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

Title of paper: Entry Strategy into Impacts of Oil and Gas Production in Angola: SanawaOil Ltd

Brief synopsis of the issue

As a medium-sized oil and gas industry fast follower, SanawaOil Ltd has had great achievements in getting E&P projects in developing states. This prompted the anticipation that it would generate revenues for the local community development but to no avail. As a result, its success was hampered and corporate image destroyed for involving military power on the protesting community groups because of failure to initiate developments. This led to huge steepening of its share price and reduced market capitalization.

Despite being trapped in controversies, attempts are underway to restore its corporate image so that it can acquire new exploration and production deals in up-coming markets in oil and gas producing countries like Angola. But it needs to adopt joint venturing scheme which involves cost sharing while entering new markets for instance in the Angolan developed upstream (Angola Today Business, 2016). Also, joint ventures are beneficial for SanawaOil Ltd as exploration and production costs are met by the established oil and gas companies.

Recommendations

• SanawaOil Ltd should aim promote economic gain of the community by engaging it in initiating development projects to avoid future protests.
• The management should protect the corporate image of the company by guarding against anything that seeks to destroy its reputation.
• The management should not neglect the community but ensure amicable solution to stalemates between it and the community.
• For the restoration of reputation and maintenance of growth, SanawaOil Ltd management should consider venturing in the downstream which is still under-developed and could provide opportunities for more expansion.

Background

After the destruction of the corporate image of SanawaOil Ltd, the then CEO Silvio De Binti was relieved of his duties to pave the way for Hazel Akua-Aba. The new CEO is to propose strategies for exploring opportunities for E&P projects in Angola and bringing back the company corporate image and achieve and uphold sustainable development. Following are key issues about oil and gas production in Angola.

Key facts the oil and gas production in Angola

The economy of Angola relies on the oil production which is said to have recorded a boom between 2000 and 2010 (MBendi, 2016). Angola became the 12th country to join the Organization of Petroleum and Oil Exporting Countries (OPEC) in 2007 and took over its lead in 2009 (Angola Today Business, 2016). Angola has firmer and more serene atmosphere than its rivals. The industry accounts for more than 95 per cent and 75 per cent of the export and government revenues respectively (eBizguides, 2009). Though in 2011 the oil production dropped to an average 1.65 million bbl/d because of temporary technical issues industry analysts predicted an increase exceeding 1.85 million bbl/d towards the end of that year. This was further expected to rise to a capacity of 2.5 – 3 million barrels per day (bbl/d) in 2016 (EIA, 2011).

The Angolan oil is regulated by Sonangol, a national oil company which was founded in 1976 (Angola Today Business, 2016). It partners with different global companies via joint ventures (JVs) and Production Sharing Agreements (PSAs) in the production and supply of the oil. The international oil companies (IOCs) are Total, Chevron, BP, Eni and ExxonMobil (EIA, 2011). The Angolan oil sector is controlled by the upstream zone i.e. crude oil and natural gas exploration and production. However, the downstream sector which deals with refinery and distribution is yet to be fully developed. Angola has higher domestic demand for oil which some oil refineries have failed to meet (Angola Today Business, 2016).

Discovery of oil in Angola is traced to the 1910 prospecting and researching on hydrocarbons by Canha & Formigal company which led to the drilling of a first oil well in 1915 (IBP USA Staff, 2015). This was followed by another discovery in 1955 by Petrofina in the inland Kwanza basin which partnered with the colonial administration to construct the Luanda oil refinery plant. By the late 1960s, there were more oil discoveries including detection of the Cabinda abundant reserves of oil along its off-shores (James, 2011). This led to the rapid growth of the oil industry thereby overtaking coffee in 1975, which had been the Angolan leading export. The production continued to rise during the 1980s and 1990s despite the civil war in Angola (IBP Inc., 2013).

However, more deep water discoveries were furthered by the IOCs and the aftermath of the civil war saw production rise to 2 million bbll/d in 2002. Angola is reported to produce light fragrant crude oil with low sulphur volumes (Koning, 2012). This qualifies it for the processing of kerosene, gasoline and diesel of high quality. By January 2010, the proven crude oil reserves in Angola were above 9 billion barrels. Additionally, Angola has a division of 35 blocks along its coastal continental shelf. Blocks 0-4 in the north Luanda offshore fields are the major producers of oil with Cabinda – block 0, leading the production (Angola Today Business, 2016).

Moreover, the direct by-product of the Angolan oil production and this is estimated to total to 11 trillion cubic feet of reserves (Sakmar, 2013). Hence significant investments should be done to ensure the natural gas industry get hold of its full economic potential. The large natural gas reserve means Angola can supply close to five million tonnes of LNG for the next twenty years. But, inadequate feasible alternative choices have seen much of the current Angolan gas being spread or vented (Stead, Rorison and Scafidi, 2013). Nevertheless the government of Angola is using this precious resource for production of Liquefied Natural Gas (LNG) for export and internal production of electricity.

The LNG is expected to offer more economic gains in addition to effective management of the natural gas to ensure environmental friendliness (The World Bank, 2016). The companies which are part of the Angolan LNG project and chiefly engage in exploring and producing natural gas with their market stake are Chevron (36.4%), Sonangol (22.8%), BP (13.6%), Total (13.6%) and Eni (13.6%) (Angola Today Business, 2016). These companies are members of the Global Gas Flaring Reduction partnership (GGFR), which is led by the World Bank (Hamso, 2013). Furthermore, they aim at minimizing gas flaring to the lowest possible level.

Attractiveness of Angola for investment in the E&P projects

• Porter’s forces analysis of the oil and gas industry in Angola

Porter’s forces are factors which influence competitiveness and can help identify attractiveness of the Angolan oil and gas industry (Hill and Jones, 2008). These forces include the following:

• Rivalry amongst competitors (strong)

The Angolan oil and gas industry is highly competitive in the international markets and is also in higher domestic demands (Angola Today Business, 2016). International oil refineries prefer the Angolan oil due to its light fragrance with low sulphur volumes qualifying it for the production of kerosene, high quality diesel and gasoline (Koning, 2012). Angola’s major destinations are China, European Union and India. However, it may face stiff competition from the USA which reportedly produces the same quality of crude oil as Angola (OMTI, n.d.). This feature is evaluated as strong.

• Threat of substitutes (low)

This is also a feature that makes the oil and gas industry in Angola to be attractive and is assessed as low. Though the Angolan natural gas is being flared, the government aims to convert a portion of it to Liquefied Natural Gas (LNG) for export and internal production of electricity (The World Bank, 2016). However, over half of the Angolan population is yet to get electricity connection and therefore depend on traditional biomass and waste (OMTI, n.d.). In as much as this may be a threat to the Angolan oil and gas industry, it offers an opportunity for the industry expansion to meet the needs of the entire population of Angola.

• Threat of new entrants

Most oil companies in Angola are international with heavy investments in equipment and technological expertise (Orfao et al, 2010). This is coupled with good networks for production and distribution, hence decreased expenditures and profit maximization. The heavy investments make it difficult for new entrants which are forced to form alliances through joint ventures. However, new entrants are attracted due to the financial aids through cost sharing, oil-supported loans and trade opportunities (OMTI, n.d.). On the overall, the threat of new entrants is average.

• Buyer power

This is a strongly attractive feature of the Angolan oil and gas industry as the oil is reportedly preferred by most global oil refineries due to its light fragrance and low sulphur volumes (Koning, 2012). Furthermore, it has a higher domestic demand as it is used to produce kerosene, high quality diesel and gasoline hence the attractiveness of the industry.

• Supplier power

The major equipment and electrical services suppliers to the Angolan oil and gas industry are Test Angola, Prodiaman, LDA and VersaTech Automation Services (Prodiaman, 2014). The suppliers are fewer yet the higher industry demand is great hence raising the supplier power. The upstream zone is more developed therefore calls for more exploration equipment. This may result in supplier rivalry hence reduction of their bargaining strength and so the feature is evaluated as low.

• Porter’s diamond model

This model helps in understanding how the Angolan oil and gas industry withsatnds barriers to succeed in its operations. The reasons include demand conditions, factor conditions, supporting industry and firm strategy and government policies and chance.

• Demand conditions

Angolan oil has had demand both in the global markets as well as domestically. This is due to its light fragrance and low sulphur volumes which makes it suitable for processing of kerosene, high quality diesel and gasoline (Koning, 2012).

• Factor conditions

Angola as a well-developed upstream (where exploration and production of oil takes place) and this is the sector which controls the sector. It also has a large reserve of crude oil which is estimated to exceed 9 billion barrels (Angola Today Business, 2016). A higher percentage of these reserves are situated along the Lower Congo and Kwanza offshore parts. Furthermore, Angola is strategically positioned along the stretching Atlantic Ocean coastline hence is not landlocked (Li, 2011). This means its ports are easily accessible hence the oil products can be exported via the sea to all over the world making attractive for investing in the E&P projects.

• Supporting industry and firm strategy

There are numerous oil and gas companies in the Angolan oil industry most of which are international and the major national oil company, Sonangol. The companies partner together through joint ventures and production sharing agreements hence making the industry very attractive. Also, the IOCs engage more in deep water discoveries and this has led to the increased oil production in Angola.

• Government policies and chance

These have made the Angolan oil and gas industry to be very competitive especially due to the joint ventures (JVs) and the production sharing agreements (PSAs). Angola reportedly has only one main national oil company, Sonangol but it partners with the companies through policy of joint ventures and production sharing agreements which promoted cost sharing when investing in the E&P projects.

Greed and grievance in Angola

From a mere 750,000 million bbl/d of crude oil production, the Angolan oil production has immensely grown (Koning, 2012). It is even project that by the end of 2016, it will have reached 3 million barrels per day (EIA, 2011). Production dwindled at 700,000 bbl/d in 1996 due to the civil wars (Collier and Hoeffler, 2000). But in 2002 after the civil war, it rose even recording a boom until 2010. In 2011, a technical problem occurred leading to decrease in production to 1.65 million bbl/d after which an increase has been recorded and even projected to reach between 2.5 – 3 million bbl/d (EIA, 2011).

Growth rate of net import/export of oil and gas

Angola has had a larger export economy since 1985 which as of 2014 stood at 54.6 billion dollars and imports amounting to 25.9 billion dollars (OEC, 2016). Hence it has a good positive trade balance standing at 28.7 billion dollars as can be evidenced in the figure below.

Analysis and evaluation of strategic options for SanawaOil Limited

• Strategic options

From the given analysis of SanawaOil Ltd, it has two strategic options available:

Strategic options

Comment

Facts

Strategy two:

Building a wholly-owned organization

Not recommended

This can only be effective in the downstream which is not fully developed. SanawaOil Ltd is well conversant with upstream activities hence downstream is limiting. Also, starting a new organization may strain it financially.

Strategy two:

Forming alliance with the already established oil and gas companies.

Recommended

Being a fast follower, it may lack ample resources and equipment to invest in E&P. But forming alliance offers financial aids for development projects, cost sharing oil-supported loans and trade opportunities.

• SWOT analysis of the key players in the Angolan oil and gas industry

This analysis is helpful for SanawaOil Ltd in that it can establish which company to partner with, and what to expect in the partnership.

Company

Activities

Strengths

Weaknesses

Opportunities

Threats

Sonangol - partners with Eni, Total, Mitsui, Inpex, Chevron and Somoil.

E&P activities and regulating the oil sector

Higher oil production and supply.

Shareholder in most oil and gas production projects.

Inadequate financial resources.

No cost and efficiency guarantee.

International ventures.

Global exploration opportunities.

Attacks on oil plants for example in Iraq which led to its pulling out of Iraq. Poor infrastructure.

Total–partners with ExxonMobil, BP, Chevron and Statoil.

E&P activities

Production of LNG.

Deep water exploration

Low production of natural gas.

More commercial production.

Stiff competition.

Poor infrastructure

Chevron–partners with Sonangol, Eni, Total, Inpex and Galp Energia

Oil and gas exploration and production.

The leading producer of the LNG in Angola.

Deep water and offshore exploration.

Failure to put reduce flaring of natural gas

Unitized onshore location for more deep water exploration

Flaring of natural gas.

Poor infrastructure

BP-partners with Sonangol, Statoil, SSI, Marathon.

Oil and gas production

Good business relationship with national oil company.

Deep water exploration

Reducing oil production.

Low level of LNG production.

Potential increase of gas production.

Poor infrastructure.

Changing government policies.

Eni-partners with Falcon, Sonangol and SSI

Oil and gas production.

Commercial production.

Deep water exploration.

Low LNG production.

Dwindling oil production

Downstream investment.

Potential increase in gas production

Poor infrastructure.

Stiff market competition

ExxonMobil- partners with BP, Statoil, Total and Eni

Oil production.

E&P projects

More deep water exploration.

Failure to explore gas production

Downstream and gas production investment.

Poor infrastructure. Inadequate finances

Source: (OMTI, n.d.)

From the analysis, it is evident that the Angolan oil and gas industry majorly faces the challenge of poor infrastructure and financial resources.

Stakeholders and corporate social responsibility

The corporate social responsibility of the oil and gas companies in Angola is determined through economic gains (Wiig and Ramalho, 2005). This is the basis on which legal, ethical and philanthropic responsibilities are pegged. The gains go to company stakeholders such as employees, consumers, the community, government and the owners as Angolan oil companies must adhere to the public policies and regulations and ensure that they generate profits. The CSR exists in the Angolan oil and gas industry promotes initiation of community developments, achieving stakeholder engagement aimed at sustainable growth and enhancing the corporate image.

Implementation plan for SanawaOil Ltd

With the recommended strategy, the implementation plan is as follows:

Stage

Action Plan

Initiation

This involves finding and developing link with potential partnering company to know its operational objectives and present state. Also deeper knowledge of Angolan legislations, policies, work permits and regulations governing the oil companies are sought.

Planning

Involves engagement with relevant stakeholders in environmental impact assessment (EIA) of the identified operational locality. Prospective risks are evaluated and appropriate response strategies formulated.

Execution

Involves finalizing agreements for joint ventures and partnerships with identified company and commencement of mobilization for proper operations and funds. Establishing the local community needs for reflection in the company operations like addressing poverty by creating community life-changing opportunities.

Monitoring and evaluation

All established links are monitored and openness ensured for necessary changes to be adopted with ease (Berg, 2012).

Closing stage

Here, the documents are referenced for future use in initiating and performing similar projects. Also, the management is involved and updated on the progress plan (Lorette, 2016).

Conclusion

Angola is steadily emerging as an influential African oil producing country, something which is attributed to its internally consolidated peace and security. This, coupled with friendly business environment, is essential for the easy picking up of SanawaOil Ltd operations.

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