International Investment - Oil and Gas Industry - Essay Example

INTERNATIONAL INVESTMENT By Name Course Instructor Institution City/State Date International Investment – Oil and Gas Industry Introduction The United States is the most favourable market to enter because it is the largest consumer of oil and gas in the world; for instance, it consumed 18 million barrels per day in 2012, which is approximately 20% of the world’s consumption capacity. In contrast, other competitive markets such as China, Japan, Russia, and India have low consumption capacity than that of the US. For example, the number of barrels consumed by China, Japan, and India per day in 2012 was 10.3 million, 4.7 million and 3.5 million, respectively. While China continues to experience high oil consumption rate, Japan has been recording mixed results. On the other hand, the amount of oil consumed by Russia as well as Saudi Arabia per day in 2012 consumed was 3.2 million and 2.8 million barrels, respectively. The consumption rates in many countries have been increasing, but the United States remains to be the world’s biggest market for oil and gas. The market is attractive because the U.S. economy provides the World’s largest consumer market with approximately 325 million people and a gross domestic product of $18 trillion and 325 million people. In addition, the U.S. free trade agreements with more than 20 countries would offer the company an improved access to millions of other consumers. Mode of Entry The most appropriate mode of entry for the company in the oil and gas industry is Joint venture (JV) since it has been a well-established feature in the industry. More importantly, the joint venture would be easier to unbundle as well as less risky as compared to full organisational mergers. Considering the number of companies in the oil and gas industry, the joint venture would be the appropriate way of achieving collaboration benefits devoid of the political and economic risk related to other business combination such as mergers. The main reasons why joint venture would be a suitable entry mode for the company is because upstream projects would be enormous for the company to singlehandedly finance them. Another reason is that the risk profile associated with major exploration and production projects makes it hard for a company to individually take full exposure. The company can get into a joint venture through numerous legal frameworks, structures or vehicles; Contractual, Partnership and Corporation Joint Ventures. The most suitable type of joint venture for the company is the contractual joint ventures, whereby the parties’ relationships as well as the joint venture structure are put into practice and documented in the legal instruments recognised as Joint Operating Agreements (Al-Emadi, 2010, p.662). In this case, the company’s operations legal framework of various activities such as exploitation and exploration are established through the Joint Operating Agreements (JOAs). Generally, the JOAs comprises of an operator, tasked with development as well as exploration operations under the supervision of the Operating Committee. The co-venturers make up the Operating Committee and are tasked with protecting the non-operating co-venturers rights against losses attributed to the Operator’s work. The Foreign Oil Companies and host states under the JOAs own the projects’ facilities and equipment and also the oil and gas productions. The advantage of using joint venture as a mode of entry include: the foreign company ability to gain new expertise, capacity and new technological knowledge; access to more resources; and flexibility since the company can limit its business' exposure and commitment. Some of the disadvantages associated with joint venture include challenges of building the right partnership and relationship, imbalance in expertise levels, and poor co-operation and integration because of different management styles and cultures. Some of the investments risk that the company could be exposed to include high costs associated with environmental and government regulations. As mentioned by Sherwood et al. (2006, p.74), potential foreign takeovers in the United States is subjected to more rigorous scrutiny, which somehow depicts resistance to crossborder merger and acquisitions. The company could be forced to adhere to the environmental regulations, which need capital to meet the terms, making it hard for smaller companies to enter the oil and gas sector. Political and Legal Factors The United States is considered to be democratic nations, whereby business operations are expected to be transparent and fair. Without a doubt, the U.S. has enormous economic and political influence in the global and national policymaking and is considered as the world’s superpower. To be successful in the U.S., the country would have to comply with the country’s labour regulations and must pay taxes as well as other charges. In the United States, the oil and gas industry is considered to be crucial for the country’s social, economic and political needs since the industry has an enormous effect on the social welfare, agriculture, energy production, transport capacity, and so forth. For this reason, the U.S. has made some trade agreements with many countries. Furthermore, the foreign oil independence policy has reduced the imports of energetic resources; thus, making the domestic market more profitable. The increasing need for cheap fuels has resulted in many territorial disputes between countries; for instance, the Arctic plateau has led to a dispute between Norway, U.S., Russia, and Iceland. According to Mazzarella (2005, p.60) global terrorism is a major issue for foreign oil companies since it results in high costs in terms of property destroyed and lives lost. The terrorism threat in the U.S. has a significant effect on the international investment. For this reason, the company will have to include the terrorism costs in its business expansion operations and plans. The Foreign Corrupt Practices Act (FCPA) forbids all companies that operate in The U.S. from paying bribes to political parties, politicians, or other government officials with the objective of getting favours or business opportunities (Crites, 2012, p.1050). With the view to legal factors, the company would be expected to act according to the constitution, regulations, and norms of the United States. Failure to observe the existing laws could lead to a negative influence on the modalities of oil and oil productions. More importantly, laws and regulations are imposed by the legal factors also for international trade, social and work protection, pollution, competition and work regulation, as well as anti-trust regulation. The oil and gas industry often face numerous legal challenges such as taxes as well as oil prices. Still, the environmental regulation is positively influencing the oil and gas sector in the United States. The measures that have been put in place could help the company reduce its greenhouse gas emissions. According to EPA (2016), the U.S. government through the Natural Gas Pipeline Reform Act seeks to increase the shale gas exploration. More importantly, the Clean Air Act has positively influenced the oil and gas sector. The act seeks to reduce the greenhouse gases emissions and also to reduce volatile organic compounds by 95 per cent (EPA, 2016). According to the Clean Air Act, the oil and gas companies have to take measures that would facilitate the capturing of the natural gas which escapes into the air. This technology would be beneficial to the company since it will be able to capture, treat, and solidify the natural gases rather than releasing it as a waste. Ethics in International Business In the U.S., Chan et al. (2007, p.2) posit that the ethical beliefs are commonly based on the Western socio-theological principles and laws as well as traditional Judeo-Christian. God is seen as the sovereign moral authority that helps people determine what is wrong and right and offers societal structure’s legal as well as moral code. Under the law, every person in the U.S. is considered equal. Therefore, it is important for the company to understand that the establishment of the competitive and open markets in the U.S. is attributed to the fundamental right to choose. Without a doubt, the U.S. market is beneficial since it allocates resources favourably and it is designed in a way that it satisfies the collective society needs. Still, most of ethical dilemmas and issues associated with expanding to the U.S. market are based on the fact that culture, laws and political systems are different from those of other countries. For instance, what it is considered as a normal practice in China could be unethical in the United States. The company leaders should be very sensitive to such dissimilarities in order to be able to select ethical actions that would help solve the imminent ethical problems. Some of the ethical issues the company is likely to face include environmental regulations, human rights, employment practices, as well as. Behaviours that are deemed unethical are based on a dysfunctional culture, the failure of managers to act ethically, and failure to incorporate the ethical issues into operational as well as strategic and decision making. In the U.S., most oil and gas companies engage third parties in order to effectively manage their transactions. Under the Foreign Corrupt Practices Act, a company could be legally responsible for bribery offered to the government officials by such third parties. Therefore, controlling the third parties is will be significantly challenging, and the company would be held responsible for all activities that the third parties are doing on behalf of the company. Conclusion In conclusion, it is clearly evident that the U.S. oil and gas market is the most suitable market for the company because of its strong institutions, political stability, and large population size. The joint venture is the most appropriate entry mode for the company because it would make it easy for the company to access technology and resources, optimise its supply chain and market positioning, and effectively meet the regulatory requirement. To be successful, the company would have to comply with trade restrictions, environmental laws and tariffs, as well as taxation policy. References Read More