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ConocoPhillips Alaska Report

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Updated: Jan 20th, 2020

Internal Analysis

The following sections break down the strengths and weaknesses of ConocoPhillips. In addition, there are the TOWS and VRIO frameworks that discuss the strategic opportunities available for the company. The discussion also provides an outlook of the competitiveness of the enterprise and the sources of its competitiveness.

The discussion concentrates on the company’s Alaska operations, with the key discussion points being the ability of the company to deal with its current challenges and achieve growth in size and profitability in the future.

Strengths

The company has a big brand name and a strong market position in its production of natural gas and viscous oil. These two factors help the company increase its earnings whenever the market environment is right. Continued growth of the business relies on the two factors, in addition to others highlighted below.

Significant investments in production happen in Alaska, which offers the company great influence in economic policy making in the state (Cama, 2014). ConocoPhillips Alaska has used its position as a major employer and investor in the state to lobby for favorable fiscal terms from the state government.

The company is dominant in the oil and gas industry in the state and has used its dominance to increase the state subsidies provided to the industry. The company explained that subsidizing the industry would lead to more jobs that are permanent and a reduction in unemployment rates in Alaska (DeMarban, 2015).

The company has invested in technologies, such as drones to help it respond to environmental challenges and cut costs (Koroknowski, 2013). Developments that the company is making are also highlights of its organization, investment, and partnership strengths.

It has a capable supply chain partnership with construction firms and financial institutions. It also relies on its network of the ConocoPhillips parent company. These connections provide the company with the necessary capital, infrastructure, and human resources that are required for expansion and sustenance of the business. Through its network, the company is also able to find a market for its produce within and outside the state.

Weaknesses

Accusations of pollution abound as the company continues to develop its production facilities. Oil is a non-renewable energy source, which is also a pollutant. The company enjoys considerable acceptance by stakeholders in Alaska, but the nature of its business is an inherent weakness in regards to environmental sustainability.

However, the biggest concern for the company is its current investments that are yet to begin production. If anything goes wrong, then the company will have to incur capital losses. Moreover, its investments have to produce according to the specified life span of their design. Although the company follows the highest standards in ensuring that is possible, there is no guarantee that all the facilities developed shall provide services for their specified design period.

Other factors are always at play. Besides, the organizational capabilities of the company also affect its operations. In this regard, the company is always working on facilities that are also becoming outdated due to advancements in technology. The company has to keep up with technology, which is a major weakness of the business model.

Based on this structure, the company has to set up a considerable amount of money for upgrading and advancing its technologies through replacement or scaling up. Therefore, it cannot risk having limited funds or allocating all its resources to other operational needs and remain vulnerable due to its sunken costs in technologies. Lastly, the company is incurring significant costs in maintaining its human resources.

Some accusations have been made against the business for failing to sustain a high employment rate in Alaska. ConocoPhillips has to keep labor costs low to realize a decent profit margin. On the other hand, it has to increase its employee numbers to become a caring corporate citizen of Alaska.

The inability of the company to have a bloated workforce and remain profitable amid changes in oil prices around the globe will continue to affect its ability to lobby for favorable government policies. Investments in oil and gas in Alaska depend on suitable concessions from the state government.

Matching Process

Strengths and Opportunities (SO)

Subsidies from the state that were given to the oil and gas industry in 2013 require that companies keep developing their investments in the state and keep the economy growing. Following this incentive, an important aspect of the competitive plan for ConocoPhillips, Alaska has been to keep on focusing on the development of its oil pipeline.

This approach ensures that the company continues to put investment funds in the region and qualify for some tax breaks. Besides, it is transforming its operations to become more efficient than its current state. For example, with a pipeline development, the company is shifting to lower dependence on road transport.

Therefore, it is using the pipeline as an opportunity to increase its shipment capacity, create a long-term supply capacity, and magnify its ability to serve additional areas within Alaska and outside Alaska with its products. Pipelines are operations throughout and provide a consistent element in the business, unlike road transport that is prone to a number of challenges, such as weather during winter.

Moreover, ConocoPhillips can demand increased compensation or subsidies from various tax reform programs offered by the Alaska government by the measure of its investments in the state.

Strengths and Threats (ST)

A major threat facing the company’s operations in Alaska has been the increase in the cost of labor, which threatens to kill the profitability of many ventures undertaken by ConocoPhillips. The company has been experimenting with the change of scope of its operation to remedy the situation.

It has shifted focus to infrastructure building, which only requires a high labor input into the development phase and cuts labor requirements after construction is complete. The infrastructure, technology, and automation tools help the company shift its scope of operations to concentrate more on rapid response work teams and management teams.

It eliminates a significant percentage of ordinary labor and, therefore, shields itself against the threats of labor unions to demand higher pay and change working arrangements at the company. Another threatening factor for the company has been the nature of the oil products coming out of its Alaska mines. Unlike ordinary oil, the Alaska fields produce viscous oil that presents challenges in moving through pipelines.

Previously, the company did not face transportation challenges as labor was affordable, and road transport relied on bulk road tankers. However, with a pipeline development, the company has started relying on technology to enable it to make the viscous oil move in the same way that water would move through the pipeline.

The company has tapped into its global network of financial partners to develop next-generation production facilities that would allow it effectively to handle the mobility challenges of viscous oil. It is investing in a production plan in Kaparuk to build on what it already had since 2004. The new unit will commence operations in 2017. The investment will also benefit from the tax reforms provided by the state government (Brehmer, 2014).

The company is also advancing other production projects so that it continues to build its economies of scale. With many projects, the company expects that it will be able to sustain a market share that is significant for profitable operations.

Even with the entry of new players in the Alaska oil and gas production market, the number of investments already made or those in the pipeline for ConocoPhillips Alaska will allow the company to handle the threat of market share erosion. The company is increasing the number of rigs at its primary site in Kaparuk and other areas.

Weaknesses and Opportunities (WO)

The company has been unable to scale upwards in an efficient way due to a high cost of human resources. However, lower oil prices have acted like a blessing in disguise. The company is forced to reconsider its operating costs to maintain profitability. In this regard, it has considered the opportunity presented by technology to reduce its dependence on human resources.

At the same time, it is using the current period to increase its construction projects to reabsorb some of its employees into construction jobs. The company needs to do more to assure lawmakers and other stakeholders that the tax reforms it lobbied for will eventually increase the number of jobs in the sector.

The company has to find a way of providing more jobs without influencing its costs of doing business severely. Although the company currently has to restructure and shed some jobs, it must ensure that it adopts a lean strategy that does not lead to additional job losses in the future. This strategy will ensure that it becomes a beneficiary of new opportunities for wage, labor, or tax reforms.

Weaknesses and Threats (WT)

There have been threats coming from changes in the regulatory policy that can be harmful to the operating environment of the company. For example, ConocoPhillips Alaska can only make exports of crude oil to particular destinations (Irwin, 2013). At the same time, the nature of the business requires that there are significant capital costs involved before substantial returns of investments are realized.

An example of the combined weakness and threats emerges in the ConocoPhillips Alaska developments that are taking place at Greater Mooses Tooth 1. The company is working on the first commercial oil development. Unlike other events of the same nature, this one is in National Petroleum Reserve-Alaska (NPR-A).

This is the biggest Federal Reserve in Alaska, and the state government is keen on protecting it for all stakeholders. The company has faced many regulatory hurdles as it tries to actualize its production plans in the region. Notably, it has had to deal with the Bureau of Land Management, which manages the NPR-A (Dlouhy, 2014).

The company has to keep limiting its investment options in areas that offer high regulatory hurdles. It also has to coordinate its activities with various authorities from an early stage of its investment to ensure that it does not suffer regulatory stoppages for its developments, as that could lead to significant investment losses.

In the NPR-A case, the defensive position taken by ConocoPhillips Alaska was to agree with regulators that it would pay 8 million dollars to handle harm mitigation costs that would be caused by the project. The company is ready to make the pay because it is protecting itself against losses that would arise due to a permanent stoppage of the project (DeMarban, 2015).

VRIO Framework

A VRIO framework analysis of ConocoPhillips Alaska origins of competitive advantages for the company and their sustainability is presented below. It follows the value, rarity, imitability, and organization criteria to determine whether a particular competitive advantage is sustainable.

Resource Value Rarity Imitability Organization Competitive Advantage
Physical Resources:
Drilling Rigs – natural gas facilities – in South-central Alaska, Kuparuk and Alpine fields Yes No Yes Yes Competitive Parity
Pipeline Yes Yes No Yes Competitive Parity
Performance of wells Yes Yes Yes Yes Competitive Advantage
Miscellaneous technologies e.g. drones Yes No No Yes Temporary competitive advantage
Human/Individual Resources:
International experience Yes No Yes Yes Competitive Parity
Job specific skills like management and engineering Yes Yes Yes Yes Competitive Advantage
Financial Resources:
Revenue – increasing earnings due to increases in production Yes No No Yes Competitive Parity
Development of new facilities and infrastructure like pipeline increases market share Yes No Yes Yes Competitive Parity
Mining and production license Yes Yes No Yes Competitive Parity
Organizational Resources:
Global scale production
Global and local partnership with supply companies, contractors, and stakeholders
Yes No Yes Yes Competitive Parity
Brand reputation for the development of oil and gas production facilities Yes Yes Yes Yes Sustained Competitive Advantage

One important source of competitive advantage for ConocoPhillips Alaska has been the performance of its wells, which has allowed the business to remain operational and offset other operating challenges (ConocoPhillips, 2015).

Based on the VRIO analysis framework presented in the table above, ConocoPhillips Alaska has one source of sustained competitive advantage and one source of competitive advantage. These are brand reputation and the good performance of its production wells in Alaska.

Besides, the company also has an opportunity to transform some of its rarely competitive resources into being fully competitive advantage factors. For example, the completion of its pipeline network can make the infrastructure not easy to imitate. It takes time and resources to develop a pipeline.

At the same time, a company going on a comprehensive pipeline network must have invested in sufficient drilling and production capacity throughout Alaska for it to have a business sense for investing in Alaska. Given that oil and gas resources in the state are finite, there are limited options for other companies in the industry to develop a vast network and significant production facilities as ConocoPhillips Alaska would have accomplished.

In that regard, the pipeline network would become a source of sustainable competitive advantage. No other company can take away the reputation of ConocoPhillips Alaska, and this factor continues to contribute positively to the company’s attraction of skilled human resources in the state. Brand reputation also makes the company benefit from willing partners at different production and distribution levels of its business.

Many companies would like to associate with a veteran entity in the company to boost their reputation, and this arrangement gives ConocoPhillips Alaska a good bargaining position. The financial resources of ConocoPhillips play an integral part in the company’s expansion capacity. The nature of its business requires rapid upscaling when there are opportunities.

At the same time, business hurdles such as seeking regulatory approval or the need for compensation of displaced persons and businesses requires a large financial might. The company has considerable access to funds, given that it is affiliated to its global parent. Moreover, operations in Alaska have been growing in scale, meaning that they will also increase the revenue potential of the company.

While these options are not rare, they are still hard to imitate and provide considerable value to the enterprise. They are also organizable, such that they increase the business output of ConocoPhillips Alaska. Above all, the company has a contractual license agreement with the government of Alaska, which provides it with a guarantee of operations; unlike its competitors that may still be eyeing entry or expansion and do not yet have licenses.

In fact, ConocoPhillips Alaska received a boost from the government of Alaska when it was asked to apply for an exporting license of gas. This increased its operations and provided related industry services to other companies, such as fertilizer manufacturers (Caldwell, 2013).

Conclusion

There are some strategies that are useful for the sustainability of the competitive advantages enjoyed by ConocoPhillips Alaska. The analysis done with the TOWS and the VRIO framework highlights the need for the company to continue investing in technological upgrades that deliver better efficiency, increased ability for rapid scaling, and reduced long-term operational costs.

These strategies must also be used in the context of the increasing challenges that the company faces with the realization of competitiveness from its current operations strategy. For example, the company has a major issue with its human resources, which affects its relationships with regulators and stakeholders. The issue is attached to its licensing provisions; therefore, it is an issue of concern. The analysis reveals that a defensive approach can save the company from long-term aggression from its stakeholders in Alaska.

References

Brehmer, E. (2014). . Alaska Journal of Commerce. Web.

Caldwell, S. (2013). . Alaska Dispatch News. Web.

Cama, T. (2014). . The Hill. Web.

ConocoPhillips. (2015). . Conoco Phillips. Web.

DeMarban, A. (2015). . Alaska Dispath News. Web.

Dlouhy, J. A. (2014). . Fix. Web.

Irwin, C. (2013). . CNBC. Web.

Koroknowski, R. (2013). . Climate Progress. Web.

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