Marketing opportunity study
MARKET OPPORTUNITY THAT A NEW OIL AND GAS COMPANY HAS IN THE U.K. MARKET
Table of Contents
The Oil and Gas Industry in UK
Table of Figures
Figure 1. Tonnes of UKCS Oil Spilled 2001-2005 ………………………………..10
Figure 2. UK North Sea Taxes 1991-2007 …………………………………….…..11
Figure 3. Exploration and Appraisal Drilling Activity Forecast …………….……..13
Figure 4. Exploration and Appraisal Activity Constraints …………………..……..14
Figure 5. UKCS Reserves as of 2007 ………………………………………..…..…15
Abstract
The oil and gas industry is always a very lucrative business. However along with the promise of immense wealth for any company, considerable risk comes along this venture. In the context of UK, its oil and gas market is considered as among the lushest sources of reserves in the world. Particularly, the United Kingdom Continental Shelf (UKCS) was known to possess untapped areas where oil and gas companies are vying for incenses to conduct exploration and extraction practices. This study presents the possibilities for companies to take advantage of both the upstream and downstream sectors in UK.
Introduction
The oil and gas industry is debatably one of the most lucrative ventures in business. However, the risks on such endeavours are considerably high as the capital required to initiate any attempt to penetrate the industry is noticeably high. Thus, for any company seeking to operate in the industry, they have to take on due diligence and intensive research to minimise the risks involved in the venture. In the context of the oil and gas industry in the area of the United Kingdom, there are great opportunities for commercial organisations in the North Sea as oil and gas reserves have been found to be bountiful on that area. Numerous oil and gas companies, big and small, have established their infrastructures geared towards hauling gas and oil since the 1960s to the present. Both upstream and downstream sectors of the oil and gas industry have established themselves in the areas nearby the North Sea. Basically, upstream sectors cover the drilling infrastructures and the rigging activities in the industry. On the other hand, the downstream sector includes the refineries and the transport companies that take the extracted reserves from the oil rigs to the refineries. This study intends to provide a discussion on the possible venues on which companies could invest in the oil and gas industry in UK. Basically, the paper will be analysing the microenvironments and microenvironment on which the industry possess. Thus, the findings in this paper will be useful for companies seeking to invest in the area. Moreover, the contents of the paper will be including specific cases of particular companies operating in the North Sea. The data used in this paper will be supported by articles and studies from scholarly journals and reports from organisations like the UK Offshore Operations Association Limited (UKOOA).
The Oil and Gas Industry in UK
The recent performance of the players in the oil and gas industry provides a clear picture on the viability of entering the industry. Based on the website of Oil & Gas UK the industry is bound to improve as compared to its performance in 2006.[1] The site noted that over two million of barrels of oil equivalent per day were made. This shows the potential for profit as companies could extract this amount of oil in a day alone. However, a cause of concern would be the increased cost seen in capital expenditure, operation of offshore units, and expenditure in explorations. In the report of Oil & Gas UK, the capital investments increased to approximately 66% from those given in 2005.[2] The increase manifests a clear indication that the players in the industry are continuously investing funds in their operations. This is also reflected in the increase in the money invested in exploration which amounted to £0.6 billion. At some point, this increase shows that there are still areas in the North Sea, particularly the UK Continental Shelf, which has yet to be tapped by oil companies. The only disconcerting part of the operations is the increase in the cost of operating pipelines and onshore terminals. Oil & Gas UK indicated that the increase amounted to £5.5 billion in 2006.[3] However, it is believed that the expenditures will drop in 2007. This spells good news for oil and gas companies relying on the upstream sector of the industry.
In the work of Gardiner and Matthews they noted that the UKCS is possibly one of the most lavish sources of oil and natural gas in Europe.[4] However, the Oil & Gas UK indicated that the area does offer considerable challenges particularly in installing the infrastructure used to extract the minerals from the shelf.[5] It pointed out that the UKCS part of the North Sea has a callous marine setting which could hamper the construction of such oil rigs. This is further exacerbated by the seemingly meek nature of oil and gas in the area. This means that the discovery of oil and gas seemed to be rather trying for companies as reflected in the increase in the exploration expenditures mentioned above.
PEST Analysis
The PEST analysis points to the examination of the political, environmental, socio-economic, and technological factors affecting an industry.[6] Basically, this is an examination of the general microenvironment of the oil and gas industry in UK. Issues concerning legal matters, pressures in terms of the ecological policies, need of capital and even the technological requirements in the industry are examined in this analytical tool. In any case, the knowledge on these elements will provide any company that intends to invest on this industry the capacity to foresee possible problems and exercise flexibility to address their future operations.
Political Factors
The intervention polices of the UK are seen by relevant studies as among the strictest when compared to other first world countries. This is affirmed by the claims of Richardson indicating that the Petroleum Act 1998 gives the leadership of UK prerogative in who will bestow leasing permits and reject applicants for such lease.[7] Basically, this prerogative is given to the monarchy. indicated that offshore leasing in the UKCS is still under the close supervision of the state especially when concerned with the extractions initiatives as well as the exploration endeavours of any company applying for lease.[8]
The Department of Trade and Industry (DTI) of UK is the one that supervises and handles the programmes involving the offshore activities of the companies working in the UKCS part of the North Shore. This reality presents the power of the company over the equally powerful industry in UK and possibly the rest of the world.[9] To some extent, this could serve as an issue given that the leadership in the said agency still is covered by the leadership of the state, particularly those in power in the Parliament. The rather volatile nature of the Parliament specifically in terms of the possibility of leadership changes tends to provide adverse implications for the DTI and thus for the oil and gas industry in UK.[10]
Environmental Factors
In terms of the social aspects of the industry, the main barriers that companies could encounter are those involved with environmental activism. Companies that seek to operate in the UKCS and carry out exploration and extraction activities should anticipate brushes with world-renowned environmental activists, Greenpeace.[11] It is said that the organisation view this activities, exploration and extraction, as a blatant exploitation of the natural resources with added implications that could augment emissions from automobiles and industrial areas. Being recognised by the public as the custodian of the environment, it is easy for organisations like Greenpeace to gain the favour of the public. If they decide to go against a particular issue close to their thrust, it is more likely that someone will hear them out and some will share their opinion.[12] Other ecological issues like spills, toxic release and possible fires round up the concerns in the industry. Wade indicated that man-made disasters have been the constant concern of the state, particularly the DTI.[13] Averting such accidents by checking the capabilities of a particular organisation seeking extraction and exploration activities within the North Sea territory of UK is done persistently by the state.
Figure 1. Tonnes of UKCS Oil Spilled 2001-2005
The figure above summarises the amount of spilled oil in the UK territory caused by errors in operations. The said amount is recorded by the UKOOA in their annual sustainability report.[14] Basically, the report claimed that those engaging in exploration and extraction activities incurred over 437 incidents which in turn spilled over 77.5 tonnes of oil in 2005 alone.
Socio-Economic Factors
Companies intending to take on exploration and extraction initiatives in the UKCS have to pay certain fees aside from the actual payment of the rights for the lease.[15] Specifically, the companies have to pay for royalties annually to pay for their concession of the state land. Other schemes like these are seen in other oil rich countries in the Middle East.[16] Particularly, the Iraqi government employed this type of as Tax and Royalty system during the 1970s for companies seeking to extract oil as well as those seeking to explore their territory for oil wells.
In the context of UK, this may have been among the cause of the increase in the expenditure of the companies in 2006.[17] In fact, the UK government collected over £9 billion from the said industry alone. This indicates that the state do have a rather uncompromising stand in the acquisition of fees and strict implementation of regulation in the industry.
Figure 2. UK North Sea Taxes 1991-2007
The figure above summarises the tax collection capabilities of the industry in UKCS.
Technological Factors
With reference to the previous discussions, the technological capabilities of the companies tend to be under close scrutiny of the state. Moreover, it also appears that technological capability is a high requirement for the UKCS as the environment does offer has some level of difficulty in terms of exploration and even possible in terms of the daily operations of any upstream sector firm. This indicates that having a weak level of technology would basically mean a grim future for any organisation. In the same account, those who intend to operate upstream are also required to create downstream structures to ensure more effective operations.[18] Nonetheless, this is unavoidably an added cost for the company as pipelines and operating refineries has increased in the past year.[19]
SWOT Analysis
The SWOT Analysis is essentially an analytical tool used to measure the strengths, weaknesses, opportunities and threats in a particular industry.[20] Thus, the analysis covers both the macro and micro environment that companies will have to contend to once they enter a particular industry. The following analysis will be based on articles and examinations done by the UKOOA.
Strengths of the Industry
An inherent strength of the industry in UK is the belief that the UKCS could cater to more drilling and explorations in the coming years. This is seen in the report of Oil & Gas UK with regards to the sustainability of the reserves.[21]
Figure 3. Exploration and Appraisal Drilling Activity Forecast
This trend of high exploration possibilities is dictated by the increasing levels of oil prices in UK.[22] Though the costs of the operations did have a considerable effect on the industry, this increase in the prices of oil and oil products tends to manifest the viability of the industry for any oil firm.
Weaknesses of the Industry
The industry of oil and gas in UK is considerably hard to enter. Aside from the legal barriers of entry and the substantial costs that companies could encounter, the company could also encounter certain issues that could mean certain losses.
Figure 4. Exploration and Appraisal Activity Constraints
The figure above indicates the possible constraints that a company seeking to explore and extract oil and gas in UKCS.[23] Specifically, the constraints seen include JV alignment delays, unavailability of seismic vessel and drilling rig, and seismic processing capacity.
Opportunities in the Industry
Once more, the discussions turn to Oil & Gas UK, particularly with reference to their annual report.[24] One major opportunity available for the any investor or company that intends to penetrate the industry is that there is much potential in UKCS with approximately over 9 billion barrels of oil equivalent undiscovered.
Figure 5. UKCS Reserves as of 2007
The figure above indicates the state of the reserves in the UKCS part of the North Sea. As indicated, a considerable number has been sanctioned by the state and new entrants in the industry could still take advantage of the remaining given that they satisfy the requirements given by the DTI.
Threats in the Industry
The basic threats in the industry are noted in the Oil & Gas UK website.[25] It pointed out that the industry is rather undergoing considerable stress because of the intensification of competition among the players. This is reflected in the increase the cost and capital expenditures of the members of the UKOOA. Moreover, the increasing trends in terms of collection and taxation on the part of the government tend to contribute to this threat. Though it protects the exiting players in the industry to a certain extent, it bars potential investors. In the end, the state tends to protect a privileged few in the oil and gas industry.
Analysis
For companies to trying to penetrate this rather sensitive industry, they have to take on considerable amount of effort to take on the adversities that they could encounter. They have to address issues coming from every side of their macroenvironment: from the political, environment, socio-economic, and technology. In order to address these, any potential new entrant could take a page out of the existing companies operating in the UK oil and gas industry. For instance, in the context of the environmental factors, companies could adopt the actions carried out by BP plc. In their case, they conduct corporate social responsibility projects through their major shareholders.[26] In doing so, they address the concerns on the environment and similarly find cost-effective processes. In the context of the socio-economic and technological factors, they could conduct feasibility studies to render whether they could afford going through the rigors of the industry.[27] For instance, BP Plc took on scientific analysis on how to effectively manage their expenses and minimize the costs.[28] They found out that by installing their headquarters in Wytch Farm they are able to meet the operational demands of the industry and at the same time minimize their costs.
Conclusion
The oil and gas in UK, particularly in the North Sea, provides great opportunities for investments for companies. The discussions above have provided impression of great potential for the industry, particularly the upstream sector. With the reports on the recent performance of the oil companies and drilling rigs in the area, the possibility of greater profit for those who intend to invest in these sectors. However, it is also established in the paper that the industry do have some issues to contend with. In particular, issues involving international pressure groups, ecological implications, and risk of disasters. Moreover, the greatest concern for those intending to penetrate the industry is the statutory barriers inherent in the oil and gas sector in UK. As discussed in the earlier parts of the paper, the UK government has been taking a close consideration on the area with strict requirements and intervention schemes that could hamper and even restrict the operations of any company. Some might even say that these could limit the possible revenues that a company could accumulate. However, one must recognise that the interventionist policies and statutory barriers given by the state intend to address the sustainability of the reserves. At some point, one should recognise that though this may limit the operations and rights of the lease, it could only ensure that there would still be oil and gas reserves available for future use. In any case, in deciding to enter the oil and gas industry in UK, it would be astute to engage in actions initiating it as soon as possible.
Custom Essay Writing
Australia
Send us your essay instructions. We write
it for you.
Only AUD$27
per page.
www.ivythesis.com
Malaysia Essay Writing
Send us your essay assignment. We write it
for you.
Only
RM
40/ page.
www.ivythesis.com
Singapore Essay Assistance
Have a hard time finishing your
assignment.
We write it for you. Only SG$
25/ page.
www.ivythesis.com
Comments