Impact of Financial Decision Making of State Owned Oil Companies - Research Proposal Example

Impact of Financial Decision Making (Financial Management) of owned oil companies vs. Privately owned oil companies In order to survive in the extremely competitive global marketplace companies need to introduce advanced strategic plans that will offer them the necessary support in case that the results of their operation are not the expected ones. As a crucial element of the corporate strategic planning, the financial management is usually used to identify the appropriate financial planning that will offer to the firm the ability to handle effectively any potential turbulence either of its local or the global market. It should be noticed that in all industrial sectors there are companies that face severe difficulties in order to adapt their financial projects in their strategic plans, however there are also companies that fail in achieving the above task mainly because they don’t pay the appropriate attention to the problems appeared in the organizational context while the extremely high revenues involved in their activities creates additional responsibilities for these companies’ financial management department. Energy sector is an indicative example of the above phenomenon. This sector presents a particular characteristic regarding its structure: it includes both the state owned companies and the privately owned companies. In this context, any strategic scheme appeared in the companies belonged to the above industrial sector, can present a series of particular characteristics mainly regarding the interests of the parties involved and the funds available for the materialization of the relevant projects. Chapter One - Introduction 1. Statement of the problem One of the most important characteristics of the energy sector is its strong dependency from the state. As a result all firms operating in this sector, especially those dealing with the oil, have to follow the guidelines given by the governmental authorities. In this context, the state own oil companies can be considered as having a significant influence on the privately owned oil companies to the point that the decisions of the former can alternate the operational initiatives of the latter. 2. Aims and objectives of the research This research aims to examine the particular impact of the financial management of state owned oil companies on the privately owned oil companies. At a next level, the structure of the financial management in the state owned oil companies is going to be examined in order to identify any potential weaknesses and proposing the appropriate solutions. On the other hand, the financial management of privately owned companies will also be reviewed trying to locate any particular characteristics as well as any explanations for its influence by the financial decision making process followed by the state owned oil companies. In order for the above comparison to become feasible all the particular structural and operational characteristics of the companies belonged in both the above categories are going to be analyzed in order to ensure that the proposals made are going to be effective towards the required target: the increase of independency of private owned oil companies from the state’s orders and rules. However, such an aspect is also going to be checked as of its particular parameters mostly regarding the protection of the environment and the control over the ‘deposits’ of oil used for these firm’s operational activities. 3. Research Methodology The research is going to be based on a series of statistical data revealed by governmental or private institutions regarding the issue under examination. Of course the literature review will be a basic element of the project however it will be used just regarding the presentation of the theories related with the particular subject while all data and figures involved are going to be included in the empirical research section which will be structured accordingly with the principles of qualitative research. In other words, the main tool for this project’s empirical research will be the qualitative method, i.e. the retrieval and the comparative analysis of data and figures related with the particular topic. It should also be noticed that any type of graphical representation of issues related with this subject are going to be placed in a separate section, the Appendices, in the end of the project and analyzed within the paper in the section ‘analysis of data’. Generally, the research on the specific issue will be based on the studies of theorists and researchers and the data, figures and statistics revealed by governmental and private institutions related with the specific sector. 4. Limitations of the study The research on the issue examined in current project is going to be limited by the fact that the retrieval of primary data regarding the specific issue could not be considered as a feasible task. More specifically, because of the nature of the specific subject, it would be expected that the potential ‘target team’ of a primary research, i.e. employees of state owned and privately owned oil companies would not be particularly cooperative in giving information on their companies’ financial decision making processes. In this context, the research of current project would have to be limited on the views stated in the area of literature as well as on the data revealed by the governmental and the private institutions. Chapter Two – Literature Review Although the companies operating in the oil sector are many it seems that there is no problem of shortage of oil, at least for now. Moreover, it has been found that the costs related with the exploitation and the discovering of oil have been reduced significantly (International Relations Community, 2000). On the other hand, it has been supported by Conklin et al. (1993, 329) that the ‘environmental legislation is creating additional corporate obligations, many of a crisis nature, and this requires a new body of accounting practices, which is often referred to as crisis accounting’. This means that when operating in the oil sector, firms (either state owned or privately owned) need to be conformed to the rules and the principles set for the protection of the natural environment which in this case is being threatened by these firms’ activities. Moreover, it has been supported by Pauchant et al. (1998, 53) that ‘organizations are often unaware of some of the most important forces influencing their actions’. In order to examine this issue the above researchers used a series of interviews (in which 30 executives in 23 organizations took part), the results of which were furthermore analyzed in order to help to the identification of the problems related with the above issue. Indeed these interviews revealed a series of significant data. More specifically, in accordance with the results of the above interviews ‘the concept of self or organizational identity appears to be paramount in influencing strategic actions in crisis management and for this reason many organizations need to be encouraged to examine their basic sense of identity’. At a next stage, the work of Omeje (2006, 477) refers to a ‘field study of the three largest TNOCs in Nigeria – Shell, Mobil and Chevron; the study reveals that different oil companies operating in the Niger Delta adopt different conflict management strategies depending on the precise nature and intensity of the threats concerned, which are, in turn, largely related to the locational spread or concentration of the individual firms oil operations; it is also revealed that the upsurge and intensification of violent anti-oil protests in the oil-bearing communities since the 1990s have compelled petrobusiness to explore new paradigms of security communitization, security privatization, security corporatization and securitization of development’. In other words, the activities of oil companies around the world can have significant influence on the local populations and for this reason these activities should be based on well structured plans that will ensure the protection of both the peoples’ rights as well as of the physical environment involved. Moreover, Baxter (1999, 269) tried to investigate ‘the effects of changes in market conditions and the financial structure of domestic petroleum firms on employment and investment in offshore oil leases’ and came to the conclusion that ‘falling oil prices and lower domestic oil consumption reduced spending on offshore leases; some support was found for the agency theorys claim that lower free cash flow reduced spending on offshore leases in the late eighties; support was also found for an executive defense strategy, where petroleum company managers reduced lease spending and employment as an adaptation to changes in market fundamentals and external threats from capital markets and institutional investors’. Moreover, Antill et al. (2004, 18) examined the cases of the large integrated oil companies, also known as "the supermajors" and found that among the advantages offered to these companies are tax efficiency, information flow, political and technological know-how, broad supplier and customer relationships, scale economies, cross-business economies of scope, brand power, and the ability to coordinate strategic initiatives across businesses; these advantages all translate into a lower cost of capital’. Generally, the advantages offered to the multinational companies activating in the oil sector are many. On the other hand, because of the importance of the operations of these companies for the development of the global market, the comments over these advantages are generally avoided. However, these companies should be considered as belonging to a very important industrial sector which is closely related with the physical environment and for this reason their activities should be monitored carefully. Chapter Three – Conclusion The operation of firms in the oil industry is extremely profitable. More specifically, in accordance with a report published in World Socialist Web Site (2007) ‘the three giant US-based energy conglomerates—ExxonMobil, Chevron and ConocoPhilips—posted record profits for 2006, according to reports issued by the companies at the end of 2006; profiteering off of the doubling of crude oil prices in the space of just two years—topping $78 a barrel in the summer of 2006—the big three recorded combined windfall profits of over $72 billion’. The above figures are just indicative. In fact, the profits of firms operating in the particular industrial sector can reach extremely high levels. At a next level, the control over the activities of these firms seems to be limited. More specifically, it has been stated in a report published by Public Citizen (2004, 5) that ‘although federal investigators found ample evidence of oil companies intentionally withholding supplies from the market in the summer of 2000, the government has not taken any action to prevent it; the ability of oil companies to manipulate the market would have been far more difficult in 1993 before many mergers were enacted—and, unfortunately, much easier in 2003, since more mergers have been approved after the FTC concluded its investigation in March 2001; companies have exploited this strong market position to intentionally restrict refining capacity by driving smaller, independent refiners out of business’. In this context, any potential intervention of the financial making decisions of state owned companies on the private owned companies will be just temporary and without particular importance. On the other hand, Johnston (1998, 4) supported that ‘the petroleum industry has invested millions of dollars in transportation, storage and refinery upgrades to accommodate supply, demand and seasonal variations’. In these terms, the financial management applied in the firms operating in the oil sector has been very carefully designed in order to meet the increased needs of these firms for continuous development. This issue, if combined with the fact that corporate management has as main object to maximise shareholder wealth, can lead to the assumption that the financial management applied in the state owned companies could not be appropriate for the private owned companies because there could exist a ‘conflict of interests’. However, if all the necessary measures are being taken, it can be ensured that the interests of stakeholders in private owned companies will not suffer a damage even if an intervention of state owned companies will take place. In any case, such an intervention is considered as necessary as the oil related activities are in fact related with the public interest and not with the development of personal wealth. References Antill, N., Arnott, R. (2004). Creating value in the Oil Industry. Journal of Applied Corporate Finance, 16(1): 18-31 Baxter, V. (1999). THE IMPACT OF FINANCIAL RESTRUCTURING AND CHANGES IN CORPORATE CONTROL ON INVESTMENT AND EMPLOYMENT IN THE U.S. PETROLEUM INDUSTRY. The Sociological Quarterly, 40 (2), 269–291 Conklin, D. W., Archibald, T.R., (1993) Crisis Accounting: the role of financial reporting in environmental crisis management. Industrial & Environmental Crisis Quarterly, 7:4, 329-332 Johnston, D. (1998) International Oil company financial management in nontechnical language. PennWell Books Oil Prices and Policies and their Effects on the U.S. Economy: Hearing of the House (2000). International Relations Community, 106th Cong. Omeje, K. (2006) Petrobusiness and Security Threats in the Niger Delta, Nigeria. Current Sociology, 54(3): 477-499 Pauchant, T., Mitroff, I. (1988). Crisis Prone Versus Crisis Avoiding Organizations Is your companys culture its own worst enemy in creating crises? Organization and Environment, 2(1): 53-63 Public Citizen (2004), available at http://www.citizen.org/documents/oilmergers.pdf Rueda, A. (2001). Is the OPEC Oil Conspiracy beyond the Reach of the Sherman Act? Houston Journal of International Law, 24(1): 1-45 World Socialistic Web Site (2007), available at http://www.wsws.org/articles/2007/feb2007/oil-f03.shtml Read More