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Oil & Gas Pricing and Financial Performance

Table of Contents

Introduction.

Summary and the key identification.

Application of the theory.

Analysis.

Clarity of expression and presentation.

Reference.

Introduction to The Industry of Oil and Gas

The oil and gas industry is considered to be the largest and one of the most important industries across the globe. The reason why it is stated as the most important industry is it is directly or indirectly linked with every individual's life making it a necessary component needed to live our lives. In the global economy the two most watched commodities are crude oil and natural oil which in a way has a huge contribution in building up the global economy. When it comes to employment the industry of oil and gas has over thousands of workers across the globe as well as makes billions of dollars in a year in this industry (Aung, 2017). This industry covers all kinds of businesses like transportation, heating, electricity and so on. This industry uses pipelines or usually a tanker for the transportation of crude oil, natural oil and the refined products. Other than transportation this industry also deals with the purification or rather refining of the products which is mostly refining crude oil and natural oil. There are a lot of things that are to be taken care of while working in the industry of oil and gas as it becomes very dangerous at times in these industries. A maintained pipeline is one the major things that has to be taken care of to maintain the thermal conductivity and to avoid leak in the pipeline as a minute leak in the pipeline can turn out to be a huge loss for industries in the oil and gas field (Grasso, 2019).

Summary and The Key Identification

The industry dealing with oil and gas has majorly covered the world and the global network of the tankers used, the pipeline and all the refineries makes consumption of the oil and gas more into knowledge (Nurfadilah & Daryanto, 2018). The prices have actually become quite vulnerable in the upcoming years due to which a global recession is expected in this industry. As this industry plays a vital role in terms of the global economy it is very important to closely keep an eye on the figures and development procedure of the industry. All these companies compete on an international level as the overall turnover of each company is taken nation wise and compared accordingly as in every country the oil and gas industry is very closely related to economic growth of that country. Thus if the company does better, then the economic health of the entire nation is considered to be at a good place.

There are various factors or rather components that are to be taken care of in the oil and gas industries. Some of the key components are discussed below:

  • Formation of oil and gas: It is seen that the two main components of the oil industry occur naturally which is crude oil and natural gas. They are formed under intense pressure and heat taking a lot of time in the source rock or mainly sedimentary rock. With time the way of extraction of oil also changed and developed as in 19th century drilling was done to extract oil from the sites but towards the beginning of 20th century the criteria and perspective for both drilling technology and geology knowledge changes and emerged for the good giving it a more scientific approach in the determination of where and how deep to drill for extraction (Oyewunmi & Olujobi, 2016).
  • The corporate governance: corporate governance which is basically defined as the structures involved in the industry which can be formal as well as informal and it also includes the processes and the responsibilities in terms of corporate context. It is seen that companies have a huge urge to have a quest for good corporate governance in all the nation. There are different studies that explain the failure for corporate governance both at the local as well as international level. All kinds of businesses whether it is related to a certain product or is a service provider requires investment or capital. The amount of investment required depends on the kind of business that is done by the company (Alkhaldi, Pathirage, & Kulatunga, 2017). Therefore in this industry a huge amount of money is invested before giving out the product so sometimes it becomes a reason for risk in investing as in the corporate world only assumptions are made and what may actually turn out is hard to figure.
  • Development and access right: all the firms after getting the target field have to have an access and right for doing further processes and the business so for that they have all sorts of legal documents and authorisation so that they are not questioned.there is aright to explore and develop on the property so that before possessing the property the owner has to keep up with all the documents required. Agreements are made in order to carry forward the process of developing and working on the property which basically gives the right to the owner for taking forward the activities. So the right to access is very important in this industry.
  • Exploration of oil and gas: some of the core activities related to the value chain of oil and gas are to find, develop and to produce crude oil as well as natural gas. These are the main activities that contribute in the upstreaming of the crude oil as well as natural gas when it comes to the oil and gas industry. Only finding and developing new oil and gases is not enough but to look after the laws, regulations, leases as well as permit required by the authorities is also included in the process. Some of the steps involved in the development of all the successful petroleum are:
  1. To identify the field target of oil and gas
  2. To gain to take legal access for the exploration and the development of the target found.
  3. To generate as well as analyse the date of appraisal.
  4. To make all the commercial arrangements such as the negotiation of the contract and the finance related to the project for all the production output.
  5. To commit for recovering the oil and gas which is termed as Final Investment decision (FID)
  6. And at the end to see field development as well as field production.

Application of The Theory

Oil and gas industries have one of the useful tools for making strategy and to evaluate potential opportunities, threats and risks and that is five Porter's framework .
There are five theories related to this model which in a way effects or rather the way they are applied in this industry are as follows :-

  • Competitive Rivalry: Rivalry is present in every industry, but in this industry competition is high and increasing day by day. This is happening due to the high demand of oil and gases across the globe (Bach, 2017). There is one more factor that international firms are trying to come to the United states to compete with US firms because US firms are operating internationally and earning good revenue from the business. Competition in an industry dealing with oil and gas is not just bounded within the country but rather the rivals are considered to be the other nations as well therefore the competitive nature in this industry has a bigger and wider spectrum as compared to other industries. Staying in the competition and giving a better output results in making the company’s as well as the nation's economic wealth better.
  • Threats of New Comers: The oil and gas industry is having threats for new comers in the industry (Bach, 2019). Reason behind the threat is that opening up a new oil and gas company requires a huge amount of capital therefore newcomers find it difficult to establish the business. The fluctuating price of Oil and gas poses another risk to the business. Big companies who are already in the business for a long time so they have a well defined market and buyers too. As they have more buyers they can reduce the price for the buyers to make it more difficult for the new companies in the sector.
    The aspects that affect the companies that are new to enter in oil and gas business are:
    a) Huge capital is required for business in this industry.
    b) 90% Oil and Gas reserves are looked after as well as in control by the National Oil Companies.
    c) more internal competition is observed within the industry.
    d) The big companies have the option to increase their R&D, which can directly affect the newcomers.
    e) National and International Law related to the regulation of this industry and their restrictions may affect the newcomers.
  • Threats of Substitutes: The main substitutes of the oil and gas energy is solar power, ethanol, nuclear power and wind power, these alternatives are there in global and domestic energy markets. Oil and gases are less effective and more expensive than fossil fuels (Solheim & Tveterås, 2017). Every government is providing lots of subsidies to the users who use renewable energy for their house or vehicle. There are many oil and gas alternatives emerging due to more research and development.
    The main alternatives or rather substitutes for the oil and gas for the production of energy are -
    a) Nuclear Energy.
    b) Coal.
    c) Hydrogen.
    d) biofuels and other kinds of renewable sources which is mainly solar & wind energy.
  • Bargaining power of buyers: when we are talking about the bargaining power of buyers we refer to the pressure that customer creates on the company to get products of higher quality at low cost with better customer service (Shad & Lai, 2019). The power of bargaining of the buyers in this industry is quite small because of the type of the industry. Buyers are more interested in the quality of the product and the price they are willing to invest. There are only some of the buyers who have higher bargaining power and who consume enormous amounts of oil and gas such as European Countries, The United States of America, China, Japan, India in comparison to other countries. Bargaining powers also vary on what quantity the buyer is buying, high quantity can raise a good bargaining session.
  • Bargaining power of suppliers: The suppliers of the oil and gas industries have moderate bargaining powers. Companies who are extracting the natural source oil and gases from the fields are suppliers (Pirogov, Cherentsov & Gulyaev, 2016). These companies hold a significant amount of power in the industry ambulation. The big international companies related to oil and gas such as Saudi Aramco, Petrobras, Exxon Mobil, Chevron have the power as well as the ability to affect the price of oil due to their business involvement in all the segments that are related to Oil and gas industries. So their bargaining powers are automatically higher than the buyers. The Organisation of Petroleum exporting countries (OPEC) nations reserves are higher in the world's oil, that is why it has significant bargaining powers.

Analysis

The oil and gas industry has widely taken over the world and its functioning as well. Both these elements are considered to be a necessity for the living and our day to day activities therefore in one way or the other we all are dependent on the products manufactured by these industries (Bueno, Solis et al. 2018). Crude oil and natural gas are the main components that are extracted and then developed by these industries by refining and purifying them so that it can be used by general people. Starting from the transportation to the gas required for cooking in our houses these industries deal with all these necessary items that are needed by us. So it is seen that the consumption of petroleum has grown for about 4.5% making it one of the products in demand (Heim, Kalyuzhnova et al. 2019). Evaluating the prominent trends and issues coming up in the oil and gas industry should also be taken care of very nicely so that the businesses are aware of the wider macroeconomic as well as the environmental risks related to it. Political risks are also taken into consideration as this industry is highly related to the economic condition of every nation and the increase or decrease in the growth rate of this industry can widely affect the economic health of a country. The oil and gas industry is highly facing the increase in demands for all sorts of operation and business therefore it is creating a social and environmental pressure on a lot of oil and gas companies (Naranjo, Lozada et al. 2018).

Clarity of Expression and Presentation

The oil and gas industry is such that brings a lot of business and profit to the company as it comes under one of the basic things needed to run our day to day lives. In every aspect be it for personal use or in the business segment these things are required in many activities. In the personal uses it can be the LPG that is used in most of the houses for the cooking purpose as well as the fuels used in the vehicles that we use. So in a way we use transportation every single day and cook food making it an important component used in our daily lives (Ekhator, 2016). When it comes to the business the machines used in big industries require fuels, even for the transportation and the huge amount of electricity and heat required in some of the industries get a contribution from the oil and gas industry at a very large extent. The documents required in this industry are very important because in such industries legal issues are brought up at very high range. Claiming and clarifying about the property or rather target field when the working would take place should have correct documents and approval so that the company does not face any kind of problems once the workers start working in that field. For extraction of the oil a huge set is required with a large amount of labour therefore a lot of money is invested. So the companies make sure that no laws and legal issues come up once the work starts. Planning and keeping everything in the proper place is very important. Presentation in any business is actually one of the most important factors that affects the functioning of the industry or the company (Kannan, Su et al. 2018). The way the company builds itself and presents itself is the way one can identify how promising that industry is. Being one of the necessities it is important for them to present themselves in a way that the consumer is sure about the things they are proving. For an industry like this being independent and valuable is a key factor. Value basically means whether the customer is interested in buying the thing or not. In the development of this industry it includes the activities that are performed which is drilling, shipping, the designing of pipelines, the different tools required for installation, and the other equipment and services required. As a consumer everyone knows and understands the implication of the high pricing of oil and the same place the gasoline prices also increases and gasoline is a necessary purchase for the most of the households due to which they have to spend less on other goods and services. As explained how the prices of oil affects households and businesses it becomes easy to understand how oil prices have an immense effect on the macro-industry. Thus increase in oil prices can also lead to the growth of the economy leaving their effects on the demands and supply on other goods and services other than gas and oil.

Reference for The Industry of Oil and Gas

Aung, T. S. (2017). Evaluation of the environmental impact assessment system and implementation in Myanmar: Its significance in oil and gas industry. Environmental Impact Assessment Review, 66, 24-32. Retrieved from: https://www.researchgate.net/profile/Thiri_Aung4/publication/317510043_Evaluation_of_the_environmental_impact_assessment_system_and_implementation_in_Myanmar_Its_significance_in_oil_and_gas_industry/links/59dec81f458515376b2a12b8/Evaluation-of-the-environmental-impact-assessment-system-and-implementation-in-Myanmar-Its-significance-in-oil-and-gas-industry.pdf [Retrieved on: 01.10.2020]

Nurfadilah, D., & Daryanto, W. M. (2018). Financial performance analysis before and after the decline in oil production: Case study in Indonesian oil and gas industry. International Journal of Engineering & Technology, 7(3.21), 10-15. Retrieved from: https://www.researchgate.net/profile/Samer_Adham/publication/322889011_Membrane_applications_and_opportunities_for_water_management_in_the_oil_gas_industry/links/5f59e762299bf1d43cf920e3/Membrane-applications-and-opportunities-for-water-management-in-the-oil-gas-industry.pdf [Retrieved on: 01.10.2020]

Grasso, M. (2019). Oily politics: A critical assessment of the oil and gas industry’s contribution to climate change. Energy Research & Social Science, 50, 106-115. Retrieved from: http://www.marcograsso.info/wp-content/uploads/OG-for-website.pdf [Retrieved on: 01.10.2020]

Oyewunmi, O. A., & Olujobi, O. J. (2016). Transparency in Nigeria’s oil and gas industry: Is policy re-engineering the way out?. International Journal of Energy Economics and Policy, 6(3), 630-636. Retrieved from:https://dergipark.org.tr/en/download/article-file/361664 [Retrieved on: 01.10.2020]

Alkhaldi, M., Pathirage, C., & Kulatunga, U. (2017, September). The role of human error in accidents within the oil and gas industry in Bahrain. In 13th International Postgraduate Research Conference (IPGRC): conference proceedings (pp. 822-834). University of Salford. Retrieved from: http://usir.salford.ac.uk/id/eprint/43983/1/Alkhldi%2013th%20IPGRC%202017%20Full%20Conference%20Proceedings-2.pdf [Retrieved on: 01.10.2020]

Heim, I., Kalyuzhnova, Y., Li, W., & Liu, K. (2019). Value co‐creation between foreign firms and indigenous small‐and medium‐sized enterprises (SMEs) in Kazakhstan's oil and gas industry: The role of information technology spillovers. Thunderbird International Business Review, 61(6), 911-927. Retrieved from: https://onlinelibrary.wiley.com/doi/pdf/10.1002/tie.22067 [Retrieved on: 01.10.2020]

Ekhator, E. O. (2016). Public regulation of the oil and gas industry in Nigeria: an evaluation. Ann. Surv. Int'l & Comp. L., 21, 43. Retrieved from: https://digitalcommons.law.ggu.edu/cgi/viewcontent.cgi?article=1195&context=annu survey [Retrieved on: 01.10.2020]

Bueno, A. H. S., Solis, J., Zhao, H., Wang, C., Simoes, T. A., Bryant, M., & Neville, A. (2018). Tribocorrosion evaluation of hydrogenated and silicon DLC coatings on carbon steel for use in valves, pistons and pumps in the oil and gas industry. Wear, 394, 60-70. Retrieved from: http://eprints.whiterose.ac.uk/122192/1/1-s2.0-S0043164817309882-main.pdf [Retrieved on: 01.10.2020]

Pirogov, S. P., Cherentsov, D. A., & Gulyaev, B. A. (2016, October). Prospects of applying vibration-resistant pressure gauges in the oil and gas industry. In IOP Conference Series: Materials Science and Engineering (Vol. 154, No. 1, p. 012013). IOP Publishing. Retrieved from: https://iopscience.iop.org/article/10.1088/1757-899X/154/1/012013/pdf [Retrieved on: 01.10.2020]

Kannan, P., Su, S. S., Mannan, M. S., Castaneda, H., & Vaddiraju, S. (2018). A Review of Characterization and Quantification Tools for Microbiologically Influenced Corrosion in the Oil and Gas Industry: Current and Future Trends. Industrial & Engineering Chemistry Research, 57(42), 13895-13922. Retrieved from: https://www.researchgate.net/publication/327949297_A_Review_of_Characterization_and_Quantification_Tools_for_Microbiologically_Influenced_Corrosion_in_the_Oil_and_Gas_Industry_Current_and_Future_Trends [Retrieved on: 01.10.2020]

Naranjo, J. E., Lozada, E. C., Espín, H. I., Beltran, C., García, C. A., & García, M. V. (2018). Flexible architecture for transparency of a bilateral tele-operation system implemented in mobile anthropomorphic robots for the oil and gas industry. IFAC-PapersOnLine, 51(8), 239-244. Retrieved from: http://folk.ntnu.no/skoge/prost/proceedings/ifac-oogp18/OOGP18/0020.pdf [Retrieved on: 01.10.2020]

Bach, M. S. (2017). Is the oil and gas industry serious about climate action?. Environment: Science and Policy for Sustainable Development, 59(2), 4-15. Retrieved from: https://www.tandfonline.com/doi/pdf/10.1080/00139157.2017.1274579 [Retrieved on: 01.10.2020]

Solheim, M. C., & Tveterås, R. (2017). Benefitting from co-location? Evidence from the upstream oil and gas industry. The Extractive Industries and Society, 4(4), 904-914. Retrieved from: https://www.researchgate.net/profile/Marte_C_W_Solheim/publication/319649588_Benefitting_from_co-location_Evidence_from_the_upstream_oil_and_gas_industry/links/59b8ee550f7e9bc4ca3aa1df/Benefitting-from-co-location-Evidence-from-the-upstream-oil-and-gas-industry.pdf [Retrieved on: 01.10.2020]

Shad, M. K., & Lai, F. W. (2019). Enterprise risk management implementation and firm performance: evidence from the Malaysian oil and gas industry. International Journal of Business and Management, 14(9), 47-53. Retrieved from: https://pdfs.semanticscholar.org/b82d/25bd2219ce44c899b525ed2b9b2a5dc6b6fb.pdf [Retrieved on: 01.10.2020]

Bach, M. (2019). The oil and gas sector: from climate laggard to climate leader?. Environmental Politics, 28(1), 87-103. Retrieved from: https://www.tandfonline.com/doi/pdf/10.1080/09644016.2019.1521911 [Retrieved on: 01.10.2020]

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