OIL INDUSTRY IN OCEANIA Homework Help

Discuss about Oceania………………….

TABLE OF CONTENTS

TOPIC                                                                                                                                                      PAGE

1.0                 INTRODUCTION………………………………………………………………………………………………….3

2.0                PARTNERSHIP AGREEMENTS VS NATIONALISATION………………………………………….3

2.1       MERITS…………………………………………………………………………………….…………3

2.2       DEMERITS………………………………………………………………………………………….5

3.0                 PRODUCT SHARING CONTRACTS……………………………………………………………………….6

3.1        MERITS…………………………………………………………………………………………..6

3.2        DEMERITS………………………………………………………………………………..………6

4.0              MAXIMISING OIL REVENUES…………………………………………………………………………………7

5.0            COMPETITIVE CHALLENGES…………………………………………………………………………………….8

6.0           CONCLUSION……………………………………………………………………………………………………………9

7.0          REFERENCES……………………………………………………………………………………………………………10

INTRODUCTION

            The energy sector has continued to undergo major changes and realignments today due to increased global demands. Many countries have continued to grow in their industrial sectors and they do not have the required capacity to provide the energy for these sectors. Oil has emerged as the most needed resource to supplement other energy sources like geothermal, solar and wind energy. It is a major requirement by the motor industry whose products are custom made to run on oil products as their source of energy. Countries that have been bestowed with this resource have attracted major companies with global standing who want a share of this commodity. Many countries sign partnership agreements with these multinationals for mutual benefit. But these agreements come with both their merits and demerits.

PARTNERSHIP AGREEMENTS VS NATIONALISATION.

MERITS:

There are various merits that are derived by countries when they sign partnership agreements with established companies in the oil sector. These companies are given rights to explore for sites where crude oil will be found; they also drill the wells and are also expected to develop the required infrastructure like refineries to process the crude oil into the various products like petrol, diesel, cooking gas and other industrial lubricants. These operations require large capital outlays that most governments cannot afford. Majority of these countries like Oceania lack this capital and expertise to run this industry competitively. Majority have very low per capita incomes and the only way they can leap from these resources is through engaging with the established multinationals that have the requisite capacity in the industry.

Therefore these partnerships enable the government to get a lot of revenue that is paid by the company in form of taxes, bonuses, rentals and royalties. These are usually agreed on between the government and the company before they start operations. The government is therefore able to receive a very huge boost in its revenue and can be able to meet most of its national obligations like providing education, health care and infrastructures like roads, airports and telecommunications.

These partnerships also help in the creation of jobs that are available to the nationals of that country. This is due to the capital injections done by the foreign entrants who build refining companies which will create many personnel requirements in their operations. This reduces the unemployment levels in these countries.

These private entities are very well managed compared to nationally owned state corporations that are usually riddled with inefficiency and corruption. The private entities are optimally run by qualified managers who set performance targets for their employees. Therefore there is optimal use of the resources available in the country and this will translate to higher income levels for the government.

The companies manage all their activities on their own. The government does not inject any capital in any of the activities of the company. For nationalization the government would be required to use a lot of its money. Therefore these partnerships save the government a lot of money but they ensure the government gets a lot of revenue from the company’s activities. These partnership agreements also ensure that the government benefit from the infrastructure that are set up by these companies. The resources are normally discovered, in most cases in remote regions and these exploration companies must build road networks across these areas to be able to run their activities. These facilities are also used by the residents of these areas.

DEMERITS

The implementation of these partnership agreements usually denies the government its role of wealth distribution in the country. Areas where these resources are not found are usually neglected by these private companies. They only concentrate their activities in the prime locations where the resources are found.

The country also suffers a lot because there is no guarantee that the profits made by these multinationals will be reinvested back into the country. The companies normally repatriate most of the profits into their mother countries or they invest in other exploratory works in other countries.

The governments who sign these partnership agreements normally don’t supervise the activities of the multinationals. Majority of these companies are involved in illegal activities in the localities they operate. Many are known to even fuel tensions in the areas they operate in so that they can claim compensation.  Majority of these companies have also been blamed for polluting the environment through oil spills that are known to sometimes occur through negligence e.g. broken pipes.

PRODUCT SHARING CONTRACTS

Karim (n.d) says that these are contractual agreements signed between the government and the oil exploration companies. There are various merits and demerits that pertain to these agreements:

MERITS

            These agreements invite foreign investment to the country. The oil exploration companies are ready to bring in risk capital to the country. The areas which are unexplored will be explored at no extra cost to the government.

These contracts also guarantee the investor autonomy in his operations as there will be no interference in his operations. If the exploratory works are successful the contractor is assured through the contract that he will recover all his costs.

These contracts also ensure that if the venture is successful the government will earn profits even though they did not invest anything. Sinha (n.d) explains that the government is also not liable for any of the sunk costs incase the venture is not successful.

DEMERITS

The limited knowledge the government has on the potential of the allocated fields usually puts it at a disadvantage. Bates (n.d) says that most governments do not know what they are giving away. If the exploratory works turn out to be very successful the contractor will benefit a lot and it will be like a windfall to him.

There is also conflict of interest because the government would want to carry out its regulatory duty over its wealth but the contract it has signed is binding. It also wants to leap maximum returns from the resources but it cannot be sure whether the company involved is operating optimally since they have no management capacity in the company.

MAXIMISING OIL RETURNS

The Oceanic authorities should enter into product sharing contracts with known oil companies. This is due to the difficulties in funding joint ventures which are expensive to run due to managerial challenges and huge capital requirements. As Janis (2001) asserts, these contracts will also ensure that the national oil reserves are boosted through the sharing formula that will be agreed upon. The government will also be able to develop other sectors of the economy due to the gains derived from these contracts. This will therefore ensure they have exercised their inalienable right to monetize their resources for national benefit of all. Entering into these contracts will guarantee them revenue and growth. The contracts they enter into should be very clear on the areas or fields they have allocated and the period. The periods should not be more than twenty years. They should agree on how to share the operating profits with these exploratory companies once they have succeeded in their work. They should also agree on how the companies will share oil with the state oil companies. This will ensure the state petroleum companies will continue boosting their capacity. The government should also agree on a formula of how the companies will surrender their refineries and other immovable assets upon expiry of the contract period. Johnson (2006) says that this will ensure continuity and will position the government strategically in taking over the industry.

COMPETITIVE CHALLENGES

            The Oceanic National Petroleum Company will face many challenges in its future growth but it is how it handles them that will count. The company will be required to carry out a detailed SWOT Analysis. Smith (1999) says that it helps businesses know how to respond to market and competitive challenges.

Strengths

The company will definitely have an upper hand being the main local company. Its long stand in the business and extensive knowledge in the market will give it an upper hand.

Weaknesses

Its major weakness will be the lack of capacity to process a lot of crude oil. This is where the competitors will seek to exploit. It will also face a challenge of running efficiently if it won’t have trained personnel in the various areas of operation.

Opportunities

The company will have an excellent chance to take over markets that were previously in the hands of the exploratory companies who will go away after the expiry of their contracts. The company can also start early negotiations with the government to take over the oil fields that will be left by the foreigners. It should also acquire the experienced personnel in service with the foreign companies who will be jobless after their exit.

Threats

The biggest threat to the company’s future growth will be the entry of competitors who will eat into the market share and decrease its profits. The company should therefore take advantage of its strategic position as the only domestic company in the industry.

CONCLUSION

            The countries that discover they have crude oil deposits and have no capacity to fully exploit the resource should consider entering into product sharing contracts with established companies in the sector. This will be a sure way of ensuring that they earn the much needed revenue without any initial costs. This will  enhance the growth of other  sectors of the economy  because the revenue got can be diversified into those sectors.

References

Bates, E (n.d) “The Future of Oil in Indonesia” (Online ) Available from http://www.indonesiaoil.com/ (Accessed on 12^th April 2012)

Janis, A.(2001) World Energy Markets, Pearlson Publishers, P.23

Johnson,H (2006) Marketing Mix, Vertit Educational Publishers, P.8

Karim, S. (n.d) “Indonesian Legal Framework in the oil, gas and mining sectors” (Online) Available from http://www.oilinasia.com/ (Accessed on 12^th April 2012)

Sinha, R.K.(n.d) “Global View of Product Sharing Contracts: Indian perspective “ (Online ) Available from http://www.oilinindia.com/ (Accessed on 12^th April 2012)

Smith, S. (1999) Competition in Business, Slimatons Publishers Ltd, P.41

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