Impact of Oil and Gas Production in the Developing World - Gabon - Case Study Example

Impact of Oil and Gas Production in the Developing World Table of Contents Brief Synopsis of the Issue 4 Recommendations 4 Background 4 Analysis and Key Issues of the Gabon 5 PESTLE Analysis of the Gas and Oil Industry in Gabon 6 Resource Curse and Growth of Greed and Grievance Rate 10 Porters Five Forces 12 Threat of Entrants 12 Power of Buyers 12 Power of Suppliers 13 Threat of Substitutes 14 Rivalry of Competitors 14 SWOT Analysis of the Company Operating in Gabon 14 Analysis and Evaluation of Strategic Options for Sanawa Oil Ltd 15 Global Governance Bodies and Regulations 16 Corporate Social Responsibility and Stakeholders 17 Implementation Plan 18 Measures to be put in place to deal with challenges to implementation 19 Reference List 20 Brief Synopsis of the Issue The newly appointed CEO of Sanawa Oil Ltd, Hazel Akua-Aba has been given the responsibility of restoring the reputation of the company following the scam and illegal customs in the gas and oil industry. Thus, top management of the enterprise are considering Gabon for expansion of its operation and pursue E&P projects. The purpose of the report is to analyze, investigate and suggest feasible strategies that the organization is capable of adopting for succeeding in the Gabonese oil market. Recommendations The company should follow a strategic alliance with an international oil company established in Gabon. The enterprise must conduct extensive research about the technical expertise needed to operate in the region. The organization must also develop a training and skill development department to engage local people in its operations according to the new law enacted by the government of the country. Background Sanawa Oil Ltd is a medium sized fast follower in the petroleum industry. It has experienced success through acquiring valuable Exploration & Production (E&P) contracts in developing countries which produces petroleum and also due to the increase in the price of petroleum. The company was facing a challenge to restore its reputation in the world market by expanding its operations internationally. The previous CEO, Silvio de Binti was forced to leave when it was disclosed that an unlawful compensation was made to the administration of a developing country to depress local area groups who raised their voices against the shortage of community development projects from the petroleum revenues. The manipulation on the military of the country by the enterprise has resulted in the death of 8 civilians. This in turn has resulted in the decline of in the market share of the company in the gas and oil industry and also in the reduction of the organization’s market capitalization in several billions. The “greed and grievance” theory has been used to describe the economic and political situation in the country of Gabon. The PESTLE analysis, Porter’s five forces and also the Porter’s Diamond model has been used to evaluate the external factors which affect the oil and gas industry with reference to the “resource curse” theory (Hammond, 2011). In order to get information about the domestic situation of nation, the government system of Gabon has also been studied. Moreover, a SWOT analysis is conducted to determine the weakness and strengths of the enterprise in order to take the advantages of the opportunities and also overcome the barriers in the petroleum industry. Analysis and Key Issues of the Gabon The impact of oil production in the economy of South Africa has been mixed. On one hand, there are various events of high records of abuse of human rights and huge social and environmental costs. On the other hand, earnings obtained from the seven largest exporting sub-Saharan African states which includes Gabon, have the potential to eradicate poverty and devote resources needed to reach the “Millennium Development Goals” (MDG) between 2006 and 2015 (Clers, 2007). In Gabon, the production of oil is currently declining and this has been a source of major economic and political instability. The government intends control the petroleum industry of the nation, but if the control goes beyond a certain limit, it will adversely affect the country’s ability to attract financial assistance from foreign investors. There has been a lack of major discoveries in the year 2014. Gabon depends on the petroleum industry for nearly 56% of its gross Domestic Product (GDP) due to which the nation is vulnerable to price shocks and fluctuations. Thus, the country aims to diversify its economy by introducing new hydrocarbons code and encouraging small businesses (The Oil and Gas Year, 2015). PESTLE Analysis of the Gas and Oil Industry in Gabon Factors Issues Facts Political Stable political environment (Linklaters LLP, 2014). Lack of formal political structure Between independence from France in 1960 and 2009, Gabon had only two presidents. Omar Bongo was in authority for more than four decades in Gabon (BBC, 2015). Low turnout and accusations of electoral scam during the local elections in 2002-03 (BMI Research, 2015). Economic Rising poverty Dependence on Oil Exports (Fluctuations in Oil prices) Abundant natural resources Adequate Foreign Support High per capita Income Increasing GDP According to a study conducted by “Oxford Poverty and Human Development Initiative” (OPHI), the “Multidimensional Poverty Index” (MPI) illustrates that 35.4% of the inhabitants live in scarcity with inadequate nourishment, schooling and a poor standard of living ( Oxford Poverty and Human Development Initiative, 2010). Gabon depends on the petroleum sector for about 56% of its Gross Domestic Product (GDP) (The Oil and Gas Year, 2015). There are immense investment opportunities in Gabon, due to the incomparable diversity of the countrys natural resources which includes petroleum and natural gas along with manganese, manganese, iron ore, diamond, timber and hydropower. Gabon is an associate of the African Union and is entitled for the benefits of preferential trade under the African Growth and Opportunity Act (AGOA) (Energy Information Administration, 2015). It is also a member of a number of international institutions such as the World Bank, International Monetary Fund, World Trade Organization, and United Nations (Bureau of African Affairs, 2014). The nation experience high per capita income of more than four times than other African countries due to small population (Forbes.com LLC, 2015). Gabon has a GDP growth rate of above 6% (Forbes.com LLC, 2015). Social Income Inequality Unemployment Lack of Skilled Individuals Abuse of Human Rights The inequality in income is 20.4% in Gabon in 2013 (Human Development Report, 2014). The unemployment rate for young people under the age of 30 is 30% indicating lack of employment opportunities (The World Bank Group, 2015). Gabon has a shortage in the number of trained and skilled people required to conduct plan and execute E&P projects. It relies heavily on foreign technical assistance. The oil producing and exploring companies do not carry out adequate community development programs at the local level. The local people do not have legally recognised rights overt their lands and thus companies do not have any obligations towards them (Energy Information Administration, 2015). Technological Depends on technology transfer The new law in the hydrocarbon sector is aimed at facilitating technology transfer by international firms (The Oil and Gas Year, 2015). Environmental Environmental Degradation at the Local level Deforestation Soil erosion Pollution The extraction and production of oil and gas and other natural resources has lead to the degradation of the environment. It has given rise to a number of environmental problems such as soil erosion, pollution and also deforestation which may have harmful effects on human life in the future if necessary steps are not taken to prevent them (Forests Monitor, 2006). Legal Government control and regulation in the petroleum sector. Modernized Regulatory procedures Laws encourage foreign direct investment. Lack of simplicity and precision in the legal system The regulatory authorities of Gabon are affected by influence and thus create uncertainty regarding just treatment and fair agreement of contracts (Bureau of Economic, Energy and Business Affairs, 2011). Resource Curse and Growth of Greed and Grievance Rate The United Nation’s Human Development Index shows that there is high degree of variation in the welling of humans in the resource rich countries. The very low ranked countries include Gabon among other oil producing nations. Since the economy is highly dependent on the exploration and production of oil and gas, it is vulnerable to the fluctuations of international prices of these commodities (Hammond, 2011). Though the nation is endowed with abundant natural resources, its high reliance on the petroleum sector has neglected the development of other natural resources. Gabon experiences rising GDP, but the inequality of income, education and health is a rising concern for the Gabonese government. Thus, it has also taken several steps to diversify the composition of goods and services in the country by encouraging small businesses. The diagram below shows the rate of annual energy imports and the annual rate of growth greed and grievance of Gabon for the years 1986 to 2011. The above chart shows that the net energy imports have been negative through the time period. This indicates that Gabon is a foremost exporter of petroleum and it absolutely depends on this sector. Thus, its economy is extremely affected by the price variations of petroleum in the global market. The rate of greed and grievance of a nation is measured by the extent of primary commodity exports by a nation (Collier and Hoeffler, 2000). The economy earns a major portion of its revenue from the exports of these commodities. This explains the positive growth of the greed and grievance rate. Porters Five Forces Threat of Entrants The main factors which influence the entry of new comers in the gas and oil sector are the huge capital requirements, advantage of large scale of operation, government controls, ownership of resources and product differentiation. In this industry, the companies produce similar products, but the market is dominated by lager international companies. Royal Dutch Shell and Perenco are leading oil manufacturers of the nation. The other major producers include the Sinopec-owned Addax petroleum, the Paris based Perenco and the Houston based Vaalco Energy (Energy Information Administration, 2015). The government of Gabon has taken several steps to increase its control over the oil and gas industry in the country. It has recently created the Gabon Oil Company which is entitled to purchase a maximum participation of 15 % in a “production sharing contract” (PSC) at market conditions (Linklaters LLP, 2014). Thus the threat of entrants in this sector in Gabon is assessed to be low. Power of Buyers The oil and gas industry comprises 90% of the total export earnings of the nation out of which 80% involve the export of crude oil. The country produces nearly 240,000 barrels of petroleum per day and other liquid products in 2013. The country exports a major portion of its production and mainly trades with the United States, India, Europe, Japan, Australia, Indonesia and others. Since the economy is highly dependent on the production and export of oil and gas, price fluctuations of these commodities in the world market significantly affects the economic performance of the nation. Thus, the power of buyers is very high in Gabon for the oil and Gas industry. (Source: EIA, 2014) Power of Suppliers The power of suppliers influences the market by charging high prices or limiting the production and integration. The power of suppliers can be considered low as the main imports include other consumer goods since the economy in highly dependent on the oil and gas industry. Gabon mainly exports products of the oil and gas industry and thus the power of suppliers is negligible as it is a major supplier of petroleum products to the world. Threat of Substitutes Taking advantage of the superior technology, major petroleum companies are seeking for different sources of energy as probable alternatives. The threat of substitutes increases when it offers a profitable price trade-off to petroleum, or when the buyers cost for switching to substitutes is small. The substitutes for gas and oil are very low as renewable products like hydro-electricity and solar and wind energy is not yet commercially viable. Rivalry of Competitors Strong presence of international oil companies in Gabon with comparable products as well as the identical target market would be a source of intense rivalry for Sanawa oil Ltd. The majority of the oil producers are first movers and this would be a benefit due to awareness of the economic conditions. SWOT Analysis of the Company Operating in Gabon Strengths Effective Management Economies of Scale Technical Expertise Rising Per Capita Income Weaknesses Medium-sized Company Hampered Reputation Declining Market Share Reduced Market Capitalization Opportunities Growing Market Create job opportunities in Gabon Provide Required Technical Assistance Restore its Reputation by Carrying out Corporate Social Responsibilities. Help reverse the declining trend in the share of oil and gas in the GDP of Gabon. Threats Fluctuating Oil Prices Lack of Transparency in the Legal System Government Control and Regulation Income Inequality Analysis and Evaluation of Strategic Options for Sanawa Oil Ltd The possible strategic plans that are visible are as follows: Independent entry of Sanawa Oil in Gabon: It bears certain risk related to operational disasters if it chooses to enter independently in the Gabonese oil and gas industry due to the nature of exploration activities. Also, technological requirements may differ according to the area of exploration. By adopting this strategy, the company will have to bear all the risks of financing the projects as its market capitalization has been reduced due to adverse affect on its reputation. Strategic alliance with successful international oil company already existing in Gabon (Mergers and Acquisitions): The industry of oil and gas has been dominated with strong international companies with Royal Dutch as one of the largest. This will help in sharing the financial costs, increases the chance or succeeding in the market, share the required technology if needed. This will also help in acquiring access to reserves as the international company is already established in the concerned market (Abell, 1980). Strategic Alliance with State Owned Oil Company (Gabon Oil Company) (Joint Venture Production Sharing Contract): Sanawa Oil can restore its reputation by initiating a exploration and production sharing contracts with the Gabon Oil and company which is established in order to carry out activities related to the marketing, importing, exporting and distributing hydrocarbon products, performing all the financial calculations related directly or indirectly to the oil and gas industry. It is also responsible to carry out exploitation and exploration activities on its own or jointly with other entities. State-owned companies are not equipped with modern production technologies but this will not affect the company from jointly operating with GOC as Sanawa Oil has high technical efficiency. Making an alliance with state owned company will limit the competition from other market players and thus will continue to increase its market share (Malone, Fries and Jones, 1993). Global Governance Bodies and Regulations Gabon was a member of the Organization of the Petroleum Exporting countries from 1975 to 1994 but left the organization due to high annual fees (Energy Information Administration, 2015). The Gabonese government established a nationalized oil company to augment the government’s involvement in petroleum production by taking equity stakes in future agreements in June 2011(The Oil and Gas Year, 2015). Though it has been granted legal, financial and administrative independence, it is under the Minister of Hydrocarbons and Ministry of Economy (Energy Information Administration, 2015). Corporate Social Responsibility and Stakeholders Carroll’s CSR pyramid describes the economic, legal, ethical and philanthropic responsibilities of an organization. Economic responsibility is to ensure adequate returns to investors and maximize sales and minimizes cost to be profitable. Legal responsibility is to adhere to environmental, labour, consumer and other laws associated with the operations of the organization. Ethical responsibility is the obligation to perform things in a fair way, ensure ethical leadership and minimize harm to the stakeholders. Philanthropic responsibilities involve the improvement of local communities by devoting human and financial resources. An operating license brings responsibility towards the local communities so that they benefit directly from presence of Sanawa Oil Ltd in the Gabonese market. The enterprise must focus on sustainable development and operate in a manner that will improve the standard of living of the local people along with preserving the conventional ethics and customs. The enterprise must focus on the occupational safety and health of the people and it must also treat the employees as the most precious assets (Mearns and Yule, 2009, Mearns and Flin, 1995).The primary objectives of the company should be to respect the local communities, their values and customs. It must also emphasize in the development and practice of the most environment friendly methods in the industry (Hopkins, 2012). Implementation Plan After the evaluation of the possible market strategies to enter the petroleum production market of Gabon, the following implementation plan has been proposed to the management of the organization: Initiation Process: The oil company is recommended to carry out a thorough assessment of the internal and external factors may influence the operation of the company in the gas and oil sector of Gabon. It should also gather information about the market share of all the international companies dominating the sector and also the cultural and environmental aspects influencing E&P activities. Planning Process: The enterprise must examine the existing laws and regulations, tax structure and other codes and standards, which govern the entry of oil companies in the Gabonese petroleum industry. It also assesses the political, social and technological factors to predict future shortcomings. Execution Process: The Company must adopt the strategy of entering into a partnership with an existing international company in the market as this will help in the financing of the projects, technological assistance and increase the chance of achieving success in the market of Gabon. Monitoring and Control Process: Sanawa Oil is a fast follower and thus it will rapidly adopt the practices and of its merger company. Moreover, it can carry out intense corporate social responsibility programs among the local communities and thus regain its lost reputation. Measures to be put in place to deal with challenges to implementation The company must adhere to the New Law enacted by the government of Gabon to provide greater transparency and control over hydrocarbon activity and thus increasing local benefit and ensure adherence to environmental protection regulations. According to this law, at least 90% of all jobs in the energy sector must be held by the people of the locals including the executive positions. This will require the company to develop a skill development and training department in Gabon. Reference List Abell, D. F., 1980. Defining the business: The starting point of strategic planning. New Jersey: Prentice-Hall. BBC, 2015. Gabon country profile – Overview. [online] Available at: < http://www.bbc.com/news/world-africa-13376333 > [Accessed 12 June2015]. BMI Research, 2015. Gabon. [online] Available at: < http://www.nationsonline.org/oneworld/gabon.htm > [Accessed 12 June2015]. Bureau of African Affairs, 2014. U.S. Relations With Gabon. [online] Available at: < http://www.state.gov/r/pa/ei/bgn/2826.htm > [Accessed 12 June2015]. Bureau of Economic, Energy and Business Affairs, 2011. Investment Climate Statement – Gabon. [online] Available at: < http://www.state.gov/e/eb/rls/othr/ics/2011/157280.htm > [Accessed 12 June2015]. Clers, S., 2007. Mitigating the Impacts of Oil Exploration And Production On Coastal And Wetlands Livelihoods In West / Central Africa. [pdf] Available at: < ftp://ftp.fao.org/Fi/DOCUMENT/sflp/SFLP_publications/English/oil_fish.pdf > [Accessed 12 June2015]. Collier, P. and Hoeffler, A., 2000. Greed and Grievance in Civil War. [pdf] Available at: < https://openknowledge.worldbank.org/bitstream/handle/10986/18853/multi_page.pdf?sequence=1 > [Accessed 12 June2015]. Energy Information Administration, 2015. Gabon: International energy data and analysis. [online] Available at: < http://www.eia.gov/beta/international/analysis.cfm?iso=GAB > [Accessed 12 June2015]. Forbes.com LLC, 2015. Best Countries for Business. [online] Available at: < http://www.forbes.com/places/gabon/> [Accessed 12 June2015]. Forests Monitor, 2006. Political, social and economic framework. [online] Available at: < http://www.forestsmonitor.org/en/reports/540539/549944 > [Accessed 12 June2015]. Hammond, J.L., 2011. The Resource Curse and Oil Revenues in Angola and Venezuela. Science & Society, 75 (3), pp. 348-378. Hopkins, M., 2012. Corporate Social Responsibility and International Development: Is Business the Solution? London: Earthscan. Human Development Report, 2014. Sustaining Human Progress: Reducing Vulnerabilities and Building Resilience. [pdf] Available at: < http://hdr.undp.org/sites/all/themes/hdr_theme/country-notes/GAB.pdf > [Accessed 12 June2015]. Linklaters LLP, 2014. Gabon’s revised oil & gas regime. [pdf] Available at: < www.linklaters.com. > [Accessed 12 June2015]. Malone, D., Fries, C., & Jones, T., 1993. An empirical investigation of the extent of corporate financial disclosure in the oil and gas industry. Journal of Accounting, Auditing & Finance, 8(3), 249-273. Mearns, K., & Flin, R., 1995. Risk perception and attitudes to safety by personnel in the offshore oil and gas industry: a review. Journal of Loss Prevention in the Process Industries, 8(5), 299-305. Mearns, K., & Yule, S.,2009. The role of national culture in determining safety performance: Challenges for the global oil and gas industry. Safety science, 47(6), pp. 777-785. Oxford Poverty and Human Development Initiative, 2010. Gabon. [online] Available at: < http://www.ophi.org.uk/wp-content/uploads/Gabon.pdf > [Accessed 12 June2015]. The Oil and Gas Year, 2015. Gabon 2014. [pdf] Available at: < http://www.theoilandgasyear.com/content/uploads/2015/01/Preview_TOGY_Gabon_2014.pdf > [Accessed 12 June2015]. The World Bank Group, 2015. Gabon Overview. [online] Available at: < http://www.worldbank.org/en/country/gabon/overview > [Accessed 12 June2015]. Appendix 1 Read More