Partners Embark on New Oil - Case Study Example

Analysis of the Global Oil and Gas Industry Executive Summary This research deals with why oil, the lifeblood of world economies, attracts multinational investors with strategic stakes, positioning oil investments with national policies. Porter's five forces were used in the analysis of the attributes of the oil industry stakeholders, with Iraq as a classic barrier to entry, the US as buyer power, China as rival, Saudi Arabia as supplier power, and India and Africa as substitute threats. Going beyond Porter's five forces paradigm, this study describes the self-proclaimed champion of democracy in the context of the recently concluded Iraq war, the US, as fitting the description of Mintzberg's heroic leader, wherein the desirable and ideal is the emergent leader instead. Success factors, those contributing to the industry sustainability, rest upon environment protection, counter terrorism, international diplomacy, emergent world leadership and integrity. Introduction This paper intends to establish why the oil and gas exploration and production sector attracts global investors. It aims to know the basics of oil production and the profiles of the multinational key players, which, for the purpose of this research are identified as the various country-investors namely the US, the Middle East, Africa, Russia, Japan, China, India, and the Philippines. This study analyzes the political and economic climate and how the oil and gas stakeholders position their oil exploration ventures with national and international policies. Oil / Gas Platform Floating Production Storage and Offloading (FPSO) System Oil exploration begins with oil platforms located on the continental shelf. The platform is attached to the ocean floor, consisting of a floating, artificial island. Improved technology makes possible and more profitable oil drilling and production in deeper waters. A floating production, storage, and offloading (FPSO) system is used by the offshore oil and gas industry and designed to take all of the oil or gas produced from a nearby platform, process it, and store it until the oil or gas can be offloaded onto waiting tankers, or sent through a pipeline. (Wikipedia) The world's top three oil reserves are in the Middle East namely Saudi Arabia, Iran, and Iraq. There are two major sectors within the oil industry, upstream and downstream. Upstream is the process of extracting the oil and refining it. Downstream is the commercial side of the business such as delivery to manufacturers and gas stations. (Investopedia). Oil investors talk of an average seven-year period for exploration when commercial quantity reserves should have been established; and from 25 to 35 years of production and manufacturing. A most important natural resource, oil fuels the world economies. Almost every human activity in the 21st century is related to crude oil, from illumination to transport, air conditioning, heating and sewage system to use of household products such as petroleum jelly and body creams. The US which is the world's richest economy is such because it has control over cheap oil. Recently, the Latin US, Russia, and Asia are experiencing economic growth and consuming oil at an increased level. People in these countries are entering the world of consumerism, buying appliances and gadgets that are hungry for electricity; wanting to travel by car, ships, and jets that require oil to function. Oil is the lifeblood of capitalism. Developing countries need all the oil they can get to run factories, machineries, equipment and power plants. (USOilandGas.net) This is the reason the oil and gas sector continues to attract investors from all over the world. The major players in the oil and gas sector After the war in Iraq, the US, foreign oil companies and the International Monetary Fund rushed the Iraqi government to pass the Iraq law that opened the country's national oil system to foreign control. The new oil law gives foreign corporations access to almost every sector of Iraq's oil and natural gas industry. This includes service contracts on existing fields that are already being developed and that are managed and operated by the Iraqi National Oil Co (INOC). For fields that have already been discovered, but not yet developed, the proposed law stipulates that INOC will have to be a partner on these contracts. But for as-yet-undiscovered fields, neither INOC nor private Iraqi companies receive preference in new exploration and development. Foreign companies have full access to these contracts. The exploration and production contracts give firms exclusive control of fields for up to 35 years, including contracts that guarantee profits for 25 years. A foreign company, if hired, is not required to partner with an Iraqi company or reinvest any of its money in the Iraqi economy. It's not obligated to hire Iraqi workers, train Iraqi workers or transfer technology. (Juhasz and Jarrar, 2007) Japan is involved in the reconstruction of Iraq, including the granting of loans in the hope of acquiring shares in the latter's oil reserves. But Japan is also exploring energy cooperation with Russia and other Eastern European countries like Kazahkstan. Aside from the Middle East, Japan buys oil from China, Indonesia, Mexico, Africa, Azerbaijan in Central Asia, and the Caspian Sea. A self-proclaimed champion of democracy in Asia, Japan does not want to buy oil from Africa because of the latter's corruption and human rights violations. (Masaki, 2007) Despite China's efforts to diversify sources of imports, it still relies heavily on Middle Eastern oil. In 2005, China's imports of crude oil from the Middle East accounted for 61.1% of its total crude oil imports. China's sources of oil imports have gradually extended to regions other than the Middle East, such as Africa, Central Asia, Russia and Latin America. In the first half of last year, China's top sources of oil imports were Angola, Saudi Arabia, Iran, Russia, Oman, Equatorial Guinea, Yemen, Libya and Venezuela. (Zhong, 2007) There is much hope for new oil and gas finds in India, with the latest round of exploration bids likely to ensure that India has one of the most extensive deep-sea exploration programs in the world. India offered bidding for oil and gas blocks wherein multinationals like British Gas, British Petroleum, Malaysia's Petronas, Scotland's Cairn Energy, France's Total, and Italy's ENI participated. American and Russian firms who kept away believe that India's political climate is not conducive to doing business freely. (Srivastava, 2006) In the Philippines. A Kuwaiti and Japanese firms committed to engage in a seven-year exploration over Tanon Strait once the reserve is proven to be of commercial quantity, plus another 25 years for production timeframe. (Velasco, 2005) Kuwait again and China, together with Shell Philippines Exploration (SPEx) also embark in oil and gas exploration in offshore northeast Palawan. Potential reserves of the acreage covering 1.008 million hectares are seen at a magnitude matching that of Malampaya which is the largest gas production field in the Philippines today. The project involves US$ 193 million. (Velasco, 2006) In Africa, Nigerian oil production is set at 4.5 m barrels a day (b/d) in 2010 for a string of major onshore and offshore discoveries. (Ford, 2004) China is interested in making Africa as its largest source of oil import. (Zhong, 2007) China has offered generous aid to Africa, using such to earn energy interests there. (Mizaki, 2007) Strategic Management of the Oil and Gas Industry: PEST Scan and Porter's Five Forces Analysis Political, Economic, Social, and Technology (PEST) Scan Political The global political context within which the oil and gas industry operates is volatile, with the US-Iraq war having just ended; and with the entire world under the constant threat of terrorists' attacks. Economic But the world economy is vibrant. It is predicted that the US, China, and India will count for more than 50 percent of global economic growth between 2005 and 2020, with Asia's overall share of the world economy rising to 43 percent from the current 35 percent. China will match US as the world's largest consumer market in terms of purchasing power. However, the US remains as the world's most important country across all the dimensions of power such as GDP, military might, internal cohesion and technological lead. (Asia Times Online, 2006). Social It is ironic that despite being the largest producer of crude oil, Saudi Arabia imports most of its fuels like diesel and refined products such as lubricant. Wealth is concentrated in the hands of the few. There is no appropriate scientific education for the youth so that Saudi Arabia needs to hire foreign nationals, who, unfortunately receive the anger of the locals, when it is the government's fault that such situation emerges. (Akya, 2007) Technological Technologies for more efficient and cost effective oil drilling, manufacturing, and transport continue to become available. As the oil and gas industry produces more accessible and cleaner energy, providing 63 percent of the world's energy needs, this sector at the same time also strives to preserve the environment, as well as effect technology cooperation and capacity building. Key issues that this sector faces are biodiversity, climate change, urban air quality, health management, oil spill prevention and response, product stewardship, safety, and waste management. (IPIECA-OGP, 2000) Porter's Five Forces Analysis After spending more than half a trillion dollars and with half a million Iraquis killed, the US government has successfully maneuvered the approval of the new Iraq oil law by an uninformed puppet parliament with the help of a small bunch of corrupt technocrats (Escobar, 2007) thus setting in place the classic barriers to entry that will enable the US to control the oil reserves in Iraq. The US oil companies such as Big Oil, ExxonMobil, Chevron Texaco, and Shell will be exploiting 65 percent of Iraq's 80 oil fields. Ironically, it is the US that has orchestrated the enactment of the barriers to entry law for its benefit . Aside from being a barrier to entry entity, the US is also a buyer power entity. By virtue of the provisions in the new Iraq oil law, Iraq has relinquished its barrier to entry attribute to the US. Strategic stakes are high for all the country players in the oil industry. The Middle East (Saudi Arabia) has the supplier power. Saudi Aramco is the world's largest supplier of crude oil. Other oil producing countries such as Africa, India, Central Asia, China, Philippines, and Latin America present threat substitutes. Japan and China possess buying power. Although China is predicted to match soon the US purchasing power, it is beyond China's capability to contend with the world's sole superpower in the Middle East. US can use oil as a weapon against China if the two countries are to run into conflict, for example because of the Taiwan issue. (Zhong, 2007) Alternating and switching roles (as supplier power and buyer power at various times, according to their actual oil need and political agenda) within the context of Porter's five forces paradigm, US and China are rivals. India and Africa are rivals as substitutes threats forces. Saudi Arabia is the undisputed supplier power but failing to harness education for its youth, democratic principles and ICT4D (Information and Communications Technology for Development) in its governance, it is sadly not able to approximate the powerful position of the US. Evaluation Temporary success factors are bully tactics like the ones employed by the US. The whole world suspects that the Bush administration's main agenda in the Iraq war is to control its vast oil reserves. There are also soft bullying tactics in forms of grants and loans like the ones being used by China and Japan. China is giving grants to Africa as a way of gaining access to its oil fields in the future, in the same way that Japan involves itself in Iraq's reconstruction, hoping for gains from its oil reserves later. Saudi's success factors in the production aspect are its natural oil reserves, available technology, and manpower. These are the same success factors available to the competing oil powers-would be like India, Africa, China, Philippines, Central Asia, and Latin America. Capital is not lacking as there are many interested investors and partners. The industry trend is long-term collaboration. With the US now well entrenched in the Iraq oil reserves, it is likely it will dominate the market and will coerce (if unable to seduce) Saudi Arabia to join its powerful sphere. The oil and gas industry remains to be a very attractive sector to invest in. Conclusion Authentic success factors rest on the management of the wealth derived from their oil exploration ventures. The material benefits must trickle down to the citizenry and thus ensure a sustainable economic growth for all. Fundamentals of national sovereignty and democracy need to be established in middle eastern countries like Saudi Arabia and Iraq; and also, in Africa. Caring for the environment is also crucial. A comprehensive oil spill accident program must be in place. There must be strategies to counter terrorists' attacks while oil and gas are in transport. Oil should not be used as a political blackmail weapon in place of international diplomacy. Within the context of Henry Mintzberg's "Five Perspectives," US, the sole global power is assuming "heroic" leadership of the world instead of "emergent" leadership. According to Mintzberg, heroic leadership is thrust upon those who thrust their will upon those who are around them, while emergent leadership is a sacred trust earned through respect of people who want to be led. This study is not simply about oil and gas as material commodities but as metaphysical lifeblood of world economies. Critical success factors then rest upon leader-investors with conscience and integrity. Appendices Global Oil and Gas Industry Profile Country / Company Investment worth Operation Timeframe Porter's Five Forces Attribute Saudi Arabia / SAUDI ARAMCO Upstream, mostly New and Upgrading 2004-2009 Supplier Power Iraq / INOC, Federal Oil and Gas Council 115 billion barrels / 80 oilfields Upstream 25 to 35 years Barrier to Entry (But ironically benefiting mainly a foreign power, the US) US / Big Oil, ExxonMobil, Shell, Chevron Texaco 65 percent of Iraq's 80 oilfields Upstream 25 to 35 years Buyer Power India / British Gas, British Petroleum, Petronas, Cairn, Total, ENI, China Petro, Saudi Aramco US$ 3.5 billion / 9 million ton per annum refineries Upstream Starting 2011 Substitute Threat China 183.68 million tons of crude oil produced; 138.84 million tons of crude oil imports Upstream Importation 2006 - beyond US Rival as Buyer Power Africa (Nigeria and Angola) / Nigeria Natl Petroleum Corp, TotalFinaElf, Chevron Texaco, BP, ExxonMobil 34 billion barrels reserves 4.5 million barrels a day production Upstream 2010- beyond Substitute Threat Top World Oil Net Exporters, 2001 (from US Department of Energy) Country Net Exports (million barrels per day) 1) Saudi Arabia* 7.38 2) Russia 4.76 3) Norway 3.22 4) Iran* 2.74 5) Venezuela* 2.60 6) United Arab Emirates* 2.09 7) Nigeria* 2.00 8) Iraq* 2.00 9) Kuwait* 1.80 10) Mexico 1.65 (Investopedia) References Asia Times Online 24 June 2006, "China, India moving ahead of the pack," Viewed 28 February 2007 at http://www.atimes.com. Ford, Neil 2004 "Africa Enters the Premier League," African Business, Issue 296, March 2004, p.31, Retrieved 28 February 2007 from Questia database. Investopedia, "Top World Oil Net Exporters," Viewed 28 February 2007 at http://www.investopedia.com. Juhasz, Antonia and Jarrar, Raed 28 Feb 2007, "Big oil in, stability out under new Iraqi law," Asia Times Online, Hongkong, Viewed 28 February 2007 at http://www.atimes.com. Masaki, Higane 21 February 2007, "Oil-hungry Japan looks for other sources," Asia Times Online, Hongkong, Viewed 28 February 2007 at http://www.atimes.com. Velasco, Myrna M 16 September 2006, "Kuwaiti from Japex," Manila Bulletin, Philippines, Retrieved 28 February 2007 from Questia database. Velasco, Myrna M 28 January 2006, "Spex, Partners Embark on New Oil / Gas Exploration in Palawan," Manila Bulletin, Philippines, Retrieved 28 February 2007 from Questia database. Srivastra, Siddharth 20 September 2006, "Big boys absent as India offers oil, gas licenses" Asia Times Online, Hongkong, Viewed 28 February 2007 at http://www.atimes.com. "The oil and gas industry from Rio to Johannesburg and beyond: Contributing to sustainable development," International Association of Oil and Gas Producers (OGP) and International Petroleum Industry Environmental Convention Association (IPIECA), 2000, London. Wikipedia, "Floating oil production system," Viewed 28 February 2007 at http://en_wikipedia.org. Zhong, Wu 28 February 2007, "China aims to diversify oil resources," Asia Times Online, Hongkong, Viewed 2 March 2007 at http://www.atimes.com. Read More