New Developments of Petroleum Industry - Essay Example

?Petroleum Industry: Trends, Challenges and New Developments Introduction Petroleum industry trends influence almost all other industries, market trends, and economies of the globe more than any other volatility in commodity price or demand. The growing concern over petroleum is reasonable as it is the most vital element for the sustainability of current-day industrial civilization. On the other side, fossil fuel accounts for the major portion of the world’s total energy consumption. The abundance of oil has created both opportunities and troubles for many nations, especially those in the Middle East for the past several decades. An oil-rich region today has the potential to influence the international politics and economic conditions of the entire globe. The term petroleum industry refers to all industrial activities associated with exploration, mining, refining, transporting, and selling of petroleum products. This paper will present an overview of the petroleum industry giving specific focus to the evolution of the current trends in the industry, key players and their strategic objectives, the scope for new entrant. This will also analyze the demand and supply ratio of the fuel and major challenges the industry is facing today. This report will help one understand how complex the operating environment of the petroleum industry is amidst the growing economic uncertainty, regulatory pressures, and commodity price instability. 2. Industry overview As mentioned in the introduction, numerous activities from exploration to marketing constitute the modern petroleum industry. Although fuel oil and gasoline are the major products of the industry, it involves other chemical materials like pharmaceuticals, solvents, fertilizers, pesticides, and plastics. Petroleum is a natural but complex liquid mixture of hydrocarbons and several organic compounds found underground in geologic formations (Petroleum and Petroleum Products). Although the fossil fuel in the natural form was used by humans before around 5000 years, it evolved to be an important industry in the world economy by 19th century. The history of commercial oil wells and refineries could be traced back to 1800s when imperial Russia emerged as the largest producer of oil. By the beginning of the 20th century, Apsheron Peninsula became the hub of oil from which Russia drilled out half of the world’s total oil production and became the leader in international oil markets. Industrial revolution played the key role in enhancing the petroleum industry. The invention of fuel run machines and transportation intensified the demand for fuel, and thereby the developing world’s exploration for oil. The result was that several economies across the world discovered their own oil fields. By 1850s both Canada and the United States developed their own oil wells and refineries, and the continued exploration in the industry enabled the US to outsmart Russia by becoming the largest producer of oil by the first quarter of 20th century. The industry has been amazingly vulnerable to change and instability that by the World War II US lost its leading position in the market to the new entrants of the industry, Middle East. Subsequently, the industry underwent tremendous changes. Huge oil tankers, pipelines, deepwater drills, drillships etc became the major characteristics of the petroleum industry, and multi-governmental organizations like OPEC and OAPEC emerged to be the most powerful bodies that cold control the oil prices and policies. Concerns over environmental issues related to oil and gas operations are also increasing across the globe as new projects have adverse impacts on the earth, water, and air due to the possibility of oil spills and the effect of pollutants such as CO2. 3. Key players Petroleum industry has turned to be a great phenomenon that the number of players and their positions in the market is highly subject to change. Although in general sense, international oil companies are perceived as the main players who determine the oil prices and market fluctuations, the industry is highly influenced by other elements like governments and national oil companies. Hence, it is important to know the different types of oil companies and how they play in the oil market. Among the international oil companies (IOCs), ExxonMobil, BP, and Royal Dutch Shell are important. Companies like Saudi Aramco (Saudi Arabia), Pemex (Mexico), and PdVSA (Venezuela) are some of the examples for National oil companies (NOCs). The major difference between these two types of companies is that IOCs typically carry out the company decisions in the interest of the company whereas the NOCs are often subject to governmental policies and economic interests of the country; and this is the reason why national oil companies often follow even non-market oriented objectives so as to safeguard the interest of the government (EIA 2013). OPEC members also belong to the NOC and pay attention to the economic interest of their own counties rather than the profitability of the companies. Since the world’s most oil-rich countries constitute the OPEC, it has the power to influence the market to a great extent (Ibid). According to the International Energy Statistics 2010, 70% of the world's total proven oil reserves is controlled by OPEC (See Figure 1). Figure 1 (EIA 2013) What role OPEC play? The Organization of the Petroleum Exporting Countries (OPEC) was founded in Baghdad in 1960. It has currently 12 member countries. They are; Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, UAE, and Venezuela. As per the mission statement of the organization, its objectives are the coordination and unification of the petroleum policies of its Member Countries, stabilization of oil markets so as to “secure an efficient, economic and regular supply of petroleum to consumers”, stabilizing producers’ income, and providing shareholders with fair return on investment (Our mission, OPEC). Since OPEC member countries constitute the major portion of the world’s oil reserves, it can easily control the market in several ways. For instance, if they want a price hike in crude oil, simply by reducing the production they can achieve it. As Bonsor and Grabianowski (n.d.) points out, in April 2001, OPEC reduced its production by one million barrels per day, and it caused American consumers see gas prices rise, hitting an average high of $1.71 per gallon on May 14, 2001. Smith (2005) comments on the bureaucratic nature of the organization; “OPEC acts a bureaucratic cartel; i.e. a cooperative enterprise weighed down by the cost of forging consensus among members and therefore partially impaired in pursuit of the common good” (Smith 2005, p.74). 4. Current trends According to reports (Oil & Gas Journal), as of January 2013, Iran has an estimated 154 billion barrels of proven oil reserves which accounts for more than 12 percent of OPEC reserves and nine percent of the world's total reserves. Some recent developments and policy changes in the international politics directly affected some of the key players of the industry. For instance, there was considerable decline in Iran’s oil exports in 2012, obviously due to the strategic intervention of the US and Europe Union; and this strategic change brought Iran down from the third position to the fifth rank in terms of crude oil and condensate exports (EIA 2013). Regardless of all such variations, petroleum industry has become the backbone of several economies around the world. As per the reports of Economy Watch dated 30 June 2010, the revenue earned by the economy only by exporting oil to other countries amount to 220 billion US dollars. The same report also identify the industry as one of the most potential employers of the country, for it has employed more than one hundred thousand people at an average wage rate $25 even a decade ago (Ibid). The mounting uncertainty in oil price makes projections more difficult as compared to the past. The price variation in such an odd frequency can be attributed to many factors including but not limited to unpredictable political events, global economic instability, and pricing policies of the key players. However, according to some analyses, the industry would maintain $70 to $90 per barrel by 2020 (Clik et al 2012). Another trend in the industry is the technology-focused investment that intends to make the entire processes more competitive and smarter. Despite the growing environmental concerns over hydrocarbon fuels, if the technology-oriented excavations provide petroleum products in abundance, and at cheaper rates in future, this will surely ensure the acceptability of the fossil energy and impact the people’s standard of life in a very positive way. 5. Statistics & projections According to the latest projections of US Energy Information Administration in its Short-Term Energy Outlook (as cited in Xu 2013), fuel consumption worldwide will reach 90.1 million b/d in 2013 91.5 million b/d in 2014 whereas it was only 89.1 million b/d in 2012. However, the consumption rate in Europe declined by 0.3 million b/d in 2013, and is expected to improve in 2014 due to a higher economic growth in Europe (Ibid). According to the EIA forecasts, in the US also consumption rate is expected to show remarkable increase in the coming years i.e. by 30,000 b/d in 2013, up 0.1% from last year, and by another 80,000 b/d in 2014 (Ibid). Total liquids production also tends to increase significantly for the coming years. According to the EIA assumption, production from non-OPEC players will increase by 1.2 million b/d in 2013 and by another 1.4 million b/d in 2014 mainly due to the ‘continued production growth in US tight oil formations and Canadian oil sands’ (Ibid). The long term projections (2008 to 2035) with regard to Non-OPEC players and their production volume also are relevant in this context. The United States, Russia, Brazil and Canada are the most important non-OPEC contributors; and the liquids production in 2035 is 15.3 million barrels per day indicating 57 percent of the total world increase (International Energy Outlook 2011, EIA 2013). Over the same period, OPEC will maintain its 42 percent of the world's total liquids supply that has been same for the past 15 years (Ibid). (See Figure 2) Figure 2 (International Energy Outlook 2011, EIA 2013) 7. Challenges & Opportunities Although technological advancement has enabled the tremendous growth of the industry in every aspect, experts in the field frequently warn that the proven resources will not meet the growing oil needs of the world. In the same way, no technology has been available yet to add anything to the present reserves so as to meet the future needs. According to the EIA’s (Energy Information Administration) latest forecast, the International Energy Outlook 2008, through 2030, the total global energy demand is expected to climb by 50% (cited in Wamsted, n.d.). This will cause a rise from 462 quadrillion British thermal units (Btus) in 2005 to 695 (Ibid). The forecast clearly indicates the challenges awaiting the oil industry as a whole. To illustrate, if the oil consumption of the specific period is considered in barrel terms, “this will climb from 83.6 million barrels of oil equivalent a day in 2005 to 112.5 million barrels per day in 2030”; and this increase (a projected 28.9 million barrels per day) “is only slightly less than the total daily production from the Organization of Petroleum Exporting Countries (OPEC) in 2007” (Ibid). According to the study of HermanMiller Inc (2005), although the industry is strong in several aspects, it has been undergoing certain considerable stresses for the past decade. Admittedly, the most crucial stress is the increased petroleum demand resulted from the global industrial expansion. Another factor is the tight supply of the oil. Political instability and terrorism also add to the stress (Ibid). According to the findings, the developments of alternative energies caused by ‘high per-barrel price’ also raise constraints. Stiff competition requires companies to maintain exceptional speed in order to exploit new markets (HermanMiller Inc 2005). Growing concerns over environmental and safety matters also create new challenges for the companies. Evidently, all these challenges force oil companies to reshape their HR strategies and to change the way they operate the business (Ibid). On the other hand, the above said limitations offer some competitive advantages to the well established firms. For instance, these conditions prevent new competitors from entering the industry. Key players in the industry have several alternatives to deal with the changes more easily as compared to new entrants. Merger is one of the important alternatives often adopted by firms. As per reports, there have been 24 mergers and acquisitions since 1997 (HermanMiller Inc 2005). Since the stress factors, namely that of technology, demand huge investments to vie with the competitors, new entrants are less likely to take up the risk. However, key players can easily switch to new technology or adapt to changes utilizing the present infrastructure, HR, and other resources. This could be further explained by the way OPEC foresee its future. Evidently, OPEC countries have been heavily “investing in maintaining the current capacity and building new capacity” (OPEC 2007). Despite the world’s constant concerns over resources, OPEC believes that it can continually expand resources both geographically and by volume. As Fuad Al-Zayer, Head of the Data Services Dept. at the OPEC Secretariat purports, since the early 1980s, ultimately recoverable reserves have doubled from just 1,700 billion barrels to over 3,300 billion barrels showing a 100 percent increase (Ibid). 8. Porters 5 Forces Analysis Competitive Rivalry: competitive rivalry is slowed down due to the excess growth of already large companies. Current market conditions have enabled such powerful ones to acquire the weaker ones that are vulnerable to debt. Threat of New Entrants: while considering the barriers to entry, new entrants tend to face economies of scale as a barrier. The new entrants are also likely to face threat of retaliation as the industry is highly dominated by a few key players. Availability of substitutes: substances like coal, gas, solar energy, wind power etc. are the main alternatives to oil. As far as the current trends are considered, the industry does not face very serious threats from substitutes as oil is highly required for multiple needs, and the generation of alternative energy is not very cost-effective. Power of suppliers: regardless of the huge number of oil companies, supplier power is comparatively high in this industry as the business is dominated by a few giants. Power of buyers: buyer power is very intense in the current conditions as the customer has several alternatives for better contracts and choices. 9. Conclusion The research on the petroleum industry as a whole indicates a considerable shift among the producers from generalists to specialists with special focus given to efficiency and well-run shared ventures. Unlike the past, the petroleum industry today is highly integrated and diversified. Differentiating competencies determine the sustainability of the firms today. In order to be competitive, oil and gas companies are to enhance their capabilities in technology integration and marketing strategies. Short term projections and recent statistics show that the global demand for oil is decreasing while supply is gradually increasing. All these conditions raise new challenges to the producers, for companies will have to strive more to gain profits in the coming years if the oil and gas prices set to level off. Market is not very favourable for new entrants because of prevailing uncertainty in the price levels, very sensitive political and economic conditions, technology-oriented exploration and change that require huge investments, and many other reasons. References Bonsor, K & Grabianowski. (n.d.) How Gas Prices Work. OPEC and Gas Prices Around the World. [online] available at [accessed 6 May 2013]. Click, C et al. 2012 2013 Oil & Gas Industry Perspective. Booz & Co. [online] available at [accessed 6 May 2013]. EconomyWatch. 2010 Petroleum Industry Trends. June 30, [online] available at [accessed 6 May 2013]. EIA. 2013 “Who are the major players supplying the world oil market?” [online] available at [accessed 6 May 2013]. HermanMiller, Inc. 2005 “Change and Challenge in the Petroleum Industry”. [online] available at [accessed 6 May 2013]. OPEC. 2007 “The Petroleum Industry: New Realities Ahead?” [online] available at [accessed 6 May 2013]. Our mission. OPEC site. [accessed 6 May 2013]. Petroleum and Petroleum Products. Cargo Handbook. [online] available at [accessed 6 May 2013]. Smith, J. L. 2005 “Inscrutable OPEC? Behavioral Tests of the Cartel Hypothesis”. The Energy Journal, 26(1): 51–82. US Energy Information Administration 2013. EIA. [online] available at [accessed 6 May 2013]. Wamsted, D. (n.d.) “Oil and Gas Industry Sees Challenges, Opportunities Ahead”. Forbes Customs. [online] available at [accessed 6 May 2013]. Xu, C. 2013 EIA: Worldwide liquid fuels consumption to rise in 2013-14. Oil & Gas Journal, March 12. [online] available at [accessed 6 May 2013]. Read More