Oil and Gas Management Big Oil

Question: Discuss how Big Oil is facing up to these challenges, and whether any strategic thinking and change is demonstrated in their public pronouncements and forward-thinking. Answer: Introduction Managing the risk is an essential part business procedure particularly in the energy industry. In Oil and Gas Industry, there exist various risks ranging from economic stagnation to environmental influence. This issues and risks threats the sole existence of national and international oil and gas industry. The major risk faced by oil and gas industry is slowing down of the demand due to global economic stagnation. The OPECs (Organization of the Petroleum Exporting Countries) unprecedented decision for maintaining production in order to recover lost market share has fired back by lowering the barrel range. The shale oil and gas production has led to the OPECs decision that has furthermore decreased the price of crude oil by 50% (Yusuf et al. 2014). The inflated price of the Oil and gas has led to the Cash Crunch that has affected the) business in a negative way. Apart from that, the production maximizing policy to oversupply 700,000 bpd for the year 2016 has further reduced the price of oil (Hongxun, Yujie and Peng 2015). In addition to that, the Climate Change Conference in Paris has jeopardized the sustainability and existence of Oil and Gas Industry the future. Thus, for ensuring the survival of the oil and gas industries, the focus has been given to Cash Crunch, Product Maximizing Policy, and low carbon global world. Cash Crunch A continuous and tremendous investment is required to maintain growth in the Oil and Gas Industry. Oil price reached its highest record with almost $150 per barrel in the year 2008 (Davies et al. 2014). Oil and Gas Industry witnessed a drastic change when the oil price dropped to $40 per barrel in 2009 (Bjerga and Aven 2015). The inflated price of oil leads to capital inefficiency, complacency, value destruction and uneconomic investments. Therefore, it can be said that with the reduction in capital expenditure and flat dividend, oil and gas industry would face a large shortfall in cash flow. Therefore, most of the national and international oil and gas companies need to defend their dividend to overcome the cash crunch. But a prolonged period of inflated oil price would threaten the dividend sustainability (Rahm et al. 2013). The cash crunch could result in borrowing of additional assets, and even some companies will be forced to cut or freeze the dividend that will ultimately resul t in sinking of their shares in the market. To avoid and mitigate the cash crunch problems in Oil and Gas Industry, the most significant need is the strategic planning of the business. The industry needs to focus on the long-term capabilities while ensuring the short-term need to sustain the economy. If the changes and actions were taken to mitigate the problem are not surgical that will automatically lead to harming the organization. Systematic or surgical cost reduction will assist in monitoring and control the cash flow during the cash crunch (Curran, Wolff and Stahl 2013). Since the cost inflation questions the very existence of the organization, the company needs to focus on reducing the inefficiencies and operational cost in the non-core area of the business. Furthermore, the oil and gas industry need to have projected sales. Project Sales allows the company to develop and enhance the strategic planning. Strategic planning allows controlling inventory and managing the supply chain. Identification of the potential customer and risks related to them is critical during the downtime of the company. The contribution of the customers has a potential impact on increasing not only the organizational profit but also the annual revenue collection. Identification of potential sources of capital support is most required in the industry. But initially, the company needs to focus on getting paid for their services from their regular and potential customers (Pedroni et al. 2013). If the internal resources appeared to be insufficient for funding the strategic planning, the company must bring external support to survive the crisis. The procedure to avoid or survive the cash crunch requires commitment and discipline among the Oil and Gas Industry. Analyzing and understanding the companys need, will help in avoiding the situation. The cash crunch in Oil and Gas industry if prolonged for a long time will affect the flow of cash and influence the business on a long term. If there is inefficiency in collecting the payments and turning down cash crunch, the industry will face an economic slowdown (Hladik, Focazio and Engle 2014). If this situation prevails, the majority of the Oil and Gas industry will run out of revenue within the next five years. Production Maximizing Policy Due to the falling of the crude oil price by 50% and having $40 per barrel during December 2015, the OPEC has decided to maximize the production of oil by 700,000 bpd for the year 2016 (Ong et al. 2014). Moreover, the primary strategy and intention of OPEC are the production of more crude oil for offsetting the lower crude oil. According to several companies, this decision of OPEC depicts the transparent idea of gaining the lost market due to infatuation (Hongxun, Yujie and Peng 2015). The increase in the production of shale oil is one of the major concerns for the Gas and Oil Industry due to the reduced rate of oil. Although, OPEC firmly believes that the continuous falling of oil price will force both the small and big Oil Companies to re-evaluate again their business and investment plans. Furthermore, according to OPEC, the increased number of production will force the oil companies to extract more oil from various new shale deposits that are more costly to extract than crude oil (Palmer 2013). It must be taken into account that, several companies, with the advancement of technology, can reduce the production of shale oil whereas, various companies can extract oil at a much lower rate than $40 (Cop21.gouv.fr. 2016).This acts as a power play for many companies both large and small for enhancing the Oil recovery in the recent few years. With the rate of Oils reduced to 40% of its original price, many international levels companies have started adopting "Enhanced Oil Recovery" Solution in order to increase the yield of oil production (Opec.org. 2016). Since many companies in the Oil and Gas Industry have eliminated the option of lying out more investment in another field to explore new deposits, this shale oil production has proved to be beneficial. In order to recover the market value of Oil and Gas, different large-scale oil Production Company has already invested a large sum of money on shale projects to maximizing their investment (Alam and Al-Ghawas 2015). Thus, abandoning the product maximizing policy will tremendously affect the whole oil and gas industry by backfiring and further reducing the economy. Many inventors and production company has stated that a freeze in the oil production for a certain time will boost the oil prices and stop the product maximizing policy. The US Energy Information Administrative has updated its forecast by stating that by the year 2017, the oil production might fall by 480,000 bpd (barrels per day) (Yusuf et al. 2013). These forecasts have assisted much big and small oil producing companies to rethink the initiative to abandon the maximum oil production policy. Furthermore, the forecast for reducing the production of Oil in the future will ultimately result in increased oil rate. Although it is impossible to stop the shale growth completely, OPECs decision to maximize the oil prod might be short-lived, but action will require much effort to abandon it. Thus considering the profit in the long run it will be profitable not to follow the OPECs product maximizing policy (Magness 2013). Low Carbon Global World The oil and gas industry need to look past the current economic crisis and focus on the long-term effect of the low carbon emission. Regarding the UN Climate Change Conference held in Paris, all the Oil and Gas Industries have been presenting their plans to restrain Carbon Emission past 2020 (Futureisclean.org. 2016). In spite of improving the future demand, the Oil and Gas Industry has vital responsibility for mitigating the environment risks. Therefore, the primary aim of the conference was to bind 55 countries through an agreement that will follow several laws through acceptance and approval to reduce the carbon emission (Dalderup 2014). Furthermore, the UN Climate Change Conference aimed at reducing the temperature by 2oC throughout the world and reduces global warming (Ramady and Mahdi 2015). Yusuf et al. (2013) argued that the oil and gas will continue to play a vital role as a source of energy, but the industry needs to consider the increasing pressure for decarbonizing. The gas industry will be facing a critical challenge in meeting the energy demand in the future while preventing the climate risk and administering the environmental impact. The government also plays an important role in understanding the production operations regarding the effect on the environment. The complementary activity of both the parties is required to maintain an environmentally sound and cost-effective approach. The Oil and Gas Industry must integrate the environmental issues systematically into business strategy. In spite of the rapid investment in renewable and alternative resources, energy forecast predicted the consumption of fossil fuel and gas will remain approximately 50% throughout the world (Ghanaati 2012). There still remains a huge potential for reducing the carbon dioxide emission while increasing the share of natural gas in production. The natural gas has a much lower impact on the carbon dioxide emission than the fossil oil. The Oil and Gas industry need to embed sustainability into their strategic plan and decision making procedure. The Oil and Gas industry have an opportunity for diversifying into renewable energy (Lake et al. 2014). There have been various researches and investigation have taking place for harnessing the wind power over the sea and convert in into renewable energy. Another major way to ensuring the fair share of energy is taken by the majority of the industry is to introduce "global carbon price" (Ramady and Mahdi 2015). This could have the potential to encour age innovative techniques to lower the carbon efficiency. Various oil and gas companies namely Statoil, BG group, Royal Dutch Shell has already taken initiative for Global Carbon pricing policy (Pereira et al.2013). Statoil is primarily based on Norway that has already placed the tax on carbon emission effectively for the past twenty-six years. Statoil has been effecting on influencing the economic factor for reducing the carbon emission. Technology does play a vital role in managing the carbon emission of the Oil and Gas Industry. Many companies and organization have been investing in the carbon capture and storage (CSS) (Heede 2014). With this process, the carbon dioxide emission can be theoretically prevented to 75-90% produced from the power plants (Geels 2014). The UN Climate Change Conference has played the significant role in collaborating the oil and gas companies throughout the world. Due to the low carbon global world, a significant change has been brought to Oil and Gas Industrys future development. Conclusion There is no denying the fact that in the recent days, the Oil and Gas Industries have been facing a global crisis for mere existence. Overcoming the various barriers to organizational growth require a strong business strategy with the clear view of the objective of the industry. Apart from having a robust business plan, the Oil and Gas Industry also need to leverage the advanced technological innovation to overcome the barriers to development. The recent fall in the oil prices, in the past few years, have led the industry to undergo a critical stage facing financial crisis. The effect of lower oil price with high production rate can be overcome with in-depth business strategy and adapting alternative processes. Furthermore, the cash crunch situation currently faced by most of the companies can also be overcome with perceived business strategy. Various big and small oil industries have already involved in the internal and external investment to overcome the cash crunch. In terms of en vironmental policy and reducing carbon emission, the oil and gas industry will be facing a major slow down of business in the future. But, there is no disputing the significant role of advanced technology that has eloped in Oil and Gas Industry. Thus, in order to survive the fundamental crisis, the oil and gas industry throughout the world need a robust business strategy along with technical innovation. References Alam, M. and Al-Ghawas, M., 2015, October. Challenges in Contractor Financed, Built, Owned Operated Oil Gas Processing Facilities in Kuwait. InSPE Kuwait Oil and Gas Show and Conference. Society of Petroleum Engineers. Bjerga, T. and Aven, T., 2015. Adaptive risk management using new risk perspectivesan example from the oil and gas industry.Reliability Engineering System Safety,134, pp.75-82. Cop21.gouv.fr. 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