The Future of the Petroleum Liquids Energy Industry Segment - Case Study Example

The Future of the Petroleum Liquids Energy Industry Segment Name: Course: Tutor: Institution: Date: Table of Contents Table of Contents 2 1.0 Introduction 3 2.0 Current Market Situation Analysis 3 2.1 Political Analysis 4 2.2 Economic Analysis 4 2.3 Social Analysis 5 2.4 Technology Analysis 6 2.5 Legal Analysis 6 2.6 Environmental Analysis 6 3.0 Future Opportunities 7 3.1 Supply Rise and Sustenance 7 3.2 Increased Emerging Market Demand 9 4.0 Potential Risks 10 4.1 Green Production Policies 10 4.2 Inflation and Price Fluctuations 11 5.0 Conclusion 12 References 13 1.0 Introduction The global market topography is gradually changing. In this case, technology changes and globalization have played a critical change role. One of the most affected industries is the petroleum and liquid energy industry. Traditionally, the petroleum and liquid industry demand were in the EU and the USA where the level of economic development was relatively high. As such, oil and liquid energy multinational organisations focused on mining and availing these products to the developed markets (Taverne, 2008, p.67). However, the industry market structure is changing with increased petroleum and liquid energy products demand rise in the Asian as well as the African markets. Moreover, the potential of new supply areas in tight and shale resources is bound to alter the petroleum liquids industry in the future. As such, this analysis establishes that there is need to evaluate the expected dynamic market changes in the industry, to allow a strategic management approaches for the industry stakeholders. As such, this report develops a critical evaluation of the petroleum liquids industry evaluating its current situation, as well as expected future development opportunities. Moreover, the analysis evaluates the risk elements in the forecasted industry future developments. 2.0 Current Market Situation Analysis In order to analyse and evaluate the current external market conditions and the situation in the petroleum liquids industry, this report section develops a macro-environmental analysis through a PESTLE tool application. The use of the PESTLE analysis tool is based on the argument by Henry (2011, p.22) that the tool comprehensive and diversified approach allows for a critical factor assessment. 2.1 Political Analysis A key political player in the oil industry is OPEC (the organisation of petroleum exporting countries) that controls an estimated 40% of the global petroleum liquids mining. The geopolitical control on the petroleum liquids by market share is demonstrated in the chart below. (Dan, 2013) In this case, the geopolitical alignments and the influences of the organization and the projected increased influence in the market is a key determinant of quantity mining as well on the liquid product prices. 2.2 Economic Analysis The oil industry and the global economic development are intertwined and depend on each other. In this regard, while as the oil industry relies on a growing economy to increase sales, the economy relies on the industry to provide relevant energy to fuel production and development. This scenario is best illustrated through the 2008 global financial crisis, where a barrel price dropped from $147 in 2008 pre the crisis period to $ 50 per barrel in 2009, at the height of the global financial crisis (“WTRG Economics”, 2011). However, stabilizing economies since 2010 have evidenced a rising price per barrel, although the prices are yet to stabilize. 2.3 Social Analysis Despite the rising living standards globally, the petroleum oil industry market share remains relatively static. As such, this is due to the rising health concern and the rising trend for a healthy living environment. These changes and the search for alternative energy sources have remained a key industry threat as its expected to decline in market share and profitability values in the future (Patterson, 2014). This decline in demand is demonstrated in the chart below where the demand for crude oil has been on a gradual decline. (Patterson, 2014) Therefore, changes in the petroleum liquid mining and energy production practices ought to be refined to align the industry production capacity with the global society’s preferences. 2.4 Technology Analysis Similar to other global industries, technology has greatly impacted on the petroleum liquids industry. In this case, the impacts range from the mining practices through to energy production to the liquids supply globally. As such, technology application has been a critical base through which the costs of production in the petroleum industry have been reduced significantly in the last decade, with increased manual labour replacement with automated operations (Vassiliou, 2009, p.73). In addition, quality and efficiency in the industry have been enhanced. In this case, technology application and use have allowed for the reduction of carbon emissions from the petroleum liquids use such as vehicle petrol and diesel carbon amounts emission to the environment. 2.5 Legal Analysis The environmental-health and safety regulations are the most pre-dominant regulations in the petroleum liquids industry. In this case, the industry is characterized by the presence of strict regulations to ensure that the mining and energy production practices adopted are environmental friendly with respect to resources exploitation and carbon emissions (Dupont, 2009). Moreover, the industry is mandated to demonstrate that the adopted practice and operational activities are safe to the employees as well as the society at large. 2.6 Environmental Analysis An environmental analysis of the petroleum liquids industry demonstrates that the industry is perceived as among the leading environmental pollution industries. In this case, besides the alleged over exploitation of oil resources in the developing nations, the industry carbon emission levels remain a challenge (Woo, 2012, p.225). In this case, the industry has been regulated by regional bodies such as the EU to develop environmental conservation policies through their CSR programs. These developments and the expectations for increased environmental concerns in the future serve as a limiting factor for new investor entrants in the petroleum oil industry, with declining profitability level expectations. 3.0 Future Opportunities Based on the industry macro economic analysis above, it is evident that the industry has a range of growth and expansion opportunities in the future. In this case, proper exploitation and execution of these opportunities would enhance the industry profitability as well as market share expansions. This section presents an analysis of the industry forecasted opportunities, proving an execution framework through which the stakeholders can ensure their success by exploring them. 3.1 Supply Rise and Sustenance One of the eminent opportunities in the industry is petroleum liquids supply rise. In this case, the expected new petroleum liquids from shale and tight oil. In fact, an empirical evaluation of the North American oil industry illustrated that the industry has increased its oil production by 3 million a day in the last 7 years since the 2009 drilling of shale oil (Deman, 2013). The detailed analysis of the energy industry in the North American region is demonstrated in the figure below Figure 1. Recent U.S. natural gas production history. Source: U.S. Energy Information Administration. Coalbed methane production in 2012 was estimated and conventional gas includes tight gas. (Note: Bcfd = billion cubic feet per day) (Deman, 2013). In this case, other prospects, illustrate that the UK market is on the verge of mining tight oil following government survey on the Weld Basin in South England positive feedback. In this case, it is expected that the Britain society could venture into the tight oil mining by 2020 (Butler, 2014). This presents an opportunity for the mitigation of the existing analyses environmental challenge on resource exploitation. Currently, environmental lobby groups have argued that the industry has been over exploiting oil deposits. Therefore, the rise of new alternative petroleum liquid sources will enhance environmental conservation and improve the overall industry supplies in the market. An additional merit for the increased shale and tight oil mining is the ability for self sustenance. Currently, as the macroeconomic analysis established, the industry is characterised by geopolitical forces influence and control, with the current political instability and tensions in the Middle East implicating on the industrial production and operational potential. Therefore, due to the availability of shale and tight oil across the USA and European markets, the respective nations will be self sufficient, reducing oil related conflicts globally. In order to exploit on this future opportunities, stakeholders in the petroleum liquids should invest highly on research and development operations. In this case, they should strive to establish a platform and opportunity through which to explore and evaluate new shale and tight oil rich areas for future mining endeavours. 3.2 Increased Emerging Market Demand An additionally established future opportunity in the oil industry is the expected demand rise in the Asian and Africa continents, especially from the emerging economies such as China, India, Korea, and South Africa among others (Landsberg and Van, 2012, p.174). In this case, besides the traditional EU, USA and Australian markets, the supply organisation will have additional demands across these new markets. The development of these markets presents an opportunity to mitigate the matured, developed markets industry lifecycle where over the last decade demand and earnings have stabilized and are on the verge of a decline in the future, as the industry shifts to alternative energy sources (Smith and Taylor, 2008, p.61). Therefore, the rise of the emerging economies, markets presents the industry with a lifecycle extension, as the new markets will be at the industry growth stage. In order to take advantage of this opportunity, the petroleum liquids energy industry stakeholders should develop alliances and political goodwill in the respective emerging markets. In this case, while as some of the nations have favourable foreign investment policies such as South Africa, others like China encourage joint ventures to secure and develop local industry investors’ interests. Therefore, the ventures should conduct feasibility tests on the emerging markets and as such develop relevant growth and market entry strategies as a proactive approach to expected industry changes. This strategic development approach will ensure that the organisations position and align their business operations, strategies and prioritization on the emerging markets while reducing investments in the development markets as a business going concern principle execution. 4.0 Potential Risks Despite the analysed industry opportunities with the changing dynamics, the change process is expected to carry a wide range of risks, that the industry should overcome to enjoy the presented opportunities, this report section offers a review of the potential future industry challenges, offering recommended solutions for each of the risks discussed. 4.1 Green Production Policies As already discussed under the macroeconomic factor analysis, there is a growing concern on the safety, health and environmental implications of the petroleum liquid use. As such, there have been global campaign and sensitization on the need to adopt and apply alternative energy sources. In particular, environmental lobby groups have argued for the need to adopt renewable energy sources such as the use of solar energy due to their reduced negative implications on the environment (Pimentel, 2008, p.36). As a result of the rising global consumer base pressure, a majority of the multinational organisations has established the Green production commitment policies in their CSR strategies. As such, the organisations have committed their operations on energy use efficiency and use of alternative energy sources where viable. Thus, this implies that the market share and demand for the petroleum liquids energy will decline in the future. Hence, although demand for energy is expected to rise in the emerging markets, the alternative energy sources industry has a competitive market edge. In order to mitigate this challenge, organisations should adopt technology based mining and energy production practices. In this case, the use of technology has over the last decade enhanced reduced carbon emissions, as well as environmental degradation impacts (Orszulik, 2013, p.202). Therefore, this analysis concludes that with the application of modern technology, and increased investment in research to develop industry best practices, organisations will reduce environmental, safety and health implications of the petroleum liquids energy, making it competitive in the energy industry into the future. 4.2 Inflation and Price Fluctuations As Saudagaran (2009, p.87) noted, the oil and energy industry at large plays a significant role in influencing and determining foreign exchange rates. In this case, stabilized market prices and balance of payments across the exporting and importing nations, provides stable foreign exchange market equilibrium, reducing inflation rates expectations in the future. However, with increased products exported to the emerging markets will signify a decline in balance of payments with an excess of their importation quantities. Consequently, this will reduce their currency value and eventually decrease their economic growth rates. In order to overcome this challenge, the stakeholder organisations should seek to mine and supply oil products domestically. In this case, with the opportunity for self sustenance, the organisations should exploit tight and shale gas potential in the respective emerging markets, and exploit such resources domestically wherever viable instead of importing the energy needs. 5.0 Conclusion In summary, this report develops a situational analysis of the petroleum liquids industry as a basis of evaluating its potential future opportunities and risks. On one hand, the analysis establishes that the emergence of a new market in the emerging markets, that is currently at its growth stage, and the potential for increased energy sources supply, the industry has its potential to grow and expand in the future. However, potential inflations and alternative energy use present the biggest risks to the industry’s future success. This report concludes that with the application of the offered opportunities development and risk mitigation recommendations, the industry is poised for future market competitiveness. References Butler, N., 30th November 2014, After Shale Gas, now it tight oil, New York Institute of Finance. [Online] Available at http://blogs.ft.com/nick-butler/2014/03/30/after-shale-gas-now-for-tight-oil/ [Accessed 25th March 2015]. Dan, K., 13th May 2013, Breaking down some of the key drivers behind the oil supply and demand fundamentals for your quick future reference.Refiner Link. [Online] Available at http://www.refinerlink.com/blog/Global_Oil_Balance_Simplified/ [Accessed March 25th 2015]. Deman, L., 26th August 2013, North American Shale Gas Production: A Bright Dawn for the Global Energy Trade or a Gloomy Monday?Penn Energy. [Online] Available at http://www.pennenergy.com/articles/pennenergy/2013/08/north-american-shale-gas-production-a-bright-dawn-for-the-global-energy-trade-or-a-gloomy-monday.html [Accessed 25th March 2015]. Dupont, A., 2009, An American solution for reducing carbon emissions, averting global warming, creating green energy and sustainable employment, Dupont Group, Falls Church, VA. Henry, A., 2011, Understanding strategic management, Oxford University Press, Oxford. Landsberg, C., & Van, W. J., 2012, South African foreign policy review: Volume 1, Africa Institute of South Africa, Pretoria. Orszulik, S. T., 2013, Environmental technology in the oil industry, Springer, Dordrecht. Patterson, R., 23rd April 2014, EIA’s International Energy Statistics Updated, Barrel Peak. [Online] Available at http://peakoilbarrel.com/eias-international-energy-statistics-updated/ [Accessed 24th March 2015]. Pimentel, D., 2008, Biofuels, solar and wind as renewable energy systems: Benefits and risks, Springer, Dordrecht, Netherlands. Saudagaran, S. M., 2009, International accounting: A user perspective, CCH, Chicago, IL Smith, Z. A., & Taylor, K. D., 2008, Renewable and alternative energy resources: A reference handbook, ABC-CLIO Santa, Barbara, Calif. Taverne, B., 2008, Petroleum, industry and governments, Kluwer Law International, Alphen aan den Rijn. Vassiliou, M. S., 2009, The A to Z of the Petroleum Industry, Rowman & Littlefield Publishers Group, Lanham. Woo, W. T., 2012, A new economic growth engine for China: Escaping the middle-income trap by not doing more of the same, World Scientific, Singapore. WTRG Economics, 2011, Oil Prices History and Analysis, Author. [Online] Available at http://www.wtrg.com/prices.htm [Accessed 25th March 2015]. Read More