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Challenges faced by SR limited

Describe about the Report On Oil And Gas Management Programme of Petroleum geoscience?

SR Limited is a renowned company dealing in oil and gas exploration and production services. The company earlier in the year 2014 had applied for four licenses for acquiring of the rights of test drills in four fields. Since the company along with the other companies in the E&P industry is dealing with sustainable fossil fuels, hence the exploration of new fields is necessary to add to the oil reserves of the company (Oil & Gas Monitor, 2015). The company is currently operating in seven fields. The report focuses on the four major challenges SR ltd is facing concerning the field-testing on the three fields. The report will provide a detailed analysis of the problem thereby focusing on the recommendations for the company.

SR limited is an oil and gas exploration and production company facing certain challenges in implementation of the drill testing. Firstly, the company is facing challenge in respect of inadequate financial sources for drill test expenses. SR ltd had applied for test drill license in four different fields namely Edwin, Felicity, Georgia and Hetty. However, the company secured drilling permission on three fields except Hetty. However, the company management is unsure about the availability of the financial resources in order to bear the expenses of the test drill (Oilandgasuk.co.uk, 2015).

Secondly, considering the financial constraint that SR will supposedly face in testing three fields, the management of the company decided to consider the farm out offer from Drill Well (DW). However, this farm out offer posed as a challenge when DW suggested the option payment terms to SR. The demand on the discounted purchase price for the proven reserves by DW made the management of SR apprehensive about the deal (Raymond and Leffler, 2005).

Thirdly, the goodwill of SR was threatened by the protests from the Care Green Party for the use of restricted fossil fuels like oil, gas, oil shale, oil sand and coal. This questioned the sustainability business of SR and the management of the company feared that the negative publicity would affect the stakeholders and the shareholders thereby affecting the procurement of financial resources from the market (Zhang, 2012).

Lastly, SR ltd is facing problems in relation to the corporate governance issues concerning a particular outsourcer namely Boring Holes UK. The political unrest in Apache fields had made it difficult for the SR outsourcer Boring Holes to retain, recruit, or replace employees and engineers within the company. Hence, the company forged the signature of the engineer on the control log records. Since there was no problem with the safety control procedures and since the government checking procedure is soon due hence SR ltd has decided to forgo the matter however it is a grave corporate concern as the ethical norms have been hampered within the system (Opec.org, 2015).

Problem 1

Since the CFO of SR ltd was absent, hence the company was unsure about the financial sources about the test drilling in the three fields. Moreover, the company could not wait for the CFO’s recovery since there was an open acceptance of the license within 2 weeks. As per Contract act 1872, section 2 (206), if SR ltd did not accept the offer within 2 weeks the offer may be reverted or the prices may be changed. The company is considering two options for raising finance namely bank loans and right issues (Ogj.com, 2015). The estimated expense of the test drilling is around $ 20251825 million. As per the reports of Oil and Gas Industry UK, the commercial banks have reduced their loan amounts and have increased the regulations on the loan since apart from the calculated costs the companies incur other costs like leasehold acquisition costs, capital expenditures and additional drilling costs due to involvement of new technologies. Moreover the fluctuations in the prices of the oil and gas has made it mandatory for the banks to increase the total lending rate by more than three times of the overall operating profit of the company. Moreover SR ltd will also have problems in issuing one right share against two existing shares to the shareholders since the investment amount will increase and with the fluctuating oil prices, the investors will not be willing to increase the investment rates (Downey, 2009).

Analysis of the problems

Problem 2

DW has offered option payment to SR ltd before the field was ready to be farmed out. Hence, there was a risk for DW about presence of commercial reserves in Georgia. The first condition of the agreement states that if the test drilling is not completed within 31st March 2016, SR ltd will have to pay $ 1 million (Energyinst.org, 2015). However, the uncertainty regarding finance options will prove this a risky term for SR Ltd.  Moreover, the term of keeping the $10 million in the Escrow account will also pose problems for SR Ltd. The major disadvantage being SR Ltd will have no control over the deposited money and will receive installment payments (Smil, 2008). Moreover, the money in the Escrow account will also not yield any interest for SR ltd and the company will not be able to generate further investments. SR will receive $ 6 million if the company can prove the presence of reserves of oil in Georgia that is again an uncertain factor. Finally, the agreement states that irrespective of the fluctuations in the oil prices DW will get 10% discount on the average oil price. Thus, the revenue from the Georgia field will cease to decrease (Kaygusuz, 2002).

Problem 3

As per the reports of OPEC, the future demand for the fossil fuels is likely to increase by 5.96 %. Hence, the sustainability issues are on a rise for the E&P industries. The estimated demand for the fossil fuels will increase by 30 to 50%. However, this energy growth will increase the environmental pressure. The campaign against the E&P industries including SR ltd showing their lack of interest in preserving of the renewable energy sources will affect the stakeholders of the E&P industries. SR ltd is also likely to experience a fall in the share prices due to the negative publicity. However to increase the revenue the company will have to depend on the fossil fuels exploration (Yergin, 2009).

Problem 4

In this scenario, the management of SR ltd forgoes the forgery of the signature. However, section 1 of the Forgery and Counterfeiting Act 1981 states that a person involved in the false representation of the signature or false representation of a statement shall be regarded as a criminal and punishable by law. Although SR ltd did not suffer any safety issues due to the forgery of the signature of the engineer by Boring Ltd, however the act is unethical and unlawful. The forgery of the signature by Boring Holes is an act of false representation as per section 2 of the Fraud Act 2006 (Eia.gov, 2015). Boring Hole has thus falsely represented the control chart on behalf of the ex engineer. If SR ltd foregoes the matter then in future both the companies may have to suffer legal obligations however if SR ltd acknowledged the matter then during the government inspection the Boring Holes will be ordered for closure due to act of falsification and outsourcing of SR will be stopped (Bower, 2010).

Conclusion

Conclusion

The report shows the analysis of the problems that SR Ltd is facing in successfully starting its test drilling activities in the three newly acquired fields. However, the company can cope with the situations if necessary legal, ethical, financial and managerial recommendations can be provided.

SR ltd can opt for bank loans since the company has broad asset base and moderate capital needs. With a high GP ratio of around 48% and a consistent increase in the oil and gas prices by 5% on an average will help SR ltd to secure broad asset base from other fields like Apache, Barracuda and Columbia. Thus, the company can take a low amount of low from the banks and thus will have to pay low interest rates. Moreover, the use of Mezzanine financing options will also help SR ltd to acquire finance for the projects (Longwell, 2002). If SR ltd raises loan though Mezzanine financing then the lenders will be willing to contribute the amount because if SR ltd fails to return the money then the lender will acquire ownership of shares of the company. This type of debt capitals are readily available without any collateral security hence it is s feasible option for SR ltd since the company needs urgent finance requirements to start the test drillings.

The farm out agreement between DW and SR suggested that DW would adopt an “Option farm out” however; the stated terms may pose challenges for SR ltd. Hence, in this regard SR ltd should suggest “Obligation farm out” to the farmee that is DW. The farm out agreement states that before commencing of the agreement the farmor should consider the situations like- the current economic climate, value of the target property, geological information and need of the farmor. However, in case of SR ltd management of the company is opting for a farm out agreement since they are afraid that the company will lack both financial and managerial sources for test drilling in three fields simultaneously. However the current asset base and the financing options for SR ltd confirms that the company will not have any finance issues. However, the managerial data are unknown. However SR ltd should consider offering “drill to earn” farm out to DW. Finally, DW’s demand of 10% discount on the oil prices irrespective of the changes in the oil price should be discarded. Rather SR ltd should offer the term of 10% discount on the fluctuating oil prices.

Exploration of Fossil fuels are the major source of revenue for the E&P industries hence the negative publicity against the lack of necessary precautions relating to use of fossil fuels has no solution for the companies. However SR Ltd can try to change the image in the mind of the concerned stakeholders. Firstly SR Ltd should produce a well-complied corporate sustainability Report stating the various CSR activities undertaken by the company in the financial year. Among the CSR activities, SR Ltd can avoid exploration and appraisal drilling on the roads since they contribute to erosions and surface hydrology. The CSR report should also include the facts that SR Ltd is abiding by the Petroleum laws, Environmental Protection Acts, Safety and Fire Protection acts, Marine Pollution laws etc (Dawei, 2010). Moreover SR ltd should adopt the ISO 14000 standards for production and exploration of oil and gas. As per ISO 14010 the performance evaluation of the drilling machines should be undertaken, as per ISO 14024 the life cycle analysis and product standard analysis should be conducted by SR ltd. Finally, to make the customers and the shareholders aware of the needs to exploration and oil production, SR ltd can make video campaigns of showing the dark, wet and stranded world in absence of oil and gas. This will arouse the need for the exploration and production activities in the mind of the customers and the stakeholders.

In dealing with the fourth problem, SR Ltd should consider the legal and ethical well being of the company rather than the long- term profitable future of the company. If the act of signature forgery is not settled in accordance to legal terms then the management at Boring Hole will get an opportunity to produce a similar falsification act in the future. In this case, SR Ltd may not have incurred any safety issues however, the same cannot be guaranteed for the future purpose. However, as per the Criminal Laws relating to Forgery offences, Boring Hole had no criminal or defrauding intent hence the government as well as SR Ltd should charge a minimum state penalty of around $ 125000 from the management of Boring Hole (Bjorlykke, 2010). Moreover, to avoid any suck future occurrences SR Ltd transfer an official from the main branch of SR Ltd to Boring Hole to look after the control techniques and any unethical procedure undertaken by Boring Hole.

Reference list:

Bjorlykke, K. (2010). Petroleum geoscience: From sedimentary environments to rock physics. Springer Science & Business Media.

Bower, T., (2010), The Squeeze: Oil, Money and Greed in the 21st Century, HarperPress [ISBN 978-0007276554]

Dawei, Z. (2010). Strategic concepts of accelerating the survey, exploration and exploitation of shale gas resources in China [J]. Oil & Gas Geology, 2, 004.

Downey, M., (2009) Oil 101, Wooden Table Press LLC [ISBN 978-0982039205]

Eia.gov, (2015). U.S. Energy Information Administration (EIA). [online] Available at: https://www.eia.gov/ [Accessed 9 Mar. 2015].

Energyinst.org, (2015). Welcome to the Energy Institute - Energy Institute. [online] Available at: https://www.energyinst.org/home [Accessed 9 Mar. 2015].

Kaygusuz, K. (2002). Oil and Gas Production and Consumption in Turkey. Energy, Exploration & Exploitation, 20(1), pp.37-50.

Longwell, H. J. (2002). The future of the oil and gas industry: past approaches, new challenges. World Energy, 5(3), 100-104.

Ogj.com, (2015). Oil & Gas Journal- Oil and Gas News, Prices, Oil Drilling, Exploration and Production. [online] Available at: https://www.ogj.com [Accessed 9 Mar. 2015].

Oil & Gas Monitor, (2015). New Paradigm in E&P Finance. [online] Available at: https://www.oilgasmonitor.com/new-paradigm-ep-finance/6792/ [Accessed 9 Mar. 2015].

Oilandgasuk.co.uk, (2015). Oil & Gas UK - Home Page. [online] Available at: https://www.oilandgasuk.co.uk/ [Accessed 9 Mar. 2015].

Opec.org, (2015). OPEC : Home. [online] Available at: https://www.opec.org [Accessed 9 Mar. 2015].

Raymond, H. and Leffler, W., (2005), Oil and Gas Production in Nontechnical Language, PennWell Books [ISBN 978-1593700522]

Smil, V., (2008), Oil: A Beginner’s Guide, Oneworld Publications [ISBN 978-1851685714]

Yergin, D., (2009), The Prize: The Epic Quest for Oil, Money and Power, FreePress, New York [ISBN 978-1439110126]

ZHANG, K. (2012). Strategic replacement situation and outlook of China oil-gas production area.Petroleum Exploration and Development, 39(5), pp.547-559.

Problem 4

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