Managing Challenges In The Oil And Gas Industry

Main body

Describe about The Oil And Gas Management?

The perceived importance and the basic role of the global oil energy have been changed drastically. The geopolitical sensitivity, supply security, price alteration, water pollutions, etc. IS creating higher sustainability issues for the oil marketers. It has been identified that the economic stagnation has reduced the demand for the oil. The shift in the balance of oil trading due to the initiatives of the OECD has projected massive risks with the dependence on the Middle East oil. As a consequence, the Western hemisphere is likely to be more dependent for oil in next few decades. Additionally, the overproduction of the shale field in the USA, the decision of Middle East countries  for maintaining production output at various levels have been identified as the reasons behind the current turbulent situation of the oil industry. On the other hand, the UN Convention on the climate change in Paris has appeared as a major global commitment towards resolving global warming. These initiatives have generated a transition phase for low carbon economies and significant threats are coming towards the fossil fuel companies. 

The present essay attempts to discuss three main challenges of the oil companies such as the cash crunch of sub $50/bbl oil on the projects and dividends, plan for low carbon global world and whether the oil firm could abandon production maximization policies. Finally, based upon the interpretations a high level review has been discussed ending with a potential conclusion of the current essay.

The present OPEC investment plan has increased the capacity of the oil around 4 mbd, as compared to the previous situation. However, it has been projected that half of this is accounted for the increase in the OPEC consumption, and the rest amount of risks will emerge from the world economic situation. In this context, Gusca et al. (2015) stated that China’s economic downfall has reduced the appetite for the commodities. On the contrary, the Saudi Arabia is keen to preserve the market share by lowering the oil production, so that the market prices can be boosted. At the same time, the USA has increased the shale oil manufacturer creates higher growth in the oil market. Considering the fact, Muhindo et al. (2014) stated that the approach of the USA has made the complex situation for the non US, non OPEC, producers. These entities are facing rapid cutbacks, especially in the North Sea. The analysts are concerned that the dividend of the oil companies is at higher risk, due to which the big oil companies might not be able to deliver the promises of the dividend yield. Considering the report of Shell Plc, it has been identified that the American Depository Receipts (ADR) of Shell committed to offer one year dividend yield of 7.6% (www.oxfordenergy.org, 2016). The oil price crash has created a blessing for the US shale. Along with China’s economic weakening, the glut in the crude oil supply and the reduced demand from the European and Asian market has led the oil prices down from $116/ bbl to below $50 bbl (oilprice.com, 2016). As a consequence, the share prices of the oil companies have slumped down.

Low Oil Prices

Due to the low down on the oil prices, oil companies like Shell, BP, Exxon Mobil, etc., has withdrawn pound of investments and thousands of jobs have been eliminated. However, the market analysts suggest that the further oil price can be reduced and it would start hurting the big organisations. It has been pointed out that the North Sea oil operators have cut costs and the present oil pricing is giving much pain to the producers (www.oxfordenergy.org, 2016). The criticism of the market analysts indicated that although the oil price has fallen down rapidly, the US oil producers can tolerate the current prices until it falls up to $25 (Kara, 2015). On the contrary the survey of the US oil companies revealed the fact that many of the US shale operators cannot continue the production with the price below $50.

Starting from the price fall, from 26^th November, 2014 to January 2015, the Brent price fell by more than $30 a barrel (refer to appendix, exhibit 1). However, it has been estimated that lower price can stimulate the demand for oil in the global economy and it will potentially slow down the pace of oil supply growth. Considering the fact, Rothkopf (2007) stated that although the balancing the profitability through higher production can be a good option for the big oil companies, it might take some time to filter the effect through the oil market balances. The present constitution of OPEC can be considered most effective mechanism that feeds through to the current oil market balances (www.oxfordenergy.org, 2016). However, this feedback has a range of implications for the current dynamics of the oil market. Due to the economic fluctuation the investment environment is also experiencing major issues. The pricing stability in a narrow range between the year 2011-2014 and the OPEC’s contribution towards putting a floor on the oil prices have encouraged the investors to participate, new projects and it has influenced other market players to enter into the market. Contrary to this situation, the increased oil price volatility, and the proposed future fluctuation have influenced the investors to reassess the risks (Fowler et al. 2016). As a result, higher degree of discourage can be occurred in the context of investment. Thus, analysing the perspective of Saudi Arabia, it can be stated that price volatility can increase the supply response and the investment can also be accelerated. However, this volatility might have an adverse effect on the domestic economy that has greater reliance on the oil revenues (refer to appendix, exhibit 2). The current oil market scenario is experiencing higher threats due to the lack of willingness to share the burden of the cut, which is necessary for the market stabilisation among the OPEC and non OPEC members. Although Saudi Arabia has reduced the production to regain higher market prices for the oil, producers like Iraq, Iran and Russia have provided the green signal for continuing the production and supply of more barrels in the world market.

Plan for Low Carbon Global World

Additionally, due to the greater market challenges in the oil industry, Saudi Arabia is experiencing rigid competition as a result of the shift in the petroleum products trade flow, which has been caused by the rapid increase in the oil production of the USA. This scenario has created remarkable issues to the other marketers like West Africa, Latin America, who had been forced to identify new market in the Asian region since 2010 (Dubash and Florini, 2011).

Additionally, the internal factors have also played a crucial role behind the decision to ‘leave it to the market’ (refer to appendix, exhibit 3). The financial position of Saudi Arabia has been found relatively better than other nations since past few decades (Aleklett et al. 2010). Similarly, the UK has accumulated heavy foreign assets which are more than $700 billion and the country impose a small amount of debt in terms of the relative GDP and the absolute value. The overall advent of the US shale has introduced a new set of challenges and it has been identified that maximising the revenue has become more difficult and significantly uncertain. Abbasinejad et al. (2012) stated that these uncertainties are linked with multiple dimensions such as the price elasticity of the US oil supply, whether the growth slowdown could follow a non linear or linear path and the breakeven point below which the production value will start falling. Thus, the Saudi Arabia’s defending nature of oil price might have limited success in the global market as any reduction of its operation can be offset by the improvement in the US shale production. Thus, analysing both the US shale supply and the marginal pricing of the new entrance of oil supply holds greater importance for the key market players like Saudi Arabia.

Another vital aspect is that the oil companies having been enforced to plan for a low carbon global world. The Paris 2015 UN Climate Change Conference (COP21) has imposed legal norms to the oil companies to curb the greenhouse gas emissions (Aydın, 2012). It is clear that the oil and gas sector has roles and vital challenges in the future to meet the energy demand and improving the accessibility at the time of addressing global environmental risk. It has been identified that fossil fuels will account for at least 50% of the global energy demand in the year 2040 (Bahgat, 2012). However, it is still possible for the oil marketers to shift into a natural gas from the coal in terms of generating the energy mix. The natural gas burning produces almost half of the carbon dioxide generates from the coal. The big oil companies like Shell, BP, and Exxon realised that the long term global temperature rise to the two degree Celsius, which the organisations do not want to see (royaldutchshellplc.com, 2016). In this regards, the oil companies have started calling for a carbon price Firms like BP, Shell prepare for the future by applying a carbon price to evaluate large new projects. Additionally, BP has played a key role in upstream its natural gas portfolio and committed to grow in the next few decades. Not only this, BP has also started supplying natural gas to meet the global supply demands (Alhajji and Demirel, 2015). The important gas supply chains in Europe have initiated the ‘Southern Gas Corridor’ project, so that natural gas can be brought to the European market from the Caspian Sea (www.theguardian.com, 2016). China and India are also getting benefits from the gas supply of BP.

Production Maximization Policies

The current climate change scenario projects that the Paris need not to be considered as the end of this journey, rather it needs to be considered as the beginning of the road to tackle the climate change impacts on the oil industry. The next two decades have been identified really significant to the oil producers. Considering these aspects, oil companies like Statoil invests rapidly in carbon capture and the storage (CCS). This procedure has been identified as potential enough to prevent almost 70-92% of the CO₂ generated from a power plant (www.bp.com, 2016). In the last few years, the CCS power projects have captured strong attention and it has become commercially viable. The approach of Statoil has enabled the firm reducing its carbon emission half of the overall oil industry’s emissions. Another important thing is that the oil security issue has moved to the Asian region as well. It has been identified that the Asian markets are absorbing more oil as per the supply capacity of the Middle East, which is changing the security of the supply issues.

Conclusion:

The report, published by the International Energy Agency (IEA) shows that the slowdown in the oil demand will persist till 2016. Additionally, the issue of the energy and its impact on the overall policy have been found to increase in nature. Whether the Big Oil admits it or not, an alternative energy has become a main agenda and there is no way to return into the conventional process. Thus, the threat to the oil companies is likely to increase. However, it can be hoped that the present pricing strategy will soon get revised and again the marketers could enjoy the benefit of $100 per barrel price in its operation. However, the world has changed in a significant way and the oil & gas industries have also experienced rapid changes since past few decades. Therefore, it is high time for the oil producers to identify what is happening and what are the future consequences. The globe has now become a place, where the technology and environmental threats are changing rapidly, thus, impacting significantly on the global oil industry as well. Thus, a shared thinking among all market players and statutory body would be highly required to balance the production output with the climate change. Eventually, the oil industry could experience a sustainable future across the globe.

References:

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