Setting up a new refinery in Panama - Research Paper Example

Introduction Industrial process plants where crude is refined and processed into petroleum products such as diesel, gasoline, asphalt base, kerosene, heating and petroleum gas are referred to as a petroleum refineries or oil refineries. Refineries are basically large, pervasive industrial complexes with piping running throughout. The piping carries streams of fluids to and from large chemical processing units. Predominantly refineries can be thought of as chemical plants since they use much of the technology used in chemical plants. A production plant processes the feedstock of a refinery. A depot, tank farm, is usually located near or at a petroleum refinery and it stores bulk of liquid products. A refinery is considered as a vital part of the downstream end of the petroleum industry. There are very important and major roles played by refineries in development of countries, regions and the world as a whole. Professionals in this field are cognizant of the reality that natural resources are scarce, the importance and desire for practices that are sustainable. They also reckon the need for social fairness in the use of these limited resources. They are therefore tasked with the leading role in designing, planning, building and securing a sustainable future. Refineries act as link between natural resources and the consumer. In their capacity, oil planners must continuously take part in multidisciplinary teams often with other professionals, such as economists, sociologists, and ecologists to address the issues and challenges of sustainable natural resource development. They should therefore advocate economic principles that recognize our environment and natural resources as capital assets Panama Trade, Imports and Exports: Overview The largest chunk of Panama’s trade transactions take place in the Colon Free Trade zone, the biggest free trade zoned in the world. From the estimates of the Colon Zone Management, this trade region has accounted for 92% of Panama’s exports and 64% imports in during 2007. In 1982, Panama entered into a Bilateral Investment Treaty with the United States. This agreement has been put in place to protect the United States private investment in Panama and also help it in developing its economy. In addition, Panama and the US signed an FTA agreement in 2007 and are under implementation. The United States is by far the principal trade partner of Panama. It accounts for about a third of Panama’s imports and exports. Panama’s major trade partners according to CIA reports for 2009 are as follows: Exports Imports United States 39.2% United States 29.6% Netherlands 10.7% Costa Rica 5% Costa Rica 5.8% China 5% Sweden 5.4% Japan 4.2% The main exports from Panama are; Bananas, Coffee, Shrimp, Sugar and Clothing. The nation is highly dependent of consumer and capital goods. The trade situation has improved significantly owing to the endeavor to expand the Panama Canal that has been under construction since 2007. The project is estimated to be $5.3 billion and is expected to continue the revamping on the trade sector. The number one agricultural export- predominantly controlled by foreigners is bananas. It is followed by shrimp. Panama experienced a decline in exports of about 11% from 1997 to 1998. This was caused by quotas imposed by the EU on banana exports and that banana exports contribute a fifth of all exports. The Free Trade Zone has increased the light industry exports, manufacturing and clothing textiles. On the other hand, Panama has experienced competition from Mexico starting 1996 and has experienced stunted growth since 1998 due to protective tariffs imposed on the country. COUNTRY EXPORTS IMPORTS BALANCE United States 354 1,117 -763 Sweden 62 25 37 Costa Rica 41 119 -78 Mexico 24 133 -109 Guatemala 21 62 -41 Spain 13 61 -48 Japan 12 186 -174 Colombia 9 116 -107 Ecuador 4 243 -239 Venezuela 4 222 -218 Foreign firm investment in Panama A foreign firm seeking investment in a large firm would be at an advantage considering Panama. Panama fits into the category of the world’s emerging economies and in a developing world status. The foreign investment firm may carry increased regulatory, political and currency risk and it is important to survey the risk associated with capital deployment in such markets. Considering that historically Panama has not attracted an impressive number of foreign investors, the country is experiencing tremendous growth in its economy. In 2006, the country achieved the highest GDP growth in the Latin America. Source: International Monetary Fund – 2011 World Economic outlook The changing nature of activities in Panama should be keenly studied by any foreign investor. This will definitely lead to a more clear perception in their role. In a country looking at the transnational corporations as sources of production, management and marketing and additionally as sources of capital, liberalizing the FDI policy regime should be at the forefront to give the investors new perception.FDI liberalization represents one of a number of factors directly linked to investment flows. This shows why liberalization is not always taken after by a positive increase of FDI. The significance of liberalization cannot be overemphasized. As a matter of fact, extremely restrictive conditions can shut the door to foreign investment. Foreign direct investment plays a major role the economic development of a host country. Over the years, FDI has helped the host countries economies obtain a launching platform from where they can make further improvements. The inflow of foreign resources such as foreign private investment has the tendency of stimulating employment, income, consumption and economic growth, hence the possibility of reducing poverty. The Panama economy is faced with low level of income that prevents savings, big enough to stimulate investment capital domestically or, to finance training in modern techniques and methods. One of the ways out of this problem is through the acceleration of the economy by external sources of funds (foreign investment) and technical expertise. Foreign Direct Investment Foreign Direct Investment (FDI) is a part of a country's national finances and accounts. Foreign direct investment is termed as the investment of foreign assets into local –domestic- equipment, structures, and organizations. FDI is not inclusive of foreign investment values into the stock and bond markets. Foreign direct investment is considered to be more beneficial to a country than investments made in the equity of its commercial companies since equity investments are by potency "hot money" which can be withdrawn at the first sign of tension and strain, while FDI is permanent, durable and largely useful whether the situation goes well or badly. There has been a detectable change in the attitude of the developing countries –Panama included- towards FDI in recent years. The debt situation of the early 1980s resulted into a specter of falling investment, leading to unprecedented fiscal deficits and a declining balance of payments in a lot of developing countries. These countries had the option of increasingly opening up their domestic markets to FDI. This was a means to compensate for withdrawn or reduced access to band credits from global financial and lending institutions. The impetus and need for reliance of foreign direct investment was also strengthened by the dismal trend in official development assistance. PANAMA Source: https://www.cia.gov/library/publications/the-world-factbook/geos/pm.html According to the world geography: The total population of Panama is 3,516,820, the population density stands at 47 inhabitants/ km2. It has an annual growth rate of 1.6% and the urban population is more than 74.8%. The official language of the Republic of Panama is Spanish. The ethnic origins are: 64% mixed, 10% European, 8% American Indian, 14% African descent and 4% Asian. The most widely used business languages are English and Spanish since many businesses and relationships with the United States have influenced this aspect of Panama. Similar to the ethnic mix, the religion is composed of 80% Catholics, 10% Protestants, 5 % Muslims and Others 5%. The literacy rate of Panama is 91.9%. The official name of Panama is the Republic of Panama or (Republica de Panama). Panama is located on the narrowest and lowest part of the Isthmus of Panama that links North America and South America. This part of the isthmus is situated between 7° and 10° north latitude and 77° and 83° west longitude. Panama is slightly smaller than South Carolina, approximately 77,082 square kilometers. The country’s two coastlines are referred to as the Caribbean and Pacific, rather than the north and south coasts. To the east is Colombia and to the west Costa Rica Pacific. Dominant features of Panama’s landform are highlands forming the continental divide. The higher elevations near borders with Costa Rica and Colombia. The highest point in the country is the Volcan Baru which rises to almost 3,500 meters. The lowest elevation is in the middle of the country where it is crossed by the Panama Canal. Most of the population is on the Pacific side of the divide. The population of the country is around 2.8 million with a growth rate of 1.5%. The racial and ethnic groups are 65% mestizo, 14% African descent, 10% Spanish descent, 10% Indian. The religion is 85% Roman Catholic, 5% Protestant, and 5% Islamic. Spanish is the official language, though United States influence and the Canal Zone reinforce the use of English as a second language. Panama's arts show its ethnic mix. Indian tribes, West Indian groups, mestizos, Chinese, Middle Eastern, Swiss, Yugoslav and North American immigrants have all offer contributed ingredients to the culture. Political overview Panama was governed as a constitutional as a constitutional democracy but was dominated by a commercially focused form of government till 1968 when the Military started challenging power. The National Guard ousted the seating president in 1968 and this marked the beginning of a 20 year stretch reign led by military governments including Manuel Noriega (1981-89) and Torrijos Omar (1968-81). The regimes were harsh and rife with corruption but their economic reforms and populist social appeals focused on the urban and rural constituencies largely ignored by the oligarchy that existed before. The ruling president in 1980s, Noriega, was indicted with drug trafficking related charges where the US used a neutrality treaty to raid Panama ending the military regime. Panama has moved fast to rebuild their government structures since Noriega extradition. They have made notable economic and political progress with several successful civilian elected governments. Political Structure The government is a constitutional democracy and consists of elected legislative, executive branches. It also has an independent judicial system. The country aims to achieve a social market economy that enjoys a majority in the legislative assembly. Panama is divided into nine provinces which are under governors appointed by the president. In each province, there is a local government structured into smaller districts under councilors and mayors. In total there are 65 districts and as many as 505 sub districts. Mayors wield significant powers in the cities, but their influence in the rural areas is limited. Majority of the government work and required permit approvals basically are issued at the federal level in the City of Panama. Panama as a country faces the challenge of shaking its repute as a politically corrupt drug harbor- this stigma has particularly plagued Panama since Noriega’s era. The succeeding Presidents, for example, Martin Torrijos won the national election on a “Zero tolerance” for corruption. In spite of the plagued past, the country is now politically stable and has a popular president. It has increased corruption reforms and according to the Latin Monitor, the risk ratings of Panama are very high standing and is benefiting from an integrated constitutional democracy. International relation and Main trade partners Owing economic and historical reasons, the country’s most strategic and important international trade partner is the United States. The two countries currently collaborate extensively on the three main issues affecting them: security of the canal, counter-narcotics effort and the Columbian border and the negotiations on a two way Free Trade Agreement (FTA). Signings of FTA in the recent past has solidified the relations between the US and Panama. It has in turn increased the trade volume and foreign investment. Panama also has similar free trade agreements with its neighbors Honduras and El Salvador. It has also sought to have agreements with the rest of the Central American countries in order to be included in negotiations focused on a proposed regional trade agreement between the region and EU. Panama has also signed an FTA with Singapore in the recent past. Singapore has been increasing ties with Panama by a two-way cooperation in maritime and ports industry. The Panama Canal has affected the outcome of the neighboring countries in many ways such as the economy and alliances with different countries around the world. The Canal has not only affected its neighbor’s economy in a huge way, it has also increased revenue in Panama. Even though there were major disputes in the construction of the Canal, without it the neighbors would not play as big as a role in trading as it does today. The Canal is a primary way of travel for trading around the world. The Panama Canal changed the way America was viewed by the world because it became a major economic power. To make the Canal more successful in October of 2006 the citizens of Panama voted to expand the Canal to allow for bigger ships and more trading. After the Canal undergoes construction it will be even more useful then it is today. Economic Analysis of Panama Panama has the following natural resources; mahogany forests, copper, shrimp and hydropower. The natural resources of Panama are of commercial importance to it as they contribute to the economic situation. Panama has a dollar-based economy that lies primarily on an excellently-developed services sector that contributes three-quarters of its GDP. Services that generate income include operating the Panama Canal, banking, logistics, the Colon Free Zone, container ports, insurance, flagship registry, and tourism industry. Economic growth is strengthened by the Panama Canal redesign and expansion project that commenced in 2007 and is planned to be completed by 2014 at a massive cost of $5.3 billion - about 25% of current Panama’s GDP. The project more than doubles the Panama Canal's capacity, making it possible to accommodate shipping vessels that are too big and long to traverse the existing canal without mishap. China and the United States are among the top users of the Panama Canal. Transportation Panama plans to build an underground metro system in Panama City, estimated to be at $1.2 billion and projected to be completed by 2014. Panama's flourishing transportation and supply management services sectors, coupled with fast-growing infrastructure development undertakings, is likely lead the growing economy to continued levels of growth in 2011. Formidable economic operation has not translated into broadly shared success, as the country is among the bottom countries with the worst – second worst- income distribution in Latin America region. Approximately 30% of the country’s population lives in abject poverty; however, starting 2006 to 2010 poverty level was reduced by 10 percentage points, unemployment also dropped from 12% to 6% of Panama’s labor force. The United States and Panama entered into a Trade Promotion Agreement in June 2007. The trade agreement, when implemented, is projected to help promote Panama’s economic growth. Panama, in the recent past, has signed several double taxation treaties with other countries. It is in an effort to seek withdrawal from the gray-list of tax havens by Organization of Economic Development. Social Problems and challenges of investing in Panama International disputes The presence of organized illegal narcotics cartels in Colombia revolve within the remote border region with Panama. Trafficking in persons is a major social issue and transnational dispute. The current situation in Panama is appalling since it degrades the human life value. It is a transit and a source destination country for children and women subjected to forced labor and sex trafficking. Some Panamanian girls and women are victims of sex trafficking in other Latin America countries, Europe etc. Most trafficking victims are within the country; sexual exploitation- commercial- of children was pervasive in rural areas. Panamanian young children, largely young girls, are victims of domestic servitude. Majority foreign human trafficking victims are adults. Women from Central America, Colombia and the Dominican Republic are also affected. In some cases victims migrate on their own volition to Panama purposely to work but are then forced into domestic servitude or prostitution. The situation has been under watch by the authorities, which established a commission to draft a comprehensive anti-trafficking law that would bring anti-trafficking laws up to speed with the 2000 United Nations Trafficking in Persons (TIP) Protocol. The government pointed at least 43 victims of human trafficking and prosecuted a couple of sex trafficking offenders. Also in partnership with foreign governments and civil society it offered training to officials; however, the country continued to lack restrictions against forced labor. Panamanian authorities have not convicted any specialized victim services, trafficking offenders particularly for adult victims. It remains limited and not proactive procedures have been indentified to track victims among the immigrants. Illicit drugs have made the social situation pathetic. Panama is a major cocaine transshipment point. It has seen the rise of drug lords and barons who have reined terror on the society and authorities. Panama is a primary and major money-laundering hub for narcotics revenue. The money-laundering activity is particularly rife in the Colon Free Zone. Benefits of a refinery in Panama The field of energy economics has focused on energy commodities and energy sources and includes regulatory and market structures; motivating factors to firms and consumers to supply, transport, convert and use energy resources and distributional and environmental consequences. It is cognizant that energy cannot be destroyed or created but can be converted to many forms. It also appreciates that energy comes from the physical part of the environment and returns there ultimately. Providing energy is possible by harnessing energy conversion processes to transfer and reuse the available energy. The demand for energy is dependent on properties of conversion means, technologies, and costs. Human energy makes use of resources that can be depleted in particular fossil fuels derived from the preferences. Market forces and cartels may guide a transition back to sources that are renewable. Energy as such has its effects and they come in terms of very heavy environmental costs. At the end of it they are incorporated into the energy cost and prices leading to overuse of energy and motivate policy inventions. Focusing on human utilization of the energy commodities and energy resources and the aftermath of that utilization is the main discussion of many experts. From an economist’s perspective the economic terminology, “energy” is inclusive of all energy resources and energy resources that have significant amounts of physical energy and as such can perform work. Partly, the study focuses on forces that lead economic agents to pursue alternatives in terms of other economically efficient provision and use of energy resources and commodities. The role of alternative energy market and regulatory rules on the activities of producing energy is a point of consideration for these studies. There is a kind of energy that can be replenished in a short period of time called renewable energy, which comes from sources that frequently being recycled and usually less polluting than energy from fossil fuels. There are five main categories of renewable energy: wind and oil, biomass, geothermal, hydropower among which the oil energy, provided by heat and sunlight, has been utilized least yet. However, oil energy holds a number of benefits for societies and it has already proven to have positive effects on residential homes and industrial applications. For many years, the economic choice of energy to use has been oil energy in many industries. In this areas power is required at remote locations without government help, as the vast majority of systems used need few kilowatts of power. Also, oil energy is frequently used on transportation signaling. For example, offshore navigation buoys, lighthouses, and increasingly, road traffic warning signals are using oil power due to its power saving efficiency. Oil power’s great benefit here is that it is highly reliable and requires little maintenance so it is ideal to use in places that are hard to access. Following are some details of the major advantages of oil energy. Primarily, as mentioned above, oil power is particularly useful in remote areas where it is lack of regular electricity supply Energy security is the guarantee of a reliable and stable supply of energy at reasonable economic prices. Relying on main energy sources such as and having a limited natural resource supply puts a country at odds to keep up industrialization and manufacturing. The need for a more comprehensive energy security plan is important to help curb external effects on the availability of main energy sources. Considerations of a foreign investor Foreign investments regulations are supposed to put foreign capital to work in the host country. These regulations include the advancement of local productivity; and technological development, the encouragement of minimization of foreign competition and local participation in areas that are economically served by the local businesses The FDI manger’s role is to determine which countries to invest in. Factors that a manger should consider while making the determination are as follows; economic, technology, political and developmental factors in the host of origin. Economic- This should refer to the ability for the investor -company or a country- to meet its financial obligations. Basically the projection whether or not the company or country will be able to return a profit on the investment and if there will be a positive change in the policy of the origin country in the area of taxes. Additionally, anything that would affect the result of doing business in a foreign country. Political- Changes in government policy that would pervasively affect the profits, such as set policies in place that would oblige foreign investors to turn over a huge amount of their earnings or that would constrain them on how much they can manufacture or the demand that they can only use the foreign government’s ideas and technology. Technology- A country may be underdeveloped in such technology as telecommunication, highways or roads, cell phone towers, and electricity. Legal Issues- The wise FDI manager has to consult with the legal departments at home and in the country of investment to ensure that the host country regulations are met. There are two main issues that concern management when screening potential markers and sites: keeping the research cost at a minimum and checking out each location and potential markets. Firs, identifying basic appeal- knowing the consumer needs and desires the behavior of the buyer. This is achieved by accessing the international business environment. - knowing the cultural practices; politics; the economy strength and regulations and also knowing who your competitors are. Second, the measure of the market or site potential is important; it helps in getting to know the behavior and mindset of the potential host country natives. Foreign investment regulations are very essential to have in place. They protect the investor as well the host country that is to be invested in. In absence out these regulations, investing in foreign countries could come in and cause a disaster on the country’s economy by bushing out the local businesses. It could create a stable balance between foreign direct investments and local business. It is essential that investors do the proper research prior to launching into foreign countries. They need to do a background check and look at the country, host country then develop a strategy for marketing, know the attitude, needs and desires. They need to be up to date on the changes in the potential country’s regulations. Do the proper research can be the difference between launching a successful and profitable business to having the business fail. SWOT In the given case, a conducted SWOT analysis on setting a refinery in Panama is as follows. The country has been doing well economically. It stands good chances in growing fast foods because of some of the following reasons. Strengths To start with, Panama has a global significance in terms of location in relation to its neighbors. This means that they can access clients from all over the world. For that reason, it can raise high revenue, of several $Billions every year, 50% of which comes can come from manufacturing. Weaknesses Despite the unique strengths that the country’s economy, it also faces several challenges in the certainty of its political environment and the social balance. For example, Panama has a challenge when it comes to democracy and fighting social injustices. It historically is riddled with drug lords and drug traffickers. This heightens insecurity and makes the foreign investors shy off. They also have a poor brand image for country’s tourism because of the insecurity. They also faced with challenges in export and imports and are majorly controlled by the USA. Opportunities Panama has the advantage that the petroleum demand is growing day by day because it is a natural resource which is by nature scarce. It is opening up new markets, and this is one area they have majored on mostly refined products. They can therefore maximize in that area. Generally, they operate in a fast growing market, especially in the natural resources harnessing and production into finished products. Threats As earlier noted Panama faces major issues in its political and governing structures. Many investors are therefore unhappy with the country’s economic performance as it’s affected by the prevalent political influence and tempo. The capacity to pay off the construction and take care of the loose ends in the industry affects Panama in a big way. Availability of labor and financing faces a serious problem to the success of the project in refinery building. Going by the analysis therefore, if Panama needs to work on its financial state and penetrating in the unexploited investment options, they stand high chances of sales. ­­ References Boresi, A., Schmidt, J,. & Yeric, M.(2009). Advanced mechanics of materials .New York: John Wiley & Sons. Leach, G.(2005).Global Land and Food Supply.Stockholm.Stockholm Environment Institute. Likens, G.E.,Driscoll,C.T.,& Buso, D.C.( 2006).Long-Term effects of acid rain: Response and recovery of a forest ecosystem. Environment and Science.272(7),244-245. Read More