Natural Gas Supply - Case Study Example

Choose ONE product/service of a popular company or any company which is listed on a stock exchange market Contents Introduction 3 Demand and Supply Factors 3 Market Structure 3 Necessities to compete in the market 4 Elasticity Concepts 5 Efficient use of resources 5 Economic Growth 5 Unemployment 5 Inflation 5 Balance of Payments 6 Business Cycle 6 Reference 6 Introduction The company that has been taken in the essay is BG Group Plc, one of the leading oil and gas producers in United Kingdom. It has set its head quarters in Reading after the company came in the picture in 1996. The company currently operates in the 25 nations across the globe. The major business includes Liquefied Natural Gas (LNG). The company is the leading LNG supplier in the United States. BG Group is one of the listed companies in the London stock Exchange (LSE). The British Gas plc divested Centrica and the company was created. BG Group marks its presents in 5 continents. Demand and Supply Factors First consider the demand side factors which include weather, demographics, economic growth, consumption of fuel, storage of the products and exports. The cyclical pattern seems to be the demand pattern for natural gas. The demand follows the step path in the coldest months while the opposite is the nature of demand in the hotter months (EIA, 2008). The demand tends to rise slightly in summer to meet the demand of natural gas for electric generators. Demand also increases when there is growth in the economy. Cyclical pattern is the nature of the demand curve. Storage of the produced is difficult for the companies in this sector and so excess supply cause a fall in the price level. The supply side factors are the capacity of the pipeline through which the transportation of natural gas takes place, drilling of the gas and technological advancement. The price of electricity also has a major role to play in the demand and supply frameworks of natural gas. As several competitors compete in the market, the price is set at the equilibrium level. Recently there has been technological advancement in the demand for natural gas. The rising electricity prices are the main reason for this situation. The appliances operated through natural gas can now compete closely with the electrical appliances causing demand to shoot up. The short term barriers affecting the supply of natural gas are availability of skilled workers and equipment, permitting and well development, delivery disruptions. The barriers that affect in increasing the supply of natural gas are onshore and offshore access, the financial environment (Natural Gas, n.d.). Market Structure The consumers of natural gas are now exposed to choice and competition. The government does not regulate the price mechanism. The price is set by the demand and supply conditions. Generally the price is set at the level where demand equals supply. (Soligo and Jaffe, p.2). The figure above shows the demand for gas over the past 30 years. The nature of international gas market is experiencing change. Bilateral contracts between the buyers and sellers are the characteristic of markets outside the U.S. The increased liquidity in the market has called for the emergence of non-contract LNG market. The producer owns the gas at wellhead and sells to the marketers, less developed countries and sometimes to the end users. The market for natural gas faces a significant setback. The market for other commodities can immediately react to the change in demand and supply conditions but this type of market takes time to react to such situations mainly because to increase the supply of natural gas it is required to lease land and acquire the permission of the government. Seismic work and drilling the path towards the pipeline needs a lot of time. The lifetime of the existing wells will come to an end at some point and the amount of production they are capable to produce involves uncertainty. Necessities to compete in the market The company should have access to non-competitive facilities at non-discriminatory terms and conditions. Access to the pipeline network is one such facility. Attention needs to be diverted in structuring policies that will impact on the competition (OECD, 2000, p 9). The policies that will create discrimination needs to be regulated. Consistent policies is required to be implemented which will give space for secure and environment friendly infrastructure. As resources are scarce, optimal utilization will not only prevent waste of them but also ensures future use. The traditional regulations can be withdrawn and it will provide the opportunity to promote competitive motive among the competitors. The company should also ensure that it continues to provide the high quality services which will help to capture the market demand. Elasticity Concepts The elasticity concepts that can influence the pricing strategy or the competitiveness are price elasticity of demand and income elasticity. The price elasticity of demand is given by the change in the quantity demanded due to the change in price, taking into consideration only a particular product. Suppose the demand of the product of BG Group increased by 40% as the company decided to reduce the price of the same product by 20%. In this case the price elasticity accounted is 2(Biz/ed, 1998, p.14). The income elasticity is referred as the change in demand of the considered product due to change in income of the population in a situation of ceteris paribus. The income elasticity is positive for any normal good (natural gas in this case). Efficient use of resources BG group is more inclined in extraction of natural gas than oil. The nations where the company operates are Australia, Brazil, Egypt, India and Norway, just to name a few. The year 2010 saw significant progress in achieving the largest growth opportunities in the history of the company. In the year itself the company launched the BG Group behavior. It consisted of nine core of working that can be applied into everything where the company is in and will also integrate the processes of recruitment, induction. Policies have been measured to ensure that all employees have clear idea about the roles of them. The company also updated the HR policy. The up gradation of resource planning models took place and actions towards succession planning were undertaken (BG Group, 2010, p.4). Economic Growth Economic Growth brings increased income for the population. BG Group is likely to be benefited from such growth as increased income will allow the consumers of the company to demand more. The high demand indicates more revenue and profits will display in the balance sheet. The export possibilities will rise which allows the company to acquire the steep rising path. Economic growth is a phase of the business cycle and so BG Group should prepare itself from the conditions when the slag in demand occurs. Unemployment In a situation of unemployment there is shortage of skilled, efficient worker. As a result the efficiency of the company will not be able to match the optimal efficiency and utilization of resources will get hampered. The semi-skilled or unskilled labor will not the required training and so they will operate at the below efficiency level. This is an unwanted situation for the company. The revenue will get affected and back up plans of the company needs to be implemented. Inflation Inflation has the effect in raising the rates of interest. The input prices will also take the steep uprising path. The most serious effect of inflation is on trade. Exports will be severely hampered and excess supply will drive away the accrued benefits (Bowett n.d.). The resultants will shed the shadows on the revenue forecasted. The process of attracting investments will see the darker side as firm will lose the ability to borrow money. The opportunities of creating new jobs and employment will face a setback. This would mean unavailability of personnel (Amendment 1, 2008). Balance of Payments One of the most serious incentives in taking the growth path for the company is investments. The balance of payments is the track will guide investments in the company. Investments are necessary for technological up gradation which will act to take the advantage for the company against the other competitors in the industry. The continuous flow of investments will shed its impact in the long run. Ups and Downs in the balance of payments will hurt the confidence of the investors as the aggregate demand will get reduced and the company will lose its foothold in the market and in the industry. Business Cycle The four phases of business cycle are prosperity, recession, recovery and depression. The demand shoots up in the phase of prosperity. The opening up of trade possibilities and rise in the productive capabilities will show took off situation for the company if they are able to use the situation in their favor. Reduction in the levels of demand is one of the significant effects of recession. Trade possibilities are likely to be affected. Exports will fall significantly and the difference between forecasted and observed revenues will grow. However as recovery is the next phase in business cycle, the situation arising from situation is partly compensated. Investments will slowly begin to come in the company but a lot depends on the performance of the company in the phase of recession. If the company is on the verge of closing down then it will not be able to attract the investors. Reference EIA, 2008, Natural Gas Demand. [online]. Available at: http://www.naturalgas.org/business/demand.asp. [Accessed: 19th March, 2012]. Natural Gas, n.d., Natural Gas Supply.[online]. Available at: http://www.naturalgas.org/business/supply.asp. [Accessed: 19th March, 2012]. Soligo. R. and Jaffe, A. 2004. Market Structure in the New Gas Economy: Is Cartelization Possible? [pdf]. Available at: http://iis-db.stanford.edu/pubs/20705/Gas_OPEC_final.pdf. [Accessed: 19th March, 2012]. OECD. 2000. Promoting Competition in the Natural Gas Industry.[pdf]. Available at: http://www.oecd.org/dataoecd/34/23/1920080.pdf. [Accessed: 19th March, 2012]. Biz/ed, 1998, Price Elasticity and Pricing Policy. [online]. Available at: http://www.bized.co.uk/learn/business/accounting/busaccounts/notes/pl.htm?page=14. [Accessed: 19th March, 2012]. BG Group, 2010. Sustainability Performance Report.[pdf]. Available at: http://www.bg-group.com/sustainability10/Documents/1.%20Performance%20Report/2010%20Sustainability%20Performance%20Report.pdf. [Accessed: 19th March, 2012]. Bowett R., External environment-business and inflation.[online]. Available at: http://tutor2u.net/business/external/economy_inflation.htm. [Accessed: 19th March, 2012]. The Natural Gas Supply Association, 2008. U.S. Natural Gas Market.[pdf]. Available at: http://www.ngsa.org/assets/docs/issues/USNaturalGasMarketsFinal.pdf. [Accessed: 19th March, 2012]. Read More