Introduction
The marketing message of Alaska as a business location dwells on its presentation as the last frontier. This part of North America that has not been in the limelight and it misses global mentions of trade and business investments in the region. In Alaska, Conoco Phillips serves as the biggest oil producer in the region with vast investment in natural gas production facilities and development of overall oil-related resources.
The company is invested in Kaparuk and Alpine. The company is also eyeing Prudhoe Bay. The company seeks to be the first one to have an oil development in National Petroleum Reserve – Alaska (ConocoPhillips, 2015). This report reviews the external environment affecting the company and relies on two business analysis tools to present identified conditions.
The tools are PESTLE analysis, which evaluates the overall business condition for Alaska, and Porter’s Five Forces analysis, which looks at specific environmental threats to ConocoPhillips.
PESTEL Framework
Important factors for the success of the company include the political environment that it operates in, the business environment that affects its realization of competitive advantages, the availability of resources, which serve as raw materials and growth factors.
These include the global prices of resources marketed by ConocoPhillips, the number and capacity of skilled labor available for the operations of the company, and any other opportunity available to increase the efficiency of its operations as a strategy to realize its strategies. The following section uses the PESTLE analysis tool to review the external business environment of ConocoPhillips Alaska.
Political
Alaska has traditionally been a Republican state, but an increasing number of voters are nonpartisan. The state is notable for heavily taxing oil corporations to fund its budget, and this is considered a disincentive for the companies (Jones, 2014). However, politicians will likely make statutes that promote the welfare of the people of Alaska depending on pending issues affecting the state.
Economical
Alaska sits at the northernmost point on the west coast of North America where there is water on both sides and Canada on the east, with the closest neighbor on the west being Russia. In terms of trade, Canada, and Russia present the nearest trading partners in Alaska in a geographical context.
Since its purchase from Russia by the United States, the region has become the subject of various economic opportunity rushes such as the current search for petroleum resources. It is emerging as a tourism frontier for North Americans and people outside the region.
As the 49th State of the United States, it is also benefiting from the economic policies and frameworks to promote trade and economic development in the entire United States. This includes the trade agreements that the United States has with other trading partners such as Europe and South America.
The treaties are making it easy for some financial institutions bring internal capital to the region and fund local or regional business interests. In addition, being part of the United States gives Alaska companies access to the different markets in the United States such as the New York Stock Exchange, where they can easily raise capital and increase their shareholding or alter its composition.
Besides its proximity and access to resources from the rest of the United States, Alaska is considered a tough area for doing business. The cost of doing business, workforce, economy, transportation, and business friendliness or access to capital is dismally underperforming compared to the rest of the United States.
Some of the problems arise due to natural factors about the position and geography of Alaska. The state is cut off from the road system of the United States. Therefore, the poor infrastructure claim is justified and there is little that the state authorities or individual organizations can do to remedy the situation.
Thus, for businesses operating in the area, there must be additional investment in alternative transport systems, which are likely to be costlier and increase the overall cost of doing business. Another problem for business comes from its vast size, which makes it costly for a company to conduct a geographically expanding business in the region.
Businesses have to rely on rail and barge services that are not as networked as a typical road network would be. Besides, sparse population distribution and a harsh terrain hamper the development of sufficient road networks. Besides the impediments, businesses in Alaska enjoy a low tax regime. With the population facing a small tax burden, general disposable incomes are high.
For businesses, this means that employees will likely be content with lower incomes than their counterparts in the rest of the United States will. With this in mind, Alaska presents an opportunity for a business to grow rapidly as they tap on human resources as a lower cost than their rivals elsewhere do. The disadvantage of Alaska is that it has high corporate taxes and real estate costs.
The demand for higher salaries of workers over the increased cost of living in the area is also hurting its competitiveness as a business location. Despite the low individual taxes, workers will still require higher incomes to compensate for the difficulties they face in Alaska due to lowly developed infrastructures. An important corrective procedure for Alaska’s business environment has been the use of tax credits to investors.
Alaska runs a comprehensive program for offering tax credits as investment incentives to the oil and gas industry. This intervention reduces the risks faced by exploring and developing firms in the sector such as ConocoPhillips Alaska. The state requires companies to make actual investments on the ground before they gain the credits, and this ensures that the tool functions well to attract business to the state.
In addition, increased investment in the oil and gas sector will provide positive externalities to current businesses such as the use of shared resources and joint development partnerships with their oil and gas resources (AOGA, 2015).
As a result, Alaska is now one of the top ten best tax states and is ahead of Texas, which is known for its vast investment in oil extractive industries (Drenkard & Henchman, 2014).
Social
Natives of Alaska, the Tlingit and Haida moved into the region from North America. Alaska scores highly in quality of life compared to other states in the country (Howell, 2015). Ketchikas is a tourist attraction for its art endowments. It also has other attractions such as wildlife-filled fjords and can be appealing to both local and foreign tourists.
It attracts short-term and long-term visitors who contribute to the development of its culture to ensure that the people of Alaska are well integrated into the global culture. Rural-to-urban migration in Alaska is stable. However, young people in Alaska migrate more than their older counterparts do.
This affects labor availability in rural and urban areas and forces firms to consider using incentives to attract target labor for remote location operations. Alaska is attractive to migrants because of an increase in the number of job availability, and the influx is creating mixed cultural influences for the natives. Citizens from the rest of the United States can easily move to and from Alaska to find jobs and settle to grow their families (Howell, 2015).
The small population density of Alaska makes it hard for the business to justify significant investments. A slowing birth rate is not good for the area; however, there will be considerable growth from 122,944 in 2012 to 161,483 in 2042 of the native population (Klouda, 2015). Healthcare and education sectors are developing to provide services and employment for the growing population of Alaska (Klouda, 2015).
Technology
Development of non-fossil fuel technologies is increasing in Alaska. In the last three decades, the number of hydroelectric power plants has increased, and the Alaska Energy Authority is promoting the development of renewable energy technologies and investment in the state.
This will affect demand for fossil fuels and related resources. The current focus on these technologies is on a research basis (Klouda, 2015).
Environmental
Alaska has a harsh climate caused by its geographical position. Climate change in Arctic and sub-Artic conditions pose challenges to the region as it seeks to develop its resources including its seafood industry and oil industries. The reliance on fossil fuels presents challenges for sustainability.
Legal
Internal laws, federal laws, and state laws on economic activity, social life, and general society conduct are operational with a functioning police system and judiciary. Businesses have access to a variety of licensing and arbitration instruments to ensure that the market operates fairly and protects private property rights.
Various government incentives and activities of the State to increase its competitiveness would allow investors and companies to access bundled legal services and, therefore, save on time. Recently, the Senate Bill 21 tax structure began being implemented and the oil and gas industry continues to assess its impacts, whose full effect is unknown (Klouda, 2015).
Porter’s Five Forces Model
Power of Buyers
ConocoPhillips enjoys a big brand name and has a strong market position in Alaska; it has the power to dictate terms to most of its buyers. However, regulatory oversight by the state and relevant oil and gas authorities together with its affiliation to the Alaska Oil and Gas Association all limit its ability to dictate terms to buyers.
Nevertheless, the buyer’s power remains average as the company enjoys a 50-year reputation for being in Alaska and does not have many rivals. The choice for customers is limited and they have to deal with most industry conditions dictated by producer companies such as ConocoPhillips.
Power of Sellers
The power of sellers is also low, but greater than that of the buyers. Sellers service some companies throughout North America with equipment and services. ConocoPhillips relies on third-party consultancy and logistics support. These are critical functions of its business model.
In addition, it relies on third-party contractors for various projects that it undertakes and has to bend its rules to accommodate the expert recommendations by various contractors. This can lead to increased costs of development that may not be passable to buyers. The biggest threat from sellers comes from demands by labor for increased pay.
Employees of the company are organized in unions, and they have considerable bargaining power of labor compensation by the enterprise. The company has to navigate the labor issue politically, dealing with unions and political representatives in Alaska whenever it has to cut jobs, and this presented considerable power of sellers as a force affecting its competitiveness (DeMarban, 2015).
Competitive Rivalry
Advances in technology and geopolitical events affect the productivity of major oil and gas firms in the world. ConocoPhillips competitiveness in Alaska depends on the global prices of oil and gas, as well as local prices. Its rivals are companies serving the same markets, irrespective of their location, and they benefit from improvements in technologies.
However, a growing population of Alaska continues to increase the demand for natural gas, which boosts the business legitimacy of ConocoPhillips. Nevertheless, the business has to attract investors to fund its resource development. It also requires incentives by the state to reduce its risks.
If other companies have the financial muscle to outperform ConocoPhillips, then they will do so in the fundamental competitive challenge for the company is changes in technology that come after it has incurred sunken costs on its existing technology investments. In this regard, the factor of competitive rivalry in the industry has a medium influence. ConocoPhillips can still rely on existing contracts and its research and development efforts to increase its sources of competitive capabilities.
Threat of Substitutes
Renewable energy sources pose the greatest threat as energy sources for the oil and gas industry. A company like ConocoPhillips is developing energy infrastructure driven by fossil fuel discoveries. On the other hand, the popularity of renewables is increasing, and policymakers in Alaska are opening up to the idea of promoting the development of additional state capacities for production of electricity from renewable energy.
With substantial research efforts going to the development of geothermal energy in the region, there is a challenge that in future decades, the demand for natural gas as a primary source of fuel in households may not be high. However, in the current setting, renewable energy sources do not pose a real threat to fossil fuel energy sources in Alaska.
The demand for energy is increasing rapidly due to investments in infrastructure and overall growth of expenditure by the state’s population. In any case, the demand for natural gas will continue to increase. The export market is also showing signs of growth in demand with overall growth in population and incomes in different markets.
On the other hand, ConocoPhilips enjoys the benefit of having production costs that are competitive, which makes the threat of substitutes very low. The increase in the number of cars using electricity possesses a mild threat to the profitability of the company because of the low development of renewable energy sources in Alaska.
Threat of New Entrants
New entrants face high costs of capital investment in the oil and gas industry. Therefore, they can only be established companies with sufficient resources or well-connected start-up companies able to harness different sources of funds to enable them risk investing in a sector whose return on investment period is very long.
The existing rivalry in the industry posed by BP, Exxon Mobil among others, which serve similar markets to ConocoPhillips already saturates the market. Therefore, new entrants have a limited scope of operation. They have to negotiate production contracts, establish networks for the export and domestic markets, and come up with strategies for engaging the Alaska business community to gain market opportunities that would sustain their growth.
It takes the time to achieve these results. Therefore, ConocoPhillips has a time advantage against new entrants and it, therefore, faces a few threats. In addition to that, entrants must secure untapped exploration and mining segments for the available resources in Alaska, and they would be in a separate production market segment.
Conclusion
ConocoPhilips has considerable room for growth in its investment in Alaska. The external environment is conducive for the business. However, there are notable threats that the enterprise has to consider as it continues to operate in Alaska. The variations in tax policy can affect its long-term opportunity to gain considerable returns on its investment.
Increased migration to Alaska will likely increase the supply of labor; however, it will also lead to increased state burden for public service provision. Together with a significant population increase, the state will likely turn to its most profitable industries for taxation, which includes the oil and gas industry.
Therefore, the company cannot afford to be over-ambitious. The PESTLE analysis and the Porter’s five forces analysis have elaborated the threats and opportunities available for the company to support this conclusion that there are many reasons for continued investment in the enterprise in Alaska.
References
AOGA. (2015). Oil tax credits. Alaska Oil and Gas Association. Web.
ConocoPhillips. (2015). Who we are. ConocoPhilips Alaska. Web.
DeMarban, A. (2015). Conoco moves ahead on North Slope even as layoffs proceed. Alaska Dispath News. Web.
Drenkard, S., & Henchman, J. (2014). 2015 State business tax climate index. Tax Foundation. Web.
Howell, D. (2015,). Rural and urban migration: Where people move and how it affects their employment. Web.
Jones, B. (2014). Politics, Alaska-style. The New York Times. Web.
Klouda, N. (2015). The Alaska economy, past present, and future. Alaska Business Monthly. Web.