Macro environmental and competitive conditions in the oil and gas industry

International Business Strategy

Critically analyze the macro environmental and competitive conditions of the oil and gas industry

Oil and gas industry is one of the most important industries in the world today because of the huge impact it has on people, their governments, economy and the growth and development of the entire world at large. Though this is a powerful sector, it also faces stiff competition and problems and has to be on the constant lookout for events that can dampen this industry.

Competition from renewable resources

Despite the pervasive nature of the oil and gas industry, it is also beset by numerous challenges that the members of this industry have to overcome to continue their production and ability to make profits. The primary problem is the finite nature of the oil resources that is available. Though the exact amount of oil reserves is not known and is highly debatable, there is no doubt that it will be exhausted sometime in the future. Since the entire world runs on oil and is used in almost every aspect of human life, there is a big question of what happens when the world runs out of oil. To prepare themselves for this situation, many green and environment-conscious companies are investing money in alternate sources of energy that are renewable like solar, wind and water.

Currently, these renewable sources are a not a major threat to the oil and gas industry because they are in the nascent stages of development. It is likely to take a lot more time to come up with a technology that can effectively harness these renewable sources. The exact time-frame is not known, but the entire world has to transform the way they think about energy and its usage for this transformation to take place. So, it is not an immediate threat to the oil and gas industry. However, it is a good idea for the players in this industry to devise ways to be competitive when the technology to tap renewable resources becomes mature.

This is the time for the oil and gas companies to start preparing to handle competition from renewable energy sources because the industry currently has an upper hand in terms of usage and availability. The resources are not going to be exhausted within the next few decades and people all over the world depend on this industry for every aspect of their life -- from food to transportation to recreation. The price of crude oil and natural gas is one of the most followed prices in the commodity markets and many governments around the world have become stronger or weaker based on their handling of energy prices and the problems that come with it. These inherent advantages further strengthen the industry and it also gives them a lot of time and money to become more competitive. The players in this industry have to seize this opportunity and innovate their technology and undertake extensive investment to continue to stay on top of renewable resources.

There are two aspects that can make this industry more competitive against renewable resources. The first is the cost and the second is the impact on the environment. More and more people understand the impact of drilling oil on the environment, especially in the wake of changing weather patterns. To appease these people and to continue its dominance, the oil industry has to invest heavily in technology that will reduce carbon emissions and the release of greenhouse gases to the environment. Also, more resources have to be explored so that when one region becomes dry, the industry can focus on another region while giving the dried-out regions the much needed time to recuperate. Another aspect that can be turned in its favor is the price of oil. Though the demand and supply factors dictate the price to a large extent, consolidated groups like OPEC can intervene to have a bigger say in it.

An in-depth analysis of these factors are presented below.

Price of Oil

The price of oil has risen steadily during the last fifty years or so. The cost of one barrel of oil was around $2.50 to $3.00 in 1948 and today, it is well more than $100 (Inkpen, 2010). Even after accounting for inflation, this is a huge increase in its costs. The price increase may augur well for the oil-producing countries, but not for the people around the world. When the price of oil spikes, it increases the cost of food and transportation and this results in poverty and gross inflation of essential goods. When this happens, more and more people will be looking at alternate sources of energy and this can eat into the profits of the oil and gas industry within the next few decades.

In order to stay competitive, the oil-extracting companies should come with a trade embargo that restricts the price increase to reasonable levels. One way to do is to come up with a more efficient and cost-effective way to drill and extract oil and the other is to discover new oil reserves that will boost supply and keep the price in equilibrium. The International Energy Agency (IAEA) predicts that the demand for energy will go up by 60% in 2030 and more than 80% of this demand will come from non-oil-producing countries. (Inkpen, 2010). In this industry, there are only a handful of producers and the remaining countries are consumers and this means that the prices can be controlled by the countries that produce it. The industry should be in a position to capitalize on this demand and one of the best ways to start is to have a cap on the price rise.

Discovery of new resources

The discovery of new oil resources is vital for the survival of this industry. Though there are abundant supplies currently in Saudi Arabia and other middle-eastern countries, it will eventually run dry one day and so its important that new resources are identified to replenish them. A case in point is the extensive resources found in Alberta, Canada. Though these reserves were identified earlier, there was no means to extract them because they were present in oil sands that contain a combination of sand, clay, water and petroleum. New advances made in technology make it easy to extract the oil from these sands today and it is estimated that it contains the second largest reserve after Saudi Arabia. More such resources should be identified and the technology required to convert them into usable oil should be developed in order for this industry to continue to have its dominance in the energy sector.

Better technology for drilling and extraction

A good way to continue being competitive is to constantly innovate and use better technology for drilling and exploration. This will not only be cost-effective and quick for the company in the long-run, but will also reduce the carbon footprint of the exploration process on the environment. Therefore, the company should plan to invest heavily in its research and development department to further strengthen its position in the energy sector.

In short, oil companies have a profound negative effect on the environment as well as on the people who depend on it. Also, there is a growing threat from renewable resources and the fear that the oil resources will run dry in the future. To combat these challenges, the oil companies should shed their complacency and constantly look for ways to make themselves more competitive through innovation and prudence.

Question 2: How will this have changed by 2025?

The future of the oil and gas industry is likely to be affected by a combination of many factors such as growing demand, more environmental protection and a changing economic and political environment. The oil industry has to take these factors into consideration before planning for its future.

Growing Demand

The demand for oil is estimated to increase by leaps and bounds within the next decade. A good chunk of this demand will come from growing economies like China and India that import oil in large numbers to satisfy the growing aspirations of its people. By 2030, it is estimated that China will import more than 80% of its oil (Inkpen,2010). This is a huge demand because of its ever-increasing population figures. Also, there is little regulation as regards to environment and human rights and this is probably why the Chinese cities are one of the most polluted in the world. They have higher sulfur concentrations in their oil mix than most other countries and this can change the way oil companies explore and refine oil.

India is another booming economy that will become the fifth largest importer of oil by 2025. (Inkpen, 2010). Its population is growing steadily and as more and more opportunities come up,. so do the aspirations of its people and this simply means more energy consumption per person. The oil industry cannot afford to ignore these two Asian giants and they have to come up with ways and means to cater to this significant percentage of population, if they want to continue to dominate the energy sector. In order to meet the growing demands of India, China and other countries around the world, they have to look for new resources and come up with a better technology to extract the oil reserves.

Environment consciousness and renewable resources

More and more governments around the world are looking at non-hydrocarbon or renewable resources as an alternative forms of energy to reduce their dependence on the oil-rich countries. A good example is the Obama administration that is encouraging companies to adopt greener measures and is encouraging the technology and usage of alternate resources like solar, hydro-electric and wind. The European Union is also thinking along the same lines and this could mean that competition from renewable resources is a bigger threat than previously thought. The oil companies should be prepared to integrate these renewable resources into their business and use it to supplement their existing production.

Another factor is the growing awareness of the environmental impact of the oil and gas industries. As the effects of global warming is experienced by people across the world, there is a growing urgency to protect the environment. This can lead to some people taking a voluntary stance to avoid the usage of oil and energy and instead opt for energy-saving and renewable options. Though the percentage of people who are fighting against this industry is insignificant today to have any major impact, these numbers are expected to increase within the next decade as the effects of global warming become more profound. So, the oil companies should look at reducing their impact on the environment now to ensure that it gets the continued support of people. Otherwise, it can lose a good amount of its market share to renewable sources by 2025.

Mergers & Acquisitions

Mergers and acquisitions have always been an integral part of this industry and this is likely to continue well into 2025. The only expected change in this segment is likely to be the increase in the number of oil companies from emerging markets like India and China that will play a bigger role on the international market. This is partly due to the growing economic prowess of these countries as well as the demand of its increasing population. These companies will look to garner a larger market share especially from poorer regions such as Sudan and Nigeria that have oil resources, but not the technology to extract them.

Problems with exploration and transportation

As the demand for oil increases, so does the need for new resources. Unfortunately, most of the accessible resources are already being used or they are depleted and this makes it all the more difficult to find newer places where oil and gas can be found. The resources that are being explored are at a greater depth in the ocean far away from land or they are found in inaccessible places that make it difficult to use them with the existing technology. Furthermore, they are found at a distance from human habitation and this means the companies have to incur more costs to get them to the consuming markets. They have to come up with an economic way to refine and transport it to the consumers without passing on more burden in terms of price to the final consumer.

When the oil companies look to pass on this economic burden to consumers, it will only lead to a fall in demand and a consequent increase in the search and technology of renewable products. This is a double whammy for the oil industry and this trend is likely to intensify by 2025 when the renewable resources are likely to be tapped with superior technology. So, the industry as a whole should be prepared to meet this challenge and this can be a crucial phase for the oil and gas companies.

Political Instability

A major concern for the oil and gas industry is the political instability in the key oil producing regions. The last few months has seen a lot of political changes in the middle east region that has the largest reserves of oil in the world. The democratic movements and the resulting overthrowing of their leaders have created a climate of political uncertainty and has raised a bigger question for the future of oil companies in this region.

The wave of changes taking place in countries like Libya, Tunisia, Egypt and Bahrain throw light on the problems that can come up when the political government is averse to allowing oil companies to continue their operations in the country. This can be catastrophic for the oil industry and its players because they have huge stakes in these middle eastern countries. This is one of the most important changes that is likely to have a big influence on the operations of the oil and gas industry as a whole.

In short, the oil and gas industry is facing a tough future and by 2025, its problems are only going to become more complicated. Not only will there be a reasonable threat from the renewable energy sources, but its own resources would have dried up. The only way for this industry to survive is to identify newer areas that can be used effectively and the technology that can make exploration easy and less harmful to the environment.