Dissertation Writing Help on Growth Strategy of Oil and Gas Companies in the World
Market context
Population growth combined with economic growth, particularly in Asia, is expected to generate a significant need for energy. The U.S. Department of Energy’s Energy Information Administration (EIA) forecasts energy consumption to increase by 57% by 2025 from 2002 levels.
As much as 80% of the growth in consumption could come from emerging countries. These economies are projected to grow at rates higher than 5% (on a purchasing power parity basis) resulting in a doubling of energy consumed by them over the next two decades.
Most of the global energy requirement, as much as 80%, is forecast to be met by fossil fuels such as coal, oil and gas. The oil consumption is expected to grow between 1.4% and 1.9% per annum over the next 25 years while gas consumption is expected to grow even faster between 1.8% and 2.3% per annum during this period. The consumption of coal is expected to grow between 1.8% and 2.0%.
One of the biggest drivers of increased demand for oil will be the transportation sector in non-OECD countries.
Nuclear energy is also seeing a revival of interest all over the world after two decades of phase-out post Chernobyl disaster, prompted by national energy security concerns and limitations on green-house gas emissions imposed by Kyoto protocol.
Increase in oil demand due to robust global economic growth coupled with limited excess capacity for oil production have driven oil prices, in real terms, to the levels last seen in early 1980’s. Concerns about a supply crisis due to political events, terrorist strikes and natural calamities have further supported these prices. According to BP, the demand for oil grew by a hefty 2.5 mmb/d in 2004. Chinese consumption alone
increased by 900,000 b/d. As a result of the sharp rise in demand, spare oil production capacity reduced from 3 mmb/d in 2003 to as low as 1 mmb/d in the middle of 2004.
Based upon 2004 global oil consumption figures from BP, 3 mmb/d is only 3.7% excess capacity.
The shortage in excess capacity is largely due to inadequate investment in exploration and production in the late 1990s, when low oil prices did not provide companies with the economic incentives to undertake such projects.
Hedge funds, commodity funds and other financial investors, are reported to have taken significant long positions in oil, believing that oil prices will continue to rise in the near term. The sheer size of their investment has also contributed in sustaining the high oil prices.
Although there is a wide divergence in the views held by analysts, investors and oil executives about the future of oil price, with some expecting further increases while others forecasting a collapse, the consensus is that oil prices are expected to remain high in the near term due to positive global economic outlook, tight oil supplies and lingering concerns about the stability of oil supply.
2005 was a year of record profits and cash flows for the large oil & gas companies due to high crude oil prices. Given the outlook of high oil prices in near term, it is expected that the oil majors would continue to return cash to shareholders in form of dividends and share buy back as well as make investment, both in form of capital investment and acquisitions.
The large, western oil & gas companies are experiencing decline in production in several of their existing and mature fields. Their reserve replacement ratio has dipped below historical average and, in some cases, below 100%.
The fact that vast majority of the world’s reserves are outside their reach, as these are controlled by state owned entities of the OPEC nations, has heightened the competition for finding reserves. Most companies are expecting to increase their reserves in non- OECD countries, which should increase their business risk given the political and economic risks associated with these countries.
As companies compete for reserves, mergers and acquisitions would continue to be one of the routes to address these concerns. Strategic priorities such as access to markets and resources have driven recent transactions.
Oil & gas companies are also venturing into deepwater exploration and in difficult locations (such as the Arctic) to augment their resource bases. In addition, companies are making important strategic decisions about investment in unconventional oil (such as oil sands) and alternate forms of energy (such as solar power and wind energy), which will have important ramifications for the industry.
As the demand for gas in the US and Europe begins to outpace local production, the oil & gas majors are investing heavily in LNG (Liquefied Natural Gas) infrastructure and LNG is widely seen as a driver of gas delivery in the next 10 to 15 years.
Technology development is becoming a key element of the competitive strategy of the companies, as it allows them to be more efficient in extracting oil from existing fields as well as in addressing the new challenges in exploration and production
A number of alternative energy sources, such as, hydrogen, biodiesel, ethanol, shale oil, Gas to Liquids (GTL), Coal to Liquids and Tar Sands, are in various stages of development. However, these technologies need to surmount several challenges to be a reliable alternative in the near term. On a longer time scale, hydrogen may be a potential challenger to oil, if fuel cells become economically viable to run cars and
produce power on an industrial scale.
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