STRATEGIC focuses on UK Industry operations. The
STRATEGIC MANAGEMENT OF ANALYSIS OF UK OIL AND GAS SECTOR 1. 0 INTRODUCTION 1. 1 UK OIL SECTOR OVERVIEW The oil and gas industry is a large Industry and contributes a critical role in driving the global economy (Sam’s et. al. , 2006). The upstream section of the Industry is involved with the first stage of exploration and production, the midstream section involves the transportation of crude through pipelines, ships e.
t. c to the refineries. The downstream is involved with refining and process of the oil and gas products.
The distribution and marketing of crude is then done for end user consumption.For purpose of this report the analysis shall be on oil and gas operations with emphasis in the United Kingdom. According to (Oil and gas UK, the voice of the offshore Industry), the country has over 99% of the oil and gas production occurring under the seas surrounding the continental shelf.
With a network of 14,000km lay down of pipeline connection and fitting for effective distribution and transformation of crude oil products which links close to 107 oil platforms which connects a large number of gas platforms and subsea installations.The total number of fields producing within the region is about 383 and 17 new ones came on stream in 2008. 3970 exploration wells and appraisal wells have also been drilled to further determine the reservoir extent and explore for new discoveries. ?1.
4 billion was spent in 2008 drilling exploration wells and appraisal wells which had 109 wells producing delivering 300-400MMboe. The United kingdom oil and gas operations provides a delivering solution to prolong the lifespan and efficiency of the UKCS.In 2004 UK was the fifth largest producer of offshore gas (Spends & Trends 2006). However decline has set in top fields in the UK, where oil and gas are seen to however pass their peaks (Spends &Trends 2007). 1. 1 AIM OF REPORT: This report analysis the oil and gas industry and focuses on UK Industry operations. The report is structured to: 1.
Give an understanding of the UK oil and gas industry and the mode of operation. 2. Evaluate the growth trends of the Industry in terms of its revenue, crude pricing, demand and supply, oil and gas production trend e. t. c. 3.
Use PORTER’S, PESTEL and SWOT to analyze the macro and micro environmental factors that are likely to have an influence on the Industry operation. 4. Suggest probable strategy for the Industry. 2. 0 TRENDS WITHIN UK OIL AND GAS INDUSTRY 2. 1 OIL AND GAS DEMAND: Crude oil still remains a major source of energy. Report by (IEA, 2010) puts the average demand of oil at 1.
67mb/d in 2009. UK’s oil demand has steadily been on the decrease from 2005 falling at a compound average rate of about 2. 2%. Increase want for gasoline could be one of the factors that have lead to that.
Oil would continue to serve the world and serve as a major feed for transportation for years to come. (Watson, 2010) in his report of issues facing the oil industry, world total energy consumption from 1980’s to 2030 showed a 1. 6% growth rate with above 50,000MBDOE, from oil production and world gas production and world gas production greater than 50MBDOE. Following this growth trend, 2003-2030 experienced a 1. 7% as compared to 1.
6% experienced during the early years. EU total energy growth is about 8% from 1980-2003 reducing to about 0. % probably due to crude oil decline in the region. Majority of the demand is used up by the transportation sector which represents about 70% of total oil demand this is probably due to the fact that substitutes means of energy for powering motor vehicles is on the average relatively low thereby leading to high demand in the products from crude. 2.
3 Forecast Trend in Oil and Gas Production According to the (Oil and Gas Activity Survey, 2010) over the next 2 to 3 years larger amount of production would be from crude instead of gas.In today’s terms if investment can be maintained at about ? 5billion/year then by 2020 the UKCS can produce about 1. 5MBOEPD from development opportunities and current activities in exploration. This however shows that UKCS can still cater for increasing world demand and portrays its security of supply support provided that oil and gas provides 705 of the primary energy supply in 2020. Figure 3 shows a projection in the volume of oil and gas that would be produced between 2008 and 2015, provided there is sustainable investments made.
Figure 1: Oil and gas Production. Source: Oil and Gas UK Activity. 2. 4 Imports/exports and import dependency: The oil industry in the UK has being highly dependent on importation of crude oil since 2005 according to (EIA, 2010) reports. The industry produces refined products that are in excess of the consumers demand and making it a net exporter when it comes to refined oil, this however lead the country to account for about 12% of the net importation from crude oil in 2009.
With the huge capacity of refining capability the Industry could be to a large degree a net importer, in coming years the increase in want of aviation fuel and diesel fuel could lead to an increase in the refinery output and with the continuous decline of crude production in the country, Uk is faced with coming up with decisions and strategies of ways of solving the increasing demands of the above products and deciding on how much it would need to alter its refinery capability to deliver the products and the degree of import dependency it would need.Figure shows the exports and imports of crude by region with Western Europe having the highest values. Figure 2: Imports and Exports of crude. Source: EIA 2. 5 Oil and Gas Prices The Brent oil price in 2008 fell to about $30’s/bbl in December after it had gone as high as $145’s/bbl that same year. This must have been due to crude price swings and the global recession which hit the world, but the price has since been picking up see Figure 3.
Different factors contributes to prices coming back like increase stability in the global economy and credit markets.Over the last two years the UK gas markets swings have been more than the oil market this market do not have a regulatory body like that of the crude market that is being controlled by OPEC. Figure 4 shows a comparison between the price of Brent oil and NBP gas price. Gas prices fell as low as $30/boe at 2009 compared to 2008 price of $58/boe about a 98% drop in price. The gas forward market does not indicate a recovery on the price, currently the price of gas is trading at half the price of crude oil. Oil & Gas UK Activity Survey, 2010).
Figure 3: Daily price of Brent Fig 4: Brent Oil and NUB Gas Price Comparison Source: EIA Source: Oil and Gas UK, Activity 2. 6 Industry Revenue In the (HMRC, 2010) National statistics report for the UK oil and gas industry, it showed the tax revenue generated for the government in oil and gas production and its continental shelf from 1984-85, to 2009- 2010.The yield from the gas levy was given but excluded in calculating the total tax gotten from income of oil and gas production due to the fact that it’s been put into the category of tax on expenditure The chart presented includes the annual tax yield, petroleum revenue tax (PRT), ring fence corporation tax (RFCT), royalty e. t.
c. Figure 5: Government Revenue for oil & gas production Source: (HMRC, 2010) 2. 7 EMPLOYEE STRENGTH: In 2006, the total number of employee that was provide by the Oil and Gas sector rose to about 480,000 in which about 380,000 personnel’s were involved in domestic operations.The breakdown provided indicated that about 30,000 workers were in oil and gas companies, the major contractors were about 260,000 constituting people within the wider supply chain 90,000 workers involved in economic activities carried out by oil and gas employees spanning throughout the economy. Supply chain companies had about 100,000 employees involved in export activities (UK Trade and Investments, 2008). This report doesn’t state the present number of people working in UK industry.
The table below shows some major oil and gas firms that are present in the UK, the revenue generated from sales of their product and the employee’s strength in the global business of the firm. For recent years 2010 and 2009, BP revenue saw a 24% increase from years 2009 despite the spill the company suffered during year 2010 and an increase in the total employee figure. From the five top players presented below, ExxonMobil had overall large sales revenue accounting to about 23% rise between 2009 and 2010.
TABLE 1:Sales Revenue and Employee Number of Some Top Oil Companies COMPANIES NAME($M) SALES REVENUE (FY 2010)($M) SALES REVENUE (FY 2009)EMPLOYEES (FY 2010)EMPLOYEES (FY 2009)SOURCE (Company Site) BP297,107239,2729200080300(BP Summary review 2010) Chevron1981981674025826759630(2010 Annual Report Chevron) Conoco Philips198,6551523902970030000(2010 summary annual report Conoco Philips Exxon Mobil3701253015008360080700(Summary Annual Report 2010) Shell368,056278,18897000101000(Shell annual report 2010) Premier Oil763. 6621. 1561508(Annual Report and Financial Statement) Tullow Oil1089. 915. 9890560Annual Report 3.
0 EXTERNAL AND INTERNAL ANALYSIS OF UK OIL INDUSTRY 3. 1 PESTEL ANALYSIS The environment in which organisations operates is what gives them their form of survival. It generally creates opportunities and it presents threats this could however have a positive influence or a negative one on the business operated.
The business environment of the firm consists of all the external influences that affect its decisions and performance. The layer of business environment includes the macro environment, Industry or sector, Competitors and markets (Johnson, et al, 2011).In analyzing the environment were a business operates, it is important to identify the factors that might in turn affect a number of vital variables that are likely to influence the organization’s supply and demand levels and its costs. The PESTEL framework presented is used to evaluate the business environment in which UK oil industries operates by analysing the factors that constantly affects it directly. POLITICAL Political Factors, for analysis the probable factors that affects the oil &gas industry in UK: 1.
Politics of climate change. 2. Security of future energy suppliers. 3.Terrorist restrictions. 4.
The influence of UK government to the Industry. 5. Large political risk and political instability. ECONOMICAL The Economical factors likely to influence UK oil sector include changes in interest rate, money supply, exchange rates and inflation rates, Investment in infrastructure, investment in oil and gas production, the increase in energy prices, availability, disposable income and demands from other countries (David Hunger and Thomas Wheelen, 1995). The industry is highly influence by macroeconomic changes which would in turn affect the firms within the Industry.Other economic factors influencing the UK oil industry includes: 1.
Investment in oil and gas production 2. Increasing Energy prices. 3. Declining reserve of the North Sea threatening supply. 4.
Earnings due to high prices of crude oil and demand. SOCIAL The social factors mainly reflect the ways in which the firms operating within the industry are affected by the changes made in/by the society. Some of these factors include (Aubert et. al,2007). 1. Changes in lifestyle and the income distribution 2.
Climate change and energy conservation. 3.Rising prices of the domestic energy production growth.
4. Changes in demographic. 5. The growing concerns and pressure to control environment. 6. The growing demand as a result of industrialization and new emerging markets in other regions.
TECHNOLOGICAL: Changes in technology can affect a firms operation as well as its products and services (Wright Peter et. al. , 1992). The oil and gas industry in UK are highly dependent on technological advancement to optimise productions and discover new opportunities which in turn impacts on the profitability of the industry.As the oil companies within the industry are driven towards locations that are highly challenging, with increase in oil markets new infrastructure needs to be put in place to meet the customer’s needs, this technological developments are generally needed in securing the safety of oil and gas assets (Aubert et.
al,2007). Some technological factors include: 1. Techniques for reducing greenhouse emissions.
2. Innovation/Technological skills. 3. Making investments in infrastructural equipments that are likely to sustain supply. 4.Increase in enhanced oil recovery rates, exploration success to reduce cost. ENVIRONMENTAL The environmental factors refer to the issues governing the environment in which the oil and gas operations are being carried out.
The important environmental concerns for the oil and gas industry are: 1. Effects of extreme weather conditions 2. Infrastructure costs as a result of environmental issues. 3. Environmental policies. 4. Co2 capture and storage.
5. Greenhouse emissions. LEGISLATIVE Government Regulations have been used in this industry to sharpen the process by which operations are being performed.
Some government legislative that influences the industry are highlighted below (BP Corporate strategy, 2010). 1. The taxation and Fuel duty (1993): This law affected the prices of crude. 2.
The renewable transport fuel obligation (2005): This law strictly is in favour of the use of bio-fuel. 3. EU emissions trading scheme: This law favoured the allowance of carbon emission. 4. Local transport act (2008): This is concerned with road pricing.
5. Stringent EU product specifications. 6. The UK licensing round for offshore oil and gas Industry. 7.
Strong legislative pressure to adopt best practice. 3. PORTERS ANALYSIS To analyse the degree of rivalry in the oil and gas industry amongst firms in Uk (Porter, 1980) model would be used for analysis, Porters framework takes into consideration the competition that exists between customers, suppliers and competitive firms. The analysis aims to determine the industry threats and industry opportunities’ and fuse it with the resource and capabilities in order to have a competitive advantage. (Aubert et. al, 2007). Figure 6: The Five Forces Framework: Adapted from M.
E. Porter, Competitive Strategy: Techniques for Analysing Industries and Competitors 3. Distribution System of Products and Services.
Crude oil and refined products could be imported into the United Kingdom either from EU member states or other countries. The crude oil products are delivered primarily by the use of ships to refineries within the UK which are carried out by major oil companies within the region. The North Sea produces crude oil and Natural gas that are imported by either tankers or pipelines from both the UKCS and the Norweign region. The finished petroleum products can be bought from major oil companies operating in the UK or it could be bought on the Spot Market.Other forms of semi –finished crude oil products maybe imported from international companies. The diagram below illustrates the distribution network system of crude oil and its products from the collection of crude supplied by the E&P companies which are then passed unto the refineries to make out products that are of beneficial use and then the delivery to major markets where the refined products are utilised then the various distribution channels used to deliver the end products to companies and final customers (EIA, 2009) report.Figure 7: Supply Chain Distribution Network Source: EMC(Energy Markets Consultant) 3.
3 FACTORS INFLUENCING GROWTH AND DECLINE OF UK OIL AND GAS INDUSTRY In analysing the above factors the SWOT analysis would be used to examine the Industry strengths and weaknesses in relation to its environmental opportunities and threats. This helps to consider the major issues that centre’s around the business environment and those identified strategic capability in which the organisation possesses that could directly or indirectly have an impact on the strategic development adopted. Johnson, et .
al, 2008). This environmental opportunities influencing the Industry are potential ones unless the Industry in question can mainly utilize available resources to take advantage of the opportunities and until the strategic leader in this case the firms contained within the industry decides it is appropriate to pursue the opportunity. (Thompson and Martin, 2005). STRENGTHS •Light crude oil production making it attractive to foreign buyers. The by- products from the oil and gas industry in UK conforms to the highest standard internationally for example the EU pressure Equipment directive and the products could be tailored to cater for regional, national and also international specifications. •Uk gas industry application are environmental friendly and is being adapted in other parts of the world e.
g CHP & NGV •Extensive pipeline networks •According to the report by EIA quoting from Oil and gas journal, the UK had about 3. 1 billion bbls of crude oil reserve proven in 2009, which is the most of any EU member country. The oil and gas Industry within the UK developed the well known CCGT systems which is a technology used for the generation of electricity and has significantly generated more than the conventional means of electricity generation. (UK trade and Investments, 2008). •They also have a natural gas vehicle market that makes use of the commercial vehicles driven on the streets being fuelled by compressed natural gas (CNG) or liquefied natural gas (LNG). This offers cost reduction and reduces environmental pollution. (UK trade n Investments, 2008).
WEAKNESS •Decline of North sea crude UK oil and gas industry are now becoming net importers of crude oil after being net exporters. •Increasing cost of operation by the industry as crude production moves to remote and inhospitable regions and formations. •Small operators entering into the Industry due to mature fields, and forcing companies like BP and shell selling their UK assets to focus more on international opportunities providing high growth. OPPORTUNITIES •Increasing the UKCS resource base by exploration i.
e. using advanced technology for finding new appraisal wells and exploration reserves. Extend the infrastructural life: extending infrastructural life of industry helps in understanding what impacts the economic and the physical life of infrastructure and resources needed by the industry. •UK industry investments in the growing alternative energy business. TREATS •Changing Market Demand: switch in the use of marine gas oil (MGO) previous usage was fuel oil, decreasing demand by end users for gasoline and increasing demand for diesel and jet fuel, figure 3 shows a 20% drop in gasoline inland deliveries from 1990 to 2009, Brent crude is now becoming relatively more expensive due to the shortage in supply,.
These changes in market demand would lead to investments in higher upgrading units. •Tighter fuel specifications: Higher specification for sulphur content in diesel fuel and gasoline which is currently 10ppm as against the previous 50ppm. •Emission Specifications: UK climate change act of 2008 which enforces a 34% reduction in CO2 emissions by 2020 and a further 80% reduction by 2050. The heavy pressure put by the UK government to reduce these emissions is one challenge facing the refineries operating in the country. Due to the country being a net importer Uk oil industry would need to invest in upgrading units for refineries to treat heavier crudes imported from the middle east. •Shortage in Uk gas storage capacity: UK has a significant shortage in its gas storage capacity compared to other European countries.
STRATEGIES FOR UK OIL AND GAS INDUSTRY Probable strategy for long term direction and scope that would help the industry achieve advantage, through its resource configuration that can restore and redirect profits to retain endurance would include: 1.Market Penetration: Taking advantage of the growing energy sector to reduce the country dependency on crude oil and with the fast decline rate of the North Sea, this can be done by continuously investing more in the energy and renewable markets. 2. Increase in domestic production.
3. Restructuring. 4.
The Industry could also strengthen the importation channels into the country by taking step to build infrastructure that would enable receiving of Liquefied natural gas, terminals and transnational pipelines to receive crude from other regions in the world.Approach by the industry in making investments in infrastructure imports and storage, finding means of improving gas emissions maximizing the implementation of appropriate energy efficiency and improving the diversity within the oil and gas system can all add to Uk energy security and strategies that could be implemented within the sector, since the security of production efficiency has a particular role in being able to minimise the oil and gas systems exposure to security treats, the lack of storage systems in the UK is of upmost concerns.REFERENCES a. Wheelen, T.
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