and storage facilities based in Australia. The company is interested in frontier and emerging provinces in Asia, Sub Saharan Africa, Australia, Atlantic margins and Pacific region. The company operates in US, Canada, Asia and Australia. Porter’s model is used to distinguish various stages of supply, physical changes in the inputs and outputs and supply services e.g. technological development and strategic planning. The greatest benefit is added to these services or a combination of individual strategies. Activities relate and should be integrated within the value chain. These activities involve resource exploration, petroleum production, storage, marketing, distribution, and transport

WPL value chain analysis begins with identifying areas to do an exploration for gas or oil. The next step is appraising, developing and producing of petroleum fields. This stage in the value chain is known as upstream. These oilfield services involve other auxiliary services in the process of E&P e.g. seismic surveys, equipment supply, well drilling and engineering projects. They form a crucial part of gas and oil industry.

To illustrate exploration and production WPL should consider the breakdown of profit for large petroleum companies. This is due to the fact that private company’s value and taxation represent their social value. The annual report on WPL according to (CSFB, 2002, p. 23) announced its production and consolidated results for the 1st half year ended on 30/June/2017. Its NPAT is $ 507M which is 49%more than the 1st half year of 2016.

Value Chain Analysis

Operation cost was $1,869M for 2017 against $1,938M in 2016. Cash flow statements rose up by 170% to $445M. PBT was $763M against $508M in 2016. Profit for equity shareholders of the company was $507M equivalent to 60.3%per diluted and basic share against $340M (41%) of diluted and basic share in 2016. Cash from operation was $1235M against $1201M in 2016. Exploration expenditure and capital were $689M against $948M in 2016. Production cost is $42.2M. This was because of the high prices of oils.

Ordinary distribution cost was $0.49m payable in September 2017. Profits may not necessarily mean a positive value. The company appointed James Richard as the director

From (Boardman, Greenberg, & Vining, 2006, p. 45)Gas processing and oil refining are used to change hydrocarbons extracted into usable products. Processed products are distributed to the market either through retailer, wholesaler or directly to the consumer.

This stage of the value chain is known as downstream. WPL represent feedstock for other petrochemical industry that shows a geographic and historic relationship between the two.WPL can integrate more than one activity using value chain using vertical integration. Mostly, integration involves E&P and R&M and can expand within a given task thus horizontal consolidation. In Australia, the horizontal consolidation in the upstream is affected by natural gas and downstream by the size of the local market and ability manages exports of products and services. Vertical integration in the country is made using licensing tools and regulatory tools e.g. seeking approval to build or not build a processing facility.

The description of WPL is based on alternative sources to determine different extraction processes. Aggregate inputs involve all cost of funding, cost of depletion, opportunity cost and production cost.

From production place, crude gas and oil are transported to the relevant processing areas and thereafter distributed to the market. According to (Johnston, 1994, p. 56)Infrastructure used involve transport e.g. pipelines, railways, roads and ports and storage facilities are  key issues in different stages of the value chain that links between processing and production facilities and between final consumer and processing. These stages of the value chain are known as midstream.

WPL can store the gas and oil in different locations along the chains chain for various reasons e.g. price speculation or hedging and security during supply. Crude oil is normally stored in large holding tanks and transported by truck, pipeline, tankers, and roads to the refineries company for processing.

Upstream Activities

An example of a pipeline that reaches out to other countries is Druzhba pipeline that connects Europe and Russia, Trans-Alaskan pipeline and Baku-Tbilisi-Ceyhan pipeline that links Caspian and the Mediterranean Sea. WPL uses ocean tankers to connect international services. Exports ports are located near the company or production place for easy access and distribution. The company is interested in frontier and emerging provinces in Asia, Sub Saharan Africa, Australia, Atlantic margins and Pacific region. The company operates in US, Canada, Asia and Australia. Major import facilities have huge loading and storage facilities e.g. Singapore and Rotterdam refineries to reduce transport charges and be near product demand regions. It also allows the purchase of oil in an open market or buys from producers directly. When they are done with refining the product is distributed by similar modes of transport for marketing.

Road transport is the most common means of transport but uses the pipeline to reach out to other countries. Natural gas is usually stored in underground facilities using various methods including; aquifers, salt caverns, and reservoirs. Transportation of gas depends on the physical state of the gas. The natural gas liquid can be distributed using tanker trucks and pipeline while a dry gas is distributed by pipeline and not in deep seas and ocean. This reduces the chances of trading natural gas between various regions since pipeline transport is expensive and may not be allowed in other regions. An alternative for LDG is LNG. Piped gas must be distributed from the production site to the final consumer for industries, individual use and power stations using different types of pipeline networks. Adding compression in pipelines can serve the purpose of the storage facility.

Therefore it would be a challenge for WPL to integrate gas networks for scheduling within a short period and trading. In Australia gas producers don’t own a majority share in pipeline infrastructure, as a result, they sell their gas to the gas grid. Major projects of pipeline need upfront investment therefore not viable for the business without proper identification of users, revenue or tariff, and financing facilities.WPL involves many countries and is likely to suffer geopolitical challenges. For any evacuation infrastructure and supply, sunk costa became expensive, but once installed they may improve the viability of the project and economy of the country.

WPL refines crude oil is usually to get oil products suitable for consumption. The main products are gas oil, fuel oil gasoline, kerosene, and LPG. Middle distillates involve gas, oil, and kerosene; light distillates involve naphtha and gasoline. The main consumers of energy are power generation stations, transportation, and heating while consumers of non- energy include e.g. feedstock for petrochemical companies. The uses differ in the market depending on the purpose for use. Non- energy users and transportation are vulnerable making them captives in the market for oil. For power stations and heating, markets can be switched easily between fuels i.e. between coal, gas, and oil making their price elasticity high. From the study by (Westwood, 2008, p. 126)oil refining involves separating hydrocarbons from crude oil by converting it into important petroleum products. Refineries consist of the process of separation followed by conversion then treatment. The first process involves heating, separation of crude oil to required products using distillation. They are then directed for conversion parts to be altered using heat, catalyst, hydrogen, and pressure. The output is then heated. Refineries involve categories of configuration and size i.e. technical flexibility and capability to process different types of feedstock and other products. Due to their chemical nature, crude oil can produce different products when refined. Lighter and sweeter crudes produce high yields, valuable products, and trade in premium markets. Refineries struggle to optimize crude oil depending on the company’s configuration processes, anticipated product price and desired product mix. The demands of Oil products are usually seasonal. Refining is cyclical and profitability is sensitive depending on marginal changes in demand and supply. Profitability is measured using gross refining margin calculated as revenues received minus cost of feedstock and another cost e.g. maintenance, labor and working capital. GRM does not include non-cash costs and may translate to losses.

Production and Consolidated Results

Marketing involves distribution and selling of refined products through retail, wholesale or direct to the consumer. Transportation is distributed to retail stations while heated oil is distributed to customers. Kerosene is bought directly by customers, airlines, airports; industrial plants and shipping companies. Marketing margins are more stable compared to refining margins thus increasing the profitability margin of petrol stations. WPL does not involve gas production but also in marketing of products. Gas must be processed and transported in suitable pipelines. NGLs are bought by industrial, retailers and wholesalers through petrol stations. The GTL processes are used to convert natural gas to more quality odorless, colorless and biodegradable products. Technology has been used in some plants.

Trade in LNG is expected to grow because of declining of production in indigenous products.

According to (Collier, 2007, p. 48) , Porter's five forces refers to factors that determine the company competition e.g. industry rivalry, suppliers, customers, new entrants and alternative products. Even though the strength of forces differs between industries, when they are put together they help determine profitability. It affects the investment, prices, market share, profit margins and volume of the industry. These forces include:

Rivalries develop in the market naturally and they compete for the same customers. They use product promotion tools such as introduction of new products, innovation, advertising, attractive customer service price completion and warranties to enhance their being in the market and win big market share. According to the model the speed at which rivalry is in the market it results in slow growth of the company, equal companies, high fixed cost, overcapacity, price cutting, the risk of exit, barriers to entry in the market and lack of differentiation.

Substitute products affect industry competition by placing a limit on the level of profitability within the company. Substitutes involve a search for other products that serve similar functions same as the one the company produces. Porter uses this model to show how companies should take importance in the availability of these products.

Suppliers are important in the market and they affect the purchasing power in terms of price and product quality.  According to (Collier, 2007, p. 63)Suppliers exert more pressure on the company to improve the quality, price and substitute products in the market. The products of suppliers are important in the market. They differ in costs, integration, labor and methods of supply. They can be altered if proper strategies are used.

Downstream Activities

Buyers buying patterns are significant. They can make prices to go up or down by demanding more or less depending on the need and availability of products. The quality of products influences the demand for a product in that people will buy more if the products meet their needs. The purchasing power differs each time. Integrating these changes may be hard making it hard to determine the market structures.

A threat to the company of new entrants depends on entry barriers. Porter identified six barriers

  • Reduction in the cost of a unit of product or economies of scale. This leads to new entrants on a larger scale that leads to a reaction from the existing companies. Or accept a low cost on a small scale.
  • Product differentiation of the company including brand identification to ensure customers loyalty.
  • The frequency of switching costs to absorb the cost of the buyer and supplier.
  • Accessibility to channels of distribution. New entrants need to have their distribution channels for their products.
  • Independent of scale which leads to cost disadvantages. Existing company has an advantage over product technology, favorable sites, government subsidies, accessibility to raw materials and experience.

New entrants are disadvantaged in the form of government regulation and licensing. They face opposition from existing firms and face changing technologies and market stability. Other changes may be strategic planning strategies, manpower, and level of expertise. The problem of interfering with new price and existing price show challenges that new entrant’s face. This model concentrates on competitive environment that affects the profitability of the industry. Using this model will ensure WPL is profitable. It has to establish these processes so that it is competitive in the market. This will help them to respond to competitive forces in an appropriate way. For porter directors need to analyze competitive strategies in order to prepare for changes, new businesses and market problems to improve stability

Despite the many benefits the model has to the organization, one should consider the following factors when applying it.

  • The speed of change may be slow.
  • It has static Market structures.
  • It provides a snapshot of the business only.
  • It is hard to define the industry of business.
  • It ignores non-market forces.
  • It assumes competition in the market.
  • It is applicable for small markets.

The market stability today is affected by changes in technology, new businesses, entry barriers and relationships to supply chain that causes market disruption. This affects the model of the organization to maintain the company’s market position. The company has to update the model regularly in order to suit the market. This model provides a snapshot of a given market. It does not give information on taking preventive actions but it gives suggestions to the threats and challenges to the company though evaluating alternatives. The dynamics of companies makes it a challenge to define the industry market.

WPL sells different types of products in the market. This makes it difficult for them to define their market. Porter’s model has a challenge in integrating complex markets. If the company narrows its market segments to match the model then other key factors may be ignored e.g. the relationship between buyers and sellers and legislation. WPS should be aware, understand the effects and respond to ethics, social responsibility, and state legislation. They have to consider their ethics and internal culture when making strategies.

Refining Process

Porter’s value chain model is not able to incorporate the effects of sharing skills, strategy, and resources as methods of responding to opportunities.

Benefits of porters value chain model

Despite all the above challenges, from (CSFB, 2002, p. 256)porter’s model helps management of WPL to assess, analyze changes and dynamics of the market and evaluate their current market structure.

It provides a good framework for future research and collecting information needed for formulating the company’s future strategy.

  • Determine the profitability of the company and competition strategy by looking at the strengths and threats of the company. This will help them make informed decisions on whether to increase capacity in other sectors or develop strategies.
  • It helps the company to determine and understand the importance of services and products in ascertaining potential profits.
  • It will help the company to identify the strengths as well as threats to improve their company and avoid such mistakes.

Conclusion

WPL value chain involves exploration of fields, production of gas and oil, storage and transportation and marketing and refining of oil. If all these activities are integrated well they transform into a required product for consumption. In the value chain model, activities and processes are inter-linked between individual companies, within and across the other regions of the world. Integration in the process of the value chain can be vertical or horizontal they are used to help generate increasing value. This ensures wide economies of scale in relation to exploration and production activities this helped the company to access funds properly to continue investing, act as a solution to the consumers and developing risks. As a strategy to WPL the natural resources helps to improve production and exploration activities and issues in relation to strategies of depletion. Value chain helped the company to invest beyond their regions. Vertical integration guide and encourage diversification in the value chain process. This involves diversifying risks to the country to acquire a large value-adding process in order to respond to changes in international and domestic demand. Porters’ value chain helps a company determine its profitability and competition strategy through analysis of strengths and threats. It also helps in making informed decisions on whether to increase capacity in other sectors or develop strategies. Along the value chain, WPL will be able to determine and understand the importance of services and products in ascertaining potential profits. The market stability is affected frequent changes in technology, new businesses, entry barriers and relationships to supply chain. These changes cause market disruption, affects the model of the organization. WPL need to maintain the company’s market position by updating the model regularly in order to suit the market. Solution to value creation is difficult to recommend instead an experience the company gets around the world provides information for successful arrangements and operation strategies. When these strategies are properly analyzed they form a basis for future decisions in solving issues in the country.

This model provides a snapshot of a given market. It does not give information on taking preventive actions but it gives suggestions to the threats and challenges to the company though evaluating alternatives. The dynamics of companies makes it a challenge to define the industry market.

References List

Adelman, M. A. (2004). "The real oil problem." Regulation (1 ed.). NY: McGraw Hill.

Bacon, R., & Tordo, S. (2005). "Crude Oil Price Differentials and Differences in Oil Qualities. A Statistical Analysis" ESMAP Technical Paper. NY: ESMAP.

Boardman, A. E., Greenberg, D. H., & Vining, A. (2006). Cost-Benefit Analysis: Concepts and Practice. NJ: Prentice Hall.: Upper Saddle River.

(2008). Statistical Review of World Energy 2008. London: BP Plc.

Collier, P. (2007). Laws and Codes for the 'Resource Curse', . The university of Oxford.

CSFB. (2002). Oil and Gas Primer. New York: Credit Suisse First Boston Equity Research.

Johnston, D. (1994). International petroleum fiscal systems and production sharing contracts. Tulsa: PennWell Books.

Westwood, D. (2008). The World Offshore Oil & Gas Production & Spend Forecast. NJ.

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