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Oil and Gas Management
Background of the Study
The chief international and national oil companies (The Big Oil) are fronting probably their utmost challenge and risk to their persistence. This is attributed to the demand for oil produces which has reduced due to the worldwide commercial sluggishness. The outburst of shale oil and gas oil making in the U.S.A. led to an extraordinary pronouncement by OPEC in the November 2014 to uphold production levels to recuperate the lost market share. Consequently, the crude charges fell by over 50% to trade in the low $40 for each barrel assortment in December 2015. In its conference in December 2015, OPEC retained the existing production levels. The sustained production levels were projected to upshot into the anticipated 700,000bpd excess supply in 2016. This is to say that greater rates are not at the corner. The United Nations (UN) Convention on Climate Change that was held in Paris in France seemed to be brokering some solemn international pledge and resolve by utmost national governments to edge global warming and climate change by transiting from high carbon economies to low carbon economies and, therefore, complete the death-knell for fossil fuel usage, and thus fossils fuel companies. This has postured an inordinate challenge on the survival if the Big Oil and their continued existence is significantly susceptible. In addition, there are numerous rules and regulations and agency policies that are being put forth and implemented in high carbon economies to limit the usage of fossil fuels in such economies. This has led to reduced demand for fossil fuels which has extensively influenced the operations and wellbeing of the Big Oil.
Purpose of the study
As an outcome of the frequent challenges confronted by the Big Oil, this study is done to research how the Big Oil is fronting up these challenges. In addition, to find out if any tactical intelligence and thinking is revealed in their public proclamations and headlong thinking. The study will deliver views of the industry by deliberating the foremost areas that are becoming progressively a challenge for the oil companies. It will also provide personal interpretations and conclusions from the study that are believed to be ultimate.
The Cash Crunch of Sub-$50/bbl. on Oil Projects and Dividends
The Big Oil is pugnacious to creäte sufficient money to cover their expenditure and disbursements, notwithstanding the struggles to reduce billions of dollars from their costs in the face of plummeting oil prices. Expenditure on new-fangled projects, share buybacks and bonuses at four of the major oil companies recognized as the supermajors (BP PLC, Chevron corp., Exxon Mobil corp., and Royal Ditch Shell PLC) was established to have outperformed cash flow by more than a collective $20billion in the first half of 2015 conferring to a Wall Street Journal scrutiny. Specialists anticipated the companies to divulge continual deficits when they reported incomes a few moments ago after the third quarter in which oil prices cut down to their lowermost level subsequent of the financial disaster. The international standard (Brent Crude), averaged approximately $50 per barrel in the third quarter, likened to with greater than $60 a barrel in the second quarter and nearby $100 in 2014(Pedroni, Fennessey, Romer and Ruck, 2014, p.45). The cash crunch underlines the cloudy imminent fronting these Big Oil within a 16-momths decline in oil prices. After a decade when great oil prices buttressed mega-projects and gradually intensifying expenditures to shareholders, the supermajors have lowered outlay by more than $30 billion in latest months, laying off workers and deferring projects. In this view, more slashes are thus projected. After the original denial, panic, capitulation, and shock, oil service benefactors and oil manufacturers and energy investors must outlook the future in a different way centered on the lower-for-longer oil price situations, or risk their own. Some investment banks anticipate the mainstream of the companies they shield to post-record shortfalls in unrestricted cash flow this year. Cost cutting could impend the companies’ capability to sustain or escalate production in the future. The Big Oil companies stated had strapped back expansion and development of an approximated 7.3 billion oil tubs, natural gas, and other liquids conferring to an account from consultancy Wood Mackenzie. It was reported that the world’s major energy companies have doubled down on their potential to guard dividends in spite of a impulsive drop in proceeds this year accredited to deterioration in oil prices. The dividends and payouts to stockholders have no reason to be as unstable as the oil price. It is dreadful to eradicate dividends and sign that the business was not doing well. Oil prices are presently trading marginally $40 per barrel. It was reported that more investment banks, energy companies, and analysts do not perceive the prices increasing above $60 per barrel till 2017. The International Energy Agency stated that oil prices would sluggishly upsurge to $80 per barrel by 2020, but also delineated a situation in which they continued at $50 per barrel. This has elevated questions on a latent cash crunch at oil companies, a delinquent the companies acknowledge and said they are taking phases to address. The companies said they would maintain vigorous balance sheets that provide them suppleness to increase funds to aid them cover costs when required (Wilson & Briesen, 2012 p.288). In reaction to queries, the four companies pointed to the determinations to the enhancement of cash-flow and management of expenditure to upkeep their dividend outflows. The Big Oil has said it would be capable of covering its dividends and investment spending from cash flow by 2017 and the existing scrutiny said that Shell could do the same by 2018 even if the prices persisted at $50 per barrel. The companies reported that they still anticipated their productivity to upsurge in spite of the outlay cuts.
Whether to Abandon Oil Production-Maximizing Policies
There are numerous reasons that have been delivered for the melodramatic drop in the price of oil to about $60 per barrel slackening demand owing to worldwide commercial sluggishness, over-production at the shale grounds in the United States, the resolution by Saudis and other Middle East OPEC manufacturers to uphold production at existing levels to castigate higher-cost manufacturers in the U.S. and in another places; and upsurge the worth of the dollar relative to other moneys. There is, nevertheless, solitary reason that’s not being deliberated, and yet it could be the utmost significant of all: the comprehensive downfall of the Big Oil’s production-maximizing commercial model. Till last all, when the prices deterioration gained momentum, the oil goliaths were functioning at complete control, propelling out extra petroleum daily. They did so because of the revenue from extraordinary prices. The International Benchmark for crude oil (The Brent Crude) had been selling at $100 or greater while the Big Oil was also functioning conferring to the corporate model that supposed an ever-increasing demand for its merchandises, nonetheless expensive they might be to produce and improve. This implied that no fossil fuel reserves, no latent basis of supply no matter how inaccessible or hard to reach, how enclosed in rock, how far offshore or profoundly buried, was considered unattainable in the mad struggle to upsurge productivity and proceeds(Pedroni, Fennessey, Romer and Ruck, 2014, p.43). This production maximizing approach had, in turn, created momentous affluence for the huge companies. How things transformed in a matter of months was incredible. With demand stationary and surplus production the story of the moment, the very approach that had produced record-breaking proceeds has abruptly become despairingly dysfunctional. To copiously appreciate the nature of the energy industry’s quandary, it is essential to reflect on 2005 when the production-maximizing approach was initially embraced. That time the Big Oil confronted a critical crisis. Several prevailing oil grounds were being exhausted at a stifling speed leading specialists to forecast an impending crowning in international oil production, tailed by an irreparable debility in worldwide production as the swift commercial development in India, China and other mounting countries was strident for fossil fuels into the stratosphere. The major apprehension here was over climate modification which was then gaining impetus, intimidating the imminent of Big Oil and creating forces to invest in alternate forms of energy. This implied that to flourish under such setting, the oil industry had to embrace another strategy, abandoning production-maximizing strategy (Wilson & Briesen, 2012 p.288). The fossil fuel (oil) prices have been subject to instability. The precariousness is regularly, therefore, no comfort, nevertheless, to the companies trying to run or to funding businesses in the sector predominantly given the long-lead times and life-spans of assets. Such periods there is no one who can forecast the future precisely to have the finest suiting responses that can be done to try understanding why the price falls occurred, ask the correct queries about what might transpire next and make the businesses as irrepressible as conceivable. This is because in economics things take relatively long to occur than one could think they would and, therefore, this occasionally causes difficulties to forecast the happenings since they may happen faster than one could imagine or slower than one could anticipate.
Planning by Oil Companies to Plan for Low-Carbon Global World
Oil and gas firms need to understand past the contemporary glitches instigated by stumpy product prices and emphasize on the broader mega-trends that will reform the future of the energy industry in the long-term, conferring to a report released by Consultant giant PwC. While Oil and gas will linger to perform a vivacious role in any forthcoming energy system as international customer demand for dependable and reasonable energy supplies, companies must reexamine their portfolios in the face of rising force to de-carbonize. International demand for inexpensive, consistent energy will endure to grow for the predictable future, but there is a novel longer-term back-drop as the world changes to low carbon system. The push to substitute fossil fuels with cleaner energy bases is building, oil and gas firms need to contemplate their futures in this situation. Even with the augmented investment in unconventional energy sources, most energy predictions foresee that fossil fuels will account for at slightest 50% of the international energy demand in 2040. In spite of this, there is still inordinate latent to lessen carbon dioxide releases by mounting to share of natural gas comparative to coal in the energy combination. This is so because burning natural gas yields approximately half as much as carbon dioxide per unit of energy associated with coal. In relation to this, efficacious operators have revealed the capacity to react to the challenges by captivating a long-term observation, inventing, acclimatizing and evaluating main tendencies as they outline medium-long-term investment strategies. Together with the low-carbon changeover, other vicissitudes to market subtleties are eminent comprising OPEC’s struggles to defend its market share and the rise moderately inexpensive and abundant U.S. shale gas (Wilson & Briesen, 2012 p.288). In this regard, there are four setups recommended for firms to use bearing in mind how the oil and gas industries may be influenced in the future. In one scenario, PwC proposes that as governments execute COP21 guideline, inducements and straight investments, demand for energy efficacy and renewable energy will increase placing additional stress on oil and gas companies to broaden their horizons their businesses. In the meantime, under a business-as-usual setting, where the segment lingers to change with restricted government participation, price instability remains to present key finance challenges. Operators and service benefactors are enforced to cooperate more to drive effectiveness, while gas becomes an indispensable changeover fuel as investors look to de-risk their portfolio. Other situations envisage increasing customer demand for cleaner energy bases driving reserved investment in new sanitary expertise, or the growth of straight government action in contradiction of supplementary fossil fuel survey as nations pursue to attack increasing carbon emanations (Pedroni, Fennessey, Romer and Ruck, 2014, p.45). In recent studies, the Inter-governmental Panel on Climate Change and the Inter-national EnergyAgenncy have proposed that in order to realize the worldwide objective of restraining global warming to estimated 2˚C, the globe is required to live inside an established carbon budget, and a noteworthy percentage of verified comprehensive fossil fuel reserves will be necessary to left in the ground. It is, therefore, significant to comprehend the companies’ reserve disclosure to the perils linked to contemporary and likely impending guidelines for plummeting green-house gas discharges by 80% by 2050. It also important to appreciate what choices there are for the companies’ to mitigate these jeopardies, for instance, carbon concentration of its resources, stripping its greatest carbon intensive assets, varying their business by capitalizing in lower carbon energy bases of returning capital to stockholders. Nevertheless, our governments, colliding illogicalities abolish the climate strategies.
- Pedroni, P.M., Fennessey, K., Romer, R. and Ruck, P., 2014, March. Making the Connection: Oil and Gas Management of Natural Resources. In SPE International Conference on Health, Safety, and Environment. Society of Petroleum Engineers.
- Wilson, J.M. and VanBriesen, J.M., 2012. Oil and gas produced water management and surface drinking water sources in Pennsylvania. Environmental Practice, 14(04), pp.288-300.
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