Developing and Applying a Portfolio Management Approach in an Oil BusinessChapter 1- Introduction1.1 BackgroundThe industrial revolution of the nineteenth century and the communication and information revolutions of the twentieth century have changed the face of the world and are responsible for growth of energy needs. The increase of comforts for the people leads to the greater fuel and energy needs. The global energy demands are on the upswing and the major contributor towards meeting the demand is oil which is rightly termed as the black gold. From 64.7 million barrels per day in 1999, world production grew to 71.2 million barrels per day in 2004, coming from the Middle East, the Western Hemisphere, the former Soviet Union, Africa, Europe and the Asia-Pacific regions.
Growth came from the countries of Mexico, Canada, Western Siberia, West Africa, and China. The economic liberalization, market economy reforms and western style corporatization management reorganizations in the last two decades have had their impacts on the oil and gas industries of major energy producing countries such as Russia, Norway, Canada and Malaysia. The gap between the high ranking of national oil companies’ resource holdings and the ranking of the world’s largest oil and gas production operating companies highlights a potential source of supply instability in world energy markets.
How ever, the major national oil companies are in the process of re evaluating and changing business strategies, goals and priorities which would have an impact on the market supply stability and security. In addition to the demand supply equation which makes the oil business a complicated one, the oil industry is also subjected to risks and uncertainties in a number of ways.
The world economy and the price of oil seem to be dependent on each other. The major events of the world like wars and political turnarounds have major effect on the oil business. The resulting price fluctuations in turn change the economic trends of major oil consuming countries. For example, Yom Kippur War between Israel and Syria led to the 1973 oil crisis and the breakup of the Soviet Union in 1991 that contributed to the heavy oil pollution in the Caspian Sea. The strategy for increasing the oil business and revenues by it is to construct new pipelines such as Baku-Tbilisi-Ceyhan oil export pipeline.
The construction of these types of pipelines will involve the employment for labor and results in construction new surface transport infrastructure. This provides extra employment and even generates revenue for the companies involved in it. The construction will result in Trans Caspian pipelines. These pipelines as they are able to affect the fish migration routes the business and lives affected by that change must also to be taken into consideration.
When the regeneration of the natural resources is difficult the revenues generated and the portfolios managed now will be difficult to be sustained in future. The spike in the prices in 2005 was not tolerable to the American companies. The price has rose by 52 percent in 2005. As no developed or developing country is showing a trend of decreasing oil consumption, from 2005 to till date, the oil companies can manage a portfolio of new investments. As almost every OPEC country is producing to its full capacity, the investment on the oil fields other than OPEC countries or, acquiring the oil fields in OPEC countries will be growth signal for the oil companies.
The investment on the oil exploration also can be termed as a good decision towards managing the portfolio.